Concessions for small business entities

About this guide

This document has been archived. It is current only to 30 June 2010.

Concessions for small business entities 2007-08

This publication is current for 2007-08 and later income years and incorporates changes up to June 2010.

If you operate a small business as a sole trader, partnership, company or trust, you can use this guide to find out more about the small business concessions for:

• capital gains tax (CGT)
• income tax
• goods and services tax (GST)
• pay as you go instalments (PAYG instalments)
• fringe benefits tax (FBT).

You may be eligible to choose from the following concessions:

• small business tax break (2008-09 to 2010-11 income years inclusive)
• choice to account for GST on a cash basis
• choice to pay GST by instalments
• annual apportionment of GST input tax credits
• simplified trading stock rules
• simplified depreciation rules
• entrepreneurs' tax offset
• CGT 15-year asset exemption
• CGT 50% active asset reduction
• CGT retirement exemption
• CGT rollover provisions
• PAYG instalments based on GDP-adjusted notional tax
• two year period for amending assessments (exceptions may apply)
• immediate deductions for certain prepaid business expenses
• FBT car parking exemption (applies from 1 April 2007).

Throughout this guide you will find important notes (look for the

symbol) that help you with key information you should note.

You will also find 'more information' boxes (look for the

symbol) that show any further steps you may need to take or extra information you may need to refer to.

How to obtain this publication

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The Publications Distribution Service operates between 8.00am and 6.00pm, Monday to Friday.

For more information about your tax obligations as a small business operator, refer to: Record keeping for small business (NAT 3029) Tax basics for small business (NAT 1908) Income and deductions for small business (NAT 10710) GST for small business (NAT 3014) Home-based business (NAT 10709) PAYG withholding (NAT 8075).

Terms we use

When we say:

• business we mean the individual, partnership, company or trust that carries on the business activity
• small business we mean small business entity, which is a business with an aggregated turnover of less than $2 million.
• aggregated turnover is, broadly, your annual business turnover for the income year plus the annual turnover of any business that is connected with you or that is your affiliate.

For more information on the aggregation rules and working out aggregated turnover go to Am I eligible for the small business entity concessions?

The small business concessions

Since 1 July 2007, you have been eligible for a range of small business concessions if both of the following apply:

• you have carried on a business
• your aggregated turnover is less than $2 million.

For more information about calculating your aggregated turnover see Eligibility. For more information about whether you need to combine your turnover with any other business, see The aggregation rules.

Using income tax concessions

To be eligible for these concessions, you must meet a range of conditions.

You do not have to use all the concessions - you can choose to use those that best suit your business.

For information about: how income tax applies if you choose to use the concessions, see Comparing the income tax concessions the other concessions available to small businesses, refer to division 328 (section 328-5 - section 328-295) of the Income Tax Assessment Act 1997.

Small business tax break

Broadly, the tax break provides an extra tax deduction for small businesses of 50% of the cost of eligible new assets that are to be used in the business.

In order to claim the tax break, certain conditions must be satisfied - for example:

• the asset must be an eligible asset
• you must have committed to investing in it by 31 December 2009
• you must first use it, or have it installed ready to use by 31 December 2010.

Small businesses can claim the deduction for eligible assets costing $1,000 or more.

For more information, see: Overview: small business and general business tax break Guide to small business and general business tax break.

The 25% entrepreneurs' tax offset (ETO)

You may be entitled to this offset if your business has an aggregated turnover of less than $75,000. It allows you to reduce the amount of income tax you are liable to pay on your business income by up to 25%.

From the 2009-10 income year, an additional income test has been introduced into the ETO eligibility criteria for individuals. Broadly, the amount of ETO payable in respect of partnership or sole trader activities, or income from a trust is reduced if your income for ETO purposes exceeds the relevant threshold.

For more information, see Entrepreneurs' tax offset.

Simplified depreciation rules

If you are using the simplified depreciation rules, you must:

• immediately write off most depreciating assets costing less than $1,000 each
• pool most other depreciating assets with an effective life of less than 25 years in a general small business pool and claim a 30% deduction for them each year
• pool most other depreciating assets with an effective life of 25 years or more in a long-life small business pool and claim a 5% deduction for them each year
• claim a deduction for most assets you have newly acquired at either 15% or 2.5% in the first year, regardless of when you acquired them during that year.

For more information, see Simplified depreciation rules.

Prepaid expenses

You can choose to claim an immediate deduction for certain prepaid expenses that meet the 12-month rule, such as:

• subscriptions to professional associations
• rent
• insurance payments.

For more information, see Prepaid expenses.

Simplified trading stock rules

If the difference between the value of your opening stock and a reasonable estimate of your closing stock is $5,000 or less, you do not have to:

• account for changes in the value of your trading stock
• do stocktakes for tax purposes.

For more information, see Simplified trading stock rules.

Review of assessments

For the 2007-08 and later income years, we can only review and amend a small business' income tax assessment within two years from when we give you notice of your assessment. This period can be extended in certain circumstances - for example if there has been fraud or evasion.

For more information, refer to Review of your assessment and record keeping.

Simplified tax system (STS) accounting method

If you used the STS before 1 July 2005, you had to use the STS accounting method. After this time, you could choose whether or not to continue with the STS accounting method. For the 2007-08 and later income years, the STS has been replaced by the small business provisions.

You may only continue using the STS accounting method if all of the following apply:

• you have been using the STS accounting method continuously since before 1 July 2005
• you were in the STS in 2006-07
• you are a small business from 2007-08 onwards.

If you meet these three requirements, you can continue using the STS accounting method until you choose not to, or you are no longer a small business.

For more information, refer to Simplified tax system accounting method (NAT 3957).

Small business capital gains tax concessions

Basic conditions

To qualify for any of the small business CGT concessions, you must first meet one of the four following basic conditions.

• You are a small business.
  
   
• You do not carry on business, but your asset is used in a business carried on by a small business that is your affiliate or an entity connected with you (passively-held asset).
  
   
• You are a partner in a partnership that is a small business, and the CGT asset is one of the following:
  • your interest in a partnership asset (partnership assets)
  • an asset you own that is not your interest in a partnership asset (partner's assets).
• You meet the maximum net asset value test.

Also, the asset must meet the active asset test.

There are more basic conditions if the CGT asset is a share in a company or an interest in a trust.

In the 2008 Budget, the government announced that it would increase access to the small business capital gains tax (CGT) concessions for businesses with aggregated turnover less than $2 million via the small business entity test, for: taxpayers owning a CGT asset used in the business of a related (affiliate or connected) entity partners owning a CGT asset used in the partnership business. The main changes are now law and apply from the 2007-08 income year. Other minor changes apply for various years from 2006-07 to 2008-09. For more information refer to Small business entity concessions essentials.

For more information refer to: Guide to capital gains tax concessions for small business 2009-10 (NAT 8384) Advanced guide to capital gains tax concessions for small business 2009-10 (NAT 3359).

There are four CGT concessions you can use. You can use as many concessions as you want to until any capital gain you make is reduced to nil. However, you must meet the conditions of each concession before you can use it.

There are rules about the order you can apply in:

• the CGT small business concessions
• any current year or prior year capital losses
• the CGT discount.

The CGT discount may be available as well as the small business concessions if you have held the asset for at least 12 months.

Small business 15-year exemption

Any capital gain you make from disposing of a business asset is exempt from CGT if you:

• have owned the asset for 15 years, and
• are either of the following:
  • aged 55 years or over and retiring
  • permanently incapacitated.

Small business 50% active asset reduction

If you have owned an asset that you have used in your business, your capital gain is reduced by 50% when you dispose of the asset.

Small business retirement exemption

Any capital gain you make from disposing of a business asset when you retire is exempt from CGT up to a lifetime limit of $500,000. If you are under 55, the capital gain is only exempt from CGT if you pay it into a complying super fund or a retirement savings account.

Small business rollover

You can use this concession to defer a capital gain from disposing of a business asset for two years or longer if you do either of the following:

• purchase or acquire a replacement asset
• make a capital improvement to an existing asset.

While the rollover lets you defer a capital gain to a later income year, you may be able to use other CGT small business concessions to exempt or reduce your capital gain.

The maximum net asset value test

To pass this test, the total net value of your CGT assets must not exceed $6 million. Use the aggregation rules to work out which businesses you must include when working out if you meet this test.

The net value of your CGT assets is their total market value, less any liabilities you owe relating to those assets - for example, a business loan to purchase the asset. Some assets are excluded from the test.

The active asset test

An asset must meet certain conditions to qualify as an active asset.

Your asset must be used or held ready for use in, or inherently connected with one of the following:

• your business
• the business of your affiliate or connected entity
• your spouse or child under 18 years of age.

A share in a company or an interest in a trust can also be an active asset under certain circumstances.

Certain CGT assets cannot be active assets, for example, assets whose main use is to derive rent. As such, a rental property generally does not qualify as an active asset. There are some exceptions where a property is taken not to have the main use of deriving rent.

In addition, your CGT asset must be active for one of the following:

• 7 ½ years, if you have owned it for more than 15 years
• half of the total period you have owned it, if you have owned it for less than 15 years.

These time rules are modified for CGT assets you purchased or acquired under the rollover provisions relating to assets you compulsorily acquired, lost or destroyed.

The time rules are also modified where you have transferred a CGT asset under the rollover provisions relating to marriage breakdown.

For more information refer to: Guide to capital gains tax concessions for small business 2009-10 (NAT 8384) Advanced guide to capital gains tax concessions for small business 2009-10 (NAT 3359).

Gross domestic product (GDP) adjusted PAYG instalment amounts

If you report and pay PAYG instalments quarterly, you can choose to pay instalment amounts we work out for you. We print the amount we work out on your quarterly activity statement or instalment notice. This can save you time in working out the amount you need to pay.

You can choose the GDP adjusted instalment option in your first quarter of the income year (usually, this is the activity statement or instalment notice due in October). Once you have made a choice, that option applies for the whole of the income year. If you choose this option, you must pay the amount shown at label T7 on your activity statement or instalment notice.

From the 2009-10 income year onwards, if you are a full self-assessment (company or super fund) taxpayer that is a small business, you can choose to pay your PAYG instalments using the GDP adjusted option.

Full self-assessment taxpayers that are not small businesses may still be eligible to choose the GDP adjusted option. Individuals are automatically eligible to use the GDP adjusted option.

How we work out your instalment amount

We generally take the information we use to work out your instalment from your most recently assessed income tax return. We also adjust your instalment amounts to take expected economy changes (as measured by GDP) into account.

If you choose to pay the PAYG instalments we work out, we work out your income tax when we process your income tax return. If we find you overpaid, we refund the extra amount to you, as long as you have no other tax debts. If we find the amount you have paid does not fully cover the tax you must pay, you must make an extra payment to cover the shortfall.

If the instalment amount does not match your expected income tax liability

If you believe the instalment amounts we work out will add up to be more or less than the total income tax you must pay for the income year, you can:

• pay the instalment amounts we work out and have any overpayments refunded or make up any shortfall once we process your income tax return
• vary your instalment amounts each quarter
• work out your PAYG instalment amount yourself using the instalment rate x instalment income option.

	You may be liable to pay the general interest charge if you vary your instalment down and end up paying less than 85% of the tax that you should have paid on your business and investment income. You will not be liable for additional charges if you simply pay the amount we work out for you.
	For more information, refer to: GDP adjusted PAYG and GST instalment amounts (NAT 5094) Choosing a payment option for pay as you go (PAYG) instalments How we work out the GDP adjustment in your PAYG instalment amount (NAT 72215).

GST cash accounting

You can choose to account for GST either on a cash basis or non-cash (accruals) basis. The tax period you account for GST in depends on which accounting basis you choose.

Accounting for GST on a cash basis means you can:

• account for the GST you must pay on sales you make in the same tax period you receive payment for them
• claim GST credits for the GST you pay in the price of your business purchases in the same tax period that you pay for them.

When claiming GST credits for purchases that cost more than $82.50 (including GST), you must have a valid tax invoice. If you do not have a valid tax invoice, you must wait until you receive one from your supplier before you claim the GST credit, even if this is in a later reporting period.

You can also access this concession if you:

• are not operating a business, but are carrying on an enterprise with a GST turnover of $2 million or less
• account for income tax on a cash basis
• carry on a kind of enterprise that we decide can account for GST on a cash basis regardless of its GST turnover
• are an endorsed charitable institution, the trustee of an endorsed charitable fund, a gift-deductible entity or a government school, regardless of your GST turnover.

For more information, refer to Cash and non-cash accounting (NAT 3136).

GST and annual private apportionment

If you choose to use the GST annual private apportionment concession, when claiming GST credits for the GST you paid in the price of business assets you purchase you:

• do not need to estimate how much you intend to use an asset for private purposes
• can claim a GST credit for the total amount of GST you paid in the purchase price of the asset in most situations
• make a single adjustment after the end of your income year to account for the extent you used the assets for private purposes.

This adjustment will either increase the amount of GST you must pay or reduce your GST refund for the tax period you make it in.

When you can use annual private apportionment

You can use annual private apportionment if you do not report GST annually or pay GST by instalments.

You can also access this concession if you:

• are not operating a business, but are carrying on an enterprise with a GST turnover of $2 million or less
• do not pay GST by instalments or report GST annually.

Your choice will:

• take effect from the beginning of the earliest tax period for which your activity statement is not yet due
• continue to apply until you are no longer eligible, or you cancel your choice to use this option.

You do not need to tell us when you choose annual private apportionment, but you must keep a record of your decision to do so. Your records must include the date you chose annual private apportionment and the date it took effect.

For more information, refer to GST and annual private apportionment (NAT 12877).

GST instalments

You can choose to report and pay your GST in instalments and lodge an annual GST return. We work out the amount you need to pay in each instalment. However, you can vary this amount if you want to.

We refund any amount of GST that you have overpaid when you lodge your annual GST return, provided you have no other tax debts. If we find the amount you have paid does not fully cover the GST you must pay, you must make an extra payment to cover the shortfall.

Under most circumstances, if you choose to pay GST by instalments, you pay four quarterly instalments in an income year.

You may be eligible to pay GST in two instalments in an income year if you are:

• carrying on a primary production business
• a special professional such as an author, inventor, performing artist, production associate or sportsperson.

When you can pay GST by instalments

You may be eligible to pay your GST by instalments if you:

• do not lodge your activity statement monthly
• have lodged an activity statement for at least two quarters (or four months if you previously lodged your activity statement monthly)
• have lodged all your previous activity statements as required
• were not in an overall GST net refund position in the previous year (this does not include the first activity statement you lodged).

If you are currently lodging monthly activity statements for GST purposes and want to pay GST by instalments, you must first change to lodge quarterly.

You can also access this concession if you:

• are not operating a business, but you are carrying on an enterprise with a GST turnover of $2 million or less
• meet the four criteria stated above.

Once you choose the instalments option, you must use it for the rest of the financial year. We only refund any extra GST you have paid to us after you lodge your annual GST return.

For more information, refer to: GST instalments (NAT 4238) Varying your GST instalments (NAT 4239).

Fringe benefits tax on car parking

You may have to pay fringe benefits tax (FBT) on benefits you (as an employer) provide to your employees or their associates (such as family members). However, you may be exempt from FBT on car parking benefits you provide.

When you incur FBT on a car parking fringe benefit

You provide a car parking fringe benefit for each day you provide parking for an employee if you meet all of the following conditions:

• a car is parked at premises that you own, lease or otherwise control
• the car is parked for a total of more than four hours between 7.00am and 7.00pm on the day
• either you provided the car or your employee owns, leases or otherwise controls it
• you provide the parking as part of your employee's employment
• the car is parked at or near your employee's primary place of employment on that day
• your employee uses the car to travel between home and work (or work and home) at least once on that day
• there is a commercial parking station within a one-kilometre radius of the premises where the car is parked that charges a fee for all-day parking that is more than the car parking threshold
• the commercial parking station, at the beginning of the FBT year, charges a representative fee for all-day parking that is more than the car parking threshold.

When car parking you provide is exempt from FBT

Car parking benefits you provide are exempt from FBT if all of the following apply:

• you do not provide the car parking in a commercial car park
• you are not a government body, a listed public company or a subsidiary of a listed public company
• your business was a small business for the last income year before the relevant FBT year (the FBT year is from 1 April to 31 March).

	If you do not meet the definition of a small business, you may still be entitled to the FBT car parking exemption.
	For more information, refer to Fringe benefits tax - a guide for employers (NAT 1054).

Eligibility

This section contains the information you need to work out if you are a small business for an income year. You must review your eligibility each year.

When we say business, we mean the individual, partnership, company or trust that carries on the business activity. When we say small business we mean small business entity, which is a business with an aggregated turnover of less than $2 million.

Are you a small business for the current year?

You are a small business if you are an individual, partnership, company or trust that:

• carries on a business for all or part of the income year, and
• has less than $2 million aggregated turnover.

For more information about what it means to carry on a business, refer to: Am I in business? (NAT 2598) Taxation Ruling TR 97/11 - Income tax: am I carrying on a business of primary production? (The examples used in this ruling relate to primary production activities but the principles can be applied to other activities.)

Aggregated turnover

Broadly, aggregated turnover is your annual business turnover for the income year plus the annual turnover of any business that is connected with you or that is your affiliate.

You must use the aggregation rules to work out if you need to include another business' annual turnover in your aggregated turnover. These rules stop larger businesses splitting their activities to inappropriately access small business concessions.

For more information, see The aggregation rules.

Three ways to work out if you are a small business

You can work out if you are a small business for the current year in any of the following ways:

• use your aggregated turnover for the previous income year
• estimate your aggregated turnover for the current year as at the beginning of the current year
• use your actual aggregated turnover for the current year as at the end of the current year.

Most businesses find the first method easiest.

You must:

• use the same method for any connected or affiliated business
• keep records of how you worked out your aggregated turnover.

There are some exceptions and limitations to the estimated current year and actual current year methods.

Method 1 - Use your previous year's aggregated turnover

If your aggregated turnover for the previous income year was less than $2 million, you are a small business for the current year.

Method 2 - Estimate your current year aggregated turnover

If your estimated aggregated turnover for the current year is less than $2 million, you are a small business for the current year.

You can only use this method if your aggregated turnover was less than $2 million for one of the last two income years.

You must work out whether your aggregated turnover is likely to be less than $2 million based on the conditions you know about at the beginning of the income year or, if you are starting a business part way through the year, at the time you start your business.

Factors to consider when estimating your turnover include:

• your turnover in earlier income years
• whether you plan to reduce or increase staff in the current year
• whether your business operating hours will increase or decrease
• whether previous extraordinary sales or product lines will be available in the current income year
• whether your business will face increased competition in the current income year
• whether your business activity will increase or decrease because of changing conditions.

Method 3 - Use your actual current year turnover

If your actual aggregated turnover at the end of the current year is less than $2 million, you are a small business for the current year.

If you use your actual aggregated turnover, you cannot use the goods and services tax (GST) and pay as you go (PAYG) instalments concessions for that income year. This is because you must choose these concessions earlier in the income year.

Example: A business operating for part of an income year

Rosa has a business and plans to retire in March 2010. She decides to gradually ease out of the business and doesn't take on any new clients after March 2009.

Rosa's turnover for both the 2007-08 and 2008-09 income years was more than $2 million so she cannot estimate her turnover for 2009-10. To be an eligible small business for the 2009-10 income year, Rosa must use her actual current year turnover.

When Rosa finishes her business in March 2010, her turnover for the income year to date is $1.1 million. Rosa is an eligible small business for 2009-10 because she estimates that her turnover would have been $1.5 million for the full income year.

If you are not a small business in an income year, you may still be able to access the: capital gains tax concessions if you pass the $6 million maximum net asset value test fringe benefits tax concession if your combined ordinary and statutory income is less than $10 million.

Winding up a business

In a year when you are winding up a business, we take you to be still carrying on the business and have access to these concessions if both of the following apply:

• you are winding up a business you previously carried on
• you were a small business in the income year you ceased business.

If you were an STS taxpayer in the year you ceased business, you are taken to be a small business in a later year when you are winding up your business for the purposes of the following concessions: simplified deprecation rules simplified trading stock rules entrepreneurs' tax offset prepaid expenses two year period of review.

How to work out your aggregated turnover

Step 1 - work out your annual turnover (for the previous or current year)

Your annual turnover includes all ordinary income you earned in the ordinary course of business for the income year. Turnover means your gross income, not your net profit.

If you operate multiple business activities, either as a sole trader or within the same business structure, you must include the income from all your activities when working out your annual turnover. For example, a sole trader operating a part time consultancy and a retail shop would include the income from both business activities when working out annual turnover.

Example: Amounts included and not included in ordinary income

Include these amounts:

• trading stock sales
• fees for services you provide
• interest from business bank accounts
• amounts you receive to replace something that would have had the character of business income.*

* However, assessable income from an individual's personal income protection insurance policy is not included as it is not 'from' a business activity.

Do not include these amounts:

• GST you charge on a transaction
• amounts you borrow for the business
• proceeds from selling business capital assets
• insurance proceeds for the loss or destruction of a business asset
• amounts you receive from farm management deposit repayments.

Special rules for working out your annual turnover

Operating a business for part of the year

If you start or cease a business part way through an income year, you must make a reasonable estimate of what your turnover would have been if you had carried on the business for the entire income year. This rule applies for all three methods of working out whether you are a small business entity.

Retail fuel sales

Do not include retail fuel sales when working out your turnover. This is a special rule because sales of retail fuel are characteristically high in volume with low profit margins.

Non-arm's length business transactions

Include any income from transactions with an associate in your turnover.

If the dealing was not at arm's length (that is, the goods or services were sold at a discounted price because of their association with you) you must use the market value of the goods or services when working out your annual turnover.

However, you may take into account any discounts that you would have offered had the dealing been at arm's length.

Example: Non-arm's length business transactions

Lana carries on a printing business and Max carries on a florist business. Lana and Max are married and are, therefore, each other's associate. Lana manufactures 200 gift cards for Max which he uses in his florist business. Lana only charges him the amount it costs her to manufacture the gift cards, with no profit margin.

This is a non-arm's length transaction between associates, so the amount that Lana must include in her turnover is the ordinary income she would have made from the sale of the gift cards if the transaction had been at arm's length. A useful guide for the amount she must use is the price she would charge any regular customer (taking into account bulk discounts that she would offer other customers).

If the aggregation rules do not apply to you, your aggregated turnover is the same as your annual turnover. You do not need to read any further. If you must consider the aggregation rules, or are not sure if they apply to you, continue to step 2.

Step 2 - consider the aggregation rules

You must include the annual turnover of a relevant business with your annual turnover when working out your aggregated turnover.

A relevant business is a business that, at any time during the income year, is one of the following:

• connected with you
• your affiliate.

For more information, see The aggregation rules.

Example: Aggregation rules

Lana and her husband Max each own 50% of the shares in a company, Lamax Pty Ltd.

Max has a florist business and Lana runs a printing business. Max and Lana do not have any involvement in each other's businesses.

Lana and Max are connected to Lamax Pty Ltd because they control the company. Lamax Pty Ltd is a relevant business of both Lana and Max.

If you have a relevant business, repeat step 1 for each relevant business to work out their annual turnover. You must use the same method for working out your annual turnover and the annual turnovers of all your relevant businesses.

Step 3 - work out your aggregated turnover

To work out your aggregated turnover, add the annual turnovers of relevant businesses to your annual turnover.

When working out your aggregated turnover, do not include income:

• from dealings between you and a relevant business
• from dealings between any of your relevant businesses
• of a business when it was not your relevant business.

If your aggregated turnover is less than $2 million, you are a small business for the current year.

Example 3: Working out aggregated turnover

Jun runs a clothing business and her brother Jai runs a kitchen supplies store. Jun and Jai are associates but they are not affiliates because they do not act in concert with one another or according to the directions or wishes of each other in regard to their respective businesses.

Jun and Jai each own 50% of the shares in a third business, JJ Photographics Pty Ltd. They are both connected with JJ Photographics Pty Ltd.

Jun must include JJ Photographics' turnover in her aggregated turnover because JJ Photographics is connected with her. Jun does not include any income from her transactions with JJ Photographics and she does not include Jai's turnover in her aggregated turnover because Jai is not Jun's affiliate.

Jai must include JJ Photographics' turnover in his aggregated turnover because he is connected with JJ Photographics and he does not include any income from his transactions with JJ Photographics. Jai does not include Jun's turnover in his aggregated turnover, as Jun is not his affiliate.

The following chart will help you work out if you are a small business for the current year.

For more information about the aggregation rules: see The aggregation rules refer to subdivision 328-C of the Income Tax Assessment Act 1997 - What is a small business entity?

The aggregation rules

You must use the aggregation rules to work out whether you must add any other business entities' annual turnover to your annual turnover when working out your aggregated turnover.

When we say business we mean the individual, partnership, company or trust that carries on the business activity. When we say small business we mean small business entity, which is a business with an aggregated turnover of less than $2 million.

If you are aggregated with one or more other businesses, you do not need to use a particular concession just because some or all of those other businesses have chosen to use it.

When do the aggregation rules apply?

The aggregation rules apply if another business is:

• your affiliate, or
• connected with you.

These business entities are also called 'relevant' businesses.

If your aggregated turnover is $2 million or more, you may still be eligible for the small business CGT concessions if you meet the $6 million maximum net asset value test. You also use the aggregation rules to work out when another entity is your affiliate, or is connected with you, for the purposes of the $6 million maximum net asset value test.

Affiliates

What is an affiliate?

An affiliate is any individual or company that, in relation to their business affairs, acts or could reasonably be expected to act according to your directions or wishes, or in concert with you.

Trusts, partnerships and super funds cannot be your affiliates.

For the purposes of the $2 million aggregated turnover test, when working out your eligibility for the CGT small business concessions, an entity can be taken to be an affiliate of another entity in certain circumstances. This rule can apply where any of the following is true: they are an affiliate of the asset owner and the asset owner's asset is used in a business carried on by a different affiliate one entity owns an asset that is used in a business carried on by a spouse or child, or by an entity that spouse or child owns or has an interest in they are an affiliate of the partner and the partner's asset is used in the partnership business.

For more information see Advanced guide to capital gains tax concessions for small business 2009-10 (NAT 3359).

What does 'in concert with you' mean?

Broadly, acting 'in concert with you' means there is a substantial degree of dependence on, or connection with you in relation to their business affairs.

Factors to consider in working out whether an individual or company is acting in concert with you are:

• the nature and extent of the commercial dealings between you and that entity
• whether one of the entities is under a formal or informal obligation to purchase goods or services or conduct aspects of their business with the other entity
• any common resources, facilities or services
• the other's involvement in the managerial decisions and day-to-day management
• financial interdependencies (for example, financial support or shared banking arrangements)
• any common flow of profits
• any common ownership or capital backing.

Working together on a specific venture and sharing in the profits of that venture does not automatically mean two entities are acting in concert, if the underlying businesses continue to operate independently.

Generally, another business would not be acting in concert with you if they:

• have different employees
• have different business premises
• have separate bank accounts
• do not consult you on business matters
• conduct their business affairs independently in all regards.

None of these factors are conclusive in their own right. You need to consider these factors in combination to work out if another business is acting in concert with you.

An individual or company is not automatically your affiliate because of the relationship they have with you, or their relationship with an entity that is common to you both.

For example, if you are a partner, another partner in the same partnership is not your affiliate just because that partner acts, or could reasonably be expected to act, together with you in relation to the affairs of that partnership. To be your affiliate, the partner must act in concert with you in respect of a business separate from that partnership.

Similarly the following are not automatically affiliates of each other:

• directors of the same company
• directors and the company they are a director of
• individuals or companies who are joint trustees of the same trust.

Are franchisees and franchisors affiliates?

Franchisees are not necessarily affiliates of the franchisor simply because of the franchise arrangement. Whether the franchisee acts in concert with the franchisor in respect of their franchise business depends on, among other things, the nature of the franchise agreement between them.

Are spouses and children affiliates?

Neither a spouse nor a child under the age of 18 years is automatically your affiliate. You must consider whether they are acting according to your directions or wishes, or in concert with you, in relation to their business affairs.

There is a special rule that may treat your spouse or child as an affiliate for the small business CGT concessions where either of the following applies: you own an asset and that asset is used in a business carried on by an entity that your spouse (or child) owns or has an interest in an entity you own or have an interest in owns an asset , and that asset is used in a business carried on by your spouse (or child), or an entity that your spouse or child owns or has an interest in. If this rule applies, you may need to include the turnover of other entities when working out your aggregated turnover.

For more information see Advanced guide to capital gains tax concessions for small business 2009-10 (NAT 3359).

Example: Not affiliates

Senwe and Mosi are husband and wife. They share in the running of their household. Senwe carries on a cleaning business with an annual turnover of $1.7 million while Mosi carries on a bakery with an annual turnover of $1.8 million.

They have nothing to do with each other's business. They have:

• separate bank accounts for their businesses
• different business locations
• their own employees.

Neither Senwe nor Mosi control the management of the other's business.

Even though Senwe and Mosi are married, neither is an affiliate of the other because they do not act:

• in concert with each other in respect of their businesses
• according to the directions or wishes of the other.

Therefore, neither Senwe nor Mosi has to include the annual turnover of the other's business in working out the aggregated turnover of their own business.

What does 'connected with you' mean?

An entity is connected with another entity if either of the following applies:

• either entity controls the other
• both entities are controlled by the same third entity.

For example, an entity is connected with you if that entity:

• is controlled by you
• controls you
• is controlled by another entity that also controls you
• is controlled by your affiliate
• is controlled by you together with your affiliate
• is controlled by an entity that you control (see the indirect control test).

You work out whether a control relationship exists between entities using the control rules.

For the purposes of the $2 million aggregated turnover test in working out eligibility for the CGT small business concessions, an entity can be taken to be connected with another entity in certain circumstances. This rule can apply where any of the following apply: they are connected with the asset owner and the asset owner's asset is used in a business carried on by a different connected entity one entity owns an asset that is used in a business carried on by a spouse or child, or by an entity that spouse or child owns or has an interest in they are connected with the partner and the partner's asset is used in the partnership business a partner owns an asset that is used in two or more partnerships in which they are a partner.

See Advanced guide to capital gains tax concessions for small business 2009-10 (NAT 3359).

Control of a company

You must consider whether you have an interest in any company and whether your affiliates have interests in any companies.

You control a company if you, your affiliates, or you together with your affiliates have either of the following:

• shares and other equity interests in the company that give you and/or your affiliates at least 40% of the voting power in the company
• the right to receive at least 40% of any income or capital the company distributes.

Example 1: Control of a company

Yusef is a sole trader. He also owns shares in a company that carry 50% of the voting power in the company. Yusef controls the company.

Example 2: Control of a company

Lucy is a sole trader. Her interests in Cool Computers give her 30% of the voting rights in that company.

Sean is Lucy's affiliate. He also owns interests in Cool Computers that give him 30% of the voting rights in that company.

Lucy controls Cool Computers because Lucy's interests and Sean's interests together give them the right to exercise more than 40% of the voting rights in Cool Computers. Lucy must include Cool Computers' and Sean's turnover when working out her aggregated turnover.

Control of a partnership

You control a partnership if you, your affiliates, or you together with your affiliates have the right to 40% or more of the partnership's net income or capital.

Example: Control of a partnership

Olivia and Jill are partners in a professional practice. As they each have a 50% interest in the partnership, they each control the partnership and would, therefore, need to include the partnership's turnover when working out their eligibility.

Control of a fixed trust

You control a fixed trust if you, your affiliates, or you together with your affiliates have the right to receive 40% or more of any income or capital the fixed trust distributes.

Control of a discretionary trust

There are two tests for control of a discretionary trust. You control a discretionary (non-fixed) trust if you meet either of these tests.

Distribution test

You meet the distribution test if, in any of the previous four income years, you, your affiliates or you together with your affiliates received a trust distribution of 40% or more of the total income or capital the trust distributed for that income year.

Influence over the trustee test

You meet the influence over the trustee test if the trustee either acts, or might reasonably be expected to act, according to the directions or wishes of you, your affiliate or you together with your affiliates.

You must consider all the circumstances to work out whether you meet this test. For example, to prove that you had no influence over the trustee, it would not be enough for the trust deed to say the trustee must ignore your directions or wishes.

Some factors you might consider include:

• the way the trustee has acted in the past
• the relationships between you, your affiliates and the trustee
• the amount of property or services you or your affiliates transferred to the trust
• any arrangement or understanding between you and any person who has benefited under the trust in the past.

Example: Control of a trust

Gavin is working out whether he is an eligible small business for the 2011-12 income year. In the 2008-09 income year, Gavin received a distribution from a discretionary trust that was 70% of the total amount of the income the trust distributed in that income year. Gavin controls that trust because he received a distribution of income in 2008-09 that was more than 40% of the total amount of income distributed that year. When working out his aggregated turnover, Gavin must include the annual turnover of the trust.

Transitional rules can apply to stop your business losing access to concessions.

Control of a discretionary trust - trustee did not make a distribution

Where the trustee of a discretionary trust did not make a distribution because the trust had a tax loss or no taxable income, the trustee can nominate up to four beneficiaries as controllers of the trust for that income year.

The implications of being a nominated controller are different for the aggregation rules and the active asset test. For the purposes of the aggregation rules, if you are a nominated controller, you are not connected with the trust. This means that you do not have to include either the trust's turnover for the aggregated turnover test or the value of the trust's net assets when considering whether you meet the maximum net asset value test.

For the purposes of the active asset test, if you are a nominated controller, you are connected with and are taken to control the trust for that income year. This means that an asset you hold can qualify as your active asset (and potentially be eligible for the CGT concessions) where it is used or held ready to use in the trust's business. Additionally, if the asset you hold is an intangible asset, such as goodwill, it can be your active asset if it is inherently connected with the trust's business.

Before 2007-08, this rule applied differently. If you were a nominated controller for the 2006-07 or earlier years, you were connected with the trust for that year for the purposes of the maximum net asset value test.

Transitional rules - control of a discretionary trust

Transitional rules can apply to stop you losing access to the former STS concessions because of the introduction of the 40% distribution test for discretionary trusts. These rules only apply for the purpose of accessing the following concessions:

• simplified depreciation rules
• simplified trading stock rules
• entrepreneurs' tax offset
• deductibility of prepaid expenses
• two-year amendment period.

This transitional rule allows you to use the distribution test that existed under the STS grouping rules rather than the 40% distribution test. Under the STS grouping rules, you control a discretionary trust if, in any of the previous four income years, the trustee of that trust distributed $100,000 or more to you, your affiliates, or you and your affiliates together.

Under the transitional rule you do not control the trust if the distribution was more than 40% but less than $100,000. This rule only applies for distributions made before the 2007-08 income year. This rule will stop having effect for the 2011-12 and later income years.

Tax exempt entities and deductible gift recipients can never control a discretionary trust, regardless of the percentage of distributions they receive.

The indirect control test

This test is designed to look through business structures that include interposed entities. For example, where you directly control a second entity, and the second entity either directly or indirectly controls a third entity, you are taken to also control the third entity.

In the above figure, the small business has more than 40% direct and indirect interest in companies A and B. Therefore, the small business controls companies A and B but not company C.

Public entity exception

The indirect control test does not apply if an entity controls a public entity and that public entity controls a third entity - unless the first entity actually controls the third entity (for example, because it holds 50% of the voting rights in the third entity excluding interests it holds indirectly through the public entity).

The types of public entities are:

• companies whose shares are listed for quotation in the official list of an approved stock exchange, unless those shares carry the right to a fixed dividend rate
• publicly traded unit trusts
• mutual insurance companies
• mutual affiliate companies
• any company where all of its shares are beneficially owned by one or more of the entities listed above.

Discretion about the control test

If you meet the 40% threshold under one of the control tests, we may decide that you do not control an entity if both of the following apply:

• your control percentage is less than 50%
• we are satisfied, or think it is reasonable to assume, that someone else actually controls the entity.

However, it is possible that both you and another person or entity jointly control an entity if you each have a control percentage of at least 40% and you share the responsibilities.

Example: Discretion about the control test

Lachlan owns 45% of the shares in a private company. He plays no part in the day-to-day or strategic running of the business. Daniel owns the other 55% of the shares in the company. All shares carry the same voting rights and Daniel runs the company. Even though Lachlan owns 45% of the shares in the company, he would not be taken to control the company because we would be satisfied that Daniel controls the company.

Comparing the income tax concessions

This section shows the main differences between using the income tax concessions and not using them.

25% Entrepreneurs' tax offset	Choosing to use the concession	Choosing not to use the concession
For more information, see Entrepreneurs' tax offset.	If you have an aggregated turnover of $50,000 or less, you can apply a 25% tax offset to your income tax. If your aggregated turnover is between $50,000 and $75,000, you may be able to apply part of this offset. From the 2009-10 income year, an additional income test has been introduced into the eligibility criteria for individuals only.	You cannot apply any offsets.

Simplified depreciation rules For more information, see Simplified depreciation rules.	Choosing to use the concession	Choosing not to use the concession
Low-cost assets (assets costing less than $1,000)	Generally, you can claim an immediate deduction for the proportion of the asset's cost that relates to a taxable purpose (for example, business use).	You cannot claim an immediate deduction for assets you use in the business (including assets costing less than $300). You can claim an immediate deduction for certain tangible assets costing $100 or less. Also, you can do either of the following: place low-value assets in a pool and deduct at 37.5% - or at half that rate (18.75%) in the first year regardless of when during the year you first use or install the assets ready to use work out a deduction for each asset based on its effective life.
Assets with an effective life of less than 25 years For more information see Small business pools.	You can place most of these assets in a general pool and treat the pool as a single asset so you do not need to do separate calculations for each asset. You can then deduct the pool at 30%.	You must work out the deductions for each asset separately, based on its effective life.
Assets with an effective life of 25 years or more For more information see Small business pools and long-life assets held before 1 July 2001.	You can generally place these in a long-life pool and treat the pool as a single asset so you do not need to do separate calculations for each asset. You can then deduct the pool at 5%.	You must work out the deductions for each asset separately, based on its effective life.
Assets you acquired during an income year For more information see Assets you first use during an income year.	You can deduct these at half the pool rate (either 15% or 2.5%) regardless of when during the year you first use or install the assets ready to use.	You must work out the deduction on a pro-rata basis, based on the date you first used or installed the asset (unless you have placed it in a low-value pool or you can claim an immediate deduction).
Primary producers For more information see Primary producers.	If you are a primary producer, for some assets you can choose between the following rules: specific primary producer rules, or simplified depreciation rules. Once you have chosen how to treat an asset, you cannot change this. You must claim deductions for other assets based on their effective life.	You must use specific primary producer rules if they apply to your assets. You must claim deductions for other assets based on their effective life.
Disposals For more information see Asset disposals.	When you dispose of a: pooled asset, you reduce the relevant pool balance by the taxable purpose proportion of the asset's termination value low-cost asset, you include the taxable purpose proportion of the termination value in your assessable income.	The difference between the asset's termination value and the adjustable value (taxable purpose proportion only) is either assessable income or a deduction. If the termination value is more than the adjustable value, you include the difference as assessable income. If the termination value is less than the adjustable value, you deduct the difference from your assessable income.
Capital gains tax	If you use an asset for a non-taxable purpose and you claimed deductions for the asset using the simplified depreciation rules, you do not need to account for any capital gain or loss when you dispose of the asset.	If you use an asset for a non-taxable purpose, you must account for any capital gain or loss when you dispose of the asset.

 

For more information about assets you purchase for less than $100 where you are not using the simplified depreciation rules, refer to our practice statement PS LA 2003/8: Taxation treatment of expenditure on low-cost items for taxpayers carrying on a business.

Prepaid expenses	Choosing to use the concession	Choosing not to use the concession
Prepaid expenses For more information, see Prepaid expenses.	You can claim an immediate deduction where both of the following apply: the period of service is 12 months or less the period of service ends in the next income year.	You need to apportion the expense where the period of service covers more than one income year.

Simplified trading stock	Choosing to use the concession	Choosing not to use the concession
Simplified trading stock For more information, see Simplified trading stock rules.	You do not have to account for changes in the value of your trading stock or do a stocktake unless the difference between the value of your opening stock and a reasonable estimate of your closing stock is more than $5,000. You can choose to account for the difference where it is $5,000 or less, but then you must accurately work out the value of the trading stock at the end of every income year, usually by carrying out a stocktake.	You must: account for changes in the value of trading stock, and accurately work out the value of your trading stock at the end of every income year, usually by carrying out a stocktake.

Entrepreneurs' tax offset (ETO)

About the ETO

The entrepreneurs' tax offset (ETO) is a tax offset equal to 25% of the income tax payable on your business income if you have an aggregated turnover of $50,000 or less.

If your aggregated turnover is more than $50,000 the ETO is phased out so that the offset stops once your turnover reaches $75,000.

From the 2009-10 income year, an additional income test has been introduced into the eligibility criteria for individuals. The amount of entrepreneurs' tax offset payable in respect of partnership or sole trader activities, or income from a trust is reduced if your income for ETO purposes exceeds the relevant threshold. The test will reduce the ETO entitlement for single individuals whose income for ETO purposes is over $70,000 and for families with income for ETO purposes over $120,000.

The tax offset can only reduce the amount of tax you must pay this year. That is, we cannot:

• refund any unused tax offset
• defer it to reduce your tax in a later income year, or
• transfer it to another taxpayer to reduce their tax.

For more information, refer to subdivision 61-J (section 61-500 - section 61-525) of the Income Tax Assessment Act 1997 (ITAA 1997).

Who is eligible for the ETO?

You may be eligible for the ETO if both of the following apply:

• your aggregated turnover for the year is less than $75,000
• you have net small business income for the year (that is, your small business turnover is more than the deductions that directly relate to that turnover).

For more information about how to work out your aggregated turnover, see Eligibility.

The ETO is available to:

• an individual or a company that is a small business
• a partner in a partnership that is a small business
• a beneficiary of a trust that is a small business where the beneficiary is liable to pay the tax
• a trustee of a trust that is a small business where the trustee is liable to pay the tax.

From the 2009-10 income year, if you are an individual, the amount of your offset is reduced unless you meet the income test. You meet the income test if your income for ETO purposes does not exceed the following thresholds:

• $70,000 if you are single with no qualifying dependant
• $120,000 if you had a:
  • qualifying dependant on any day during the income year, or
  • spouse on the last day of the income year.

If you had a spouse on the last day of the income year you will need to include details of their income in working out whether you meet the threshold.

For more information about how to work out your income for ETO purposes, see Income for ETO purposes.

To work out the amount of ETO you can claim, you first must know your:

• taxable income - total assessable income minus all allowable deductions
• basic income tax liability - the tax payable on your taxable income taking into account any special rules that apply and before reducing it by any offsets.

Then you must work out your:

• small business turnover
• net small business income.

Small business turnover

Your small business turnover is the total ordinary income you earned in the ordinary course of carrying on your business in an income year.

For examples, see Amounts included and not included in ordinary income.

Use your small business turnover to work out the amount of your ETO. In most cases, your small business turnover is the same as your aggregated turnover amount. However, there are some special rules for working out aggregated turnover that do not apply when you work out your small business turnover.

If you have already worked out your aggregated turnover, you may have to make adjustments to it to work out your small business turnover.

If you:

• have included another business' turnover in your aggregated turnover amount, you must:
  • exclude that business' turnover
  • add back any income you derived from your affiliates or connected entities
• operated a business for part of the year, you only include your actual turnover amount, you do not need to use the estimate of your full year turnover
• have retail fuel sales, you must add back your retail fuel sales.

Net small business income

Your net small business income is your small business turnover less the sum of the deductions that directly relate to that turnover.

The following do not reduce small business turnover:

• tax losses from prior years under Division 36 (section 36-1 - section 36-55) of the Income Tax Assessment Act 1997 (ITAA 1997)
• personal super contributions under subdivision 290-C (section 290-150 - section 290-180) of the ITAA 1997
• gifts or donations
• costs of managing your tax affairs under section 25-5 of the ITAA 1997
• non-commercial losses that have been deferred to a later year under Division 35 (section 35-1 - section 35-55) of the ITAA 1997.

Example: Working out your net small business income

Lizzie operates a small business and is not grouped with any other business under the aggregation rules. The business has a turnover of $35,000 for the year. Lizzie claims deductions for business expenses, including materials, stationery, postage and electricity relating to her home office, totalling $5,000.

Lizzie earns a salary of $60,000 for the year as well as her business income. Her work-related expenses total $1,200.

She also has a negatively geared share portfolio from which she receives $5,000 of dividend income and has $6,000 of interest expenses related to borrowings to acquire the shares. Lizzie makes a loss of $1,000 from her share investments.

Lizzie's net small business income only includes the amount she earns in carrying on a business. This is her small business turnover of $35,000 less business deductions of $5,000 that directly relate to that turnover, giving her net small business income of $30,000.

The income and expenses relating to her salary and share investments do not affect her small business turnover.

Multiple business activities

If you carried on more than one business activity (as a sole trader or within the same entity), to work out your net small business income you need to:

• combine your small business turnover from all business activities, and
• reduce that amount by the deductions attributable to that turnover.

Example: Multiple business activities

Kaitlin is a sole trader operating a shoe shop. She also runs a part-time hairdressing business from her home. She derived ordinary income of $15,000 from the first business and made a profit of $10,000. She derived ordinary income of $20,000 from the second business but made an overall loss of $5,000.

The small business entity turnover is the total ordinary income that she derives $35,000 ($15,000 + $20,000). The deductions attributable to that turnover are $30,000 ($5,000 + $25,000). Therefore, Kaitlin can claim the ETO for the amount of $5,000 ($35,000 - $30,000).

Non-commercial losses

If you are an individual or a partner in a partnership and you make a net loss from your business activity, you can only claim a deduction for that loss if you meet certain criteria. If you do not meet the criteria, defer the loss to a later income year.

Losses you cannot deduct because of the non-commercial loss rules do not reduce your net small business income in the loss year.

Similarly, if you have two separate business activities and made a deferred loss in one and a profit in the other, you cannot offset the deferred loss from the loss activity against the profitable activity. This is because amounts you defer are taken not to have been incurred in the loss year and, therefore, are not a deduction that directly relates to small business turnover in the loss year.

You can reduce your small business turnover for an activity in an income year if amounts you deferred from that activity in an earlier year are a deduction in that later year. This is provided the total of all deductions relevant to that activity, including the deferred losses, does not exceed the assessable income from that business activity.

If the total deductions exceed the assessable income from the business activity and you again defer the excess, you cannot reduce your small business turnover by the deferred amount in the year that it is deferred. Accumulated deferred losses and other amounts that are deductions against your small business turnover can only reduce your net small business income to nil.

For more information, refer to Non-commercial losses: overview - factsheet (NAT 3379).

Partnership distributions and deferred losses

Deferred non-commercial losses from a partnership activity that become deductible in a later year are the partner's deduction and, therefore, do not reduce the partnership's net small business income. The deferred losses that the partner can claim for income tax purposes do not reduce the partner's net small business income share from the partnership for ETO purposes.

Income test

From the 2009-10 income year, if you are an individual with net small business income that is eligible for the ETO as a sole trader, partner in a small business partnership or beneficiary of a small business trust you will also need to meet the income test.

You meet the income test if your income for ETO purposes does not exceed:

• $70,000 if you are single with no qualifying dependant
• $120,000 if you had a:
  • qualifying dependant on any day of the income year, or
  • spouse on the last day of the income year.

If your income for ETO purposes does not exceed the threshold amount your ETO will not be reduced.

If your income for ETO purposes is above the threshold your ETO, worked out before applying the income test, is reduced by 20 cents for every $1 over the threshold amount. This reduction is in addition to the phase-out that begins where your aggregated turnover exceeds $50,000.

If your income for ETO purposes is above the threshold, use the following formula to work out your reduction amount.

Income for ETO purposes for the income year - the relevant threshold

                                                          5

You are not entitled to any tax offset if the reduction amount is more than the ETO you worked out before applying the income test.

Income for ETO purposes

If you are an individual who is eligible for the ETO as a sole trader, partner in a partnership or beneficiary of a trust, you also need to know your income for ETO purposes.

To work out your income for ETO purposes, total your:

• taxable income
• reportable fringe benefits total
• reportable superannuation contributions
• total net investment loss.

Then subtract the following amounts where you are eligible for an ETO of more than zero before applying the income test:

• your net small business income
• any share of net small business income you received as a partner in a partnership or beneficiary of a trust.

If you had a spouse on the last day of the income year, your income for ETO purposes will also include the sum of your spouse's:

• taxable income
• reportable fringe benefits total
• reportable superannuation contributions
• total net investment loss.

Any net small business income of your spouse is not deducted from the calculation when working out your income for ETO purposes.

For more information, refer to subdivision 61-J (section 61-523) of the Income Tax Assessment Act 1997 (ITAA 1997) 'non-ETO small business income'.

Example: Sole trader's income for ETO purposes

In the 2009-10 income year, Kerry runs a bookkeeping business which has an aggregated turnover of $25,000 for the 2009-10 income year. Before applying the income test, Kerry can claim the ETO for the net small business income attributable to her bookkeeping business.

The net income from her business is $20,000 (that is, $25,000 turnover less $5,000 business expenses). This is Kerry's net small business income.

She also has a part-time job from which she receives salary and wages of $30,000. She is married to Mark who earns $65,000 per year and who receives a further $15,000 in reportable fringe benefits.

As Kerry and Mark are married as at the last day of the income year, both Kerry and Mark's income are taken into account in working out Kerry's income for ETO purposes. That is, ($50,000 - $20,000*) + $65,000 + $15,000 = $110,000.

* Kerry's net small business income of $20,000 has been deducted from this amount.

Example: A partner's and beneficiary's income for ETO purposes

Nick is a partner in a partnership that is a small business entity with an aggregated turnover of $70,000 for the 2009-10 income year. As the partnership's aggregated turnover is less than $75,000, Nick can claim the ETO for any distribution from this partnership. Nick receives a partnership distribution of $25,000 for the 2009-10 income year.

Nick is also a beneficiary of a small business trust with an aggregated turnover of $120,000 for the 2009-10 income year. As the trust's aggregated turnover is more than $75,000, the beneficiaries are not eligible for the ETO. Nick receives a $30,000 trust distribution which he must include in his assessable income for the 2009-10 income year.

In addition to the income he received from the partnership and trust, Nick also earns $41,000 in the 2009-10 income year from investments he holds. So, for the 2009-10 income year, Nick has taxable income of $96,000. However, his income for ETO purposes is $71,000 ($96,000 - $25,000).

Meaning of spouse

Your spouse includes another person (whether of the same sex or opposite sex) who:

• you were in a relationship with that was registered under a prescribed state or territory law,
• although not legally married to you, lived with you on a genuine domestic basis in a relationship as a couple.

Meaning of qualifying dependant

For the purpose of working out your relevant income test threshold, a qualifying dependant is one of the following:

• your child who is under 21 years old regardless of residency
• a resident of Australia to whose maintenance you contribute and who is:
  • a child less than 21 years old (not being a student)
  • a student under 25 years old who is studying full-time at school, college or university
  • a child-housekeeper - being your child (of any age) who is wholly engaged as your housekeeper
  • your parent or a parent of your spouse
  • an invalid relative - that is, your child, brother or sister aged 16 years or older who:
    • receives an Australian Government disability support pension
    • receives a rehabilitation allowance under the Social Security Act 1991 and who, immediately before they were eligible to receive that allowance, was eligible for an invalid pension under that Act, or
    • has a certificate from a Commonwealth-approved doctor certifying a continuing inability to work.

The meaning of qualifying dependant is different for ETO purposes and does not include a spouse.

A child includes your natural child, an ex-nuptial child, your adopted child or a child of your spouse (step child).

A dependant (other than a child less than 21 years old), needs to be an Australian resident for tax purposes. We treat a student as a resident if they have always lived in Australia or they came to live in Australia permanently, unless they have set up a permanent home outside Australia.

If your dependant was overseas, we will consider them to be your dependant for tax offset purposes if you are taking the steps necessary for their migration in a timely manner.

What is maintaining a dependant?

You maintained a dependant if any of the following applied:

• you and your dependant lived in the same house
• you gave your dependant food, clothing and lodging, or
• you helped them to pay for their living, medical and educational costs.

We consider you to have maintained a dependant even if the two of you were temporarily separated, for example, due to holidays or because they were overseas.

Taxable income

Your taxable income is your assessable income less your allowable deductions for an income year.

Reportable fringe benefits

Your total reportable fringe benefits are the total of reportable fringe benefit amounts shown on your payment summaries.

Refer to your payment summaries from your employer for details of your reportable fringe benefits.

Reportable super contributions

Reportable super contributions include your:

• reportable employer super contributions
• personal deductible contributions.

Reportable employer super contributions

Reportable employer super contributions are salary sacrificed super contributions or other contributions your employer makes to a super fund on your behalf where both of the following apply:

• you influenced the amount or rate of super your employer contributes
• the contributions are additional to the minimum contributions they must make under one of the following:
  • super guarantee law
  • an industrial agreement
  • the trust deed or governing rules of a super fund
  • a federal, state or territory law.

If your employer makes reportable employer super contributions for your benefit, they must include the total amount of these contributions on your 2009-10 payment summary. You must then include this amount in your income tax return and we use it to work out your total reportable super contributions for the year.

Check with your employer for details of your salary sacrificed super contributions.

Personal deductible contributions

Your personal deductible contributions include any personal contributions you made to a super fund which you can claim an income tax deduction for on your individual tax return.

You can claim an income tax deduction for personal contributions you make to a super fund if you meet certain eligibility criteria. Generally, you must:

• be self-employed
• earn less than 10% of your assessable income plus reportable fringe benefits from activities you conduct as an employee for super guarantee purposes.

If you made a personal contribution and you did not claim a deduction for it, that amount is not a reportable super contribution.

Example

In the 2009-10 income year, Fred is self-employed and earns $40,000. Fred is not an employee for the purposes of super guarantee law.

Fred contributes $1,000 to his super fund. If he lodges a notice of intent to deduct and that notice is acknowledged by his super fund:

• he can claim a personal income tax deduction of $1,000
• his taxable income is $39,000 if he claims no other deductions.

However, for the non-commercial losses income requirement, Fred's income is $40,000; that is, $39,000 taxable income, plus the $1,000 reportable super contribution amount.

For more information: about reportable super contributions, refer to Guide for employees and self employed - Reportable super contributions - income tests about personal deductible contributions, see Claiming deductions for personal super contributions.

Total net investment loss

You have a total net investment loss when the amount of allowable deductions you claim for your financial investments and rental properties is more than the gross income you receive from those investments. It doesn't matter whether the investment is overseas or in Australia.

Your total net investment loss is the sum of your net investment losses from the following two types of investments:

• rental property investments - such as negatively geared rental properties
• financial investments - such as negatively geared share portfolios

Financial investments include the following classes of investment:

• shares
• managed investment schemes
• forestry managed investment schemes
• a right or option for any of the above.

We only take the net loss from your rental properties and the net loss from your financial investments into account when we work out your total net investment loss. Net income from a rental property investment does not offset a loss from a financial investment or vice versa.

Example

During the 2009-10 income year, Joe makes a combined net loss on his negatively geared share portfolio and managed investment scheme of $10,000. He also receives $15,000 in net rental income against which he has no allowable deductions.

To work out Joe's total net investment loss, he does not offset the net rental income he receives against the net loss he makes on his shares and managed investment scheme. This means Joe's total net investment loss for the 2009-10 income year is $10,000.

For more information about total net investment losses, refer to Total net investment losses - income tests.

How to work out the ETO

How you work out the ETO depends on the business structure you use to conduct the business. There is a specific way of working out the ETO depending on whether you are:

• an individual or company
• a partner in a partnership
• a trustee of a trust
• a beneficiary of a trust.

If you are an individual or a company

Step 1	Work out your taxable income for the year.
Step 2	Work out 25% of the basic income tax liability on that taxable income (use the applicable tax rates and take into account any special rules that affect the liability, but do not take any tax offsets into account).
Step 3	Work out the small business percentage using the formula: Net small business income for the year  x   100            Taxable income for the year If the result is more than 100%, the small business percentage is 100%.
Step 4	If the aggregated turnover is $50,000 or less, the tax offset is: Step 2 amount x small business percentage
Step 5	If the aggregated turnover is more than $50,000, adjust the offset by the small business phase-out fraction. Work this out using the formula: $75,000 - the aggregated turnover for the year                                     $25,000 The tax offset is: Step 2 amount x small business percentage x small business phase-out fraction

If you are not an individual this is the end of your calculation.

If you are entitled to an ETO as an individual (other than in your capacity as a trustee) go to Step 6 to apply the income test.

Income test

Step 6	Work out your income for ETO purposes.
Step 7	Go to step 8 if your income for ETO purposes exceeds: $70,000 if you are single with no qualifying dependant, or $120,000 if you had a qualifying dependant on any day of the income year or you had a spouse on the last day of the income year. If your income for ETO purposes does not exceed the relevant threshold, the amount you worked out at Step 4 or Step 5 is your ETO.
Step 8	Reduce the amount you worked out in Step 4 or Step 5 by the amount you calculated using the formula: Income for ETO purposes for the income year - the threshold amount                                                       5 You are not entitled to any tax offset if the reduction amount is equal to or more than the amount you worked out in Step 4 or Step 5

Example: Sole trader with other non-business income

In the 2009-10 income year, Jenny runs a physiotherapy practice from her home. The net income from her practice is $18,000 (that is, $30,000 turnover less $12,000 business expenses). This is Jenny's net small business income. She also has a part-time job from which she receives salary and wages of $27,000. She is married to Geoff who earns $96,000 per year. Geoff has no other income.

The step 1 amount	= $18,000 + $27,000 = $45,000 (taxable income)
The step 2 amount	= 25% of Jenny's basic income tax liability of *$7,350 = $1,837.50
The step 3 percentage	= $18,000/$45,000 x 100 = 40% (the small business percentage)
The step 4 amount	= $1837.50 x 40% = $735
Step 5	Does not apply as her aggregated turnover is not more than $50,000.

Income test

Step 6	Jenny's income for ETO purposes is: ($45,000 - $18,000) + $96,000. = $123,000
Step 7	Jenny's income for ETO purposes of $123,000 exceeds the family threshold of $120,000
Step 8	The reduction amount is: = $123,000 - $120,000                     5 = $600 Reduce the amount from Step 4 by the reduction amount $735 - $600 = $135

Jenny is entitled to a tax offset of $135.

* Resident individual tax rates applying to taxable income of $45,000.

Example: Company

For the year ended 30 June 2010, Elpin Pty Ltd has:

• aggregated turnover of $50,000
• net small business income of $40,000
• taxable income of $80,000.

Elpin Pty Ltd is entitled to a tax offset.

The step 1 amount	= $80,000 (taxable income)
The step 2 amount	= 25% of Elpin's basic income tax liability of *$24,000 = $6,000
The step 3 percentage	= $40,000/$80,000 X 100 = 50% (the small business percentage)
The step 4 amount	= $6,000 x 50% = $3,000
Step 5	Does not apply as the company's aggregated turnover is not more than $50,000.

The additional income test does not apply to companies.

Elpin Pty Ltd is entitled to a tax offset of $3,000.

* Taxable income of $80,000 multiplied by the 30% company tax rate

Example: Company turnover between $50,000 and $75,000

For the year ended 30 June 2010, Mitzi Pty Ltd has net small business income of $20,000 (representing small business entity turnover of $60,000 less expenses of $40,000) and no other source of income.

Kalico Pty Ltd is grouped with Mitzi Pty Ltd under the aggregation rules and has turnover of $10,000, but is making a loss.

The aggregated turnover of the two companies is $70,000. Mitzi Pty Ltd can, therefore, claim the tax offset.

The step 1 amount	= $20,000 (Mitzi's taxable income)
The step 2 amount	= 25% of Mitzi's basic income tax liability of *$6,000 = $1,500
The step 3 percentage	= $20,000/$20,000 x 100 = 100% (the small business percentage)
Step 4	Does not apply as the aggregated turnover is more than $50,000. Therefore, Mitzi must adjust the tax offset by the small business phase-out fraction.
The step 5 amount	= ($75,000 - $70,000)/$25,000 = 0.2 (the small business phase-out fraction)

The additional income test does not apply to companies.

Mitzi is entitled to a tax offset of:

$1,500 x 100% x 0.2 = $300

* Taxable income of $20,000 multiplied by the 30% company tax rate

If you are a partner in a partnership

If you are a partner in a partnership that is a small business, the partnership's aggregated turnover determines its eligibility for the ETO. To work out how much you can claim in steps 1 to 3 below, use:

• your taxable income
• your share of the partnership's net small business income.

Step 1:	Work out your taxable income for the year.
Step 2:	Work out 25% of the basic income tax liability on that taxable income (use the applicable tax rates and take into account any special rules that affect your liability, but do not take into account any tax offsets).
Step 3:	Work out the small business percentage using the formula: The partner's net small business income share x 100    The partner's taxable income for the year If the result is more than 100%, the small business percentage is 100%.
Step 4:	If the partnership's aggregated turnover is $50,000 or less, the tax offset is: Step 2 amount x small business percentage
Step 5:	If the partnership's aggregated turnover is more than $50,000, adjust the offset by the small business phase-out fraction. Work this out using the formula: $75,000 - the partnership's aggregated turnover for the year                                        $25,000 The tax offset is: Step 2 amount x small business percentage x small business phase-out fraction

If you are not an individual, this is the end of your calculation.

If you are entitled to an ETO as an individual (other than in your capacity as a trustee), go to Step 6 to apply the income test.

Income test

Step 6	Work out your income for ETO purposes.
Step 7	Go to Step 8 if your income for ETO purposes exceeds: $70,000 if you are single with no qualifying dependant, or $120,000 if you had a qualifying dependant on any day of the income year or you had a spouse on the last day of the income year. If your income for ETO purposes does not exceed the relevant threshold, the amount worked out at Step 4 or Step 5 is your ETO. .
Step 8	Reduce the amount you worked out in Step 4 or Step 5 by the amount calculated using the formula: Income for ETO purposes for the income year - the threshold amount                                                          5 You are not entitled to any tax offset if the reduction amount is equal to or more than the amount you worked out in Step 4 or Step 5.

Example: Partnership

Michael and Zoe are equal partners in a partnership that is a small business for the year ended 30 June 2010. The partnership's net income is $40,000 (representing a turnover of $50,000 less business expenses of $10,000).

Michael also has a part-time job as an employee from which he receives a salary of $50,000 and a further $30,000 from investments. Michael has two children and no spouse.

The step 1 amount	= $20,000 + $50,000 + $30,000 = $100,000 (Michael's taxable income)
The step 2 amount	=25% of Michael's basic income tax liability of *$25,450 = $6,362.50
The step 3 percentage	= $20,000/$100,000 x 100 = 20% (the small business percentage)
The step 4 amount	= $6,362.50 x 20% = $1,272.50
Step 5	Does not apply as the partnership's aggregated turnover is not more than $50,000.

Income test

Step 6	= $100,000 - $20,000 = $80,000
Step 7	Michael's ETO is the amount he worked out in Step 4 as his income for ETO purposes is less then the family threshold = $1,272.50
Step 8	Does not apply as Michael's income for ETO purposes is less than the threshold amount.

Michael is entitled to a tax offset of $1,272.50.

* Resident individual tax rates applying to taxable income of $100,000.

If you are a trustee of a trust

If you are a trustee of a trust that is a small business, the trust's aggregated turnover determines eligibility for the ETO. To work out how much you can claim, in steps 1 to 3 below, use:

• the net income of the trust
• the share of the trust's net small business income you are liable to be assessed on under either section 98, 99 or 99A of the ITAA 1936 (your net small business income share).

Step 1:	Work out the net income of the trust for the year.
Step 2:	Work out 25% of your income tax liability on that net income (in working this out, use the applicable tax rates and take into account any special rules that affect the liability, but do not take any tax offsets into account).
Step 3:	Work out the small business percentage using the formula:   Your net small business income share      x 100 The net income of the trust for the year If the percentage that results is more than 100%, the small business percentage is 100%.
Step 4:	If the trust's aggregated turnover is $50,000 or less, the tax offset is: Step 2 amount x small business percentage
Step 5:	If the trust's aggregated turnover is more than $50,000, you adjust the offset by the small business phase-out fraction. You work this out using the formula: $75,000 - the trust's aggregated turnover for the year                                          $25,000 The tax offset is: Step 2 amount x small business percentage x small business phase-out fraction

The income test does not apply to trusts, or trustees assessed under section 98, 99 or 99A of the ITAA 1936.

Example: Trustee of a business trust

For the year ended 30 June 2010, the ABC trust has net income of $40,000 (representing business turnover of $40,000 less business expenses of $10,000 and net rental income from a residential rental property of $10,000). The trust has no affiliates or connected entities under the aggregation rules, so the aggregated turnover of the trust is also $40,000.

Thomas is a non-resident beneficiary of the ABC trust who received all the net income of the trust for the year ended 30 June 2010. We assess the trustee of the ABC trust under section 98 of the ITAA 1936 on the trust's net income which was distributed to Thomas.

The step 1 amount	= $40,000
The step 2 amount	= 25% of the income tax liability of *$11,650 = $2,912.50
The step 3 percentage	= $30,000/$40,000 x 100 = 75% (the small business percentage)
The step 4 amount	= $2,912.50 x 75% = $2,184.38
Step 5	Does not apply as the trust's aggregated turnover is not more than $50,000.

The income test does not apply to trusts, or trustees assessed under section 98, 99 or 99A of the ITAA 1936.

The trustee can claim a tax offset of $2,184.38.

* Non-resident individual tax rates applying to the trust net income of $40,000

If you are a beneficiary of a trust

If you are a beneficiary of a trust that is a small business, the trust's aggregated turnover determines eligibility for the ETO.

To work out how much you can claim, in steps 1 to 3 below, use your taxable income and your share of the trust's net small business income (your net small business income share).

Step 1:	Work out your taxable income for the year.
Step 2:	Work out 25% of your income tax liability on that taxable income (use the applicable tax rates and take into account any special rules that affect the liability, but do not take any tax offsets into account).
Step 3:	Work out the small business percentage using the formula:      Your net small business income share         x  100 The beneficiary's taxable income for the year If the result is more than 100%, the small business percentage is 100%.
Step 4:	If the trust's aggregated turnover is $50,000 or less, the tax offset is: Step 2 amount x small business percentage
Step 5:	If the trust's aggregated turnover is more than $50,000, adjust the offset by the small business phase-out fraction. Work this out using the formula: $75,000 - the trust's aggregated turnover for the year                                         $25,000 The tax offset is: Step 2 amount x small business percentage x small business phase-out fraction

If you are not an individual, this is the end of your calculation.

If you are entitled to an ETO as an individual (other than in your capacity as a trustee) go to Step 6 to apply the income test.

Income test

Step 6	Work out your income for ETO purposes.
Step 7	Go to Step 8, if your income for ETO purposes exceeds: $70,000 if you are single with no qualifying dependant, or $120,000 if you had a qualifying dependant on any day of the income year or you had a spouse on the last day of the income year. If your income for ETO purposes does not exceed the relevant threshold, the amount you worked out at Step 4 or Step 5 is your ETO.
Step 8	Reduce the amount worked out in Step 4 or Step 5 by the amount calculated using the formula: Income for ETO purposes for the income year - the threshold amount                                                      5 You are not entitled to any tax offset if the reduction amount is equal to or more than the amount you worked out in Step 4 or Step 5.

Example: Beneficiary of a business trust

For the year ended 30 June 2010, the ABC trust has net income of $40,000 (representing business turnover of $40,000 less business expenses of $10,000 and net rental income from a residential rental property of $10,000).

The trust has no affiliates or connected entities under the aggregation rules, so the trust's aggregated turnover is also $40,000. As a resident beneficiary of the ABC trust, Sarah received a 50% share of the net income from the trust of $20,000. Sarah also receives salary and wages of $80,000. She has no qualifying dependant and no spouse.

The trustee must advise Sarah of the trust's aggregated turnover and her share of the trust's net small business income (50% of $30,000 = $15,000).

The step 1 amount	= $20,000+ $80,000 = $100,000 (Sarah's taxable income)
The step 2 amount	= 25% of the income tax liability of *$25,450 = $6,362.50
The step 3 percentage	= $15,000/$100,000 x 100 = 15% (the small business percentage)
The step 4 amount	= $6,362.50 x 15% = $954.38
Step 5	Does not apply as the trust's aggregated turnover is not more than $50,000.

Income test

Step 6	= $100,000 - $15,000 = $85,000
Step 7	Sarah's income for ETO purposes of $85,000 exceeds the single threshold of $70,000.
Step 8	The reduction amount is: = $85,000 - $75,000                  5 = $2,000 Applying the reduction amount ($954.38 - $2,000) reduces Sarah's ETO entitlement to nil.

Sarah is not entitled to any tax offset.

* Resident individual tax rates applying to taxable income of $100,000.

Being eligible for more than one ETO

If you are entitled to net small business income from more than one source, you may be eligible for more than one ETO in the same income year.

For example, if you are a sole trader carrying on a business, and are also a partner in a separate business partnership, you may be entitled to an ETO for your:

• income as a sole trader, and
• share of the net small business income from the partnership.

In working out each claim, you need to work out your aggregated turnover separately from the aggregated turnover of the partnership.

ETO and PAYG instalments

We do not take the ETO into account when we work out your PAYG instalment rate (the ETO is an excluded tax offset under the tax laws).

If you expect to claim the ETO when we assess your income tax return, you may vary the amount or rate of your PAYG instalments. However, if you choose to vary and you underestimate the instalments you must pay by more than 15%, you may have to pay the general interest charge on the shortfall.

For more information about variations, refer to How to vary pay as you go (PAYG) instalments (NAT 4159).

Simplified depreciation rules

This section explains the simplified depreciation rules for small businesses. The simplified depreciation rules are another way to work out your deductions for most of your depreciating assets.

In general, you can:

• immediately write off most depreciating assets costing less than $1,000 each (low-cost assets)
• pool in a general small business pool, and deduct at the rate of 30% most other depreciating assets with an effective life of less than 25 years (such as motor vehicles and computers)
• pool in a long-life small business pool, and deduct at the rate of 5% most depreciating assets with an effective life of 25 years or more (such as wharves and cement silos)
• deduct most newly acquired assets at either 15% or 2.5% in the first year, regardless of when they were acquired during that year.

You cannot use these rules for some assets. If you choose to use the simplified depreciation rules, you must use them to work out deductions for all your depreciating assets that the rules apply to.

If you have non-business income, such as salary and wages, you will also claim a deduction for depreciating assets you use in earning your employment income under these simplified depreciation rules.

Depreciation for FBT exempt items Employees are no longer entitled to depreciation deductions for FBT-exempt items (including laptop computers, personal digital assistants and tools of trade) purchased after 7.30pm (AEST) on 13 May 2008. For the 2008-09 and later income years, employees can no longer claim depreciation deductions on FBT-exempt items purchased before 7.30pm (AEST) on 13 May 2008.

Where you can claim a GST credit for a depreciating asset, you must deduct the amount of the GST credit from the asset's adjustable value before working out the deduction for depreciation. The examples in this section use GST-exclusive figures.

Low-cost assets

A low-cost asset is one whose cost at the end of the year you first used it, or installed it ready to use for a taxable purpose, is less than $1,000 (excluding horticultural plants). You use an asset for a taxable purpose if you use it to produce assessable income.

You can claim an immediate deduction for low-cost assets in the income year that you first use those assets, or install them ready to use for a taxable purpose. However, you can only claim the immediate deduction if you acquired the asset during a year in which you are a small business choosing to use the simplified depreciation rules.

Small business pools

You allocate to a small business pool:

• most depreciating assets costing $1,000 or more that you acquire in the year that you use the simplified depreciation rules
• most depreciating assets that you held before you used the simplified depreciation rules.

There are two pools:

• the general small business pool - for assets with an effective life of less than 25 years
• the long-life small business pool - for assets with an effective life of 25 years or more.

Generally, the effective life of an asset is the period you or anyone else can use it for a taxable purpose or for the purpose of producing exempt income, assuming reasonable wear and tear and levels of maintenance.

If you held any assets at the start of the income year that you chose to use these rules, you must generally allocate them to a pool at the beginning of that year.

If you started to hold depreciating assets costing $1,000 or more during the year you first chose to use these rules, you must allocate them to a small business pool at the end of that year.

Taxable purpose

You must estimate (as a percentage) how much you will use a depreciating asset for a taxable purpose - for example, for producing assessable income.

You must make a new estimate of the taxable purpose proportion of each asset allocated to:

• the general small business pool - for each of the first three years after the year you allocated it to the pool
• the long-life small business pool - for each of the first 20 years after the year you allocated it to the pool.

Adjustable value

You must work out the adjustable value of each depreciating asset you start to use, or have installed ready to use, for a taxable purpose. Broadly, the adjustable value of an asset is its cost less its decline in value since you first used it (or installed it ready to use) for any purpose whether business or private. The asset's cost does not include any amount that you can claim as a GST credit.

For assets you held before starting to use these rules and that you have been claiming deductions for under the general capital allowance rules, use the asset's adjustable value at the end of the previous year.

Allocate the taxable purpose proportion of the adjustable value of each asset costing $1,000 or more to the appropriate pool then depreciate each pool as a single asset.

If you are eligible for the small business tax break deduction of 50% of the cost of the asset in the 2008-09 to 2010-11 income years, do not reduce the cost by the amount of the tax break deduction you are eligible to claim.

Applying the simplified depreciation rules

To apply the simplified depreciation rules follow these steps.

Step 1

For all the assets you held or installed ready to use at the start of the year:

• in the first year that you use these rules, work out your opening pool balance
• in subsequent years, work out your adjustment to the opening pool balance to account for any
  • changes in taxable purpose proportion
  • new assets since last using the rules.

Step 2

Work out the taxable purpose proportion of the adjustable value for:

• each of the assets you first held or installed ready to use during the current year
• each of the low-cost assets you first held or installed ready to use during the current year
• any cost addition amounts you incurred or improvements you made in the current year to an asset you held or installed ready to use in an earlier year.

Cost addition amounts include the costs of capital improvements to assets and costs you can reasonably attribute to disposing of, or permanently ceasing to use, an asset.

Step 3

Work out the taxable purpose proportion of the termination value of any assets you disposed of during the year.

Generally the termination value is the amount you receive for an asset when a balancing adjustment event occurs.

Step 4

Work out the deductions for:

• assets you held or installed ready to use at the start of the year
• each of the assets you first held or installed ready to use during the current year
• each of the low-cost assets you first held or installed ready to use during the current year
• any improvements you made, or cost addition amounts you incurred in the current year to an asset you held or installed ready to use in an earlier year.

Step 5

Work out your closing pool balance.

If a pool balance falls below $1,000

After taking into account any additions and disposals but before working out any deductions, if the balance of a pool is below $1,000 but more than zero, you can claim a deduction for the remaining amount. The closing pool balance then becomes zero.

Record keeping

You must keep records for five years about:

• how you worked out your opening pool balance
• any change in an asset's taxable purpose proportion
• any assets you dispose of.

Assets you held at the start of the year

How you apply the simplified depreciation rules to depreciating assets that you held at the start of the year depends on whether this is the first year you are using the rules or whether you have used them in a previous year.

Using the simplified depreciation rules for the first time

When you first use the simplified depreciation rules you must work out each pool's opening balance.

In later years, you must review, and in some cases adjust, the opening pool balance for the changes to taxable purpose proportion before working out your pool deduction. If you have started using the simplified depreciation rules again after ceasing to use them, you must adjust the opening pool balance for any assets you have started to use (or have installed ready to use) since you last used the rules.

Opening pool balance

The opening pool balance is the taxable purpose proportion of the adjustable values of all depreciating assets in your pool. The first time that you use these rules, only include assets that you held at the start of the income year that you first chose to use the rules.

The opening pool balance for a later income year is the closing pool balance from the previous year except where you make an adjustment to reflect a change in the amount you use a pooled asset for income producing purposes.

For more information about depreciation, see: Continuing to use the simplified depreciation rules Working out the closing pool balance.

Example: Using the simplified depreciation rules

Before using the simplified depreciation rules, Fiona held the following depreciating assets to use in her business:

• a station wagon with an opening adjustable value of $15,000. Fiona estimates that she uses the vehicle 70% of the time to produce assessable income. The taxable purpose proportion of the station wagon's adjustable value is $15,000 x 70% = $10,500
• a computer with an opening adjustable value of $3,000. Fiona estimates that she also uses the computer 70% of the time to produce assessable income. The taxable purpose proportion of the computer's adjustable value is: $3,000 x 70% = $2,100
• a refrigerated cabinet with an opening adjustable value of $1,500. Fiona uses the cabinet solely for producing assessable income. The taxable purpose proportion of the cabinet's adjustable value is $1,500 x 100% = $1,500.

All of these assets have an effective life of less than 25 years. Fiona allocates these assets to the general pool.

Fiona works out the opening pool balance for the 2009-10 income year by adding the taxable purpose proportion of the adjustable values of the existing assets:

$10,500 + $2,100 + $1,500 = $14,100

To work out her deduction for the general pool in the 2009-10 income year, Fiona multiplies the opening pool balance by the pool rate:

$14,100 x 30% = $4,230

Asset	Adjustable value	Taxable purpose proportion	Amount added to pool
Station wagon	$15,000	70%	$10,500
Computer	$3,000	70%	$2,100
Refrigerated cabinet	$1,500	100%	$1,500
Opening pool balance			$14,100
Deduction (opening balance x 30%)			$4,230

Continuing to use the simplified depreciation rules

In later years, you may need to adjust the opening pool balance before working out your pool deduction if you:

• change the extent you use a pooled asset for a taxable purpose
• have assets that you started to use, or hold ready to use, since last choosing to use these rules.

The adjustment ensures that your pool deduction is based on the correct estimate of the adjustable value of all your assets and their taxable purpose proportions for the current and future income years.

Changes in taxable purpose proportion

You must review the taxable purpose proportion of each asset allocated to the general and long-life pools according to the table below.

If the taxable purpose proportion changes by more than 10% from your most recent estimate, you must make an adjustment. Your most recent estimate may be the original estimate or a previously adjusted estimate.

General pool assets	Long-life pool assets
Must be reviewed in each of the first three years after the year in which it was allocated to the pool.	Must be reviewed in each of the first 20 years after the year in which it was allocated to the pool.

Adjustment formula

You work out the adjustment using the following formula:

Adjustment     =

Reduction factor

x

Asset value

x

(Current year taxable purpose proportion - Most recent taxable purpose proportion)

Reduction factor

For assets you first used (or installed ready to use) for a taxable purpose while you were not using the simplified depreciation rules, the reduction factor for assets in the general pool is:

• 0.7 for the income year after you allocate it to the pool
• 0.49 for the income year after that
• 0.343 for the income year after that.

For assets you first used (or installed ready to use) for a taxable purpose while you were using the simplified depreciation rules, the reduction factor for assets in the general pool is:

• 0.85 for the income year after you allocated it to the pool
• 0.595 for the income year after that
• 0.417 for the income year after that.

Asset value

The asset value of a depreciating asset is its adjustable value before you do either of the following:

• add it to a pool
• first use it or install it ready to use for a taxable purpose.

The asset value for a depreciating asset you first used, or installed ready to use, for a taxable purpose while you were not using the simplified depreciation rules is its adjustable value at the start of the income year you allocated it to a pool.

The asset value for a depreciating asset you first used, or installed ready to use, for a taxable purpose while you were using the simplified depreciation rules is its adjustable value at the time you first used it, or installed it ready to use, for a taxable purpose.

The asset value includes any cost addition amounts.

The difference between the current year estimate and the last estimate represents the change in your estimate of how much you will use an asset for taxable purposes. The last estimate is either of the following:

• your original estimate
• your previously adjusted estimate.

If the adjustment is because of:

• an increase in the taxable purpose proportion, you increase the opening pool balance and the pool deduction for the year is increased
• a decrease in the taxable purpose proportion, you reduce the opening pool balance and the pool deduction for the year is reduced.

Example: Adjustment formula

Grace chooses to use the simplified depreciation rules in the 2009-10 income year. Before starting to use these rules, she had a car that she used for business purposes 60% of the time. Grace includes the taxable proportion (60%) of the car's adjustable value ($12,000) in the general pool.

During the 2010-11 income year, Grace increases the taxable purpose proportion of the car from 60% to 75%. As this is an increase of 15%, Grace must make the following adjustment to the opening pool balance for the 2010-11 income year:

Adjustment = 0.7 x $12,000 x (75% - 60%) = $1,260

Grace increases the opening balance by $1,260 to reflect the changed taxable purpose proportion and this in turn increases the pool deduction for the year.

Grace must make an estimate of the taxable purpose proportion of the car and make any necessary adjustments (where the estimate differs by more than 10%) only for the first three income years up to and including the 2012-13 year.

For more information, refer to section 328-225 of the ITAA 1997 - Change in business use.

Starting to use the simplified depreciation rules again

If you start using these rules again, you must adjust the opening pool balance for any depreciating assets that you have started using or installed ready to use since last using the rules. Your new opening pool balance will be your previous closing balance plus the taxable purpose proportion of the adjustable value of any depreciating assets you have not added to a pool before.

Pool deduction for assets held at the start of the year

You work out your pool deduction using the following formula:

Opening pool balance x pool rate

The pool rate is 30% for the general small business pool or 5% for the long-life small business pool.

Assets you first use during an income year

For assets you first used, or held ready to use, during the year, you must work out your:

• immediate deduction for any low-cost assets (less than $1,000)
• part-year pool deductions for assets costing $1,000 or more.

You must then increase your closing pool balance to include the taxable purpose proportion of the adjustable value of these assets (including cost addition amounts and improvements to existing assets).

Working out your deduction for low-cost assets

You work out the deduction for low-cost assets as follows:

Adjustable value x Taxable purpose proportion

Example: Immediate deductions

Fiona operates a florist, Fi's flowers. She has operated the business for several years.

During the 2009-10 income year, Fiona acquires the following assets:

• a cash register, on 12 July 2009 at a cost of $800, that she uses solely in her business
• a photocopier/fax, on 15 September 2009 for $1,100, that she estimates she uses in her business for 80% of the time - the taxable purpose proportion of the adjustable value of the photocopier/fax is: $1,100 x 80% = $880.

Fiona can claim an immediate deduction of $800 in the 2009-10 income year for the cash register, which is a low-cost asset.

Fiona cannot claim an immediate deduction for the photocopier/fax because it cost more than $1,000 (even though the 80% taxable purpose proportion brings the amount below $1,000). The photocopier/fax is included under the pooling arrangements.

Working out your pool deduction

Where you first use, or have installed ready to use, a depreciating asset part way through an income year, you can claim a deduction at half the pool rate in that income year. This applies regardless of when during the year you acquired the asset.

You work out the deduction as:

The taxable purpose proportion x adjustable value x pool rate

The pool rate is 15% for an asset in the general small business pool and 2.5% for an asset in the long-life small business pool.

Example: Assets you acquire during the year

During the 2009-10 income year, Fiona acquires the following assets:

• the photocopier/fax - the taxable purpose proportion of the adjustable value of the photocopier/fax is $1,100 x 80% = $880
• a new refrigerated cabinet to replace the old one, acquired on 1 April 2010 at a cost of $5,000 - as it will be used exclusively for business purposes, the proportion of the adjustable value of the cabinet is: $5,000 x 100% = $5,000
• a delivery van, acquired on 1 May 2010 at a cost of $20,000 - Fiona estimates that the van will be used 70% of the time for a taxable purpose, so the taxable purpose proportion of the adjustable value of the van is: $20,000 x 70% = $14,000.

Fiona can deduct assets that she acquired during the year that cost $1,000 or more at half the appropriate pool rate:

($880 + $5,000 + $14,000) x 15% = $2,982

Asset	Adjustable value	Taxable purpose proportion	Amount added to pool
Photocopier/fax	$1,100	80%	$880
New refrigerated cabinet	$5,000	100%	$5,000
Delivery van	$20,000	70%	$14,000
Taxable purpose proportion of the adjustable value of assets Fiona first used, or installed ready to use, for a taxable purpose during the income year			$19,880
Deduction ($19,880 x 15%)			$2,982

Adjusting the closing pool balance

You must increase the closing pool balance to account for any assets you first used, or installed ready to use, for a taxable purpose during the year.

You work out the adjustment as the taxable purpose proportion of the adjustable value of the asset at the time you acquired it. You then allocate this amount to the relevant pool at the end of that income year and include it in the closing pool balance.

Cost addition amounts

Cost addition amounts include:

• the cost of capital improvements to an asset
• costs you can reasonably attribute to disposing of, or permanently ceasing to use, an asset (this may include advertising and commission costs or the costs of demolishing the asset).

Calculate your pool deduction for cost addition amounts

If you allocated the asset to a pool in an earlier income year, you deduct the taxable purpose proportion of the cost addition amount in the year the cost addition is made, at the rate of:

• 15% for the general small business pool
• 2.5% for the long-life small business pool.

You must increase the closing pool balance for any cost addition amounts you make to pooled assets. To do this, calculate the taxable purpose proportion of the cost addition amount and allocate this amount to the same small business pool as the relevant asset.

If you made the cost addition in the same income year that you acquired the asset, the taxable purpose proportion of the cost addition amount simply becomes part of the original cost of the asset.

Example: Cost addition amounts

Fiona installed a high-speed internal modem in her computer on 1 August 2009 at a cost of $1,200. Fiona has already estimated that the computer is used 70% of the time for business purposes, so the taxable purpose proportion of the adjustable value of the modem is:

$1,200 x 70% = $840

The new modem is an improvement to the existing computer which Fiona allocated to the general pool in a previous year. Fiona can claim a deduction at half the pool rate in the first year that she uses the modem:

$840 x 15% = $126

Asset	Adjustable value	Taxable purpose proportion	Amount added to pool
Modem (including installation)	$1,200	70%	$840
Taxable purpose proportion of the cost of improvements made to assets in the pool during the income year			$840
Deduction ($840 x 15%)			$126

Asset disposals

A balancing adjustment event occurs when you stop using a depreciating asset for any purpose or you dispose of, sell, lose, or destroy the asset. To account for this event, you must deduct the asset's taxable purpose proportion of the termination value from the pool. You work out this amount as follows:

Termination value x Taxable purpose proportion

The termination value could be money you received from selling an asset or insurance monies you received as the result of an asset's loss or destruction.

Where a balancing adjustment event occurs to a depreciating asset because of a change in ownership, you may be able to access rollover relief. The change in ownership can be a result of a:

• change in a business structure that involves a partnership
• transfer of assets because of a marriage breakdown
• transfer of assets to a wholly owned company.

The effect of the rollover relief is that you ignore the balancing adjustment event until you dispose of the asset.

If the disposal is a taxable supply, you must reduce the termination value by the amount of GST payable (except where the termination value is deemed to be the market value of the asset).

You do not incur a capital gains liability for disposing of a depreciating asset that you have deducted under the simplified depreciation rules.

Low-cost assets

If you have claimed an immediate deduction for a low-cost asset and you dispose of that asset, you must include the taxable purpose proportion of the termination value in your assessable income.

Pooled assets

If you dispose of a pooled asset, you deduct the taxable purpose proportion of the termination value from the pool balance at the end of the income year.

Where you have a negative pool balance because you disposed of an asset, the amount of the balance is treated as assessable income. The closing pool balance then becomes zero.

Example: Disposing of assets

During the 2009-10 income year, Fiona disposes of the following assets:

• her old refrigerated cabinet, sold for $1,000 on 1 April 2010 - the taxable proportion of the asset's termination value is $1,000 because it was used 100% in the business
• her station wagon, traded in for $10,000 on her new delivery van on 1 May 2010 - the station wagon was used 70% for business purposes, so the taxable purpose proportion of its termination value is: $10,000 x 70% = $7,000.

Fiona must reduce the closing pool balance for the 2009-10 income year by the taxable purpose proportion of the termination values of the old refrigerated cabinet and the station wagon:

$1,000 + $7,000 = $8,000

Asset	Termination value	Taxable purpose proportion	Amount deducted from pool
Refrigerated cabinet	$1,000	100%	$1,000
Station wagon	$10,000	70%	$7,000
Taxable purpose proportion of the termination value of any pooled assets disposed of during the income year			$8,000

Asset disposal where you changed the taxable purpose proportion

If you dispose of an asset and you have changed the taxable purpose proportion during the time it was in the pool, you must also adjust the termination value. You must work out the average taxable purpose proportion during the income years the asset was in the pool.

Example: Reasonable estimate

Grace added her car to the pool in 2007-08. She increases her business use of her car from 75% to 90% in the 2009-10 income year. She sells her car for $3,000 at the start of the 2011-12 income year. Grace must now average the estimate of her taxable use of the car for the year it was allocated to the pool and the next three years to work out the taxable purpose proportion of the termination value. She works out the taxable purpose proportion by averaging the following:

• 60% (2007-08 original estimate)
• 75% (2008-09 estimate)
• 90% (2009-10 estimate)
• 90% (2010-11 - no change from previous year).

The total is 79% (315% ÷ 4).

The taxable purpose proportion of the car's termination value is $3,000 x 79% = $2,370

Working out the closing pool balance

You must work out the closing pool balance at the end of each income year using the following table.

	A	opening pool balance for the year
plus (+)	B	taxable purpose proportion of the adjustable value of assets that you first used, or installed ready to use, for a taxable purpose during the year
plus (+)	C	taxable purpose proportion of the cost of any cost addition amounts, including improvements you made to assets in the pool during the year
less (-)	D	taxable purpose proportion of the termination value of any pooled assets you disposed of during the year
less (-)	E	deduction allowed for assets you held at the start of the year
less (-)	F	deduction allowed for assets you first used during the year
less (-)	G	deduction allowed for cost addition amounts, including improvements you made to the pooled assets during the year
equals (=)		closing pool balance for the year

The closing pool balance then becomes the opening pool balance in the following year, except where you make an adjustment to reflect the changed taxable purpose proportion of a pooled asset.

Example: Closing pool balance

Fiona works out her closing pool balance for the year as follows:

			Amount
	A	opening pool balance for the year	$14,100
plus (+)	B	newly acquired assets	+$19,880
plus (+)	C	improvements to assets	+$840
less (-)	D	disposals	-$8,000
less (-)	E	deduction for pooled assets	-$4,230
less (-)	F	deduction for newly acquired assets	-$2,982
less (-)	G	deduction for improvements	-$126
equals (=)		closing pool balance for the year	$19,482

Cars

If you deduct car expenses using either the cents per kilometre basis or the 12% of original value method, you cannot also claim a deduction under the simplified depreciation rules.

In these circumstances you allocate the car to the general small business pool with a taxable purpose proportion of 0%. This means that you cannot claim a deduction for depreciation under the simplified depreciation rules.

If you change from either the cents per kilometre or 12% of original value method to either the log book or one-third of actual expenses method, the taxable purpose proportion will change from 0% to your estimate of the taxable purpose proportion. You must use the adjustment formula to adjust the opening pool balance to reflect any change of more than 10%.

Example: Raoul's car expenses

Raoul begins business in September 2009. In his first year in business, Raoul claims his car expenses on a cents per kilometre basis. This is also the first year Raoul uses the car for a taxable purpose. He allocates the car to the general small business pool with a taxable purpose proportion of 0%. So, he does not deduct depreciation for the car in that year.

In 2010-11, Raoul decides to claim his car expenses using the log book method. Using this method, Raoul is entitled to claim depreciation for the car.

Raoul works out from his log book that he uses the car 60% of the time for a taxable purpose in 2010-11. The adjustable value of the car at the time he allocated it to the pool in 2009-10 was $12,000. Because there has been an increase of more than 10% in the taxable purpose proportion, Raoul must adjust the opening pool balance for 2010-11 using the adjustment formula.

Raoul increases the opening pool balance by:

0.85 x $12,000 x (60% - 0%) = $6,120

Car limit

There is a limit on the cost you can use to work out the depreciation of cars and station wagons, including four-wheel drives. We update this limit each year.

The limit for 2009-10 is $57,180.

If you choose to stop using these rules

If you choose to stop using these rules, you cannot choose to use them again until at least five years after the income year you chose to stop using them.

You can:

• continue to operate the general and long-life small business pools
• claim deductions for those pools.

This also applies where you stop carrying on a business and dispose of pool assets, providing:

• the entity continues to exist
• the pool balance is more than zero.

If the pool balance falls below zero because you dispose of an asset, include the amount below zero in your assessable income. However, because you are no longer using the simplified depreciation rules, you:

• cannot add further assets to a small business pool
• can no longer claim an immediate deduction for low-cost assets under these rules.

Example: Five-year rule

In the 2007-08 income year, Karen used the simplified depreciation rules. In the 2008-09 income year, she decided to stop using this method.

Karen cannot access this concession again until the 2014-15 income year.

If you can no longer use these rules

If you become ineligible to use these rules because you are no longer a small business, you can still claim deductions for assets in those pools.

You cannot add more assets to a small business pool and you can no longer claim an immediate deduction for low-cost assets under these rules. However, if you later meet the small business eligibility requirements, you may choose to use this concession again in the year you become eligible without having to wait five years.

If you stop using these rules and later start using them again, the opening pool balance will be the closing pool balance for that pool from the previous year plus the taxable purpose proportion of the adjustable value of any depreciating asset you have not yet allocated to that pool.

This means that on starting to use these rules again, you must allocate assets that you have begun to use, or have installed ready to use for a taxable purpose, since you last used this concession, to the appropriate pool.

For more information about uniform capital allowances, refer to: Division 40 of the ITAA 1997 - Capital allowances Guide to depreciating assets 2009-10 (NAT 1996) Capital allowances: at a glance (NAT 6504).

Contractors and consultants

If you are a small business and you have income that is a reward for your personal efforts or skills, you may be affected by the personal services income rules. If you are affected, you can still deduct amounts for your depreciating assets under the simplified depreciation rules. However, a personal services entity can claim deductions for only one car that has a private use proportion.

For more information about personal services income, refer to Alienation of personal services income: contractors and consultants (NAT 4788).

Exclusions

There are types of depreciating assets the simplified depreciation rules do not apply to. However, these assets may be deductible under other parts of the income tax law.

Assets you rent or lease to others

You cannot claim a deduction for assets you lease out, or will lease out, for more than half the time on a depreciating asset lease under the simplified depreciation rules. You may generally deduct these under the uniform capital allowance (UCA) rules. The UCA rules are the general depreciation rules.

You generally cannot claim a deduction for depreciating assets used in rental properties under the simplified depreciation rules because they are part of property that is subject to a depreciating asset lease.

You can, however, claim a deduction for assets you lease out under a hire purchase agreement, or short-term hire agreement.

Assets allocated to a low-value pool

Where you allocated assets to a low-value pool before using the simplified depreciation rules, those assets stay in the low-value pool and you continue to claim deductions under the UCA rules.

Horticultural plants

You cannot claim a deduction for horticultural plants (including grapevines) under the simplified depreciation rules, but you may deduct them under the UCA rules.

Software

Under the UCA rules, you can continue to deduct expenditure that you incurred in developing software that you allocated to a software development pool before you started to use these rules. You cannot claim any other deduction for this type of expenditure under the simplified depreciation rules or UCA rules.

Capital works

You cannot claim deductions for most buildings and structural improvements under either the simplified depreciation rules or the UCA, but you can generally claim them under the capital works rules in Division 43 (section 43-10 - section 43-260) of the ITAA 1997.

However, you can deduct some buildings and structural improvements, such as improvements for conserving and conveying water, under the UCA rules. If you are using the simplified depreciation rules, you can choose to deduct these assets under either these rules or UCA rules.

Investments in Australian films

The simplified depreciation rules do not apply to investments in Australian films. Deductions may be available under existing law (Division 10BA or Division 10B of the ITAA 1936).

Research and development

You cannot claim deductions using these simplified depreciation rules for assets that were previously deductible under the research and development provisions under the ITAA 1936.

Options

Sometimes you can choose whether or not certain assets are treated under the simplified depreciation rules. These options are listed below.

Once you make a choice you cannot change it.

Primary producers

Certain depreciating assets you use in the course of carrying on a primary production business attract specific UCA rules, such as those applying to landcare operations, water facilities, electricity connections and telephone lines. For each of these assets, you can choose whether to use the simplified depreciation rules or the UCA rules.

Software

If you do not have a software development pool but you incur expenditure that can be included in this type of pool, you can establish one. However, once you choose to establish a software development pool, you must allocate all subsequent relevant expenditure to that pool.

Alternatively, you can allocate the adjustable value of the developed software to a small business pool at the time you first use it, or installed ready to use, for a taxable purpose. If it qualifies as a low-cost asset you can claim an immediate deduction.

Assets with an estimated effective life of 25 years or more that you held before 1 July 2001

You can choose not to allocate an asset to the long-life pool if you first used the asset, or installed it ready to use, for a taxable purpose before 1 July 2001. You must make this choice in the income year you first use the simplified depreciation rules. If you choose not to allocate the asset to the long-life pool, you can claim a deduction for the asset's decline in value under the UCA rules.

Rollover relief

You must make an adjustment to your taxable income when a balancing adjustment event occurs because pooled assets have changed owners. You may be able to obtain rollover relief to defer these adjustments if the change of ownership involves partnerships, marriage breakdowns or company incorporations.

Partnership variations

If there is a change in your partnership structure that causes balancing adjustment events, you may obtain optional rollover relief - for example, where:

• the partnership is reconstituted
• there is a variation in the interests of partners in the partnership
• a sole trader takes on a partner, or
• one partner leaves and the remaining partner carries on as a sole trader.

You can obtain rollover relief where:

• at least one of the entities that had an interest in the asset before the change has an interest in the asset after the change, and
• the asset was a partnership asset before the change or becomes one because of the change.

We do not assess the partnership on any capital gain that arises from this change in ownership. Instead, you account for a taxable gain or loss when you dispose of the assets.

Marriage breakdowns and company incorporations

The simplified depreciation rules also provide optional rollover relief where there is a change in ownership that results in a capital gain where one of the following occurs:

• a sole trader, trustee or a partnership disposes of all the assets in the small business pool to a wholly-owned company
• all assets in a small business pool are transferred to another taxpayer because of a marriage breakdown
• you meet the conditions in the following table.

Type of capital gains tax (CGT) rollover	Conditions
Disposal of asset to wholly-owned company	You can choose a rollover under subdivision 122-A for the CGT event.
Asset disposal by partnership to wholly-owned company	You are a partner in a partnership, the property is partnership property and the partners choose a rollover under subdivision 122-B for disposing of their CGT assets consisting of their interests in the property.
Marriage breakdown	There is a rollover under subdivision 126-A for the CGT event.

This rollover applies to balancing adjustment events occurring in 2007-08 and later income years.

If you choose the rollover

The effect of the rollover relief is that you do not have to subtract the termination values of the depreciating assets from the closing pool balances of the general and long-life small business pools because of the change in ownership. The transferee simply takes over your depreciating asset pools.

The transferred assets must go into a pool regardless of whether the transferee chooses to use the simplified depreciation rules or not. However, they do not have to use the simplified depreciation rules for any new assets or add any new assets to the pool. They are deemed to have chosen the simplified depreciation rules for the transferred assets in an earlier year and, therefore, they must continue in the pools.

In the year that the change occurs, you split the pool deduction equally between you and the transferee. For income years after the change occurs, the transferee claims the deductions.

Conditions

To be eligible for this rollover relief, you must work out deductions for the depreciating assets using the simplified depreciation rules. Therefore, to be eligible for the rollover relief, the assets must be in a pool at the time of the balancing adjustment event.

The transferee must hold all the depreciating assets immediately after the change.

Both you and the transferee must:

• choose to apply rollover relief
• put this choice in writing
• keep this evidence for five years after the end of the income year the change occurs in.

The written choice must contain enough information about the pooled assets for the transferee to work out the deductions under the simplified depreciation rules.

You must make this choice within one of the following:

• six months after the end of the transferee's income year the balancing adjustment event occurred in
• a longer period we allow.

A choice you make about primary production assets applies to the transferee as if the transferee made it.

If you stop deducting amounts for depreciating assets under the simplified depreciation rules, or are no longer eligible to use the rules, depreciating assets you have allocated to a general small business pool and a long-life small business pool continue to be depreciated under these rules.

This means that former small businesses, or small businesses that choose not to continue to use the simplified depreciation rules, may choose rollover relief for depreciating assets allocated to a small business pool when a balancing adjustment event occurs.

A transferee need not choose to use the simplified depreciation rules to be eligible for the rollover. They will be treated as having been a small business and having stopped being a small business for that year. Therefore, they continue to allocate the assets to the small business pool for that year and those assets continue to be depreciated under the simplified depreciation rules.

If you do not choose the rollover

If you transfer all the pooled assets to another entity and are otherwise eligible to choose the rollover but decide not to, the transferred assets must still go into a pool. You must work out deductions for those transferred assets according to the simplified depreciation rules.

Assets first used and cost addition amounts

If you started to use an asset, or had one installed ready to use during the change year, the deduction is split equally between you and the transferee. The same applies for cost addition amounts you incurred.

If the transferee started to use an asset, or had one installed ready to use during the change year, they would claim the deduction and you cannot claim anything for the asset. The same applies for cost addition amounts the transferee incurred.

If you started to use a low-cost asset, or had one installed ready to use, and a balancing adjustment event occurred before the time the change occurred, the transferee:

• cannot claim anything
• does not include the taxable purpose proportion of the asset's termination value in their assessable income.

Changes in taxable use

The transferee uses the taxable purpose proportion estimates you made for assets you held just before the change occurred. The transferee does not adjust the opening pool balance for the year the change occurs in to reflect changes in estimates of income producing use because of the change. Changes in the taxable purpose proportion you made are taken to have been made by the transferee.

Example: Reconstituted partnership

In the 2007-08 income year, a partnership, made up of equal partners Teresa and Sally, agree to accept Matthew as a partner with a 30% share.

Teresa and Sally sell Matthew the equivalent of a 15% stake in the partnership each. This is a balancing adjustment event.

The effect of this is that the old partnership must subtract the termination value of the depreciating assets from the relevant asset pool balance.

The partnership has five assets, all in the general pool and all used 100% for business purposes. The opening pool balance is $10,000. The partnership adjustment occurs on 30 June 2008 and the termination value of the assets for this balancing adjustment event is their combined market values of $12,000. The balancing adjustments that arise because of this change in the make up of the partnership put the general pool into a negative balance.

In the normal course of events Teresa and Sally would have to account for this negative amount in the partnership's assessable income.

If, however, Teresa and Sally choose to apply rollover relief, and Matthew (as a partner in the new partnership) also agrees, they ignore the balancing adjustment event. The old partnership of Teresa and Sally can claim 50% of the deduction for the 2007-08 income year worked out under the simplified depreciation rules. The new partnership of Teresa, Sally and Matthew can claim the remaining 50% deduction for the 2007-08 income year. The assets are allocated to a depreciating asset pool for the new partnership and the new partnership continues to claim deductions for this depreciating asset pool.

If Teresa left the partnership in the 2009-10 income year, this would mean another partial partnership change. Provided all of the partners chose to apply the rollover relief, the old partnership would not have to subtract the termination value of the assets from the respective pool balances. In effect, if the assets were worth $12,000 and the pool balance was $10,000 at the time Teresa left, the partnership of Teresa, Sally and Matthew would not have to account for the negative balance that would normally occur.

The partnership is not assessed on any taxable gain as part of this partnership adjustment. Instead, a taxable gain or loss is only accounted for when the partnership ultimately disposes of the assets.

Other capital expenditure

Business-related costs

You may deduct business-related costs under the UCA rules provided both of the following apply:

• the costs do not form part of the cost of a depreciating asset
• your business is, or was, carried on for the purpose of producing assessable income.

Business-related costs include:

• business establishment costs
• business restructuring costs
• business equity-raising costs
• defending your business against a takeover
• costs to the business of unsuccessfully attempting a takeover
• liquidating a company that carried on a business that you are a shareholder of
• costs of ceasing to carry on the business.

You deduct 20% of the cost in the year you incurred it and in each of the following four years. You include any costs you recoup in your assessable income.

For more information about depreciation, refer to: subdivision 328-D (section 328-170 - section 328-257)of the ITAA 1997 - Capital allowances for small business entities Taxation Ruling TR 2008/4W - Income tax: depreciation effective life Guide to depreciating assets 2009-10 (NAT 1996).

Prepaid expenses

You must use the prepayment rules to work out how much you can claim in an income year for certain prepaid expenses. These rules let you choose how to treat certain prepaid expenses if they meet certain requirements.

This chapter explains the general prepayment rules and the special rules for small businesses.

The examples below use GST-exclusive figures.

Applying the prepayment rules

You apply the prepayment rules when you incur an expense for goods or services that will not be fully provided within the same income year that the expense is incurred.

For example, if you pay for an advertisement in the local paper to be run fortnightly for six months:

• the prepayment rules apply if you pay in March for advertising to appear from 1 April until 30 September in the following income year
• the prepayment rules do not apply if you pay in July for advertising from 1 August until 31 January of the same income year because the services are provided in full in the same income year that you incurred the expense.

How to treat prepaid expenses

Generally, the prepayment rules mean that you must apportion deductions for certain prepaid expenses of $1,000 or more over the income years that the goods or services are provided.

However, if you are a small business and you meet the 12-month rule, you can choose to deduct those prepaid expenses immediately.

You must apportion the deduction over the income years that the goods or services are provided if either of the following apply:

• the prepaid expense does not meet the 12-month rule
• you choose not to claim an immediate deduction.

There are some prepaid expenses that the prepayment rules do not apply to. You do not have to apportion them and you can deduct them immediately, even if:

• the expense does not meet the 12-month rule, or
• you are not a small business.

If you are using the STS accounting method, before you can claim a deduction you must: incur the expense, and pay it.

The 12-month rule

You meet the 12-month rule where:

• you incur an eligible prepaid expense for something to be done over a service period of 12 months or less
• the service period ends in the income year following the year you incur the expense.

If you are a small business, you can claim an immediate deduction for both your business and non-business prepaid expenses that meet the 12-month rule. A non-business prepaid expense, for example, could be related to a rental property you own.

Where a prepayment does not meet the 12-month rule, you cannot claim an immediate deduction. This means you must apportion the deduction over the period of service (to a maximum of 10 years).

Example: Immediately deductible prepaid expense

The BM7 Company makes a prepayment of $24,000 on 1 September 2009 for rent on its business premises for a service period from 1 December 2009 to 30 September 2010.

The $24,000 prepayment satisfies the 12-month rule because the service period is less than 12 months and ends in the next income year. The BM7 Company may claim an immediate deduction of $24,000 in the 2009-10 income year.

Prepaid expenses you do not apportion

You do not have to apportion a deduction for a prepaid expense that is any of the following:

• for goods or services you receive in full in the same income year you incur the expense
• less than $1,000
• a prepayment of salary or wages (under a contract of service)
• required to be incurred by either of the following
  • a law of the Commonwealth, a state or a territory, (for example, statutory fees or charges payable to a government body such as vehicle registration fees)
  • an order of a court of the Commonwealth, a state or a territory.

You can claim an immediate deduction for these prepaid expenses in the year you incur it, if both of the following apply to the expense:

• it meets the requirements of the general deduction rules
• it is not private, domestic or capital.

This applies even if the service period is more than 12 months.

Example: Expenses that you do not have to apportion

John operates a small cartage business and pays $1,200 on 31 December 2009 to register his truck for 12 months from 1 January 2010 to 31 December 2010. He uses the truck exclusively for business purposes.

Although the registration fee is more than $1,000 and it covers more than one income year, John does not have to apportion it. This is because he must pay the registration fee under state or territory law.

John can deduct this expense in the year he incurs it.

Prepaid expenses that must meet the 12-month rule

Expenses you deduct under the following provisions must meet the 12-month rule to qualify for immediate deduction:

• the general deduction rules in section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)
• for eligible companies, the research and development rules in sections 73B, 73BA, 73BH, 73QA, 73QB or former section 73Y of the Income Tax Assessment Act 1936 (ITAA 1936).

Broadly, under the general deduction rules you can deduct from your assessable income any loss or outgoing to the extent that you incur it in either of the following:

• gaining or producing your assessable income
• carrying on a business for the purpose of gaining or producing your assessable income.

You can never deduct prepaid expenses under the general deduction rules if they are:

• private, capital or domestic
• incurred in gaining exempt income.

You do not have to apportion prepaid expenses you can deduct under a specific deduction rule of the tax law, unless you are a company claiming under the special research and development rules. You can only immediately deduct these if the expenses also meet the 12-month rule.

The service period

The period over which you receive the goods or services is called the service period. The service period begins the day you start to receive the goods or services, or the day you incur the expense, whichever is later. The service period continues until the last day you receive the goods or services, or for 10 years, whichever is earlier.

Example: Service period

Mike runs a delicatessen from leased premises. On 1 December 2009, Mike makes a lease payment to cover the period from 1 December 2009 to 30 November 2010. The service period starts on 1 December 2009 and ends on 30 November 2010, a period of 365 days.

Mike's income year ends on 30 June of each year. As the services (providing leased premises) are not provided wholly within the expenditure year, the prepayment rules may apply.

If you do not meet the 12-month rule

If you make a prepayment which does not meet the 12-month rule, you cannot claim an immediate deduction.

In this case, you must spread the deduction over the service period or 10 years, whichever is less, using the following formula:

Expenditure

x

Number of service period days in the income year      Total number of days in the service period

Example: Service period more than 12 months

On 31 May 2010, Merry Pty Ltd pays $15,000 for advertising that will air from 1 June 2010 to 30 June 2011 (395 days). The service period is longer than 12 months, so Merry Pty Ltd cannot claim an immediate deduction. Instead, the deduction must be apportioned over the service period. The deductions are worked out as follows:

2009-10

$15,000

x

30 (1 June 2010 to 30 June 2010)                        395

= $1,139

2010-11

$15,000

x

365 (1 July 2010 to 30 June 2011)                        395

= $13,861

The total deduction Merry Pty Ltd can claim over the 2009-10 and 2010-11 income years is $15,000.

Example: Service period is 12 months or less but ends after the last day of the next income year

Pippin Pty Ltd receives a 15% discount on advertising for the period 15 July 2010 to 14 July 2011, providing payment is made by 30 June 2010. Pippin Pty Ltd accepts these conditions and pays $10,000 for these services on 30 June 2010.

Although the service period is 12 months or less, Pippin Pty Ltd has not met the 12-month rule. This is because the service period ends after the last day of the income year following the year the expense is incurred. The deduction for the expenditure must be apportioned over the service period as follows:

2009-10

Nil. No part of the service period occurs in this income year.

2010-11

$10,000

x

351 (15 July 2010 to 30 June 2011)                            365

= $9,616

2011-12

$10,000

x

14 (1 July 2011 to 14 July 2011)                       365

= $384

The total deduction Pippin Pty Ltd can claim over the 2010-11 and 2011-12 income years is $10,000.

Prepaid expenses you make under tax shelter arrangements

If your expense relates to a tax shelter arrangement, special rules may apply to limit immediate deductions. Under the tax shelter rules, you must apportion some prepaid expenses that you could otherwise immediately deduct. This applies whether or not the prepaid expense satisfies the 12-month rule.

For more information about prepaid expenses, refer to: sections 82KZl-82KZO of the Income Tax Assessment Act 1936 - period of deductibility of certain advance expenditure Deductions for prepaid expenses 2009-10 (NAT 4170) Prepaid expenses - investments in tax shelter arrangements - fact sheet (NAT 4513).

Simplified trading stock rules

This section explains the rules that apply if you hold trading stock and choose to use the simplified trading stock rules. If you choose to use the simplified trading stock rules, you only need to conduct a stocktake and account for changes in your trading stock's value in certain circumstances.

You can use either the simplified trading stock rules or the general trading stock rules.

For more information, refer to subdivision 328-E (section 328-280 - section 328-295) of the Income Tax Assessment Act 1997 - Trading stock for small business entities.

What is trading stock?

Trading stock includes anything you produce, manufacture, acquire or purchase for manufacture, sale or exchange. This includes livestock (but not animals used as beasts of burden or working beasts in a non-primary production business).

Trading stock does not include:

• standing or growing crops, timber or fruit - these only become trading stock when they are harvested, felled or picked
• stocks of spare parts held for repairs or maintenance to plant and equipment
• DVDs owned by a DVD lending business where they are used to earn income by hire or rental, rather than manufacture, sale or exchange
• consumables used in manufacturing trading stock, such as cleaning agents or sandpaper.

Valuing trading stock

Generally, you must undertake a stocktake to work out the value of trading stock at the end of the income year. This means you must work out the physical quantities of stock on hand and assign a value to each item of stock.

You can choose from three methods of valuing trading stock:

• cost price - this includes all costs connected with bringing the stock into existence. The cost of finished goods, for example, must include freight, customs duties and delivery charges, as well as the purchase price. For manufactured goods and work in progress, the full cost includes the cost of labour and materials, plus an appropriate proportion of fixed and variable factory overheads, such as power, rent, rates and factory administration costs
• market selling value - the current value of the stock you sell in the normal course of business. Under this method, you cannot allow a reduced valuation where you are forced to sell the stock for some reason
• replacement value - the price of a substantially similar replacement item you purchase in your normal buying market on the last day of the income year.

You can change the method you use to work out the value of trading stock each year and can also use different methods for different items of stock. However, the value of stock at the beginning of each income year must be the same as the value of the stock at the end of the previous income year.

The value of trading stock does not include GST where you are entitled to a GST credit.

For more information about valuing trading stock, refer to subdivision 70-C (section 70-35 - section 70-70) of the Income Tax Assessment Act 1997 - Accounting for trading stock you hold at the start or end of the income year (this contains special valuation rules including rules for obsolete stock and natural increase in livestock).

Trading stock rules for small business

You can choose whether or not to conduct a stocktake and account for changes in the value of trading stock only if there is a difference of $5,000 or less between the following:

• the value of your stock on hand at the start of the income year
• a reasonable estimate of the value of your stock on hand at the end of that year.

The $5,000 threshold applies to both increases and decreases in the value of your trading stock.

If the difference is more than $5,000, you must conduct a stocktake and account for changes in the value of your trading stock at the end of the income year.

Stock value at start of income year

The value of your stock on hand at the start of the income year is the same as the amount you included in your return at the end of the previous year.

If you did not have any trading stock in the previous year, the value of trading stock at the start of the year is zero. This might occur if you have a new business or in the first year you have trading stock.

If the value of trading stock varies by $5,000 or less and you choose not to account for the difference, we deem the value of your trading stock on hand at the end of the year to be the same as at the start of the year.

Estimating stock value

You must make a reasonable estimate of both the quantity of stock on hand and the value of each item of stock.

In general, for your estimate to be reasonable, you must do all of the following:

• take into account all relevant factors and considerations likely to affect the number and value of your trading stock on hand
• undertake your estimate in good faith
• follow a rational and reasoned process
• be able to explain and verify your process to a third party.

You must consider the following factors when you make an estimate:

• the type of trading stock you hold (for example, a large range but few items or a small range of many items)
• where and how your stock on hand is stored (for example, one location or several locations)
• how you value items of stock (cost, market selling value or replacement value method)
• whether the value of your stock varies from previous income years or during the income year
• how you record your sales and purchases and how accurate your records are
• your inventory systems and how accurate they are
• the quantity and value of your stock on hand in previous income years
• information from any stocktakes you have undertaken
• significant changes to the type and quantity of stock you hold.

Example: Trading stock estimate

Colin is an electrician. Mostly, he does small repair and installation jobs he needs fairly standard stock items for. He always has a small number of these items in his van and workshop. At year end in past income years, he has valued this stock at between $5,000 and $7,000. At the end of the previous income year he valued his stock at $6,800.

Colin's business has not changed during the current income year. He estimates that the quantity of stock he holds at the end of the current income year is similar to the amount he held in previous income years. However, he knows that the cost of most items has risen by an average 15% during the current income year. On this basis, he increases the value of stock on hand at the end of last income year by 15% to arrive at a reasonable estimate of $8,000.

As the difference between his opening stock value ($6,800) and his reasonable estimate of closing stock ($8,000) is not more than $5,000, Colin does not need to do a stocktake or account for the change in the value of trading stock when working out his assessable income.

Stock you have not paid for

A reasonable estimate must take into account the value of all trading stock on hand, including stock you have not yet paid for.

However, you still claim a deduction for trading stock in the same way you claim your other expenses. If you are claiming your deductions when you pay them, not when you incur them, you cannot claim a deduction for the cost of your trading stock until you have paid for it.

Applying the trading stock rules

Choosing not to do a stocktake

This example shows how you apply the simplified trading stock rules if you choose not to do a stocktake.

Example: Choosing not to do a stocktake

Dave runs a small art supplies shop. The value of his stock on hand at 1 July 2010 is $5,700 and he reasonably estimates the value at 30 June 2011 to be $6,700.

As the difference is not more than $5,000, he does not need to do a stocktake or account for the change in the value of his trading stock when he works out his assessable income.

The value of Dave's trading stock at the end of the 2010-11 income year is taken to be $5,700 - the same as at the start of 2010-11.

This will also be the opening value of his stock for the 2011-12 income year.

Choosing to do a stocktake

You can choose to do a stocktake and include the change in value in your assessable income even if that change is $5,000 or less. You might make this choice if you prefer to do either of the following:

• increase your assessable income in small increments over a number of years (assuming the value of your stock is increasing) rather than making one large adjustment when the increase in stock value reaches the $5,000 threshold
• reduce your assessable income immediately (assuming the value of your stock has decreased).

Where you choose to account for the change in value, the general trading stock rules apply.

Example: Choosing to do a stocktake

Poppy runs a leather goods store. Her stock on hand at 1 July 2010 is $6,600 and she reasonably estimates the value at 30 June 2011 to be $7,800.

As the difference is not more than $5,000, she does not need to do a stocktake or account for the change in the value of her trading stock when she works out her assessable income.

Poppy chooses to account for the change in value of her trading stock. She must do a stocktake and value each item of her trading stock on hand at 30 June 2011 at its cost price, market selling value or replacement value.

She chooses to value each item at cost and values her closing stock at $7,780.

Because she has chosen to account for the change in value, Poppy includes the difference of $1,180 ($7,780 - $6,600) in her assessable income for the 2010-11 income year.

Value of trading stock changes by more than $5,000

You must use the general trading stock rules if there is more than $5,000 difference between the value of your trading stock at the start of the income year, and a reasonable estimate of the value at the end of the year.

This means you must value each item of trading stock on hand at the end of the year and account for the change in value between your opening and closing stock.

You must apply the general trading stock rules, regardless of whether the value of your stock on hand has increased or decreased by more than $5,000.

Example: Value of trading stock changes

Joel runs a knitwear store. His opening stock for 2009-10 was $5,600. Joel reasonably estimated the value of his closing stock for 2009-10 to be $8,000. As the difference is less than $5,000, he does not need to do a stocktake or include the increase in value of his stock in his assessable income.

The value of his opening stock for 2010-11 is $5,600. Joel reasonably estimates the value of his closing stock in 2010-11 to be $12,000. As the difference between the opening stock ($5,600) and his reasonable estimate of closing stock ($12,000) is more than $5,000, Joel must do a stocktake and account for the increase in value of his stock.

General trading stock rules

The general trading stock rules apply to you where the value of your trading stock changes by:

• more than $5,000, or
• $5,000 or less but you choose to do a stocktake and account for the change in value.

Using the general trading stock rules, you must record the value of all trading stock you have on hand at both of the following:

• beginning of the income year (generally 1 July)
• end of the income year (generally 30 June).

One annual stocktake is enough to meet tax obligations because the value of stock at the end of an income year is the same as its value at the start of the next income year.

If the value of closing stock is more than that of opening stock, you must include the difference as part of your assessable income.

If the value of closing stock is less than that of opening stock, you can reduce your assessable income by the difference.

Where a business starts during an income year, the total value of stock on hand at the end of that year is included in your assessable income.

You can choose to use the general trading stock rules even if you are eligible to use the simplified trading stock rules.

Definitions

Adjustable value

The adjustable value of an asset is the asset's cost less its decline in value since it was first used or installed ready to use for any purpose, whether business or private.

Affiliate

An affiliate is any individual or company that, in relation to their business, acts or could reasonably be expected to act according to your directions or wishes, or in concert with you.

Aggregated turnover

Aggregated turnover is your annual turnover plus the annual turnovers of any business you are connected with or that is your affiliate.

Annual turnover

Your annual turnover includes all ordinary income you earned in the ordinary course of business for the income year.

Assessable income

Assessable income is your ordinary income and statutory income.

Asset value

The asset value for a depreciating asset that you first used, or installed ready to use, for a taxable purpose:

• while you were not using the simplified depreciation rules - equals the asset's adjustable value at the start of the income year you allocated it to a pool
• while you were using the simplified depreciation rules - equals the asset's adjustable value at the time you first used the asset, or installed it ready to use, for a taxable purpose.

The asset value includes the cost of any improvements.

Associate

The definition of associate is very broad. As an individual, your associates include but are not limited to:

• your relatives, such as your spouse or children
• a partnership you are a partner in
• another partner in that partnership and that partner's spouse and children
• a trustee of a trust that you, or your associate, are a beneficiary of
• a company that you, or your associate, control or influence.

There are similar rules to work out who is an associate of a company, partnership and trustee.

Balancing adjustment amount

You work out a balancing adjustment amount by comparing the asset's termination value and its adjustable value at the time of the balancing adjustment event. If the termination value is:

• more than the adjustable value, you include the excess in your assessable income
• less than the adjustable value, you can deduct the difference.

Balancing adjustment event

A balancing adjustment event occurs where you stop holding a depreciating asset (for example, you sell the asset) or using it for any purpose.

Connected with

An entity is connected with you if either of the following apply:

• you control or are controlled by that entity
• both you and that entity are controlled by a third entity.

Cost

The cost of an asset includes both the amount you paid for it and any additional amounts you spent on transporting and installing it. Cost also includes amounts you spent on improving the asset.

Cost addition amounts

The cost of capital improvements to assets and costs you can reasonably attribute to disposing of or permanently ceasing to use assets (this may include advertising and commission costs or the costs of demolishing the asset).

Current year estimate

Your estimate for the current year of how much you will use an asset to produce assessable income (expressed as a percentage) as distinct from private use and use to produce exempt income.

Decline in value

The value of a capital asset that provides a benefit over a number of years declines over the asset's effective life. You can claim a deduction for the decline in value of a depreciating asset to the extent you use it for a taxable purpose.

Depreciating asset

A depreciating asset is an asset that has a limited effective life and is expected to decline in value over the period you use it. Land, items of trading stock and certain intangible assets are not depreciating assets.

Depreciating asset lease

A depreciating asset lease is an agreement under which the right to use a depreciating asset is granted to another person by the holder. Hire purchase agreements and short-term hire agreement are not depreciating asset leases.

Diminishing value method

A method you use to work out the decline in the value of an asset. It assumes that the decline in value each year is a constant proportion of the remaining value and produces a progressively smaller decline over time.

Effective life

Broadly, how long you can use a depreciating asset for a taxable purpose, or for the purpose of producing exempt income, assuming reasonable wear and tear and reasonable levels of maintenance.

You express effective life in years, including fractions of years.

Fixed trust

A trust is a fixed trust if one or more beneficiaries have fixed entitlements to all of the income and capital of the trust.

General small business pool

The general small business pool is the pool you allocate a depreciating asset to if it has an effective life of less than 25 years.

GST credit

A GST credit is called an input tax credit under the GST law. If you are registered for GST, you can claim a GST credit for the GST part of the purchase price of an item you use in your business.

Hire purchase agreement

Broadly, a hire purchase agreement is one of the following:

• a contract for the hire of goods
• an agreement for the purchase of goods by instalments where the title of the goods does not pass until the final instalment is paid.

Horticultural plants

A horticultural plant is a live plant or fungus that you cultivate or propagate for any of its products or parts.

Income for ETO purposes

In this guide, when we say 'income for ETO purposes' we mean 'non-ETO small business income'.

To work out your income for ETO purposes, total your:

• taxable income
• reportable fringe benefits total
• reportable superannuation contributions
• total net investment loss.

Then subtract the following amounts where you are eligible for an ETO of more than zero before applying the income test:

• your net small business income
• any share of net small business income you received as a partner in a partnership or beneficiary of a trust.

If you had a spouse on the last day of the income year, your income for ETO purposes will also include the sum of your spouse's:

• taxable income
• reportable fringe benefits total
• reportable superannuation contributions
• total net investment loss.

However, any net small business income of your spouse is not deducted from the calculation when working out your income for ETO purposes.

Last estimate

The last estimate is either the original estimate or the previously adjusted estimate of how much you will use an asset to produce assessable income.

Long-life small business pool

The long-life small business pool is the pool you allocate a depreciating asset to if it has an effective life of 25 years or more.

Low-cost asset

A low-cost asset is one whose cost at the end of the year you first used or installed it ready to use for a taxable purpose in was less than $1,000 (excludes horticultural plants).

Low-value asset

A low-value asset is one:

• that is not a low-cost asset
• that has an opening adjustable value of less than $1,000
• where you have worked out previous year deductions using the diminishing value method.

Net small business income

This is the amount for an income year by which your annual turnover exceeds the sum of your deductions attributable to that turnover.

Net small business income share

Your share of a partnership or trust's net small business income.

Non-fixed trust

A trust in which beneficiaries do not have a fixed entitlement to all of the income and capital of the trust.

Ordinary income

Ordinary income is income according to ordinary concepts.

Ordinary course of business

In general, you derive income in the ordinary course of carrying on a business if you:

• regularly or customarily derive the income in the course of carrying your business, not from any special circumstance or unusual event
• don't regularly derive the income but you do derive it directly from your normal business activities.

You may derive ordinary income in the ordinary course of carrying on your business, even if the income is not the main type of ordinary income you derive. The income does not need to account for a significant part of your business' overall receipts. It is enough that the ordinary income is of a kind derived regularly or customarily in the course of carrying on your business.

Person

Person is an individual but also includes a company.

Personal services entity

A personal services entity is a company, partnership or trust whose ordinary income or statutory income includes the personal services income of one or more individuals.

Personal services income

Personal services income is income that is mainly a reward for your personal efforts or skills.

Reduction factor

For assets you first used, or installed ready to use, for a taxable purpose while you were not using the simplified depreciation rules, the reduction factor for assets in the general pool is:

• 0.7 for the income year after you allocate it to the pool
• 0.49 for the income year after that
• 0.343 for the income year after that.

For assets you first used, or installed ready to use, for a taxable purpose while you were using the simplified depreciation rules, the reduction factor for assets in the general pool is:

• 0.85 for the income year after you allocated it to the pool
• 0.595 for the income year after that
• 0.417 for the income year after that.

Relevant business

Is a business entity that is your affiliate or that is connected with you.

Retail fuel

Retail fuel is gasoline and diesel within the meaning of the Fuel Sales Grants Act 2000 that you sell by retail. It also includes liquefied petroleum gas you sell by retail.

Small business entity

You are a small business entity if you carry on business with less than $2 million aggregated turnover. When we say 'you' we are referring to the individual, partnership, company or trust that carries on the business.

Small business

In this guide, when we say 'small business' we mean 'small business entity'.

Small business turnover

Small business turnover is the total ordinary income that you derive in the income year in the course of carrying on your business.

Short-term hire agreement

A short-term hire agreement is an agreement for the intermittent hire of an asset on an hourly, daily, weekly or monthly basis.

Statutory income

Statutory income is income that is not ordinary income and that you include in assessable income because of a specific rule in the tax law. A net capital gain is statutory income.

Taxable purpose

You use an asset for a taxable purpose if you use it to produce assessable income.

Taxable purpose proportion

The taxable purpose proportion is your estimate (expressed as a percentage) of how much you use a depreciating asset for a taxable purpose, such as for producing assessable income.

Taxable supply

A taxable supply is a supply GST is payable on.

Tax-related expense

A tax-related expense is an expense for managing your tax affairs or complying with an obligation imposed on you by a Commonwealth law as it relates to your tax affairs. It also includes the general interest charge under Division 1 of Part IIA of the Taxation Administration Act 1953.

Termination value

Generally, the termination value is the amount you receive for an asset when a balancing adjustment event occurs, such as the proceeds of selling an asset.

Trading stock

Trading stock includes:

• anything you produce, manufacture or acquire that you hold for purposes of manufacture, sale or exchange in the ordinary course of your business
• livestock.

Support for businesses

Online services

We offer a range of online resources to help you manage your tax affairs online.

Business portal

The Business portal can help reduce the time and paperwork associated with your tax transactions. To apply for access, see Online services.

You can use the Business Portal to:

• lodge an activity statement and receive instant confirmation that you've been successful
• revise your activity statements online
• view details of activity statements you have lodged
• view your activity statements online
• view your business registration details
• update certain business registration details (address, contact details)
• request a refund for accounts in credit
• request a transfer of amounts across your different business accounts
• send a secure message to us and receive a secure response from us on selected topics.

Australian Business Register

You can use this register to:

• apply for a business tax file number (except for sole traders)
• register for or cancel an Australian business number (ABN)
• register for goods and services tax (GST) and pay as you go (PAYG) withholding
• access your ABN details and update them as required
• check the details of other businesses, such as their ABN or GST registration
• register for fuel tax credits.

Business entry point

This website offers convenient access to government information, transactions and services. It is a whole-of-government service providing essential information on planning, starting and running your business.

Online payment methods

BPAY®

Use the link from the Business Portal or your financial institution's BPAY facility to pay all your tax online.

®Registered to BPAY Pty Ltd ABN 69 079 137 518

Direct credit

You can make an electronic payment using internet banking or a banking software package.

Credit Card

You can make credit card payments online or by phone. To make a credit card payment you will need:

• A current Visa, MasterCard or American Express card
• Your EFT code or PRN

A card payment fee applies to transactions made using the credit card payment service

Face-to-face

Business seminars and workshops

We run small business seminars and workshops on a range of topics, including GST, PAYG, activity statements and record keeping. See Tax basics seminar programs to register your interest, or phone us on 1300 661 104 to find out whether there is a seminar or workshop near you or to make a booking.

Business assistance visits - no strings attached

If you would like personalised, specialist assistance or if you are new to business, you can organise a business assistance visit by phoning us on 13 28 66. Visits are confidential and conducted at your place of business or preferred location.

Phone

You can obtain more information by phoning us on one of the following numbers.

Business infoline - 13 28 66

Phone us from Monday to Friday, between 8.00am and 6.00pm for information about:

• ABN & GST registration and change of details
• activity statements and PAYG
• fringe benefits tax, income tax, capital gains tax
• fuel tax credits.

Account management infoline - 13 11 42

Phone us from Monday to Friday, between 8.00am and 6.00pm for information about:

• account queries, including payments and refunds
• outstanding debts or lodgments.

ATO Business Direct - 13 72 26

This is a self-help service available at any time. Make sure you have your ABN and tax file number (TFN) handy when calling to:

• verify an ABN
• lodge a nil activity statement
• arrange to pay a debt
• find out about your refund
• order PAYG withholding forms
• register for fuel tax credits.

Super infoline - 13 10 20

Phone us from Monday to Friday, between 8.00am and 6.00pm for information about:

• super co-contributions
• lost super
• unpaid super
• super guarantee
• self-managed super funds, including trustee responsibilities
• taxing super, including employer termination payments, pensions and annuities.

Individual tax infoline - 13 28 61

Phone us from Monday to Friday, between 8.00am to 6.00pm for information about:

• personal tax enquiries
• TaxPack
• e-tax
• the Family essentials
• Higher education loan schemes essentials
• Your notice of assessment
• your tax file number.

If you do not speak English well and need help from the Australian Taxation Office (ATO), phone the Translating and Interpreting Service on 13 14 50.

If you are deaf, or have a hearing or speech impairment, phone the ATO through the National Relay Service (NRS) on the numbers listed below:

• TTY users, phone 13 36 77 and ask for the ATO number you need
• Speak and Listen (speech-to-speech relay) users, phone 1300 555 727 and ask for the ATO number you need
• internet relay users, connect to the NRS on www.relayservice.com.au and ask for the ATO number you need.

More information

For more information about your tax obligations as a small business operator, refer to:

• Recordkeeping for small business (NAT 3029)
• Tax basics for small business (NAT 1908)
• Income and deductions for small business (NAT 10710)
• GST for small business (NAT 3014)
• Home-based business (NAT 10709)
• PAYG withholding (NAT 8075)
• Super - what employers need to know (NAT 71038)
• our fact sheet - Concessions for small business entities (NAT 71398)
• Taxation Ruling TR 93/30 Income tax: deductions for home office expenses
• Practice statement PS LA 2001/06 Home office expenses.

Last Modified: Thursday, 1 July 2010

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We are committed to providing you with accurate, consistent and clear information to help you understand your rights and entitlements and meet your obligations.

If you follow our information and it turns out to be incorrect, or it is misleading and you make a mistake as a result, we will take that into account when determining what action, if any, we should take.

Some of the information on this website applies to a specific financial year. This is clearly marked. Make sure you have the information for the right year before making decisions based on that information.

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Commonwealth of Australia

This work is copyright. You may download, display, print and reproduce this material in unaltered form only (retaining this notice) for your personal, non-commercial use or use within your organisation. Apart from any use as permitted under the Copyright Act 1968, all other rights are reserved.

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ATO references:
NO NAT 71874