How does the tax system work for small businesses?

In Plain English

Based on the provided information, here's how the tax system works for small businesses:

• Tax Offset: If you're a small business, you might be able to get a tax offset (a reduction in the amount of tax you pay). This offset is calculated as a percentage of your "net small business income," but it's capped at $1,000.
• Net Small Business Income: This is basically your business income minus certain deductions. Capital gains and personal services income might not be included.
• Immediate Deductions: Small businesses can immediately deduct certain start-up expenses, like advice on the business structure or fees paid to government agencies.
• FBT and Portable Electronic Devices: There are some Fringe Benefits Tax (FBT) exemptions for small businesses regarding portable electronic devices.
• Simplified Accounting Methods: Small businesses can use simplified accounting methods for GST.
• Small Business Restructure Roll-over: Small businesses can restructure without incurring tax gains or losses.
• Lower Tax Rates: Small businesses may be eligible for lower corporate tax rates.
• Increased Turnover Threshold: The turnover threshold to be considered a small or medium business has increased to $50 million for certain concessions.

Detailed Explanation

The provided legislative context outlines several tax-related measures and concessions specifically designed for small businesses in Australia. Here's a breakdown:

• Small Business Income Tax Offset (Subdivision 328-F of the Income Tax Assessment Act 1997):
  • Eligibility (Income Tax Assessment Act 1997 s 328-355): Individuals who are small business entities or who have a share of net small business income from an unincorporated small business entity included in their assessable income may be entitled to a tax offset.
  • Amount of Offset (Income Tax Assessment Act 1997 s 328-360): The tax offset is calculated as a percentage of the individual's "total net small business income" but is capped at $1,000. The percentage has varied over time:
    • 5% for the 2015-16 income year (Tax Laws Amendment (Small Business Measures No. 3) Act 2015).
    • 8% commencing 1 July 2016 (Treasury Laws Amendment (Enterprise Tax Plan) Act 2017).
    • 13% commencing 1 July 2020 (Treasury Laws Amendment (Enterprise Tax Plan) Act 2017).
    • 16% commencing 1 July 2021 (Treasury Laws Amendment (Enterprise Tax Plan) Act 2017).
  • Net Small Business Income (Income Tax Assessment Act 1997 s 328-365): This is the entity's assessable income from carrying on a business, excluding net capital gains and certain personal services income, less attributable deductions (excluding tax-related expenses, gifts, and personal superannuation contributions as per Income Tax Assessment Act 1997 s 328-370).
  • Modification for Under 18s (Income Tax Assessment Act 1997 s 328-375): Special rules apply if the individual is under 18 years old.
• Immediate Deductibility of Start-up Expenses (Schedule 2 of the Tax Laws Amendment (Small Business Measures No. 3) Act 2015):
  • Small businesses can immediately deduct capital expenditure incurred in relation to a proposed business for advice/services on the business structure/operation or for payments to Australian government agencies for fees/taxes related to establishing the business (Income Tax Assessment Act 1997 s 40-880(2A)).
• FBT and Portable Electronic Devices (Schedule 3 of the Tax Laws Amendment (Small Business Measures No. 3) Act 2015):
  • There are specific FBT rules related to portable electronic devices for small business entities. The definition of "small business entity" in this context refers to the definition within the Income Tax Assessment Act 1997.
• Small Business Restructure Roll-over (Schedule 1 of the Tax Laws Amendment (Small Business Restructure Roll-over) Act 2016):
  • This allows small businesses to restructure their operations without triggering immediate tax consequences (capital gains or losses) (Income Tax Assessment Act 1997 Subdivision 328-G).
• Simplified Accounting Methods for GST (Division 123 of the A New Tax System (Goods and Services Tax) Act 1999):
  • The Commissioner can create simplified accounting methods for retailers and small enterprise entities to reduce GST compliance costs (A New Tax System (Goods and Services Tax) Act 1999 s 123-5).
  • A "small enterprise entity" is defined in A New Tax System (Goods and Services Tax) Act 1999 s 123-7, referencing the small business entity definition in the Income Tax Assessment Act 1997, but with some modifications.
• Lower Corporate Tax Rate (Part 1 of Tax Laws Amendment (Small Business Measures No. 1) Act 2015):
  • The corporate tax rate for small business entities is lower than the standard corporate tax rate (Income Tax Rates Act 1986 s 23).
• Expanded Access to Small Business Concessions (Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Act 2020):
  • The turnover threshold for accessing certain small business concessions has been increased to $50 million for "medium businesses" for certain concessions (Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Act 2020).