Income and deductions for small business

List of definitions

Accruals basis of accounting

If you account on an accruals basis, you include all income you have received and any income you have issued an invoice for in the income year. You include expenses once you have received an invoice or paid for any part of them, whichever occurs first.

Assessable income

Income that is subject to tax is called assessable income.

Capital expenses

Capital expenses are expenses you incur to establish, replace, enlarge or improve the business structure, as distinct from working or operating expenses. Some capital expenses may be deductible over a period of time, while some may be deductible outright under specific provisions of the tax law.

Capital gains tax concessions

There are four capital gains tax concessions that you may be eligible to use to reduce capital gains you make when you dispose of:

• business assets
• your interest in an entity that carries on the business.

Cash basis of accounting

If you use a cash basis of accounting, you include in your income only amounts you received in that income year. You can generally claim a deduction for expenses in the income year you incurred them in.

Company

For tax purposes, a company is an incorporated or unincorporated body or association, but doesn't include a partnership or a non-entity joint venture. An incorporated company is a distinct legal entity and pays tax on the company's income.

Decline in value

Decline in value is the new term for depreciation.

Depreciating asset

A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time you use it. Depreciating assets include such items as computers, electric tools, furniture and motor vehicles.

Fringe benefit

Basically, a fringe benefit is a benefit provided to an employee (or their associate, such as a family member) because that person is an employee. Benefits can be provided by an employer, an associate of the employer, or by a third party under an arrangement with the employer. An employee can be a current, future or former employee.

Fringe benefits tax

Fringe benefits tax (FBT) is a tax paid on certain benefits employers provided to their employees or their employees' associates (typically family members). FBT is separate from income tax and is based on the taxable value of the various fringe benefits provided.

Low-cost asset

A low-cost asset is a depreciating asset whose cost as at the end of the year in which you start to use it or have it installed for a taxable purpose is less than $1,000 (excluding GST credits).

Low-value asset

A low-value asset is a depreciating asset that is not a low-cost asset but has an opening adjustable value of less than $1,000, and for which you used the diminishing value method to work out the decline in value for a previous income year.

Low-value pool

A low-value pooling arrangement for depreciating assets costing less than $1,000 or having an undeducted cost of less than $1,000. You can choose to allocate such assets to a low-value pool, which is depreciated at statutory rates.

Occupancy expenses

Occupancy expenses are expenses associated with occupying your home, namely, rent, mortgage interest, rates, land taxes and house insurance premiums.

Partnership

For tax purposes, a partnership is an association of people or entities that carry on business as partners or receive income jointly. A partnership is not a separate legal entity and doesn't pay tax on the income the partnership earned.

PAYG instalments

PAYG instalments is a system for paying instalments towards your expected tax liability for business and investment income for the income year. Instalments may be paid in four or two instalments during the year or annually, at the end of the income year, subject to you meeting the respective eligibility criteria.

PAYG withholding

PAYG withholding is the system whereby payers withhold amounts from payments to payees and send the withheld amounts to us.

Personal services business

You are considered to be conducting a personal services business if you earn personal services income as an individual and meet certain conditions.

If you earn your personal services income through an entity (such as a company, partnership or trust), that entity is considered to be conducting a personal services business if it meets certain conditions.

Revenue expenses

Working or operating expenses that relate to the everyday running of your business (for example, office stationery, rent of office premises, salary and wages) are called revenue expenses. You can generally claim a deduction for these expenses in the income year you incur them.

Running expenses

Running expenses include phone rental and business calls, internet fees, decline in value of office furniture and equipment, and any additional heating, cooling, lighting and cleaning expenses.

Sole trader

A sole trader is an individual trading alone. The income of the business is treated as the individual's personal income. Sole traders pay the same tax rate as individual taxpayers.

Tax offsets

Tax offsets reduce your tax payable but are not deductions. As a general rule, tax offsets you are entitled to cannot exceed the amount of tax you must otherwise pay and therefore will not give you a refund.

Tax offsets generally do not reduce the Medicare levy you have to pay. However, there are special tax offsets known as refundable tax offsets that can be used to pay your Medicare levy and you can even get a refund from them.

Taxable income

Your taxable income is your assessable income less the deductions you can claim against that income.

Taxable sale

This term is widely defined to include most sales (goods, services and anything else) you make in your business. A sale is not a taxable sale if it is GST-free, input taxed or otherwise non-taxable.

Trading stock

Trading stock is anything you produce, manufacture, acquire or purchase for manufacture, sale or exchange by your business. We consider livestock to be trading stock. We consider you to have trading stock on hand if you have the power to dispose of that stock (see Taxation Ruling No. IT 2670 Income tax: meaning of 'trading stock on hand').

Trust

A trust is an obligation on a person to hold property for the benefit of others, who are known as 'beneficiaries'. A trust is not a separate legal entity.

Uniform capital allowance system

From 1 July 2001 there are new rules for working out deductions for your depreciating assets, such as plant and equipment. These new rules are part of the uniform capital allowance system.