Chapter 4: Small business entities
Warning:
This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.
End of attentionFrom the 2007-08 income year changes to the law have made it easier for small businesses to access a range of existing concessions. Eligible small businesses are now called small business entities and they may choose to use the concessions which best suit their business needs.
Are you a small business entity?
You are a small business entity if you are an individual, partnership, company or trust that:
- is carrying on a business, and
- has an aggregated turnover of less than $2 million.
Aggregated turnover is your annual turnover plus the annual turnovers of any businesses you are connected with or have influence over. The aggregation rules determine when you need to include the annual turnover of another business when calculating your aggregated turnover.
If you are not linked with any other business and your business turnover is less than $2 million, you are a small business entity.
See also:
Summary of rules including the 12-month rule
- Prepaid expenditure that is subject to the tax shelter rules is apportioned over the eligible service period or 10 years, whichever is less. For more information, see chapter 2.
- Prepaid expenditure incurred under a plantation forestry managed agreement is deductible under the 12-month rule if
- the eligible service period for the expenditure is 12 months or less, and
- the period ends on or before the last day of the income year following the year in which the expenditure was incurred.
This rule, known as the 12-month rule, applies to both deductible business expenditure and deductible non-business expenditure incurred by a small business entity that chooses to use this concession.
- If a prepayment does not meet the 12-month rule, you cannot claim an immediate deduction. Small business entities must apportion the deduction over the eligible service period or 10 years, whichever is less.
Small business entities still using the Simplified Tax System (STS) accounting method
You may continue using the STS accounting method if you:
- were an STS taxpayer continuously from before the 2005–06 income year until the end of the 2006–07 income year
- used the STS accounting method for the 2005–06 to 2007–08 income years, and
- have been a small business entity from the 2007–08 income year.
If you meet these three requirements, you can continue using the STS accounting method until you choose not to, or are no longer a small business entity.
If you are a small business entity using the STS accounting method, the expense must not only have been incurred, it must also have been paid before a deduction can be claimed.
Calculating your deduction if the 12-month rule is satisfied
Example: Prepaid expense that is immediately deductible
The Jacobs Trust is an small business entity. On 1 June 2009, it made a payment of $24,000 to cover the lease of its business premises for a 12-month period commencing on 1 July 2009 and ending on 30 June 2010.
As the eligible service period for the expenditure does not exceed 12 months and ends on or before the last day of the income year following the year in which the payment was made, the prepayment satisfies the 12-month rule. The Jacobs Trust can therefore claim an immediate deduction of $24,000 in the 2008–09 income year.
End of exampleCalculating your deduction if the 12-month rule is not satisfied
If you make a prepayment that does not satisfy the 12-month rule, you cannot claim an immediate deduction. As an STS taxpayer, you must apportion the deduction over the eligible service period or 10 years, whichever is less, using the following formula:
Expenditure × (number of days of eligible service period in the income year ÷ total number of days of eligible service period)
Example: Prepaid expense where eligible service period is greater than 12 months
Tom Pty Ltd is small business entity. On 31 May 2009, it paid $15,000 for business advertising to cover the period 1 June 2009 to 30 June 2010 (395 days). Because the eligible service period is longer than 12 months, the prepayment does not satisfy the 12-month rule. Tom Pty Ltd cannot claim an immediate deduction for the prepayment. Instead, the deduction for the expenditure must be apportioned over the eligible service period as follows:
2008–09 (1 June 2009 to 30 June 2009)
$15,000 × (30 ÷ 395) = $1,139
2009–10 (1 July 2009 to 30 June 2010)
$15,000 × (365 ÷ 395) = $13,861
The total deduction allowed proportionately over the 2009 and 2010 income years will be $15,000.
End of example
Example: Prepaid expense where the eligible service period is 12 months or less but ends after the last day of the next income year
Noel Pty Ltd, a small business entity, was offered a 15% discount on advertising to cover the period 15 July 2009 to 14 July 2010 providing payment was made by 30 June 2009. Noel Pty Ltd accepted these conditions and paid $10,200 for these services on 30 June 2009.
Although the eligible service period is for a period of 12 months or less, the 12-month rule has not been satisfied. This is because the eligible service period does not end before the last day of the income year following the one in which the expenditure was incurred. The deduction for the expenditure must be apportioned over the eligible service period as follows:
2008–09
Nil. No part of the eligible service period occurred in this income year.
2009–10 (15 July 2009 to 30 June 2010)
$10,200 × (351 ÷ 365) = $9,809
2010–11 (1 July 2010 to 14 July 2010)
$10,200 × (14 ÷ 365) = $391
The total deduction allowed proportionately over the 2010 and 2011 income years will be $10,200.
End of exampleSee also:
Last modified: 04 Mar 2016QC 21781