Small business entity thresholds
Small businesses with an aggregated turnover of less than $10 million are called small business entities and may qualify for a range of tax concessions. Prior to 1 July 2016, the aggregated turnover threshold was $2 million.
The $10 million aggregated turnover threshold applies to most of the small business concessions, except for:
- the small business income tax offset, which is available to businesses with an aggregated turnover of less than $5 million from 1 July 2016 (individual partners claim this offset)
- the capital gains tax (CGT) concessions, where the aggregated turnover threshold of $2 million continues to apply.
Eligible businesses can choose to use the concessions that best suit their needs. However, eligibility must be reviewed each year.
Depending on its aggregated turnover for an income year, the small business entity may be eligible for the following concessions:
- CGT 15-year asset exemption (see CGT concessions)
- CGT 50% active asset reduction (see CGT concessions)
- CGT retirement exemption (see CGT concessions)
- CGT rollover provisions, including the small business restructure rollover with effect from 1 July 2016 (see CGT concessions)
- simplified depreciation rules
- immediate deduction for certain prepaid business expenses
- immediate deduction for a range of business start-up expenses
- simplified trading stock rules
- choice to account for GST on a cash basis
- annual apportionment of input tax credits in certain circumstances
- paying GST by instalments
- FBT car parking exemption
- FBT portable electronic device exemption
- PAYG instalments based on GDP-adjusted notional tax
- a concessional corporate tax rate
- simplified BAS with effect from 1 July 2017.
Some of these concessions have additional eligibility conditions that you must also satisfy.
CGT concessions
Where a capital gain arises from a CGT event that involves the creation, transfer, variation or cessation of an interest or right that entitles someone to the income or capital of a partnership, the partners in the partnership can no longer access the small business CGT concessions where both the:
- CGT event occurs after 7:30 pm (AEST) 8 May 2018
- interest or right isn't a membership interest held by the person with the entitlement.
For more information, see:
A partner who is an individual may be entitled to a tax offset on the tax payable on their share of net small business income earned by a partnership that is a small business entity with an aggregated turnover of less than $5 million. See, item 5 Business income and expenses.
Eligibility
A partnership is eligible for the small business entity concessions if it meets the small business entity test; that is, the partnership:
- is carrying on a business
- has an aggregated turnover of less than $10 million.
Partnerships that would be small business entities if the aggregated turnover threshold was less than $50 million are also eligible for some concessions.
‘Business’ is defined broadly to include ‘any profession, trade, employment, vocation or calling, but does not include occupation as an employee’.
‘Carrying on a business’ isn't defined in the tax law and, therefore, takes its ordinary meaning. An entity is taken to be carrying on a business for the purposes of the small business entity test in an income year if:
- the entity is winding up a business it formerly carried on
- it was a small business entity in the income year that it stops carrying on the business.
Aggregated turnover is the annual turnover of the partnership, plus the annual turnovers of any entity that is connected with it, or that is its affiliate. For more information on calculating aggregated turnover, including the meaning of connected with the partnership and affiliated with the partnership, see CGT small business entity eligibility. You must review eligibility each year.
Calculating turnover
Turnover includes all ordinary income the partnership earns in the ordinary course of business for the income year. The following are some examples of amounts you include and don't include in ordinary income of a business.
Include these amounts:
- sales of trading stock
- fees for services provided
- interest from business bank accounts
- amounts received to replace something that would have had the character of business income.
Don't include these amounts:
- GST the partnership has charged on a transaction
- proceeds from the sale of business capital assets
- insurance proceeds for the loss or destruction of a business asset
- amounts received from repayments of farm management deposits.
There are special rules for calculating the annual turnover if the partnership has retail fuel sales or business dealings with associates that aren't at market value.
For more information on calculating turnover, see CGT small business entity eligibility.
Aggregation rules
Special rules called the aggregation rules will determine who the partnership is connected or affiliated with.
These rules prevent larger businesses from structuring or restructuring their affairs to take advantage of the small business entity concessions.
An entity that is connected with the partnership, or that is its affiliate, is referred to as a relevant entity.
When calculating the aggregated turnover of the partnership, don't include income from:
- dealings between the partnership and a relevant entity
- dealings between any relevant entities of the partnership
- a relevant entity when it was not a relevant entity of the partnership.
For more information on the aggregation rules, including the meaning of ‘connected with’ or ‘affiliated with’ the partnership, see Small business CGT concessions.
If the partnership carries on a business during the current income year and has an aggregated turnover of less than $10 million under the aggregation rules, then the partnership is a small business entity.
Business operating for only part of the year
If the partnership, or a relevant entity, carries on a business for only part of the income year, work out the annual turnover using a reasonable estimate of what the turnover would have been if the partnership, or a relevant entity, was carrying on a business for the whole of the income year.
Satisfying the aggregated turnover threshold
There are 3 ways to satisfy the $10 million aggregated turnover limit or the $50 million aggregated turnover limit. These are:
- your 2023–24 turnover
- your estimate of your 2024–25 turnover
- your actual 2024–25 turnover.
Most businesses will only need to consider the first method.
Previous year turnover
If the aggregated turnover of the partnership for 2023–24 was less than $10 million, the partnership is a small business entity for 2024–25. This is regardless of its estimate or actual aggregated turnover for 2024–25.
If the aggregated turnover of the partnership for 2023–24 was less than $50 million, the partnership can access those small business entity concessions with a $50 million aggregated turnover limit.
Estimate of current year turnover
If the estimated aggregated turnover of the partnership for the current income year is less than $10 million, the partnership is a small business entity for the income year.
If the estimate of aggregated turnover of the partnership for the income year is less than $50 million, the partnership can access those small business entity concessions with a $50 million aggregated turnover limit.
If you're estimating your turnover, you need to:
- estimate your turnover basing it on the conditions you're aware of on the relevant date
- assess whether the aggregated turnover is more likely than not to be less than $10 million or $50 million on the relevant date.
The relevant date is either:
- the first day of the income year
- the time the business starts, if the partnership starts a business part way through the year.
Partnerships that start carrying on a business in the current year need to make a reasonable estimate of what their turnover would have been had the business been carried on for the whole income year.
You can't use this method if the aggregated turnover of the partnership in each of the previous 2 income years was equal to or more than the aggregated turnover limit.
Actual current year turnover
If the actual aggregated turnover of the partnership was less than $10 million at the end of the income year, the partnership is a small business entity for that income year.
If the actual aggregated turnover of the partnership is less than $50 million at the end of the income year, the partnership can access those small business entity concessions with a $50 million aggregated turnover limit.
This method is only needed if the first 2 tests can't be met.
If the partnership is a small business entity by means of this method only, it can't use the GST and PAYG concessions for that income year, as those particular concessions must have been chosen earlier in the income year.
Former STS taxpayers
There is a transitional rule for former STS taxpayers that deals with the continued use of the STS accounting method.
There is also a special rule that applies if the partnership is winding up a business this year that it previously carried on and it was an STS taxpayer in the income year it ceases business. The special rule provides that the following will apply to the partnership in the year it's winding up the business as if it's a small business entity, the:
- Simplified depreciation rules.
- Simplified trading stock rules.
- Rules concerning deductions for certain prepaid expenses.
See, section 328-111 of the Income Tax (Transitional Provisions) Act 1997.
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