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Tax concessions: helping small businesses

Running a business keeps you pretty busy, so it's easy to overlook the help that's available. Many small businesses don't realise the government offers a range of valuable concession that can make a real difference to their annual tax bill.

Depending on your annual turnover, these can include reduced tax rates, asset write-offs, simplified depreciation rules and tax-free restructuring.

Lower income tax rates

A key concession for small business entities (SBEs) is lower company tax rates.i If your business has an aggregate turnover threshold of under $50 million, you are eligible for a flat income tax rate of 27.5 per cent during the 2018-19 and 2019-20 financial years. In 2020-21, this tax rate will drop to 26 per cent, with a rate of 25 per cent applying in 2021-22 and later years.

These lower tax company tax rates represent a significant discount on the tax rates applying to personal income and sole traders and the full company tax rate of 30 per cent.

Another valuable concession is the instant asset write-off, which allows eligible businesses to immediately deduct the cost of a depreciating asset if the asset costs less than $30,000. This concession is currently available until 30 June 2020 for business entities with an aggregate turnover of less than $50 million.

Simplified asset depreciation

For SBEs with an aggregate annual turnover of under $10 million, another valuable tax concession can be the rules for simplified asset depreciation.

These allow you to pool the business portion of higher cost assets (those not eligible for immediate write-off), and claim a 15 per cent deduction in the year you start using them. You can then claim a 30 per cent deduction each year after that and deduct the balance of the pool at the end of the year if the balance is less than the instant asset write-off threshold.

If the difference between the value of your trading stock on hand at the start and end of an income year is less than $5,000, an SBE can also choose not to account for its trading stock in that income year.

SBE restructure roll-overs

Another useful tax concession permits SBEs to access a rollover where - as part of a genuine restructure - ownership of its assets are transferred without a change in ultimate economic ownership.

This means any gains and losses arising from transfer of capital gains tax (CGT) assets, depreciating assets and trading stock to a new business entity are not counted, so tax is not payable on the restructure.

When you first start-up an SBE, there is also a tax concession for some of the costs involved.ii Fees for professional advice and government fees, taxes and charges are all immediately tax deductible.

The ATO also has a shorter time period (two years) to amend a business tax assessment for an SBE, rather than the normal four years.

Small business income tax offset

A valuable tax concession for SBEs operating as unincorporated entities (such as sole traders) with an aggregate turnover of less than $5 million, is eligibility for the small business income tax offset.iii

This concession provides a discount on your income tax liability for business income and comes in the form of a tax offset (capped at $1,000 per taxpayer per year). In 2019-20 the discount rate is 8 per cent, rising to 13 per cent in 2020-21 and 16 per cent in 2021-22.

When it comes to disposing of assets, there are valuable CGT concessions if an SBE has an annual turnover under $2 million. These concessions can limit the amount of CGT payable when business assets are sold and represent significant tax savings if you are eligible.

In addition, many SBEs also qualify for concessions allowing them to use the Simpler BAS rules, account for GST on a cash basis and pay GST in instalments. They can also make an annual apportionment of their input tax credits.

SBEs may also qualify for exemptions on car parking and work-related devices under the FBT rules, and can pay their PAYG tax obligations in instalments.

If you would like more information about the tax concessions available to your SBE, call us today.

 

https://www.ato.gov.au/Rates/Changes-to-company-tax-rates/

ii https://www.ato.gov.au/business/small-business-entity-concessions/concessions/income-tax-concessions/?anchor=Deductionsforprofessionalexpensesforstar#Deductionsforprofessionalexpensesforstar

iii https://www.ato.gov.au/business/small-business-entity-concessions/what-s-new-for-small-business/?anchor=Increasedsmallbusinessincometaxoffset#Increasedsmallbusinessincometaxoffset

2019 Year in Review: a year of highs & lows

It was a year of extremes, with shares hitting record highs and interest rates at historic lows. Yet all in all, 2019 delivered far better returns than Australian investors dared hope for at the start of the year.

The total return from Australian shares (prices and dividend income) was 24 per cent in the year to December.i When you add in positive returns from bonds and a rebound in residential property, Australians with a diversified investment portfolio had plenty to smile about.

Humming along in the background, Australia entered a record-breaking 29th year of economic expansion although growth tapered off as global pressures mounted.

Global economy slowing

The US-China trade war, the Brexit impasse and geopolitical tensions weighed on the global economy in 2019. Yet late in the year optimism grew that US President Donald Trump would sign the first phase of a trade deal with Beijing.

The re-election of Boris Johnson's Conservatives in the UK also raised hopes that the Brexit saga may finally be resolved.

The US economy is in good shape, growing at an annual rate of 2.1 per cent in line with inflation and a jobless rate of just 3.5 per cent. China has fared worse from the trade tensions, with annual growth of 6 per cent its weakest since 1992.

In Australia, growth slipped to an annual rate of 1.7 per cent in the September quarter. Inflation, at 1.7 per cent, is well below the RBA's target and unemployment is stuck around 5.2 per cent.ii

Despite the global slowdown, higher commodity prices were a major contributor to Australia's healthy trade surplus in 2019.iii

Commodities prices mixed

Iron ore prices rose 28.7 per cent in 2019 following a mine disaster in Brazil which reduced global supply. Other major Australian exports to receive a boost were gold, up 18.5 per cent, and beef, up 32 per cent.iv

At the other end of the scale, thermal coal prices fell 34 per cent and liquefied natural gas (LNG) was down 44 per cent.v

Middle East tensions and tighter supply led to a surge in crude oil prices, with Brent crude up almost 21 percent.vi As Australia is a net importer of oil, a jump in oil prices coupled with a fall in the Aussie dollar filtered through to higher petrol prices for motorists.

Interest rates at new lows

In an effort to stimulate the economy, the Reserve Bank cut the cash rate three times in 2019 to an historic low of 0.75 per cent. The US federal Reserve also cut rates to a target range of 1.50-1.75 per cent. This was the main reason the Australian dollar listed from its decade low of US67c in October to finish the year where it started, around US70c.vii

Rate cuts flowed through to yields on Australian 10-year government bonds which fell to just 1.37 per cent.viii However, falling bond yields result in higher bond prices and this lifted total returns from the government bonds by around 8 per cent.ix

Retirees and others who rely on income from bank term deposits has another difficult year, with interest rates generally below 2 per cent. After inflation, the real return was close to zero.x It's little wonder then that many looked elsewhere for a better return on their money.

Bumper year for shares

The hunt for yield was one reason Australian shares jumped 18.4 per cent in 2019, the best performance in a decade.xi The market climbed a wall of worries to hit a record high in November on optimism about a US-China trade deal, then eased back on concerns about slowing economic growth.

Despite low interest rates and personal tax cuts, consumers are reluctant to spend.

The Westpac/Melbourne Institute survey of consumer sentiment fell to 95.1 in December - anything below 100 denotes pessimism.xii

Property prices recovering

Australian residential property prices rebounded strongly in the second half of 2019, driven by lower mortgage interest rates, a relaxation of bank lending practices and renewed certainty around the taxation of investment property following the May federal election.

According to CoreLogic, property prices rose 2.3 per cent on average, led by Melbourne and Sydney, both up 5.3 per cent. Also up were Hobart (3.9 per cent), Canberra (3.1 per cent) and Brisbane (0.3 per cent). The only capitals to fall in value were Darwin (-9.7 per cent), Perth (-6.8 per cent) and Adelaide (-0.2 per cent).

When rental income is included, the total return from residential property was 6.3 per cent.xiii

Looking ahead

Property prices are expected to recover further this year but with shares looking fully valued and bond yields near rock bottom, returns could be more modest.

The Australian government is under pressure to do more to stimulate the economy in the short term to head off further rate cuts by the Reserve Bank. More fiscal stimulus could inject fresh life into the local economy and financial markets.

Overseas, the US-China trade war is far from resolved and could remain up in the air until after the US Presidential election in November. There is also uncertainty over the Brexit deal and its impact on trade across Europe.

The one thing we do know is that a diversified investment portfolio is the best way to navigate unpredictable markets.

If you would like to speak to us about your overall investment strategy, give us a call.

i Econonomic Insights: Sharemarket winner and losers. CommSec Economics, 2 January 2019
ii Trading Economics, viewed 1 Jan 2020,
https://tradingeconomics.com/indicators
iii https://dfat.gov.au/trade/resources/trade-statistics/pages/australias-trade-balance.aspx
iv Trading Economics, prices as at 31 Dec 2019 viewed 1 Jan 2020, https://tradingeconomics.com/commodities
v Econonomic Insights: Sharemarket winner and losers. CommSec Economics, 2 January 2019
vi Trading Economics, prices as at 31 Dec 2019 viewed 1 Jan 2020,
https://tradingeconomics.com/commodities
vii Trading Economics, prices as at 31 Dec 2019 viewed 1 Jan 2020, https://tradingeconomics.com/currencies
viii RBA, https://www.rba.gov.au/statistics/tables/#interest-rates
ix Economic Insights: Year in Review; Year in Preview, CommSec 2 January 2020
x Canstar,
https://www.canstar.com.au/term-deposits/highest-term-deposit-rates/
xi Trading Economics, viewed 1 Jan 2020, https://tradingeconomics.com/stocks
xii https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/economics-research/er20191211BullConsumerSentiment.pdf
xiii https://www.corelogic.com.au/news/corelogic-december-2019-home-value-index-strong-finish-housing-values-2019-corelogic-national

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Here are some tips on how you can make the most of your upcoming break.

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Here's a roundup of some of the latest tax developments:

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For most business owners, it also means it's time to start thinking about saying thanks to your employees for another year of hard work.

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Finding safe harbour when business is rough

Australia's economy is growing at a slower pace than many would like, with small businesses in some sectors doing it tough. Recognising the warning signs of potential insolvency is key to trading through difficult times.

Basically, an insolvent company is one that is unable to pay its debts when they fall due.

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