Taxation Law: Small Business Concession - Analysis and Recommendations

This report provides an overview of small business tax concessions in Australia. It discusses the importance of small businesses and the revenue they generate. The report outlines different types of concessions, including those related to active assets, retirement, and rollovers, as well as the criteria for eligibility. It explores the objectives of these concessions, such as simplifying tax measures and reducing compliance costs. The report also covers the history of small business tax, current amendments, and the effectiveness of new policies like simplified depreciation rules, immediate tax deductions for prepaid expenses, and GST and income tax accounting based on cash basis. Recommendations are made to improve eligibility criteria and aggregate turnover. The conclusion emphasizes the increasing adoption of these concessions and their positive impact on reducing tax compliance costs. References to relevant literature are also included.

Taxation Law
Small Business Concession

Introduction:
 Small business forms the sizeable share of Australia.
 Small business contributes greater $1.4 trillion in the form of revenue for the
Australian government.
 Small business tax system was bought into the action with the objective of
providing the small business an options of measuring the tax
 Small business simplifies the measures of tax by simultaneously lowering the cost
of tax compliance.

Types of small Business Concessions:
50% reduction in the active assets
Exemptions associated to retirement
15 year exemptions
Exemptions of rollover

CRITERIA FOR MEETING THE ELIGIBILITY OF
CONCESSIONS:
 Fulfilling the test of Net Asset Value
 Fulfilling the criteria of active asset
 Where the assets are as shares in company or unit in the
trust

OBJECTIVES OF THE SMALL BUSINESS CONCESSIONS:
• The purpose of the small business concessions was to give the taxpayers with a new platform
of dealing with tax.
• The purpose of applying the simplified rules of business is to lower down the cost of tax
compliance cost for around 95% of the business.
• The actual small business concessions provide the business with the options of collectively
undertaking four sets of tax treatment.

Four Sets of Tax Treatment
• Simplified depreciations rules
• Accounting in cash for the purpose of income tax
• Simplified business rules trading stock
• Claiming tax deductions immediately for prepaid expenses

HISTORY OF MEASURING TAX FOR SMALL BUSINESS:
• There are additional concessions for the business that comprised of CGT relief
and GST relief for the purpose of accounting based on the cash basis.
• The small business concessions were implemented on business that had the
annual turnover was lower than $1 million every year.
• Under the traditional system it ignored the debtors and the credits with the
taxation of work-in-progress when it realised.

Current amendments that are made to the small business concessions:
■ Simplified rules for trading stock enables the Value of trading stock to be be carried
forward.
■ Simplified rules for depreciation enables the depreciation of asset at half of the pool rate
for the income year.
■ Claiming immediate tax deductions for prepaid expenses.
■ GST base accounting on cash basis enables the business to account on the basis of non-
cash or based on accrual basis.
■ Income tax based on the cash basis accounting enables large sum of debtor’s balance to
deferred till next accounting year.

EFFECTIVENESS OF THE METHODS
• New policies in small business concessions it has assisted the small business in reducing
the compliance costs of tax that the business faced.
• Business are provided with the options of undertaking the simplified tax rules and leading
to reduction of burden of tax compliance cost.

SIMPLIFIED RULES FOR DEPRECIATION
• NEW AMENDMENT THAT WAS MADE PROVIDES THE SMALL BUSINESS WITH THE
ADVANTAGE OF ADOPTING THE SIMPLIFIED DEPRECIATION RULES UNDER THE
“SECTION 328-170 TO 325-257 OF THE ITAA 1997”
• UNDER THE SIMPLIFIED DEPRECIATION IS THAT WHEN THE ASSET IS BOUGHT
DURING THE YEAR OF INCOME THE ASSET CAN BE DEPRECIATED AT HALF OF THE
POOL RATE FOR THE INCOME YEAR.
• THE NEW RULES THE USE OF PRO-RATED DEPRECATION IS REMOVED.

RECOMMENDATIONS
• The taxpayer’s ability of meeting the $6 million maximum test is difficult criteria.
• Recommendations can be made to replace the $6 million test with the substitute eligibility
test.
• A revised aggregate turnover would help in reducing the concession beyond the threshold
limit.

Claiming immediate deductions for the
prepayments
 The new rules allows the small business are provided with the facilities of claiming
deductions associated to the prepaid tax expenditure.
 The new rules provide the small business with the objective of claiming the tax deductions.
 The eligibility service period should finish before the end of the income year following the
expenditure year.

SIMPLIFIED RULES FOR TRADING
STOCK
• SMALL BUSINESS IS NO MORE REQUIRED TO VALUE EACH AND EVERY ITEM OF
TRADING STOCK IN HAND UPON THE CONCLUSION OF THE ACCOUNTING YEAR.
• VALUE OF TRADING STOCK CAN BE CARRIED FORWARD FOR UNTIL FURTHER
NOTICE.
• THE VALUE OF THE TRADING STOCK CAN GO BEYOND THE VALUE OF THE
OPENING STOCK AMOUNT BY MORE THAN $5,000.

Conclusion
 Findings suggest that small business concessions are increasingly adopted.
 One of the most popular is the CGT relief for small business and adoption of
accounting for cash basis relating to GST purpose.
 The simplified rules for depreciation and prepaid expense deductions is regarded
as helpful measures in reducing the cost of tax compliance for business.

References
• Anderson, C., Dickfos, J., & Brown, C. (2016). The Australian Taxation
Office-what role does it play in anti-phoenix activity?. Insolvency Law
Journal, 24(2), 127-140.
• Barkoczy, S. (2016). Foundations of taxation law 2016. OUP Catalogue.
• Blakelock, S., & King, P. (2017). Taxation law: The advance of ATO data
matching. Proctor, The, 37(6), 18.
• McDaniel, P. (2017). Federal Income Taxation. Foundation Press.
• Murphy, K. E., & Higgins, M. (2016). Concepts in Federal Taxation
2017. Cengage Learning.

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