With the recent downturn in the economy, you may find that you or your business may now be eligible to become a Small Business Entity (SBE). The advantages of becoming an SBE are considerable.

Broadly speaking to qualify as an SBE, you must:

• Carry on a business; and
• Satisfy the $2 million aggregated turnover test (which includes the turnover of affiliated and connected entities).

There are three ways you can satisfy the aggregated turnover test:

1. Your aggregated turnover for the previous income year was less than $2 million

2. Your aggregated turnover for the current income year is likely to be less than $2 million

3. Your actual aggregated turnover for the current income year was less than $2 million (calculated as at the end of the income year).

Turnover is therefore pivotal for qualification as an SBE. Under scenarios 1 and 2, your eligibility to become an SBE will usually be obvious to you before the end of the income year. If so, you may like to take advantage of the following strategies before 30 June which are unique to SBE taxpayers:

Depreciating Assets

SBE taxpayers can write-off expenditure on depreciable assets costing less than $1 000 in the year of purchase. Furthermore, assets costing more than $1 000 but with an effective life of less than 25 years can be depreciated at 15% in their first year regardless of when in the year the purchase was made. That is, even where the asset was purchased and installed ready for use on 25 June 2010, a full 15% deduction can be claimed.

Therefore, where appropriate, you may wish to bring forward expenditure on such assets before 30 June in order to obtain a deduction in this financial year.

Prepayments of Expenditure

In certain circumstances, an SBE can claim an immediate deduction for certain prepaid business expenses where the payment is for a period of service that is 12 months or less and ends in the next income year.

The type of expenses you may wish to prepay include:

• Rent;
• Lease payments on cars and office equipment;
• Interest; and
• Subscriptions.

Summary

Profits of many businesses have taken a battering recently. If your annual aggregated turnover dropped below $2 million last income year or this year, you may well be eligible to become an SBE. You do not need to make a choice or election in order to attain SBE status. Rather, it will be clear from the way in which you complete your tax return. In addition to the above concessions, SBE taxpayers may be able to avail themselves of the following benefits:

• Choice to account for GST on a cash basis;
• Choice to pay by GST instalments;
• Annual apportionment of GST input tax credits;
• Simplified trading stock rules;
• Entrepreneurs’ tax offset;
• CGT 15-year asset exemption;
• CGT 50% active asset reduction;
• CGT retirement exemption;
• CGT roll-over; and
• FBT car-parking exemption.

Unlike its predecessor, the Simplified Tax System (STS), the SBE system allows eligible taxpayers to determine which concessions you adopt and which you do not – the concessions are not compulsory. For instance, under the trading stock concession, an SBE can elect not to conduct a stocktake if there is a difference of less than $5 000 between:

• The value of your stock on hand at the start of the income year; and
• A reasonable estimate of the value of your stock on hand at the end of the income year.

However, it might be to your advantage to opt out of this concession and conduct a stocktake anyway – for example where your stock at hand at the end of the income year is less than at the start of the income year. By doing this you could obtain a deduction rather than opting out of conducting a stocktake. The SBE system gives you this flexibility whereas the STS did not.