Essay: Small Business Entity Concessions And Eligibility Test.

Background facts:  

• Herbie has come to you to assist in the preparation of his 2019 income tax return.
• Herbie is a sole trader who runs a business driving antique VW beetles as wedding vehicles. Prior to 2019 he has not owned these vehicles, but he paid contractors to drive their own vehicles.  
• He has kept accurate records throughout the financial year, and has come to you for tax advice only. You do not have to verify the below figures.
• He does not have any items currently being depreciated.   
• All amounts are GST exclusive.
• During the 2019 year he purchased the following assets, all of which are used 100% in his business:

1. $33,000 red VW Beetle purchased on the 1^st of October 2018.
2. $28,000 blue VW Beetle purchased on the 15^th of February 2019.
3. $29,000 yellow VW Beetle purchased on the 6^th of June 2019.

• His income and expenses were as follows:

*The 2018 information has only been provided for comparative purposes. He has not asked for advice in relation to the 2018 year.

• Prepare a letter of advice for the 2019 income year using the provided example as a guide.
• Your letter of advice should discuss the following in a professional manner:

1. Whether Herbie is a small business entity for the purposes of the ITAA 1997, and why.
2. If he is a small business entity, discuss in detail what concessions are available to him.
3. Detail whether he is able to immediately write off each of the new Beetles recently purchased.
4. If he cannot immediately write them off, how would he calculate depreciation? If there are several depreciation options, please detail them in the appendices and discuss the most appropriate method within the letter.  
5. Showing full workings, calculate his taxable income and advise him of the amount of tax payable after considering Medicare levy and all available offsets. You may include the detailed taxable income calculations in the appendices, and summarise this information in the letter.

To

Herbie

Smith Advisors Consultant & Co

85 Smiths Villa

Native Heights

Dear Herbie

We look forward to respond to your recent meeting, messages and telephone conversation. We are attaching the advice in respect to the matters sought by you in relation to the assessment of small business entity.

Scope:

The main objective or scope of the current letter of advice is to give the taxpayer with a valuable advice on the matters associated to small business entity and if the taxpayer is regarded entitled to get small business concession. The existent letter of advice will not be taking into account any other type of tax consequences that would happen from the increase in the surplus of asset.

Facts:

We are also attaching the appendix A that will be including the calculation that is associated to determining the taxable income on the basis of which the advice is made. In case you have found out that our facts and assumption are not judged well or incorrect or fails to adhere with your understanding and understanding, then kindly reach us as soon as possible because this may have a negative effect on the tax return and the advice which you have sought from us.

We are giving out the summarized opinion in respect to the matters associated to the small business entity combined with the concessions that a taxpayer can avail within the legislative provision of “Subdivision 152”. We are highly hopeful that you will be reading our discussion on the basis of the advice sought by you.  

1. The related issued that will be addressed in this message is about whether the business operations of Herbie is falling within the criteria of “small business entity” inside the definition established in “ITAA 1997”.
2. The related issue that will be addressed in this message is whether or not Herbie is considered entitled to get concession within the legislation of “ITAA 1997”.
3. The related issue that will be addressed in this message is whether or not Herbie will be considered eligible for obtaining an “instant asset write-off” for every new Bettles that is purchased by him.
4. Whether the taxpayer here will be considered entitled for depreciating the assets under the rules of depreciation.

With respect to the definition given in “sec 152-10 ITAA 1997” a “small business entity” signifies those business structure that are individuals, partnership, trust or company that are carrying out commercial operations or has the total aggregate amount during the relevant year of lower than $2 million (Www.ato.gov.au 2019). The word total turnover should be viewed as yearly gross proceeds along with the yearly proceeds of any additional business with which the taxpayer has relation or they have regulation over it.

By alluding the legislative provision of “sec 328-10 ITAA 1997” an individual taxpayer that is executing their business in the relevant income year will be adjudicated as the “small business entity” during the year or the present year, given that;

1. The taxpayer is doing business and the total combined turnover for the duration of that year is not greater than “$2 million”(Www.ato.gov.au 2019).
2. The total yearly turnover for the current year is much probable to be lesser than “$2 million”and the taxpayer is carryout his commercial or business activity in the last two earlier income year, the total combined turnover has been lesser than $2 million.
3. Or else the total aggregate turnover for the existing year is computed to be lesser than $2 million.

The small business Eligibility Test:

1. According to the legislative provision of “division 152” taxpayers that are having small business entity are allowed to avail concession given that their total aggregate turnover is not more than “$2 million”or the net value of every asset do not surpasses the mark of $6 million (Sadiq et al., 2015).
2. The CGT asset must be the active asset.

On satisfying the above cited criteria to be considered as “small business entity” there are four forms of concession that are available to taxpayers (Jones et al. 2015). These concessions are explained in detailed below;

1. 15-Year Exemption:With respect to the “subdivision 152-B” taxpayers on meeting the eligibility test can obtain the 15-year exemption that simply provides them with total tax exemption for any amount of capital gains following the sale of the CGT asset that the taxpayer has owned for a minimum of 15 years. The taxpayer should be aging 55 years or more and they are retiring or they have become permanently incapacitated. When this exemption is applicable then it is not important to take account of any other exemption because it will take the priority.
2. 50-CGT Reduction:With respect to the “subdivision 152-C” this 50% reduction permits those eligible taxpayer to lower the sum of capital gains by 50%. The taxpayers can use the 50% reduction following the capital gain has been lowered on applying the regular 50% CGT discount percentage (Du Preez 2016). This ultimately provides the taxpayer with a total discount of 75%. Additionally, the capital gains can be lower availing the small business retirement exemption or the small business rollover relief.
3. Retirement Concession:With respect to the “subdivision 152-D” the taxpayer has the permission of disregarding the capital gains originating from the disposal of CGT asset related with the small business given the proceeds are simply utilized by the taxpayer in relation to their retirement. The taxpayer should denote that there is a life time restriction of $500,000. Nevertheless, the taxpayer can implement the other concessions so that they can lower the sum prior to applying the retirement concession.
4. Roll-over relief:With respect to the “subdivision 152-E” the taxpayers are permitted to simply defect the payment of capital gains that is made from the CGT event in respect of the small business given the taxpayer has brought a replacement active asset and has decided to avail the roll-over relief (Gashenko, Zima and Davidyan 2019). The roll-over relief might be applied following the application of general CGT discount and the active asset reduction.

Facts

Under the rules of “instant asset write-off” an entity given the permission to obtain;

1. Immediate deduction for the acquisition price of assets that has the cost of lower than threshold limit of $30,000.
2. Obtain a tax deduction relating to the business part of acquisition cost all through the year where the asset has been mainly used or it is fixed for ready business utilization.

The immediate “asset write-off” rule is considered useful for the “second hand assets”. With respect to this method a business can immediately write off the cost of asset which is less than the threshold limit of $30,000. The cost of asset should be lower than the immediate write off threshold and should be brought and must be used during the year when the write-off is permitted for a permissible tax deduction (Jarczok-Guzy 2017). In order to be considered entitlted to deduction within the “instant asset write-off” rules the business of taxpayer must be identified by ATO as the “small business entity”.

According to the “Division 40 ITAA 1997” a uniform capital allowances for claiming deduction concerning “decline in value” of “depreciating assets” is permitted. As per “sec 40-25 (1)” an individual taxpayer is permitted to get deduction for depreciation associated to “decline in value” relating to depreciating assets that the taxpayer has held it for business use all through the income year (Woellner et al. 2016). To work out the depreciation for majority of the asset an entity is needed to meet the eligibility test for using the “instant asset write off” or the simplified depreciation rules for the small business.

A taxpayer can work out the value of depreciation by employing two methods namely the “diminishing method” or the “prime cost method”. As the general rule, an individual taxpayer is allowed to get deduction by choosing any one depreciation method for ascertaining the depreciation value of depreciating asset. With respect to “prime cost method” under “sec 40-75 ITAA 1997” the “decline in value” of depreciating asset is computed by simply decreasing the assets on uniform basis with respect to its effective life (Sadiq 2019). While under the diminishing method under “sec 40-72 ITAA 1997” the assets can be depreciated more during its initial stages.

Herbie in the current year has declared that he has made a total turnover of $500,000. With respect to the “section 328-110 ITAA 1997” the business of Herbie must be classified as “small business entity”. This is because total turnover of Herbie during the current income year is not greater than “$2 million” threshold limit. The total aggregate turnover which is computed for Herbie is lower than the limit of “$2 million” for the current income year. Furthermore, the net value of all his asset is not greater than $6 million mark.

The small business Eligibility Test

By alluding to the aforementioned discussion, Herbie has also satisfied the eligibility criteria to be considered as “small business entity” and he can choose to imply either one or all of the available small business CGT concession when he decides to sell his assets used for business purpose. By alluding to “sec 152-105 ITAA 1997” Herbie is allowed to implement the 15-year exemption from CGT if he uses his business asset for greater than 15-years in his business and given that he ages 55 years or more (Barkoczy 2016). Besides this, Herbie is can consider applying the 50% reduction in his total CGT because this method is useful enabling him to lower his capital gains by 50% after applying the regular 50% discount. This will allow him to get an complete discount of 75% on capital gains.

As the small business entity Herbie can avail the “retirement exemption” under the CGT but Herbie should understand he can get this exception from capital gains only up to $500,000. Finally, the small business rollover relief can also be obtained by Herbie but this can only be allowed if he purchases a replacement asset.

Herbie brings forward that he purchased three new VW Beetles exclusively for his business use. With respect to “Division 40”, Herbie can get deduction for three new VW Beetles. To determine the depreciation of VW Beetle, Herbie should refer to the “sec 40-25 (1) ITAA 1997” (Morgan, Mortimer and Pinto 2018). Within this provision, “decline in value” of VW Beetle is allowed for claim. The price of Blue and Yellow VW Beetle lower than the threshold limit of $30,000. Hence, Herbie is eligible for claiming an instant asset write-off, while one of his VW Beetle cost is $33,000 which is further than the threshold limit. Herbie can depreciate this asset on the basis of its effective life.

The total assessable income of Herbie computed for the year stands $11,660,150. Following the complete deduction of all the permissible business expenditure, the total taxable income stands $420,334. He has alsoreported PAYG Allowance of $8,406 for 2020. Herbie also provides that he has a PAYG instalment of $5,000. This amount is allowed for offset. The total tax liability for the year ended 30^th June for Herbie stands $165,653.68.  

Conclusion:

Conclusively, Herbie is eligible for small business concession because his turnover is not greater than $2 million and all his active assets stands below $6 million. After reviewing all the above given advice, if there are any area where you feel changes needs to be done then please feel free to reach us.

Yours Sincerely

Smith Advisors Consultant & Co

References:

"Deductions For Prepaid Expenses 2019", Ato.Gov.Au (Webpage, 2020) <https://www.ato.gov.au/Forms/Deductions-for-prepaid-expenses-2019/?page=5>

"Prime Cost (Straight Line) And Diminishing Value Methods", Ato.Gov.Au (Webpage, 2020) <https://www.ato.gov.au/business/depreciation-and-capital-expenses-and-allowances/general-depreciation-rules---capital-allowances/prime-cost-(straight-line)-and-diminishing-value-methods/>

"Simplified Depreciation - Rules And Calculations", Ato.Gov.Au (Webpage, 2020) <https://www.ato.gov.au/business/depreciation-and-capital-expenses-and-allowances/in-detail/depreciating-assets/simplified-depreciation---rules-and-calculations/?page=4>

"Simplified Depreciation - Rules And Calculations", Ato.Gov.Au (Webpage, 2020) <https://www.ato.gov.au/Business/Depreciation-and-capital-expenses-and-allowances/In-detail/Depreciating-assets/Simplified-depreciation---rules-and-calculations/>

Barkoczy, S., 2016. Foundations of Taxation Law 2016. OUP Catalogue.

Du Preez, H., 2016. A construction of the fundamental principles of taxation (Doctoral dissertation, University of Pretoria).

Gashenko, I.V., Zima, Y.S. and Davidyan, A.V., 2019. Principles and Methods of Taxation. In Optimization of the Taxation System: Preconditions, Tendencies and Perspectives (pp. 33-39). Springer, Cham.

Jarczok-Guzy, M., 2017. The principles of tax law equality in the context of direct taxation. Journal of Economics & Management, 30, pp.70-84.

Jones, S.M., Rhoades-Catanach, S.C. and Lemler, B., 2015. Principles of taxation for business and investment planning. Issues in Accounting education, 25(3), pp.599-600.

Morgan, A., Mortimer, C. and Pinto, D., 2018. A practical introduction to Australian taxation law 2018. Oxford University Press.

Sadiq, K., 2019. Australian Taxation Law Cases 2019. Thomson Reuters.

Sadiq, K., Coleman, C., Hanegbi, R., Hart, G., Jogarajan, S., Krever, R., McLaren, J., Obst, W. and Ting, A., 2015. Principles of taxation law 2015. Thomson Reuters.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law 2016. OUP Catalogue.