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Types Of Small Business Concessions Accounting Essay

At the first there will be the cause of this report which will mention about the definition about a small business. The next section shall discuss the different types of small business concessions such as entrepreneur’s tax offset, Simplified depreciation rules, Simplified trading stock rules, Small business CGT concessions, the Pre-payment deduction concessions, and GST cash and simplified accounting concessions.

In the last part, the report will be the conclusion, which is the information gathered and to be concluded according to the information gathered about running a small business is benefits to taxpayers.

Issue 2

In the beginning of this report shall be the introduction part, which is at the first there will be the purpose of this report which talk about the distinguishing between Personal Services Business and Personal Services Income.

The next part will be mentioned the different tests for PSI to be conducting as PSB which are the results test, the unrelated clients test, the employment test and the business premises test.

Then, the following one shall be present certain deductions and limited deductions available for PSB and PSI. Beside that, there will be some explanation about the use of interposed entity.

The report will be ended with the conclusion part, the information gathered and to be concluded based on the information gathered about the requirements needed to be qualify as Personal Services Business and the suggestion given to taxpayers who are looking for set up as a PSB.

Discussion

Issue 1

At present, the small business is a popular and derived the majority of proportion in nation’s business market. Small business entity principal, originally introduced under the STS, was designed to encourage enterprise by small business through the introduction of certain tax concession. The target of this report is to discuss about the various tax advantages offered by the Australian Tax System to small business.

The business is defined as the “individual, partnership, company or trust that carries on the business activity” (Stephen Barkoczy 2009). To be qualified as a small business entity the employees of the business must be less than 20 people, the aggregated turnover must be least than $2 million and the maximum net asset value must be least than $6 million which under section 328-110 (Australian Taxation Office 2010). Hence, the type of small business could be as non-employing businesses which contain of sole proprietorships and partnerships without employees, micro businesses which are employees of businesses must be less than 5 people and other small business which employees of businesses are 5 or more people but must be less than 20 people (Australian Bureau of Statistics 2002). For example, property business, servicing business, education business, retail trade business and construction business also health and community services business (Australian Bureau of Statistics 2001). So, normally the management of the small businesses would tend to be either independent ownership or operations, close control by owners/ managers or principal decision-making by the owner/ managers (Australian Bureau of Statistics 2001).

With carrying a small business might obtain certain tax benefits which offered by Australian taxation government. The small business concessions are defined as the business or taxpayers might receive certain tax deductions on compliance costs such as capital gains tax, income tax, goods and services tax, pay as you installments and fringe benefits tax, encouragement on business activity, simpler processes in term of capital allowances and trading stocks while taxpayers must fulfill some of the conditions which are CGT event condition, Entity condition, Active asset condition, and CGT concession stakeholder condition under section 152-10 (Stephen Barkoczy 2009). Therefore, taxpayers might obtain some tax concessions provided by Australian taxation system which are a choice to account for GST on a cash basis, Entrepreneurs’ Tax Offset, simplified trading stock rules, simpler depreciation rules and immediate deductions for certain prepaid business expenses (Stephen Barkoczy 2009).

Therefore, the various tax advantages offered by the Australian Taxation System to small businesses will be the entrepreneur’s tax offset which defined as “‘rebates’ and ‘credits’ are take off from the income tax payable by taxpayers on their taxable income under section 13-1 ITAA97 which tax offsets can only be useful to reduce a taxpayer’s income tax liability” (Stephen Barkoczy 2009). The tax offsets are used for family, social welfare and work related concessions such as dependants tax offsets under section 159J ITAA36 which taxpayers might refund the tax ascertained for the income year if he/ she has gives the repairs for a person who is a resident, low income earners tax offset under section 159N ITAA36 which taxpayers might refund the tax for the income year if the assessable income is less than $60,000 or the taxpayers might refund $1,200 if the assessable income year is more than $30,000, medical expenses tax offset under section 159P ITAA36 which taxpayers might be delighted as a rebatable in the income year if he/ she has paid the amount of money and encouragement for particular kinds of investments and activities such as superannuation tax offsets under Subdiv 290-D and Div 301 ITTA97 which taxpayers might receive a tax offset in an income year if he/ she has made a contribution to a superannuation fund or an RSA., entrepreneurs’’ tax offsets under Subdiv 61-J ITAA97 which taxpayers might receive 25% of tax offset on the income tax liability of the business income from a small business entity if the aggregated turnover is less than $75,000 or film production tax offset under Div 376 ITAA97 which taxpayers might refund the tax offset of the expenditures in making an Australian film or any film or on post, digital and visual effects production and credits for payments of tax such as franking credit under section 207-20(2) ITAA97 which taxpayers might receive tax offset for the income year if he/ she has made the allocation or foreign income tax offset under Div 770 ITAA97 which the taxpayers would have limited tax offset for a year with maximum to $1,000 (Stephen Barkoczy 2009). Beside that, there are some limitations for ETO which is taxpayers are not allowed to refund any unused tax offset or bring forward it into the later income year or shift it to another taxpayer under the Subdivision 61-J (section 61-500 – section 61-525) of the Income Tax Assessment Act 1997 (ITAA 1997) (Australian Taxation Office 2010).

In addition, the Simplified depreciation rules is one of the tax advantages for those taxpayers who carrying a small business. This rules is defined as “an option to the regular capital payment rules to work out deductions for most depreciating assets under section 40-30(1) as an asset that has a limited ‘effective life’ and can practical be likely to refuse in value over the time for example, land, trading stock or intangible assets” (Australian Taxation Office 2010).So, there are few kinds of determination of assets which are the asset’s effective life under section 40-100 where commissioner or self-assess the asset’s effective life under section 40-105, the asset’s cost which is the cost of depreciating asset might be determined based on the two elements under Subdiv 40-C such as ‘first element’ under section 40-185 is to grip the asset or ‘second element’ under section 40-185 is to carrying the asset to the nearby condition and location, also by using base value which mean an asset’s cost or its chance of changeable value for the year or cost for the year and by day held (Stephen Barkoczy 2009). For example, taxpayers might instantly mark off those depreciating assets which are less than $1,000 each (low-cost assets) and might receive 30% of deduction for those depreciating assets if the effective life is less than 25 years for example, motor vehicles and computers or for durability small business collection. However, taxpayers might also receive 5% of deduction for those depreciating assets if the effective life is more than 25 years for example, wharves and cement silos and for newly acquired assets under section 328-180 (Australian Taxation Office 2010).

Beside that, the Simplified trading stock rules also one of the tax advantages for taxpayers who carries small business which normally trading stock “is typically a form of revenue ‘asset’ which defined as anything produced, manufactured or attained that is held for principle of manufacture, sale or trade in the usual way of business under section 70-10(a) includes live stock under section 70-10(b)” (Stephen Barkoczy 2009). For example, the trading stock includes washing machines held by the Sharp Corp., food held by a hypermarket and sports goods held by the sports shop owner (Stephen Barkoczy 2009). So, taxpayer might determine whether to rate the stock items at the end of year by using the input tax credits which are unnoticed under section 70-45(1A), or taxpayers might using the market selling value to determine whether what kind of stocks or amount could be sold out or taxpayers might using the replacement value to identify what is the amount that would have to be paid for restore the stocks (Stephen Barkoczy 2009). Therefore, taxpayers just required to perform a stocktake and create an account for the adjustment of the trading stock’s value which is not more than $5,000 over the year in term of the trading stock such as items produced, manufacture, purchase for manufacture, sale or trade which included livestock and the valuing trading stock under the Subdivision 70-C (s70-35 – s70-70) of the Income Tax Assessment Act 1997 Section 328-285 (Australian Taxation Office 2010).

Then, the Small business CGT concessions is also one of the advantages for taxpayers who carries small business which is taxpayer’s net capital gain is reduced under step 4 in section 102-5 after qualified certain conditions such as the CGT event condition, entity condition, active asset condition, and CGT concession stakeholder condition (Stephen Barkoczy 2009). So that, taxpayers might receive 15-years exemption under Subdiv 152-B which he/ she might obtain the no assessable capital gain when selling the asset if the asset has owned for more than 15 years and the aged of taxpayers has reached 55 years old or retiring or lastingly incapacitated (Stephen Barkoczy 2009). Beside that, taxpayers might also receive 50% active asset reduction under Subdiv 152-C which means there will be deduction of 50% on capital gains of the business asset (Stephen Barkoczy 2009). Taxpayers might receive retirement exemption under Subdiv 152-D which is if the taxpayers are under aged of 55 with fulfill the terms of superannuation fund who might able to let off the capital gain from the sale of a business asset up to limit of $500,000 and the taxpayers might also receive roll-over under Subdiv 152-E which means taxpayers might postpone the capital gain until a late year when selling off a small business asset (Australian Taxation Office 2010).

In the other views, the Pre-payment deduction concessions also one of the advantages for taxpayers who carries small business which is defined as “normally if the payments are made in advance for goods and services which are fully deductible in the year that the payments are made in the case, FC of T v Lau 84 ATC 4929, FC of T v Raymor (NSW) Pty Ltd 90 ATC 4461 which allowed taxpayers using pre-payment schemes to obtain the benefit of up-front for expenditure on things which were to be provided over a number of years” (Stephen Barkoczy 2009). So, taxpayers might be able to deduct pre-paid expenditure fully in the year if they are acquired as non-business expenditure and the spread expenditure is sustained under certain agreements such as the prepaid expenses must $1,000 or prepaid expenses are not share out and is under tax shelter arrangements over the appropriate service period which is less than 12 months and not later than the last day of the income year under the Section 82 KZM ITAA 36 (Australian Taxation Office 2010).

In addition, the GST cash and simplified accounting concessions is one of the advantages for taxpayers who carries small business which defined as “entities attributes GST and input tax credits to ‘tax periods’ under either a ‘cash ‘ or ‘accruals’ basis of accounting” (Stephen Barkoczy 2009). The tax period is defined as three months for a period under section 27-5 which except the determination is applied by using the monthly tax periods under section 27-10 or is compulsory to use monthly tax periods (Stephen Barkoczy 2009). “The cash basis entities attributes GST and input tax credits to the extent that consideration is received or paid during a particular ‘tax period’ under section 29-5(2), section 29-10(2)” (Stephen Barkoczy 2009). For example, taxpayers might choose to receive the sales payment first rather than report for the GST on a sale that made also the PAYG self assessment concessions is which allowed taxpayers to pay quarterly instalment amounts of the business or investment income in the most lately charged tax return (Australian Taxation Office 2010). Then, the FBT car parking exemption is which taxpayers might be not liable from FBT for employee car parking if they fulfill certain requirements such as representative fee, all-day parking, one-kilometre radius, primary place of employment, car parking threshold, and commercial parking station under the section 58GA FBTAA (Australian Taxation Office 2010).

In conclusion, it can be concluded that, individual, partnership, company or trust that carries on the small business activity might receive different kind of concessions which provided by Australian Taxation Office as an encouragement or incentive which benefit them on receiving tax saving or other deductions. So that, small business concessions are very important and useful for those small businesses entity is because, they might derive different kind of deductions on helping them to be more competitive and growing sustainability and rapidly of derive more market shares within nation or oversea countries.

Issue 2

In this moment, in the market, the types of businesses are much more than before. Some types of the famous businesses could be cleaning services, security services, computer programming and maintains services and others where services provided are through a Personal Services Business (PSB), there are significant tax advantages to the business in being able to claim very important business deductions which reduce assessable income. Thus, with an appropriate tax planning, “taxpayers might derive timing benefits or deductions through reducing assessable income, increasing deductions, increasing tax offsets and reducing tax rates into subsequent years” (Stephen Barkoczy 2009). The main issues of concerns by the Australian government is to distingue whether those businesses are under PSB or rather a Personal Services Income Earner (PSI).

The Personal Services Business (PSB) is defined as “all individuals and entities earning personal services income will be affected by the alienation measure unless the income is from conducting a personal services business under subsection 86-15(2) TR 2001/8: Income tax: what is a personal services business” (Australian Taxation Office 2010). or it mean that a “PSB is carry out by a PSE if a PSB determination is in force involving to an individual whose PSI is integrated in the PSE’s ordinary or statutory income under section 87-15(1)” (Stephen Barkoczy 2009). So, there are 4 personal services business tests which individual or PSE have to meet at least one out of four PSB tests to be carry out a PSB under section 87-15(2) which are the results test, the unrelated clients test, the employment test and the business premises test (Stephen Barkoczy 2009). However, all individuals and personal services entities can self-assess the result test if the personal services income is less than 80% which comes from each source or individual or personal services entity might use the other three tests which are the unrelated clients test, the employment test and the business premises test (Australian Taxation Office 2010). That’s why personal services entity is required to fulfill one of the tests based on the situation. However, personal services entities must have determination by commissioner whether is carrying on a personal services business if the personal services income is more than 80% which comes from one source under Subdivision 87-B of the ITAA 1997 (Australian Taxation Office 2010).

Hence, one of the personal services business test will be the results test which defined as “the test is satisfied by an individual if in relation to at least 75% of the individual’s PSI during the year under section 87-18” (Stephen Barkoczy 2009). There are some questions which individual or personal services entity must fulfill to be able meet the result test which are “where an individual or partnership, trust or company is the contracting party under your contract or arrangement:- Is the income paid to achieve a specified result or outcome?, Do you have to provide any necessary tools or equipment to do the work?, and Are you liable for rectifying defects in the work?” (Australian Taxation Office 2010). Therefore, individual or personal services entity might meet the result test for that year if their personal services income fulfill all the three conditions with more than 75% under the subsections 87-60(5) and 87-65(5) (Australian Taxation Office 2010).

Therefore, the another personal services business test will be the unrelated clients test which defined as “the personal services income would be provided by each clients which is less than 80% in an income year or the personal services income is paid to a company, partnership or trust rather than individual directly under section 87-20” (Stephen Barkoczy 2009). There is a question to justified whether individual or personal service entity meet the test or not which is “‘Does the individual doing the personal services work have personal services income from two or more clients who are not associated with each other or with you?’” Hence, individual or personal services entity may meet the unrelated clients test in an income year by self-assessment if their answer is YES with less than 80% of their personal services income comes from each client (Australian Taxation Office 2010). In addition, individual or personal services entity must engaged their personal services into public in term of works or services (Australian Taxation Office 2010) such as advertising in newspapers, magazine, or business directory, and others (Australian Taxation Office 2010).

Some more, another personal services business test will be the business premises test which defined as “individual or personal services entity is retains and exploits business premises all the times during the year under section 87-30” (Stephen Barkoczy 2009). There are some questions which to determine whether individual or personal services entity meet the test or not which are “At all times in the income year are your business premises owned or leased by you?, mainly used for personal services work by the individual doing the work?, used exclusively by you?, physically separate from the private residence of the individual doing the personal services work, or their associates? Or physically separate from the business address of your clients or their associates?” (Australian Taxation Office 2010). Hence, the individual or personal services entity may meet the business premises test by self-assess if their answers are YES with less than 80% of income from each client during an income year under Subdiv 87-B is in force under section 87-15(3) (Stephen Barkoczy 2009). However, individual or personal services entity might still meet the test if they sustain and exclusive apply business premises to carry out their activities during the income year even though the premises are shared with parties (Australian Taxation Office 2010). In addition, individual or personal services entity must ensure the business premises are separate with the premises which are private used and clients used also the business premises is only used for make personal services income (Australian Taxation Office 2010).

In the other views of this case, the last personal services business test shall be the employment test which defined as “the individual or personal services entity who appoint one or more unassociated entities to complete work which is at least 20% of the entity’s principal work for the year under section 87-25” (Stephen Barkoczy 2009). There are some things to question which to justify whether individual or personal services entity meet the test or not which are “Do you have employees or engage sub-contractors or entities other than those detailed below that perform at least 20% of the principal work? Or do you have apprentices for at least half the year?” (Australian Taxation Office 2010). Therefore, individual or personal services entity may meet the employment test if their answers are YES (Australian Taxation Office 2010).

That’s why, the Personal Services Income is defined as “an individual using his/ her personal efforts or skills to generates income while it’s as an incentive under (subsection 84-5(1) TR 2001/7: Income tax: the meaning of personal services income)” (Australian Taxation Office 2010). Beside that, the supplying or selling goods for example, from retailing, wholesaling or manufacturing or made by an income-producing asset such as a bulldozer, for granting a right to use property for example, the copyright to a computer program, or made by a business structure for example an accountant working for a large accounting firm are not take into account as an income (Australian Taxation Office 2010). However, in many cases, individual or personal services entity always is justified the income they received for the work is personal services income (PSI) (Australian Taxation Office 2010). Hence, they have some criteria which determine individual or personal services entity income is PSI or not which are “individual or personal services entity must ensure what percentage of the income received from each agreement finished is in term of either labour that is the skills, knowledge, expertise or efforts of the person or the materials supplied and/or tools and equipment used to complete the job” (Stephen Barkoczy 2009). Therefore, if individual or personal services entity’s income is more than 50% which derived from their own skills, knowledge, expertise or efforts, this income will be classified as PSI (Stephen Barkoczy 2009). However, if individual or personal services entity’s income is less than 50% which derived from their own skills, knowledge or efforts; it will not be classified as PSI (Stephen Barkoczy 2009). For instance, Selling or supplying goods are not PSI is because, the income is not derived from their own skills, knowledge, experience or efforts and income producing asset is not PSI is because, the income is generated by the asset itself and also the granting a right to use property and the through a business structure is also not PSI (Stephen Barkoczy 2009). Beside that, there will be some rules applying which may limit individual or personal services entity deduction possibility such as tax returns and pay as you go withholding if the income is PSI (Australian Taxation Office 2010).

Following to the Australian Tax office, there will be some deductions for expenses for those who are carries out a business which is under personal services business under section 86-60 (Stephen Barkoczy 2009) such as advertising, bank fees and charges, business travel, decline in value of depreciating assets, electricity, employee wages under section 86-80 which taxpayers may receive deductions in the end of 14th day after the PAYG payment period during which the amount became ordinary income or statutory income for entity, the cost of any fringe benefits provided, and fringe benefit tax incurred, hire or lease of plant and equipment, home office expenses under section 86-65 which taxpayers may receive the deductions on any fee or charge payable for opening, operating or closing an account, any license, permission, approval or others by Australian government agency, interest on borrowed money, motor vehicle expenses under section 86-70 which taxpayers may receive deduction from the car expenses even that is not private use, phone expenses, registered tax agent fees, rent or lease of business premises (including home business premises), repairs, super contributions for employees under section 86-75 which taxpayers have to associate with another and perform less than 20% of the entity’s principal work of the personal services income in the entity’s ordinary income or statutory income, trading stock, transport and freight (Australian Taxation Office 2010). However, there are some requirements that allow individual or personal services entity can claim for the expenditures such as individual or personal services entity have to be essentially paid or commit to spending the money which is related to business (Australian Taxation Office 2010). Beside that, there are things which individual or personal services entity cannot claim such as private or domestic expenses for instance, food or ordinary clothing, capital expenses for instance, machinery, tools or computers, the super guarantee charge and expenses that involved before business started (Australian Taxation Office 2010).

According to the Australian Taxation System, there will be some deduction limitations for individual or personal services entity who are carries out a business which is under personal business income (Stephen Barkoczy 2009) such as individuals or personal services entity would receives the limited deductions available to expenses of employees under section 85-10 which the employee would not receive any deductions on the amount of income or is not payable to employee if the amount that is related to gaining or producing that is the ordinary income or statutory income (Stephen Barkoczy 2009) for instance, there is no claim for home to office travel, wages and superannuation paid under section 85-25 which taxpayers cannot deduct when the associate’s work is related to gaining or producing personal services income (Stephen Barkoczy 2009) and for individual or personal services entity who appointed an associated person or entity for non-principal work would not deductible for instance, spouse wages for bookkeeping (Australian Taxation Office 2010), then, the individual or personal services entity will not receive any deduction for rent, mortgage interest, rates or land tax under section 85-15 which taxpayers cannot deduct for all of their residence or associate’s residence on the amount of rent, mortgage interest, rates or land tax for all of t residence or your associate’s residence if which related to gaining or producing the personal services income (Stephen Barkoczy 2009), However, individual or personal services entity still can claim deductions for expenses which is exclusively deductible under other legislation such as wages, income protection and public, superannuation and superannuation contributions, Work Cover for non-associates or associates who complete principal work, and liability insurance (Australian Taxation Office 2010). Also, “individual or personal services entity would have an expenses termed ‘entity maintenance costs’ such as bank charges, ASIC fees and government registration fees, accounting fees are deductible but must first be offset against non-PSI income such as interest, the any excess is then an allowable deduction against PSI” (Saward & Dawson 2009).

However, the interposed entity is not allowed as a means of claiming deductions. The interposed entity is defined as “a third party who is interjected between the private company and shareholder or an associate of a shareholder” (Australian Taxation Office 2010). An entity includes an individual, a company, a partnership or a trust under the section 272-85 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) (Australian Taxation Office 2010). In normal, individual or personal services entity will appointed interposed entity to paid for their labour which may allow them access to income alienation over the income splitting and other measures for instance, “the construction industry would use the interposed entity in one particular sector where suppliers are required every workers have to take the form of an incorporated company if not they wouldn’t be received any work next time” (CFMEU 1999). Hence, the reason why interposed entity is not allowed to claim for deductions is because, the interposed entity is a third party with no registered as a company. Therefore, there is no claim for deductions allowed (Australian Taxation Office 2010).

Lastly, following to the above discussion, I might conclude that and propose that taxpayers have to fulfill the following requirements such as taxpayers have to meet the results test, less than 80% of taxpayers personal services income in an income year from each client and taxpayers meet one of the other three personal services business tests and taxpayers obtain a definition from the ATO confirming that taxpayers are a personal services business (Australian Taxation Office 2010).Hence, taxpayers can set up their business as a Personal Services Business where there are different type of deductions offered by Australian Taxation System for instance, taxpayers were able to set up a cleaning service business as a PSB which is a “business plan for mother’s house cleaning service that offers extra care and attentive cleaning services for upper class homes. Hence, taxpayer may be able to receive certain deductions on the business itself” (PaloAlto Software 2010).


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