Concepts
Small business entity
A small business entity is a business that meets the aggregated turnover test, which allows it to access a range of simplified income tax concessions available to small businesses.
A small business entity, often shortened to SBE, is a sole trader, partnership, company or trust that carries on a business and has an aggregated turnover below the threshold set by legislation. Meeting the definition opens the door to a set of concessions designed to reduce the compliance burden and help cash flow for small enterprises. The turnover threshold can change, so check the current figure on the ATO website.
The concessions are not all identical, and different ones can have different eligibility conditions. They include simplified depreciation rules, including the small business pool and any current instant asset write-off arrangements, simplified trading stock rules, the ability to account for income on a cash basis, and certain deductions for prepaid expenses. Some concessions, such as access to the small business income tax offset, apply only to unincorporated businesses.
To work out whether you qualify, you look at your aggregated turnover, which includes the turnover of connected entities and affiliates. You can generally pass the test if your turnover for the previous year, your estimated turnover for the current year, or your actual turnover for the current year is below the threshold. The test is applied each income year, so you can move in and out of the status as your business changes.
It is important to distinguish the SBE concept from other small business thresholds. Eligibility for the small business CGT concessions uses its own tests, including a maximum net asset value test. The GST registration threshold is a separate test based on GST turnover. The company tax rate for base rate entities depends on turnover and the type of income, and uses a different threshold again. A business can meet one definition and not another.
For the typical small business owner, the benefits show up at tax time. For example, an eligible business might immediately deduct certain low-cost assets, or pool depreciating assets and claim a deduction at a set rate on the pool balance. Some businesses also find that the choice to use cash accounting for income tax makes the matching of income to receipts simpler. Because the choices can interact, advice on the best combination for you is worthwhile.
A common misunderstanding is believing that being a small business for GST purposes automatically makes you a small business entity for income tax, or the reverse. Another is assuming that once you opt into a concession, you can switch freely. Some concessions have rules about how often you can change or return to them. This is general information only, so confirm your eligibility with the ATO or a registered tax professional.
Worked example
A bakery operated as a company has GST-exclusive turnover of $1.4 million and no connected entities, so its aggregated turnover is $1.4 million. It checks the ATO website for the current small business entity threshold and finds it is below it. As an SBE it can use simplified trading stock rules, meaning it does not need to do a stocktake if the stock value change is small, within the limits the rules set.
Practical tips
- Test your aggregated turnover each year, since small business entity status is not permanent.
- Check which concessions apply to your entity type. Some, like the small business income tax offset, are for unincorporated businesses only.
- Do not assume that meeting the SBE test means you meet the CGT concession tests. Those use separate conditions.