Category: Capital Gains Tax
Are You Small or Not?
16 Aug 2009
If you can be a small business under the tax law definition, there are quite a few nice tax concessions that you can get. But are you in or are you out? Are you small or not?
People generally know the $2 million annual turnover threshold. This is the general test that is in the tax law for whether a business is small or not. However, as with all things tax, it’s not quite as straight forward as just saying that you have a $2 million turnover and therefore your are a small business. It is more complex than that, particularly if your turnover is around the $2 million mark. In this blog I won’t go into all the detail. I’ll talk about a recent Tax Office ruling (in this case called an ATO Interpretative Decision) that relates to this issue.
Here’s the facts.
A person has conducted two business activities for a number of years. One business activity (“the large business” has a turnover well in excess of $2m and the other business activity (“the small business”) has a turnover under $2m. The person decides to sell the large business. This happens early in one financial year. Of course, once this happens, the turnover for the year falls below $2m.
One of the concessions a small business can get is the small business capital gains tax concessions when a business is sold. These are really good, as you can often pay no tax. Guess what? The person that sold the large business wanted to say that he had a small business for the year in which the large business was sold so that he/she could pay no tax on the sale of the large business. After all, didn’t he/she have a business with a turnover of less than $2m in that year?
No such luck. When a business is carried on for part of a year, there is a provision in the law that deems the turnover of the business to be what it would have been if the business had been carried on for the whole of the year. As the ATO says in the ruling – the intent of the provision is to ensure the true size of a business is taken into account in determining whether the $2 million turnover requirement is satisfied. And, just because another business is continued (the small business) does not mean that this provision does not apply.
Conclusion
There can be a good deal more to the $2 million test. If it’s important, make sure that you get someone to advise you that knows and reads the law, rather than just someone who has a layman’s knowledge.
Wishing you easier business.
John Jeffreys