Category: Tax

Changes in Simplified Tax System for Small Business

Recent and prospective improvements to the simplified tax system (STS) are further encouragement for small business to consider joining the system.

The changes announced in the May 2006 Federal Budget (planned to take effect in the 2007-08 income year) will further relax eligibility requirements to enter the STS.

These relate to increasing the STS average annual turnover threshold from $1 million to $2 million and removal of the $3 million depreciable assets test from the eligibility requirements

The STS is a package of measures aimed at reducing the compliance costs faced by eligible small businesses, and provides an alternative method of determining taxable income.The two main elements are:

  1. Simplified depreciation: most depreciating assets less than $1000 each can be written off immediately. Most other depreciating assets are pooled and deducted at a rate of either 30 per cent or 5 per cent, depending on their effective life
  2. Simplified trading stock rules: tax payers do not need to account for changes in the value of trading stock or do stock-takes unless the value of trading stock on hand changes by more than $5000 from the beginning to the end of the year.

For tax payers in the STS system, the Entrepreneur’s Tax Offset provides a 25 per cent tax offset (reduction) on the basic income tax liability related to the business income of a STS business with an annual turnover of $50,000 or less. The benefit is progressively phased out where the turnover is in the range of $50,001 to $75,000

Another improvement is that STS tax payers are no longer required to use the STS cash accounting method. Taxpayers who enter or re-enter the STS for an income year that begins after 1 July 2005 will calculate their taxable income using the accounting method that is most appropriate for their circumstances. The ability for tax practitioners to use an accruals tax accounting approach, which is generally more appropriate for their clients, should provide a greater incentive to use the STS,’ Mr Addison said.

The STS re-entry rule has also been relaxed so that tax payers who exited the STS in 2004-05 income year or before will be able to re-enter without having to wait five years.

Tax Commissioner on SmallBusiness Compliance

The Tax Commissioner gave a speech to the Council of Small Business Organisations of Australia (COSBOA) in Melbourne yesterday [Mon 26.6.2006]. He talked about the Australian Tax Office’s approach to small business compliance and what the Tax Office is doing to make it easier for business to comply with its taxation obligations.
Some points from that speech included:

  • in 2004-05, the Tax Office collected about $4 billion of the total net tax receipts of $214 billion — the rest came in as voluntary compliance, supported by systems such as PAYG;
  • the Tax Office’s approach to administering the tax system is threefold: (i) it wants to maximise the number of taxpayers who choose to voluntarily comply by providing service excellence and by making it as easy as possible for them to understand and meet their obligations; (ii) the Tax Office seeks to treat taxpayers fairly in accordance with the law; and (iii) at the same time, it has strategies to deter, detect and address non-compliance;
  • Tax Office research has shown the majority of people starting a new business do not get information about tax obligations early enough. In response, the Tax Office has just released on its website an updated checklist for people new to business;
  • while 95% of micro-businesses use tax agents to prepare their income tax returns, over 50% prepare their own activity statements;
  • Tax Office staff answering phone calls now have a complete history of interactions with taxpayers onscreen in front of them;
  • in June 2004, the Tax Office gave small businesses with debts under $25,000 an opportunity to clear their debt under favourable terms. As at 5 May 2006, the Tax Office has negotiated some 2,000 promises to pay by instalments or in full to the value of approximately $50 million.