CHAPTER 1
A general discussion of taxation

Key areas we will cover in this chapter

• Introduction - what this book covers
• Am I in business?
• Small business concessions
• The Big 4 - income tax, CGT, FBT and GST
• State-based taxation
• Private use of business assets
• Bookkeeping and recording systems

Defined terms we will introduce

• Micro business: used to mean a small business with a turnover under $2 million
• Small business: used in this text to mean a business with a turnover in excess of $2 million but under $25 million
• Small to medium business (SME): used to mean a business with a turnover in excess of $10 million but under $25 million
• Large proprietary (private) company (as defined by ASIC): a Pty Ltd company that satisfies any two of the following: revenue > $25m; assets > $12m; and employs over 50 staff
• Small business concessions: a set of tax concessions available to micro businesses with a turnover under $2 million
• 'Turnover': the aggregate total of all income made by the business from the provisions of goods or services, including your total sales, fees and commissions
• Simplified tax system: now replaced by the small business tax concessions
• Income tax: a tax on net income, on a sliding scale for individuals (progressive), fixed for companies (flat)
• CGT (capital gains tax): a tax on profits made from the disposal of an asset
• FBT (fringe benefits tax): a tax on benefits provided to business owners and employees
• GST (goods and services tax): a flat tax on the provision of most goods and services (basic foodstuff and financial services are among the exemptions)
• BAS (Business Activity Statement): a form part filled, sent to businesses by the Tax Office, usually quarterly, used as a method of payment for a number of taxes: Income Tax, FBT, withholding and the GST.
• IAS (Income Activity Statement): a form part filled by the Tax Office, sent to businesses not registered for the GST. It serves the same purpose as the BAS but without the GST component
• Payroll tax: a state-based tax on your total payroll. There is a minimum threshold (different for each state) under which no tax is payable.
• Duties: the new term for state-based stamp duties, usually levied on the purchase of property, motor vehicles and insurance, which differ between states

Is it really worth staying in business? Australian businesses feel so overwhelmed by paperwork that many consider giving up, while the 'experts' say that the trick to getting on top of your tax obligations is to become educated and informed. The objective of this book is to give you the knowledge and the tools that will allow you to maintain your day-to-day accounting records in such a way that your tax requirements are met with as little additional work as possible.

In the book I will discuss the process of keeping your accounting records in order so that you will comply with the taxation provisions, rather than comply with general accounting concepts, today known as the International Financial Reporting Standards or IFRS. What is the difference? Historically the tax acts have been written with little or no regard to generally accepted accounting principles! Fortunately these principles are of little use to small businesses, provided that the method used by the business to account for its business activities gives a true and fair view of the entity's financial position.

To make the book easier to read, I will as far as possible use plain English, as distinct from the jargon often favoured by accountants. For example, I use depreciation rather than the more technically correct term decline in value. I do not say 'you may deduct an amount to the extent that is used to produce your assessable income' but rather use the term business expense.

Is this book for you?

The text assumes that you are a small to medium-sized business with a turnover of up to $25 million, operating as an individual or partnership, as a private company (Pty Ltd) or as a trustee of a family trust. These different tax structures are discussed in depth in later chapters.

Further, I will also assume that you may be eligible to use the taxation concessions for small business (previously called the simplified tax system); that is, you deal with the Australian Taxation Office (Tax Office) on a cash basis for both income tax and the GST. However, as you will read a little later on, the bar to entry to these concessions is set fairly low, therefore I will also be discussing the tax positions of small businesses that are ineligible to access these concessions. Small businesses that can take advantage of these concessions because they have an annual turnover under $2 million I will refer to as micro businesses, and those with a turnover above $2 million that cannot access these concessions I will refer to as small businesses.

I should highlight a point of confusion here. There is no fixed definition of a small business; rather, wherever this term is used it is defined for that purpose. Small businesses with a turnover under $2 million are often called micro businesses; those with a turnover between $2 million and $10 million and with net assets under $6 million are defined as small; those between $10 million and $25 million are defined as small to medium (SME); while those with a turnover of over $25 million that satisfy the 'large proprietary' definition are referred to as large. It has also been proposed that large private companies will have additional reporting requirements placed on them by ASIC that will take them outside the scope of this text.

There are many concessions available to micro businesses. My principal objective is to help you to keep you records in such a manner that you take full advantage of these concessions and, further, that your accountant does not need to spend time reworking them to meet the taxation requirements. This will help to reduce your accounting fees while increasing your knowledge and understanding of the tax accounting requirements of your business.

Conservative advice

The advice given in this book tends to be on the conservative side. By this I mean that some tax accountants can be more aggressive in their approach to accounting for tax purposes. If you use this book as a 'bookkeeping guide', then you will be on a very solid footing for tax, including GST, FBT and income tax. It is not intended to completely replace the professional advice of your accountant or financial advisor. Rather, it serves as a guide that will empower you when it comes time to deal with these professionals or, if you wish, empower you to DIY.

One fact that is not generally understood by the small business community, however, is that in dealing with the Tax Office, a tax agent acts on your behalf. It is as though his actions are your actions. If the agent makes excessive claims to reduce your tax bill, those claims are your claims. The Tax Office will come to your door for an explanation and give you the bill (possibly with interest and up to 200 per cent penalties). You will not be able to hide behind your tax agent and will be held 100 per cent responsible.

The moral of this is that it is better to be a little conservative and be able to sleep at night rather than make suspect claims and be forever waiting for the knock at the door!

Am I in business?

What a silly question, of course I'm in business . . . well, maybe not?

A business, sometimes called an enterprise for tax purposes, is usually thought of as any money-making activity you undertake. However, the Tax Office has a number of rules to determine if you are 'in business' for tax purposes. The purpose of the restrictions, as far as the Tax Office is concerned, is twofold. They are intended, firstly, to prevent you from claiming business losses against other income and, secondly, to prevent normal salary and wages being 'alienated' - that is, passed through a business structure to other family members in order to reduce your tax burden.

The general rule is: if you intend to make a profit, other than profit incidental to a hobby activity, then you are in business. The courts have tried to come to terms with this concept but have failed to establish any absolute rules. Owning one goat may be a business activity while owning six cattle may not. It all depends on your real intention when you set out on this activity. Its scale, planning, business structure and profit-making purpose are all factors that will contribute to determining whether or not you are 'in business' for taxation purposes.

If you run at a loss, but have a reasonable expectation of profit, you may be in business, but if there is no reasonable expectation of profit, the Tax Office would not consider you to be in business. In these cases, you may need to seek a professional opinion as to whether or not you can claim your losses against your other income, such as against your salary or wages from other activities.

Another test is that you must be involved in an...