$20,000 write-off – will the ATO class you as a “small business”?

The new $20,000 immediate asset write-off for small businesses is welcome, and the Tax Office has already published guidance on this yet-to-be-enacted accelerated depreciation measure.

But it is perhaps timely to remind small business owners that access to the budget’s depreciation boost depends on being classified as a “small business” — and this, according to the Tax Office definition, requires annual aggregated turnover to be less than $2 million.

So just to be clear, what is meant by that term “aggregated turnover”?

According to the Tax Office, aggregated turnover is the sum of the following:

  • your annual turnover for the income year,
  • the annual turnover of any entity connected with you, for that part of the income year that the entity is connected with you, and
  • the annual turnover of any entity that is an affiliate of yours, for that part of the income year that the entity is affiliated with you.

But what makes a connected or affiliate entity?

You are connected with another entity if either of the following applies:

  • you control the other entity, or
  • you and the other entity are controlled by the same third entity.

As far as identifying an affiliate, the Tax Office says an individual or company is your affiliate if, in relation to the affairs of their business, they act, or could reasonably be expected to act, in either of the following ways:

  • in accordance with your directions or wishes, or
  • in concert with you.

It adds that an individual or company is not your affiliate merely because of the nature of the business relationship shared between you or the individual or company.

Note that when you calculate aggregated turnover for an income year, do not include:

  • the annual turnover of other entities for any period of time that the entities are either not connected with you or are not your affiliate
  • amounts resulting from any dealings between these entities for that part of the income year that the entity is connected or affiliated with you.

The Tax Office also points out that there are three alternative methods to work out if you are a small business entity for the current year, but it also concedes that most businesses will only need to consider the first method.

1. Previous year turnover
If your aggregated turnover for the previous income year was less than $2 million, you are a small business entity.

2. Estimate your current year turnover
If you estimate that your aggregated turnover for the current year (worked out as at the first day of the income year) is likely to be less than $2 million, you will be a small business entity for the current year. However, you can only estimate your current year turnover if your aggregated turnover for one of the two previous income years was less than $2 million.

3. Actual current year turnover
If you are unable to use the first two methods, you will need to calculate your aggregated turnover as at the end of the income year. If your actual aggregated turnover is less than $2 million, you will be a small business entity for that year.

If you’re not absolutely sure please check with us.