Maximising Your Small Business Entity Status

All reports indicate that the 2014/15 South Australian harvest has again produced excellent results, meaning it is likely to be another profitable year for farmers.

While big incomes are great news, another strong year could see many operations approaching the $2 million turnover mark, putting them at risk of losing their Small Business Entities (SBE) status.

SBE status enables farming operations to access a range of generous tax concessions, but once a business exceeds the $2 million threshold it is no longer considered an SBE.

The good news is, there may still be a small window of time available before 30 June that allows for the transfer of assets, most notably land for succession planning, enabling a business to utilise its SBE status and significantly reduce future capital gains tax.

Benefits of SBE status

One of the major benefits (and perhaps most known) of being classed as a SBE is a business is able to access accelerated depreciation. This method of depreciation allows farmers to pool assets and claim a larger depreciation expense earlier, therefore reducing their short-term term tax liability.

In addition to accelerated depreciation there are a number of other benefits for SBEs relating to Goods and Services Tax, Fringe Benefits Tax and Pay As You Go instalments

However, one of the concessions that is less widely known, but can have a significant impact is access to the Small Business Capital Gains Tax (CGT) concessions.

CGT occurs when a capital gains event is triggered, resulting in assessable income for tax purposes, a common event being the disposal or transfer of an asset such as farming land.

Generally there is a 50% discount available to taxpayers that have held the asset for more than 12 months. For small business entities, there is a further 50% discount if the asset is an active asset, meaning it is used by the SBE to conduct business, such as land used in farming.

There are three other valuable CGT concessions for SBEs including CGT Rollover, CGT 15-year asset exemption and CGT retirement exemption.

Accessing the benefits

If your business is growing and unlikely to be considered an SBE much longer, but you do not want to sell land immediately (or in the foreseeable future) good advice and quick action may mean you can access the benefits that come with your SBE status before it is lost.

There is potential to take advantage of CGT concessions by uplifting your business’ cost base. This involves transferring land to another entity and triggering a CGT event, in order to utilise the concessions outlined above and minimise future tax when the asset is eventually sold or transferred again.

This process can have the added benefit of assisting with succession planning. If you hold land and have children that will be taking over the family business eventually, it can be very beneficial to conduct the transfer to a more appropriate entity while these concessions are still available to you. Even if the land is held by an individual but used by the business, there is still potential for the small business CGT concessions to be utilised.

If you expect your business to exceed $2 million turnover in the 2015 financial year, the time to act is now to take advantage of this opportunity. The rules regarding this strategy are complex and we recommend you seek independent tax advice.

For advisors who understand rural business, contact Agribusiness specialist Ben Trengove at William Buck on 0419 851 008 or ben.trengove@williambuck.com