Tax Laws Amendment (Small Business Measures No. 3) Act 2015

The Tax Laws Amendment (Small Business Measures No. 3) Act 2015 is a Commonwealth Act that made three separate tax law changes for eligible small businesses.

It introduced a small business income tax offset for certain individuals with unincorporated small business income, allowed immediate deduction of some start-up expenditure for eligible small businesses, and changed the FBT treatment of portable electronic devices so eligible small business employers could provide more than one device without automatically losing the exemption for the later item.

The Act itself commenced on 26 August 2015, but each schedule has its own application rules. That matters because a business may have incurred expenditure or provided devices around the start dates and needs to match the right concession to the right income year or FBT year.

The Act repeatedly uses the concept of a small business entity. It does not create that concept from scratch. Instead, it relies on the meaning used in the Income Tax Assessment Act 1997. In practice, that means you need to confirm whether you are a small business entity for the relevant income year before assuming any concession applies.

For the income tax offset, the Act applies to individuals, not companies. An individual may qualify directly if they are a small business entity for the income year. An individual may also qualify if their assessable income includes a share of the net income of a small business entity that is not a corporate tax entity. That is the main pathway for partners and beneficiaries receiving income from unincorporated structures.

For start-up expenditure, the rule can apply where the expenditure is incurred in relation to a business proposed to be carried on. The Act also extends to some people who are not yet carrying on a business in the income year, but only if they are not connected with, or an affiliate of, another entity carrying on a business in that year that is not a small business entity.

For the FBT change, the relevant employer must be a small business entity for the income year identified by the FBT rule. The Act ties that test to the year of income starting most recently after the start of the FBT year, or the year of income ending most recently after the start of the FBT year.

Schedule 1 inserted Subdivision 328-F into the Income Tax Assessment Act 1997. The guide to that subdivision says you may be entitled to a tax offset if you are an individual who is a small business entity, or whose assessable income includes a share of the net income of an unincorporated small business entity.

The amount of the offset is 5% of your total net small business income for the income year, subject to a cap of $1,000. The Act is clear that the cap applies regardless of the number of small business entities that give rise to the entitlement. So if you have income from more than one eligible small business source, you still do not get more than $1,000 under this Act.

The Act also narrows what counts in working out net small business income. It requires the entity's assessable income to be worked out to the extent it relates to carrying on a business, while disregarding any net capital gain and any personal services income not produced from conducting a personal services business. It then subtracts deductions attributable to that assessable income, except for certain excluded deductions. The Act specifically says the relevant attributable deductions do not include deductions under section 25-5 for tax-related expenses, Division 30 for gifts or contributions, or Subdivision 290-C for personal superannuation contributions.

There is also a special modification for certain individuals under 18 years old. The Act directs that their total net small business income is worked out under a separate rule if they are a prescribed person within the meaning of the Income Tax Assessment Act 1936.

For practical use, the key point is that this Act introduced a 5% offset from the 2015-16 income year, but later law may have changed the rate for later years. If you are looking at a current return, do not assume the 5% rate is still the operative rate without checking the current law.

Schedule 2 changed the treatment of some start-up expenditure by inserting subsection 40-880(2A) into the Income Tax Assessment Act 1997. Before this change, certain business capital expenditure was generally deductible over five years. The new rule allows immediate deduction in the income year the expenditure is incurred, but only where the statutory conditions are met.

The first condition is that the capital expenditure must be incurred in relation to a business that is proposed to be carried on. The second condition is that the expenditure must fall into one of two categories. It must either be incurred in obtaining advice or services relating to the proposed structure or proposed operation of the business, or be a payment to an Australian government agency of fees, taxes or charges relating to establishing the business or its operating structure.

The third condition is about the taxpayer's status. The rule applies if you are a small business entity for the income year. It can also apply if you are not carrying on a business in the income year, provided you are not connected with, or an affiliate of, another entity that carries on a business in that income year and is not a small business entity.

This means the concession is narrower than a general statement like 'start-up costs are immediately deductible'. The Act does not say all start-up costs qualify. It only covers some start-up expenditure, and the wording is specific. Professional advice about the proposed structure or operation may qualify. Payments to an Australian government agency relating to establishment may qualify. Other costs may not.

Businesses should therefore separate establishment costs into categories and keep invoices detailed enough to show what service was provided, who provided it, and how it related to the proposed structure or operation of the business. If a payment was made to a government agency, keep the receipt and identify what the fee, tax or charge related to.

Schedule 3 amended the Fringe Benefits Tax Assessment Act 1986. The key change was to subsection 58X(4), which deals with when the exemption for an exempt work-related item is not available for a later item that has substantially identical functions to an earlier item.

Under the amended rule, that restriction does not apply if the later item is a replacement for the other item, or if the later item is a portable electronic device and the employer is a small business entity for the relevant income year linked to the FBT year. The Act also inserted a definition so that small business entity has the same meaning as in the Income Tax Assessment Act 1997.

In practical terms, this change is what allowed eligible small business employers to provide more than one portable electronic device, such as a phone and a laptop, without the later item being denied exemption merely because it performs substantially identical functions to another item. The Act's example for replacements refers to an item being lost, destroyed or needing replacement because of developments in technology.

Businesses should read this carefully. The Act changes one limiting rule, but it does not mean every device is automatically exempt in every case. You still need to check the broader FBT requirements for exempt work-related items and keep records showing what was provided, when it was provided, and that the employer met the small business entity test for the relevant period.

The practical trigger point for all three measures is not simply that you are a small business in a general sense. The trigger is whether the legal conditions in the amended tax law are met for the relevant year.

For the offset, check whether the taxpayer is an individual, whether the business income is from a small business entity, whether any entity involved is a corporate tax entity, and whether the income and deductions have been worked out in the way the Act requires. For younger taxpayers, check whether the special under-18 rule applies.

For start-up expenditure, check whether the expenditure is capital expenditure, whether it was incurred in relation to a proposed business, whether it falls within one of the two listed categories, and whether the taxpayer satisfies the small business entity or alternative connected entity condition.

For the FBT change, check whether the item is a portable electronic device, whether the employer qualifies as a small business entity for the relevant income year connected to the FBT year, and whether the item otherwise fits within the exempt work-related item framework.

Because this is a 2015 amending Act, another important check is whether later amendments have changed the current law. That is especially important for the offset rate and any related thresholds or definitions that may have been updated after this Act commenced.

The Act received Royal Assent on 26 August 2015, and the Act as a whole commenced on that day. However, the schedules apply from different periods.

The amendments for the small business income tax offset apply to assessments for the 2015-16 income year and later income years. The amendments for immediate deductibility of some start-up expenses also apply in relation to assessments for the 2015-16 income year and later income years. The FBT amendments for portable electronic devices apply in relation to the 2016-17 FBT year and later FBT years.

Those application rules are important if you are reviewing historical returns, amended assessments or earlier FBT years. A business cannot rely on the concession for a period before the relevant application date just because the Act itself commenced in August 2015.

Although this Act is about tax concessions, access to those concessions depends heavily on records. The legislation itself does not set out a bespoke record-keeping code here, but in practice you should keep enough material to support each element of the claim.

For the offset, that means records showing the source of the income, the entity structure, and how net small business income and attributable deductions were worked out. For start-up expenditure, keep engagement letters, invoices, file notes and receipts that show the expenditure related to the proposed structure or operation of the business, or that it was a qualifying payment to an Australian government agency. For FBT, keep asset registers, issue records, employee acknowledgments and evidence of the employer's small business entity status for the relevant period.

If your business has related entities, changing ownership, or a restructure around the relevant year, document that carefully. Those facts can affect whether you are a small business entity and whether the connected entity or affiliate rules prevent access to the start-up deduction.