Taxing matters made simpler

In the second of a four-part series on business tax planning, Mark Beyer looks at the Simplified Tax System.

THE introduction of the Simplified Tax System two years ago was hailed as a key initiative to make life easier for small business.

Businesses can potentially obtain substantial benefits from joining the STS regime, however, it also has limitations.

CPA Australia WA director Justin Walawski said there had been growth in the number of businesses electing to use the STS regime.

“The uptake by certain taxpayers, especially those in capital intensive industries such as farming, has become more widespread,” Mr Walawski said.

About 270,000 businesses elected to use the STS regime last financial year, according to the Australian Tax Office.

This was 14 per cent of eligible businesses.

Haines Norton director Brett Corn-wall said the number of clients electing to use the STS regime was greater than he had anticipated.

“Businesses that do a lot of trading on account can obtain the greatest benefit,” Mr Cornwall said.

“Also the more plant and equipment you’ve got, the more advantage there will be.”

He acknowledged the system did not suit all businesses.

“There are a lot of businesses where it is just not relevant. You need a special set of circumstances,” Mr Cornwall said.

The STS regime is designed for small businesses with an annual turnover of less than $1 million and depreciable assets of less than $3 million.

The key benefits of using the STS regime include the accelerated depreciation of business assets.

KPMG middle market advisory partner Graeme Sheard said businesses using the STS could depreciate most assets at a rate of 30 per cent per annum.

This is substantially higher than the depreciation rates available to other businesses.

Another benefit of using the STS is the ability to obtain immediate tax deductions for business expenses that are prepaid up to 12 months in advance.

This can include prepayment of interest, lease payments and rental expenses.

Other businesses are subject to a $1,000 ceiling on the amount of prepayments they can claim each year (with some exceptions).

Businesses using the STS also have the option of using a cash accounting method, where income and expenses need to be recognised only when they are received and paid.

This compares with the accruals method, which includes creditors and debtors.

Mr Cornwall said the biggest benefit arose in cases where accounts receivable were higher than accounts payable.

By adjusting the accounts to remove both entries the net result would be a reduction in taxable income.

Mr Cornwall and Mr Sheard both questioned the benefits of the simplified trading stock system used in the STS.

“That isn’t viewed as offering any real advantage,” Mr Cornwall said.

The Federal Government introduced further refinements earlier this year to make the STS regime more attractive.

It has provided rollover relief in cases where there is a change in the partners of a small business, including a farm business.

This often occurs when new family members are introduced into an existing family business or when a partner retires.

Under the new rules, a taxable gain in relation to depreciable assets will only arise when the business ultimately disposes of its assets.

The second change modified the definition of turnover to accommodate industries with high turnover at low margins.

Petrol stations, for instance, are able to calculate turnover based on their gross margin rather than total sales.

Businesses wishing to be covered by the STS regime next financial year need to lodge their election with the ATO when they submit their tax return for the current year.