THE SIMPLIFIED TAX SYSTEM

THE SIMPLIFIED TAX SYSTEM

From 1 July of this year, small businesses will be able to operate under the so-called "Simplified Tax Systems" ("STS").

There are three main elements to the STS, being:

Recognition of business income and deductions on a receipts or payments basis;
A simplified depreciation regime; and
A simplified trading stock regime.

Recognition of income and deductions

Under the STS, income and deductions will be recognised for tax purposes when received (if income) and when paid (if deductions).

Simplified depreciation regime

The STS deprecation changed are that:

Assets will be pooled and depreciated as a single asset
Assets will be divided into two separate pools. One will be called the "Long life STS pool" and this will have assets with an effective life of more than 25 years. Assets in this pool will qualify for a 5% write off rate on a diminishing balance basis. Assets in the other pool (the "General STS pool") will have an effective life of less than 25 years and will qualify for a write off rate of 30% also on a diminishing balance basis.
Assets costing less than $1,000 will be immediately deductible.
When an asset is first used to produce assessable income, a percentage estimate of the business use of the asset must be made. If the actual business use changes by more than 10% from the estimate, an adjustment will be made to the balance of the poll to reflect the changed usage.

Simplified trading stock regime

Under the STS regime there will be no need to account for the movement in stock values where the change in value is $5,000 or less. Taxpayers will be required to make a reasonable estimate of the value of the stock. If the taxpayer believes the value of the stock has changed by $5,000 or less, no stock take is required.

Eligibility

To be an ‘STS taxpayer’ for an income year, the taxpayer must:

Carry on business during that year; and
Have an average turnover of the business and related businesses of less than $1m (GST exclusive); and

Not have more than $3m of depreciating assets in the business and related businesses at the end of the year

Entering and leaving the STS

A taxpayer may choose to enter the STS if they qualify as an STS taxpayer for an income year. If an entity chooses to enter the STS, they need to notify the Commissioner in the approved form. A taxpayer may then leave the STS by voluntary election or when the taxpayer ceases to be eligible to be in the system.

Once an entity voluntarily leaves the STS they will be ineligible to re-enter the STS for a period of five years after the last income year that the entity was a STS taxpayer. However, the five year limit does not apply if the entity is required to leave the STS because it is no longer eligible (eg the average turnover exceeds $1m). In this situation the entity will be able to re-enter if it satisfies, at a later time, the eligibility criteria.