What qualifies a small business?
Small business is defined as a privately owned corporation, partnership, or sole proprietorship that has fewer employees and less annual revenue than a corporation or regular-sized business. The definition of “small”—in terms of being able to apply for government support and qualify for preferential tax policy—varies by country and industry.
The Australian Taxation Office (ATO) defines a ‘small business’ (whether an individual, partnership, company or trust) as a business that has an aggregated annual turnover of less than $2 million. But this was only before 2016/2017. From 1 July 2016, the definition of the small business changed to a business with an aggregated turnover of less than $10 million.
The new threshold of $10 million was announced in the 2017/2018 budget, to enable the inclusion of 90,000 additional businesses, to transform and boost the economy. The budget stated that “small business is the engine room of our economy, making up to 99 per cent of all businesses and contributing $380 billion to the economy”. It stressed that the move meant that the Australian Government was intent on creating the right environment for small businesses to grow.
The Australian Bureau of Statistics (ABS) on the other hand, uses a different definition – which is the number of persons employed:
- a micro-business employs between 0-4 persons
- a small business, between 5-19 persons
- a medium business, between 20 and 199 persons; and
- a large business employing 200 or more persons
As many of the statistics and tables are from ABS publications, this article will use the ABS definition of ‘small business’ to include ‘micro-business’ as well, unless otherwise described.
What is a small business?
A small business is defined differently by different regulators and laws.
ASIC administers the Corporations Act 2001, and this defines a ‘small proprietary company’. From financial years commencing on or after 1 July 2019, a ‘small proprietary company’ is defined as ‘small’ for a financial year if it satisfies at least two of the below criteria:
- annual revenue of less than $50 million
- less than 100 employees at the end of the financial year, and/or
- consolidated gross assets of less than $25 million at the end of the financial year.
For financial years commencing before 30 June 2019, a proprietary company is defined as ‘small’ if it satisfies at least two of the below criteria:
- annual revenue of less than $25 million
- less than 50 employees at the end of the financial year, and/or
- consolidated gross assets of less than $12.5 million at the end of the financial year.
For taxation purposes, the Australian Taxation Office defines a small business entity as having less than $10 million aggregated turnover.
For employment purposes, Fair Work Australia defines a small business as one that has less than 15 employees.
Many regulators use the Australian Bureau of Statistics (ABS) definition, which is a business that employs fewer than 20 people.
CHARACTERISTICS OF INNOVATION IN THE SMALL BUSINESS SECTOR
Innovation is related to the activities that bring new ideas to life.
Only 40 – 60 per cent of small businesses are engaged in innovative activities, compared to 80 per cent in large companies.
While the size of business makes relatively little difference in the level of product (goods and services) innovation, the disparity between small and large business is most noticeable in the areas of operational processes (22% vs 44%); organisation and management (29% vs 535); and marketing methods (26% vs 40%).
Innovation leads to more productivity, and SMEs that invest in technology stand a better chance of meeting the challenges of competition, because
innovation is clearly a driver of the success of those firms that succeed at the expense of the ones that do not.
The ATO’s definition for tax concession purposes
For receiving tax concessions, the Australian Tax Office defines a small business as an entity that has an annual turnover (excluding GST) of less than $10 million. For financial years before 2016-2017, this amount was $2 million in annual turnover. Eligibility for government small business grants is also subject to criteria, usually including revenue. Other factors can include the number of employees and location of the business (for state grants).
How ASIC assists small business
According to the Australian Securities and Investment Commission (ASIC), ‘small proprietary companies’ need to meet two of the three following characteristics. These include having:
- An annual turnover of less than $25 million
- Fewer than 50 employees at the end of the financial year
- Consolidated gross assets valued at less than $12.5 million at the end of the financial year.
Small businesses deal with ASIC when they:
- register a company or business name
- renew the registration of a company or business name
- deregister a company or cancel a business name
- report misconduct by a financial product or service provider
- verify information about other businesses by checking our registers.
If ASIC finds people or organisations have broken the law, we have the power to ban or disqualify company directors, ban individuals from the financial services and credit industries and take civil or criminal action against companies or company officers. Find out more about ASIC’s role.
Numbers of small businesses measured by employment
According to ABS numbers (from 2016), small enterprises employ over 97% of the people employed in Australia. The breakdown of employment by business definition is:
|Size||Total Employees||Percentage of total|
|Small (0-19 employees)||2,066,523||97.4|
These figures show us that small to medium enterprises (SMEs) employ 99.8 of all workers employed by private entities in Australia. To put these numbers into perspective, 61 per cent of Australian businesses by number are sole traders who don’t have employees. Having 1 to 4 employees, micro businesses account for 27 per cent of businesses in Australia.
Important facts about small-to-medium enterprises in Australia
The Australian Small Business and Family Enterprise Ombudsman have compiled statistics that show the importance of these businesses in Australia. In Australia, SMEs:
- Contribute $614.96 billion of total GDP, which is 57% of GDP
- Employ 7 million people, 67% of all employment in Australia.
In addition, 56% of SMEs are operated by members of GenX or Millenial generations. Given this fact, SMEs will continue to play an important role in Australia’s economy well into the future.
Survival and expansion
Succeeding as a small business owner is tough, and there’s no shortage of pitfalls on the way to success. Around half of all new one-person businesses fail in their first three years, compared with around a quarter of medium-sized corporations. Although there is a relationship between business size and the probability of survival, new businesses face an uphill battle regardless of how big they are.
In general, small businesses are more susceptible to fluctuations in the business cycle and show greater volatility in revenue and profitability. They tend to operate in a narrow geographical region, which forces them to rely on a small customer base and makes them vulnerable to local economic conditions.
The competition between small and large businesses is a David-and-Goliath battle in which Goliath has the advantage. Smaller enterprises are hampered because they have higher fixed costs and can’t take advantage of economies of scale. Fixed costs, including regulatory compliance and hiring expenses, can be a real burden for some enterprises. Also, because of their limited capacity to buy in bulk, small businesses are less likely to receive favourable deals from suppliers.
Finally, obtaining financing and managing cash flow can be huge obstacles. Securing a bank loan can be costly—the interest rate spread on loans for a small and large business is 2.15 percentage points. Plus, delays in receiving payment from customers can lead to unpredictable cash flow and angry creditors.
These hurdles represent a survival threat for smaller businesses—a small business fails in Australia every two minutes. Moreover, they are a barrier to expansion. Corporate mobility—the probability of a small business becoming a medium or large business—is relatively low. Smaller businesses typically are reluctant to take on more staff. In fact, they are more likely to shrink than expand payrolls, even as their turnover rises. To be sure, this may be because many sole traders won’t hire regardless of how well their business does.
Innovation—where small businesses are falling behind
Small businesses account for 96% of enterprises actively innovating in the sale of goods or services, very close to their 97% share of registered Australian businesses. Nevertheless, there is an important distinction between small businesses in general and startups. The latter is often portrayed as the engine of innovation and disruptive ideas. However, survey data shows that most small businesses aren’t startups, and they aren’t seeking to shake up their market segment.
Only 20% of small businesses innovated in methods of selling goods or services in the 2015–16 financial year compared with 30% of medium and large corporations. Small businesses are also less likely to innovate in operational or managerial processes. And they trail bigger businesses in developing business websites or social media presence.
Of course, innovation may not be necessary for many small businesses. But the data reveal a harsh truth: Innovation is not a priority for most Australian businesses. Australia ranked 23rd globally in the United Nations 2017 Global Innovation Index—behind the United States (4th), United Kingdom (5th) and Canada (18th)—and our ranking fell from 17th place two years ago.
We may have a healthy small business sector, providing employment for millions of Australians, though our approach to startups needs work. The global startup ecosystem ranking from Startup Genome saw Sydney (the only Australian city listed) slip down a spot to 17.
Recommendations from previous reports to help improve our position include creating innovation districts in major cities, establishing a program to attract promising international startups to Australia, and immersing Aussie university students in startup hubs such as Silicon Valley. While it’s important to foster an environment where startups can form and grow, there also needs to be a focus on keeping them around long enough to gauge their real value to the economy.
What is statistical information available on small business?
There are a number of publications released by the Australian Bureau of Statistics (ABS) which shed light on the contribution of small businesses to the Australian economy and how they operate.
Small business employment and contribution to industry value-added
The Australian Industry publication (ABS Cat. no. 8155.0) is produced annually and provides estimates that draw on data collected directly from the Economic Activity Survey (EAS) conducted by the ABS and the Business Activity Statement (BAS) provided by businesses to the ATO.
Australian industry provides information by business size (number of employees). By the industry on a number of key economic indicators including employment, wages and salaries, sales and service income, total income, total expenses, operating profit before tax and industry value added (IVA) for industries that are within the scope of the survey collection.
This enables comparisons of contributions of small, medium and large businesses to total employment and total IVA in the economy over the short and longer-term. IVA is the measure of the contribution by private sector businesses in each industry to Gross Domestic Product (GDP). The ABS defines GDP as the total market value of goods and services produced in Australia within a given period after deducting the cost of goods and services used up in the process of production but before deducting allowances for the consumption of fixed capital.
Small business count
The ABS also provides annual estimates of the number of operating small businesses in Counts of Australian Businesses, including Entries and Exits (Cat. no. 8165.0). The data provided is a snapshot of actively trading businesses at 30 June each year. Information is drawn from financial records held by the ATO of Australian businesses that have been issued an Australian Business Number (ABN). The data is then cleaned and stored in the ABS Australian Business Register (ABR).
Information is available on the current number of actively trading businesses by employee size and industry, the number of entries and exits of businesses that occur each year and survival rates of businesses over one, two, three and four years. Data is also provided on transitions between business size categories (for example, from businesses employing 1 to 4 employees to businesses employing between 5 and 19 employees). Information is also available on businesses by annual turnover size.
Small business exporters
Characteristics of Australian Exporters (ABS Cat. No. 5368.0.55.006) provides financial year information on the characteristics and value of international trading activities of Australian firms by business size and industry. Data is drawn from the ABS Survey of International Trade and Services, as well as data provided by the former Australian Customs and Border Protection Service (Customs) (now superseded by Australian Border Force) and records stored on the ABR.
Small business use of information technology
Selected Characteristics of Australian Business (ABS Cat. No. 8167.0) draws information on an annual basis from survey responses of 6,500 businesses. The publication provides information on the rate of connection of businesses (by firm size) to the internet and other forms of social media, and use of the internet by businesses to place and receive orders as well as advertise their products and services. The publication also provides information on the type of internet connections used by businesses (such as Digital Subscriber Line (DSL), Fibre to the Premises (FTTP), cables, fixed wireless, mobile wireless or satellite).
Small business use of flexible working arrangements
Selected Characteristics of Australian Business also provides information on the rate of adoption by small businesses of flexible working arrangements that allow employees to better balance work and caring commitments. These arrangements include paid parental leave, flexible working hours and carer’s leave.
Barriers to innovation for small businesses
Selected Characteristics of Australian Business provides information on barriers to innovation for small, medium and large businesses. Barriers can include lack of access to additional funds, skill shortages, lack of access to knowledge and technology, the impact of government regulations and compliance, the need to adhere to standards, and uncertain demand for new goods and services.
Other statistics available
Selected Characteristics of Australian Business publishes information on the rate of foreign ownership by business size, the presence of franchise arrangements, and method used to protect intellectual property. The publication also provides information on the rate of firms seeking debt or equity finance and their rate of success in securing finance.
Many small enterprises struggle to get the finance they need to grow. This situation has been worsened as a result of the Banking Royal Commission and falling housing prices. Traditional financiers, such as banks, usually require collateral for their loans. Many business owners have used the equity in their homes to get business loans. Some banks announced that they would no longer accept the residential property as collateral for business loans. Other banks lowered their loan-to-value ratios, making it more difficult for these businesses to access funds.