Individual Tax Return

What qualifies a small business?

A corporation, partnership, or single proprietorship that is privately held and has fewer employees and lower yearly income than a corporation or regular-sized business is considered a small business. Small businesses can be sole proprietorships, partnerships, or corporations.

The term “small” might mean different things depending on the nation you operate in and the sector you work in, including whether or not you are eligible for government subsidies and tax breaks.

The Australian Taxation Office (ATO) considers a corporation a “small business” if it has an annual turnover of less than $2 million AUD combined, regardless of whether it is owned by an individual, a partnership, a company, or a trust.

But it was before the 2016–2017 school year. As of 1 July 2016, the definition of a small business was altered to mean an organisation with an annual turnover of fewer than ten million dollars.

The new threshold of $10 million was established in the 2017/2018 fiscal year budget to facilitate the admission of 90,000 other firms, which would transform and stimulate the economy. According to the budget, “small enterprises are the motor room of our economy,” They account for up to 99 per cent of all businesses and contribute 380 billion dollars to the overall economy.

It was emphasised that this step signified that the Australian Government was committed to fostering an environment conducive to the expansion of small enterprises.

On the other hand, the Australian Bureau of Statistics (ABS) employs a different definition, which is the number of people who are employed:

  • a micro-business that employs between 0-4 persons
  • a small business, with anything between 5-19 persons
  • a medium business, between 20 and 199 persons; and
  • a large business employing 200 or more persons

Because many of the statistics and tables are taken from publications by the ABS, this article will use the ABS definition of “small business” to include “micro-business” unless this is specifically stated elsewhere.

What is a small business?

A small business is defined differently by different regulators and laws.

The Corporations Act 2001, which ASIC enforces, defines a “small proprietary company.” A “small proprietary company” will be considered “small” for an accounting period beginning on or after 1 July 2019 if it satisfies at least two of the following criteria:

  • less than $50 million in annual revenue, fewer than 100 employees at the end of the financial year and/or less than $25 million in consolidated gross assets at the end of the financial year are the requirements for this category.
  • when it comes to financial years that start before 30 June 2019, a proprietary company is considered to be “small” if it satisfies at least two of the conditions listed below:
  • less than $25 million in annual revenue fewer than 50 workers at the end of the financial year, and/or less than $12.5 million in consolidated gross assets at the end of the financial year are the criteria.

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.

The Australian Taxation Office defines a small business entity as having an aggregated turnover of less than $10 million. This definition is used for taxation.

According to the criteria established by Fair Work Australia, a small business has 15 workers or fewer on its payroll.

Many governing bodies adhere to the definition provided by the Australian Bureau of Statistics (ABS), which states that a small firm has less than 20 employees.

 

Innovation in the Small Business Sector

The actions that give new concepts physical form are what we mean when talking about innovation.

In comparison to the eighty per cent of large corporations that participate in creative endeavours, only forty to sixty per cent of small enterprises do so.

Innovation ultimately results in increased productivity, and small and medium-sized businesses (SMEs) that put money into technological advancement have a higher chance of rising to the challenges posed by their competitors.

There is no question that innovation is a key factor in the prosperity of those businesses that are successful in comparison to those that are not.

The ATO’s definition for tax concession purposes

The Australian Tax Office defines a small business as an entity that has an annual turnover (excluding GST) of less than $10 million.

This criterion is used to determine which businesses are eligible for tax reductions.

This sum was equivalent to a yearly turnover of $2 million in the fiscal years before 2016-2017.

In order to qualify for government grants intended for small businesses, applicants must meet a number of criteria, one of which is typically revenue. A company’s location and the number of employees are two more considerations that may come into play (for state grants).

The role that ASIC plays in assisting small businesses

The Australian Securities and Investment Commission (ASIC) mandates that in order to qualify as a “small proprietary company,” a business must exhibit at least two of the three qualities listed below.

These include being in possession of:

  • A revenue for the previous year of less than $25 million
  • At the end of the fiscal year, there were less than fifty workers on staff.
  • At the end of the fiscal year, the consolidated gross assets had an estimated value that was lower than $12.5 million.

When small enterprises do any of the following, they must deal with ASIC:

  • register a business or company name
  • renew a company’s or business name’s registration
  • deregister a company or cancel a business name’s registration
  • report financial product or service provider misconduct
  • check information about other firms in our registers

Suppose ASIC discovers that people or organisations have infringed the law. In that case, we can suspend or disqualify company directors, prohibit individuals from working in the financial services or credit industries, and take civil or criminal action against corporations or company officers. Learn more about the role of ASIC.

The number of small enterprises in terms of employment

Small businesses employ nearly 97 per cent of Australian workers, according to ABS statistics from 2016. The following is a breakdown of employment based on business definitions:

SizeTotal EmployeesPercentage of total
Small (0-19 employees)2,066,52397.4
Medium (20-199)50,9552.4
Large (200+)3,7170.2

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 information regarding Australia’s small and medium businesses

Statistics provided by the Australian Small Business and Family Enterprise Ombudsman demonstrate the prominence of small firms in Australia. SMEs in Australia:

  • Contribute $614.96 billion in total GDP, or 57 per cent of total GDP
  • Employ 7 million people, accounting for 67 per cent of all jobs in Australia.

Furthermore, members of the GenX or Millenial generations run 56 per cent of SMEs. Given this, SMEs will continue to play a significant part in Australia’s economy for many years to come.

Survival and expansion

Being a small business owner is difficult, and there are plenty of traps. Compared to a quarter of medium-sized enterprises, half of all new one-person businesses fail within the first three years. Although there is a link between firm size and survival chances, new enterprises confront an uphill battle regardless of their size.

Small enterprises, in general, are more vulnerable to business cycle swings and have higher revenue and profitability volatility.

In addition, they usually operate in a confined geographic area, which requires them to rely on a small customer base and exposes them to local economic conditions.

Small and large firms compete in a David-and-Goliath battle, with Goliath having the upper hand. Smaller businesses are restricted by greater fixed costs and the inability to take advantage of economies of scale.

Fixed costs, such as regulatory compliance and employee salaries, can significantly strain certain businesses. Small firms are also less likely to secure favourable deals from suppliers due to their limited capacity to buy in bulk.

Finally, securing funding and managing cash flow are significant challenges. Securing a bank loan can be expensive—the interest rate difference between small and large business loans is 2.15 percentage points.

Furthermore, delays in obtaining payment from clients might result in erratic cash flow and irritated creditors.

Small businesses in Australia face these challenges every two minutes, putting their survival at risk.

They’re also a roadblock to expansion. Corporate mobility, or the likelihood of a small corporation becoming a medium or large one, is rare. As a result, smaller firms are often hesitant to hire new employees.

Even if turnover rises, they are more likely to reduce rather than expand payrolls. This could be because many lone traders refuse to hire no matter how successful their business is.

Innovation—where small businesses are falling behind

Small firms make up 96 per cent of organisations actively innovating in the sale of products or services, closely matching their 97 per cent share of registered Australian businesses. However, there is a significant difference between small firms and startups.

The latter is frequently portrayed as the source of disruptive ideas and innovation. However, according to survey results, most small businesses aren’t startups and aren’t looking to disrupt their market area.

In the 2015–16 fiscal year, just 20% of small businesses innovated in terms of selling goods or services, compared to 30% of medium and large corporations. In addition, small organisations are less likely to innovate in operational or management processes.

They also lag behind larger companies in terms of building business websites and social media presence.

Of fact, many small firms may not require innovation.

However, the numbers show a grim reality: most Australian businesses do not prioritise innovation. In the United Nations 2017 Global Innovation Index, Australia was rated 23rd, behind the United States (4th), the United Kingdom (5th), and Canada (18th), down from 17th two years previous.

We may have a thriving small business sector that employs millions of Australians, but our attitude to startups should be improved. For example, Sydney (the sole Australian city mentioned) fell to 17th place in Startup Genome’s global startup ecosystem index.

Previous assessments have recommended constructing innovation zones in key cities, implementing a programme to recruit promising international firms to Australia, and immersing Australian university students in startup hotspots like Silicon Valley to assist enhance our position.

While it is critical to create an atmosphere where startups can form and grow, there must also be an emphasis on keeping them around long enough to assess their true economic value.

What is statistical information available on small business?

The Australian Bureau of Statistics (ABS) has a variety of publications that detail the contribution of small enterprises 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 published once a year and contains estimates based on data obtained directly from the ABS’s Economic Activity Survey (EAS) and enterprises’ Business Activity Statements (BAS).

Information is available by business size in Australia (number of employees). For industries that are included in the survey collection, employment, earnings and salaries, sales and service income, total income, total expenses, operating profit before tax, and industry value added (IVA) are among the main economic indicators.

This allows for short- and long-term comparisons of the contributions of small, medium, and big firms to total employment and total IVA in the economy.

IVA is a measure of the contribution of private sector enterprises to Gross Domestic Product in each industry (GDP).

GDP is defined by the Australian Bureau of Statistics as the total market value of goods and services produced in a given period after deducting the cost of products and services used up in the production process but before deducting allowances for fixed capital consumption.

Small business count

In Counts of Australian Enterprises, including Entries and Exits, the ABS also publishes annual estimates of the number of operational small businesses (Cat. no. 8165.0). The information presented is a snapshot of actively trading businesses as of 30 June of each year. The data comes from the ATO’s financial records of Australian enterprises that have been given an Australian Business Number (ABN). After that, the information is cleansed and entered into the ABS Australian Business Register (ABR).

The number of active trading enterprises by employee size and industry, the number of business admissions and exits each year, and the survival rates of businesses over one, two, three, and four years are all accessible. Transitions between business size groups are also covered (for example, from businesses employing 1 to 4 employees to businesses employing between 5 and 19 employees). Business information is also provided by annual turnover size.

Small business exporters

Australian Exporter Characteristics (ABS Cat. No. 5368.0.55.006) provides financial year statistics on the characteristics and value of Australian enterprises’ international trading activity by business size and industry.

The ABS Survey of International Trade and Services, as well as data from the old Australian Customs and Border Protection Service (Customs) (now supplanted by Australian Border Force) and information housed on the ABR, were used to compile this report.

Information technology in small businesses

Selected Characteristics of Australian Company (ABS Cat. No. 8167.0) is a yearly report that compiles data from 6,500 business survey responses.

The report details the rate at which businesses connect to the internet and other forms of social media (by firm size), as well as how businesses utilise the internet to place and receive orders and advertise their products and services.

The paper also includes information on the different types of internet connections that businesses utilise (such as DSL, FTTP, cables, fixed wireless, mobile wireless, and satellite).

Small business use of flexible working arrangements

Selected Characteristics of Australian Business also includes data on the rate at which small enterprises are adopting flexible working arrangements, which allow employees to better combine work and family responsibilities. Paid parental leave, flexible working hours, and carer’s leave are among the options.

Barriers to innovation for small businesses

Small, medium, and big firms will find information about hurdles to innovation in Selected Characteristics of Australian Business.

Lack of additional cash, skill shortages, lack of access to knowledge and technology, the impact of government laws and compliance, the need to conform to standards, and unclear demand for new goods and services are only some of the barriers that can be encountered.

Other statistics available

Selected Characteristics of Australian Firm releases information on foreign ownership rates by business size, franchising arrangements, and intellectual property protection methods. The report also includes data on the number of businesses seeking loan or equity financing, as well as their success rates.

Many small businesses struggle to obtain the funding they require to expand.

As a result of the Banking Royal Commission and plummeting house prices, the issue has gotten worse. Banks and other traditional lenders typically need collateral for their loans.

Many entrepreneurs have taken out business loans using the equity in their homes. Some banks have indicated that residential property will no longer be accepted as security for business loans. Other banks reduced their loan-to-value ratios, making it more difficult for these companies to obtain financing.

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