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 at least two of the following requirements are met by the candidate:

  • 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:

  • income for the year totalling less than $25 million
  • less than fifty people working for the company at the end of the fiscal year, and/or
  • gross assets across the company that were aggregated amounting to less than $12.5 million at the conclusion 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 definition used by the ATO for tax incentives

According to the definition provided by the Australian Tax Office, a small business is any organisation that generates less than $10 million in yearly revenue (excluding GST).

This criterion is utilised in the process of determining which types of businesses are qualified to receive tax breaks.

This amount was equivalent to a yearly turnover of $2 million in the years before to 2016-2017, when the current fiscal year began.

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:

Size Total Employees Percentage of total
Small (0-19 employees) 2,066,523 97.4
Medium (20-199) 50,955 2.4
Large (200+) 3,717 0.2

Based on these numbers, we may deduce that 99.8 percent of all workers employed by private entities in Australia are employed by small and medium-sized businesses (SMEs). To put these figures into perspective, 61 percent of all firms in Australia are owned and operated by sole proprietors, meaning they do not have any employees. Micro enterprises, which typically have between one and four employees, make up 27 percent of all firms 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 statistics on small businesses are available?

The Australian Bureau of Statistics (ABS) has produced a number of publications that provide an in-depth analysis of the ways in which small businesses contribute to the economy of Australia and how they function.


Employment in small businesses and their impact to industry value-added

The Australian Industry publication (ABS Cat. no. 8155.0) is released once a year and contains estimates that are derived directly from the ABS’s Economic Activity Survey (EAS) and firms’ Business Activity Statements. This publication can be found under the ABS’s catalogue number (BAS).

In Australia, information can be accessed according to the size of the firm (number of employees). Employment, earnings and salaries, sales and service income, total income, total expenses, operating profit before tax, and industrial value added (IVA) are among the most important economic indicators for industries that are included in the survey collection.

This enables comparisons to be made, both in the short term and the long term, between the contributions of small, medium, and large enterprises to the total employment and total IVA in the economy.

IVA is a measurement of the contribution of private sector firms to each industry’s Gross Domestic Product (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. GDP is calculated as the total market value of all goods and services produced in that period.

Small business number

The Australian Bureau of Statistics (ABS) offers annual estimates of the number of small enterprises that are operational in Counts of Australian Enterprises, including Entries and Exits (Cat. no. 8165.0). The information that is provided is a snapshot of enterprises that were actively trading as of the 30th of June of each year. The information originates from the financial records kept by the ATO of businesses in Australia that have been designated with an Australian Business Number (ABN). After that, the information is checked for accuracy and added to the Australian Business Register maintained by the ABS (ABR).

Accessible information includes the number of active trading enterprises broken down by employee size and industry, the number of businesses that enter and leave the market each year, and the percentage of businesses that survive their first, second, third, and fourth years in operation. Additionally included are transitions between different business size groups (for example, from businesses employing 1 to 4 employees to businesses employing between 5 and 19 employees). The size of the annual turnover can also reveal information about a business.

Exporters of small businesses

The report titled “Australian Exporter Characteristics” (ABS Catalogue Number 5368.0.55.006) offers statistics for the previous fiscal year on the characteristics and value of the international trading activity of Australian businesses organised according to their size and sector.

This report was compiled with the assistance of the ABS Survey of International Trade and Services, as well as data from the previous Australian Customs and Border Protection Service (Customs), which has since been replaced by the Australian Border Force, and information that is stored on the ABR.

Information technology in small businesses

The annual report known as Selected Characteristics of Australian Company (ABS Cat. No. 8167.0) is a compilation of information gleaned from the replies of 6,500 businesses to a survey.

The report provides specific information regarding how businesses utilise the internet to place and receive orders, as well as advertise their products and services, as well as the pace at which businesses connect to the internet and other forms of social media (according to the size of the firm).

The report also contains information on the various kinds of internet connections that companies make use of (such as DSL, FTTP, cables, fixed wireless, mobile wireless, and satellite).

Use of flexible working arrangements in small businesses

Data on the rate at which small businesses in Australia are implementing flexible working arrangements, which make it easier for employees to balance their work and family duties, are included in the Selected Characteristics of Australian Business report. A number of choices are available, including paid parental leave, flexible working hours, and carer’s leave.

Small business innovation challenges

In the book “Selected Characteristics of Australian Business,” businesses of all sizes—from micro to multinational—will discover knowledge on the obstacles that stand in the way of innovation.

Some of the obstacles that may be encountered include a lack of additional cash, a paucity of skills, a lack of access to knowledge and technology, the influence of government rules and compliance, the requirement to conform to standards, and uncertain demand for new goods and services.

Additional data available

The report “Selected Characteristics of Australian Firm” publishes data on the percentage of businesses in Australia that are owned by foreign investors, as well as information on franchising agreements and intellectual property safeguards. The report also contains information on the number of companies that are looking for funding in the form of loans or equity, as well as their rates of success.

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.

A significant number of aspiring business owners have taken out loans for their companies by utilising the equity in their homes. There have been reports that certain financial institutions will no longer acknowledge residential property as acceptable collateral for commercial loans. The loan-to-value ratios of other banks were lowered, making it more difficult for these businesses to receive finance.

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