We recently saw the release of the 2020-21 Federal Budget, which aims to stimulate investment and help businesses recover from the impacts of recent economic downturn. We briefly highlighted two of the key measures, the Instant Asset Write-Off and Loss Carry-Back, in our previous Federal Budget Overview(Click here to read more). Below is a further update on the two key measures that can help benefit your small business generate positive cashflow.
Instant Asset Write Off – Deadline now 30 JUNE 2022!
The instant asset write-off allows businesses with turnover less than 5 billion to deduct the cost of new depreciable assets and the cost of upgrades to existing assets in the first year of use. This means that the cost of an asset will be fully deductible in the year it is installed, rather than being claimed over the life of the asset.
Under the scheme businesses will be able to claim the full value of the assets (previously capped to $150,000 per item) when acquired from 7.30pm, 6 October 2020 and will be in effect until 30 June 2022, meaning there is no longer the rush to purchase new assets before the previous deadline of 31 December 2020.
The instant asset write-off only applies to some depreciable assets. There are some assets that do not qualify for the new rules. For example, the instant asset write-off can be used for multiple assets if the cost of each asset is less than the relevant threshold. Further, it can be used for new and second-hand assets. You cannot use the instant asset write off for assets that are excluded from the simplified depreciation rules, such as:
- Assets you allocated to a low-value pool
- Capital works for deductions
- Software allocated to a software development pool
- Horticultural plants
- Assets that are leased out for more than 50% of the time on a depreciating asset lease
Your eligibility and threshold amount will depend on when the asset was purchased, first used, installed ready for use and your aggregated turnover. Prior to 31 December 2020, the instant asset write-off threshold amount for each asset is $150,000 and eligibility has expanded to cover businesses with an aggregated turnover or less than $500 million. From 1 January 2021, the instant asset write-off will only be available for small businesses with an aggregated turnover of less than $10 million and the threshold will be $1,000. Further, if you are a small business owner using the simplified depreciation rules, you must use the instant asset write off on all eligible assets. It is also important to keep in mind that if your business has an aggregated turnover of more than $500 million, you will not be eligible to use the instant asset write-off.
For more information on eligibility and thresholds, please visit: ATO Link Here – Instant Asset Write Off
If your business makes a tax profit this year, this measure will most likely reduce the annual taxable income of the business and it may be an option to adjust any upcoming PAYG instalments to improve cashflow. If your business operates as a company and will make a tax loss, you may be able to use the loss to offset tax paid in previous years (see below for further information on this new scheme). Alternatively, tax losses can generally be carried forward to a future year.
New Loss Carry-Back Scheme
The new temporary loss carry-back rules are a welcomed announcement from the Government and are designed to provide cashflow relief to companies that have paid income tax in a previous year but who now find themselves in a tax loss position due to the COVID-19 pandemic and/or through obtaining larger tax deductions through the new instant asset write off rules (explained above).
If your business has made a loss you may be able to claim a refund for tax previously paid. This means that a company can offset tax losses against profits from a previous year, generating a refundable tax offset. Further, Companies can choose to carry a loss backward or forward. For some companies, this measure will allow some significant tax losses to be carried backward in order to generate a cash refund.
Companies, corporate limited partnerships and public trading trusts are all eligible to carry-back their tax losses. This only applies if the entity has lodged an income tax return for the current year and each of the five consecutive years prior. If you have not kept up to date with your reporting obligations, you may not be eligible to carry back your losses.
These new measures present significant planning opportunities for companies and it will become vitally important that small business owners obtain quality tax planning advice so they can accurately plan for tax in the 2020-21 financial year, in light of the new measures.
If you would like further information regarding the above or require us to review your tax position for eligibility, please call us on 07 5451 1118. possible outcome.