Tax planning is a broad and often a daunting proposition each year for new and existing clients, and with the rapid (and constant) development in the Australian Tax Office rules and regulations, clarity on subjects can be few and far between. With the upcoming 2021 year set to have a diverse range of benefits and deductions, MJJ Accounting aims to provide clarification of the benefits and pitfalls of the new introduced deductions.
Why is this year different? Last year was different too!
With the ongoing Coronavirus pandemic still massively reducing opportunities for business, the ATO has again attempted to include a broader range of concessions and larger offsets to small and large enterprises. Although in theory, this can result in a larger return for this financial year, you may be robbing Peter to pay Paul, and see lower returns in the long-term, as well as lending implications. Some of the new measures include:
- Full deduction for the cost of most depreciating assets acquired since the 6 October Federal Budget (no dollar limit)
- Full deduction for depreciating assets costing less than $150,000 (mostly overridden since 6 October by the above)
- 50% up-front deduction for depreciating assets costing $150,000 or more (also mostly overridden)
- Small businesses get a deduction for the 30 June 2021 closing balance in their depreciating asset pool
- Expanded access to a number of small business concessions where group-wide turnover is below $50 million (up from $10 million)
On the face value, these are solely designed to give back to you, and buffer out losses sustained during the pandemic. However, full deductions fall short when compared to the long-term diminishing return currently implemented.
Usually, a deduction on an acquired asset is depreciated over the years based on the small business pooling rules. It allows an entity to claim an item as a deductible expense across several years and spreads the impact of large-scale acquisitions on a business. Many of you are likely familiar with this existing method and have one or more assets depreciated in this way.
These new methods of deduction allow you to claim the full principal amount as a deduction in the one year. Essentially, you could spend all your profit on depreciating assets, and receive it all back at the end of the year. Although this is tempting, it sets your taxable income at a point that can be too low in this year, and much higher than your usual rate in the following years.
Essentially, depreciating these asset acquisitions over time helps offset the taxable income earned. This ensures you are taxed at the lowest bracket possible for income earned, and creatives a much more normative average of income. This is usually the ideal situation for most business, and part of the reason taxation planning is integral, determining how these things will be applied with your accountant before the financial years end allows you to forecast many of these deductions and plan accordingly.
The issue with this one-time asset write-off then becomes glaringly obvious, gifting a much higher return in this financial year, but disrupting the normative income flow by allocating earnings into a higher bracket in the proceeding years. This is further complicated if your business is operated through a trust, or owned by several trusts, where the multiple tax rates of each beneficiary make tax deductions, and therefore their management, critical.
Furthering this, banks are more and more frequently not adding in 100% of the instant asset write-off. This could impede any financing for the business where the banks are conducting serviceability calculations based on cashflow, and as a result you may be negatively affected.
If this all sounds confusing and complicated, it’s because it is, and it can be difficult to determine what exactly is the best route to proceed with. Tax planning has become more difficult than ever this year, with the government taking its time to clarify queries. MJJ Accounting urges organisation and preparation in the coming season, as it may take longer then previously to plan the road to recovery and success for the future of your business.