Most business’s have experienced out of the ordinary effects this 2021 financial year. With this being said, engaging in Tax Planning with your accountant is arguably the most important thing that a business owner should be commencing prior to 30 June. Putting the hard work into planning now assists a business with having an effective, realistic strategy in place which in turn can help reduce the overall tax payable.
2021 – items to consider for business owners:
- Job Keeper – the potential tax liability from the receipt of this income
All Job Keeper payments are deemed as assessable income, which will reflect on your tax return. Many business owners have not adequately prepared for the additional tax liability due to the increase in income from JobKeeper.
- New Depreciation Rules
These new rules not only have changed for 2021 financial year but will affect future tax years. The ATO states from 6th October 2020 until 30 June 2022, temporary full expensing allows deductions for:
- The business portion of the cost of new eligible depreciating assets for businesses with an aggregated turnover under $5 billion or for corporate tax entities that satisfy the alternative test
- The business portion of the cost of eligible second-hand assets for businesses with an aggregated turnover under $50 million
- The balance of a small business pool at the end of each income year in this period for businesses with an aggregated turnover of under $10 million
The instant asset write-off eligibility criteria does in fact change over time. You need to check your business’s eligibility and apply the correct threshold amount depending on when the asset was purchased, first used or installed ready for use.
- Government Grants that have been received but not extended
Prepare for the reality of no further grants being received. How will this affect your planning for the next financial year? Importantly ensure you understand the implications if you have not fully expended all Grant funding.
- Loss carry back rules
Loss carry back aids those in business that are still feeling the effects of COVID-19 restrictions on their business. Eligible entities get the offset by choosing to carry back losses to earlier years which had income tax liabilities. Loss carry back is intended to interact with temporary full expensing, encouraging new investment which may result in tax losses. The choice to carry back losses may result in a tax refund which in turn will increase your business cash flow.
- Cashflow boost and Dividend effect for companies
If you have withdrawn your cashflow boost from a company, the payment will ultimately come out as an unfranked dividend to the shareholders. For example, a $100k dividend could potentially incur $47,000 in tax. How your business is structured will determine any overall taxation consequences of receiving the Cashflow Boost payment. If unsure on this subject, we can assist in working out your tax treatment.
- Small Business Income tax offset
The small business income tax offset has been increased from 8% to 13%. This works out to be a 13% discount of the income tax payable on the business income received from a small business entity (other than a company) with a combined turnover of less than $5m, up to a maximum of $1,000 a year.
Whilst we have the above issues to consider this financial year, it is also important we still are reviewing basic tax planning issues and strategies. We discuss some of the fundamentals below:
a. $25,000 contribution cap
No matter your age, you can contribute up to $25,000 per year into your superannuation at the concessional rate including employer and personal contributions claimed as a tax deduction.
b. Carry-forward superannuation contributions
From 2019-2020, rules have changed now to allow you to make extra concessional contributions above the general cap without having to pay extra tax.
To utilize this, you need to meet two conditions:
- Your total super balance and the end of 30 June of the previous financial year is less than $500,000.
- You made concessional contributions in the financial year that exceeded your general concessional contributions cap.
The oldest available unused cap amounts are used first before then adding subsequent years working backwards. Unused cap amounts are available for a maximum of five years and will expire after this.
c. Spouse benefits for superannuation contributions
Option 1 – Contribution splitting
With this option contributions made by your employer can be split with your partner. You will still have the issue of the excess contributions as the contributions made by your employer count towards your contribution cap ($25,000). The tax on the contributions is also deduction from your balance prior to splitting with your spouse.
You are able to split 85% of your before tax contributions each financial year (up to your contribution cap).
The contributions can only be split in the following year. I.e. if you would like to split a portion of your 2020 contributions these can be split in the 2021 year.
Option 2 – Spouse contribution offset
If eligible, you can generally make a contribution to your spouse’s super fund and claim an 18% tax offset on up to $3,000 through your tax return.
To be entitled to the spouse contributions tax offset:
- you must make a contribution to your spouse’s super. This is a contribution made using after-tax dollars, which you haven’t claimed as a tax deduction
- you must be married or in a de facto relationship
- you must both be Australian residents
- the receiving spouse has to be under the age of 67, or if they’re between 67 and 74 they must meet work test requirements, meaning they were gainfully employed during the financial year for at least 40 hours over a period of no more than 30 consecutive days
- the receiving spouse’s income must be $37,000 or less for you to qualify for the full tax offset and less than $40,000 for you to receive a partial tax offset.
To be eligible for the maximum tax offset, which works out to be $540, you need to contribute a minimum of $3,000 and your partner’s annual income needs to be $37,000 or less. If their income exceeds $37,000, you’re still eligible for a partial offset. However, once their income reaches $40,000, you’ll no longer be eligible, but can still make contributions on their behalf.
The contributions for this option will come from your personal name not from your employer contributions.
Other tax saving fundamentals to consider:
- Changing lending requirements and the need to consider future borrowing requirements and how your financials will stack up. It is important if you will be seeking finance in the short term that you understand how lenders will assess Government Stimulus payments and increased tax deductions including the temporary expensing rules.
- Consider deferring income until after 30 June
- Ensure bad debts are written off in your accounts before 30 June
- Pay employer or self-employed superannuation contributions before 30 June. Note the fund must receive the money before 30 June for a tax deduction to apply
- Review your asset schedules and scrap any obsolete items before 30 June
- Review valuations of trading stock in the lead up to 30 June for the most tax-effective method
Please contact us now if you would like to book in a tax planning appointment to discuss your circumstances and options around tax saving.