With the End of Financial Year for 2021 approaching and the Federal Budget handed down last month, here are the key points to take away for Business.
Extension of Full Expensing of Assets
Eligible businesses with an aggregated turnover of less than $5 Billion can fully deduct the cost of eligible depreciating assets through to 30 June 2023. This is mainly due to supply chain issues being experienced where orders have been placed by businesses, but they were not going to receive the assets in time for the old cut off.
This usually signals businesses and owners to go out and buy assets such as new Motor Vehicles for the tax deduction. Before we go off and purchase assets we need to see if the business case stacks up. You need to ask:
Can the Business afford it?
Is it going to add revenue or value to the Business?
Generally purchasing a new motor vehicle isn’t going to add revenue or value unless you are replacing old vehicles that were required to be replaced to function fully. Now if there is a piece of equipment that will increase revenue or increase efficient for the business, then that is going to add value. The secondary benefit under the Full Expensing of Assets is being able to deduct the total cost of the asset in full.
Our tax planning for the 2021 Financial Year indicates we are going to make a profit of $100,000. There is a piece of equipment that will add value to the business available for $100,000. We determine that the business can afford to purchase it. Under the Full Expensing of Assets, we can deduct the full $100,000 in this financial year, thus reducing our profit to nil. If we assume our tax rate is 25% then we were expecting to pay $25,000 in tax on the $100,000 profit. We can now use the tax saved as a part of financing the new equipment purchase as well.
Carry Loss Back Extension
Eligible Companies with an aggregated turnover of less than $5 Billion can now carry losses back from up to the 2023 Financial Year as far back as the 2019 Financial Year. What this means is we can take a tax loss this year and carry that back against the 2019 Financial Year where we did make a profit and paid tax.
2019 Financial Year – $100,000 Taxable Profit with $30,000 Tax Paid
2021 Financial Year – $100,000 Taxable Loss
We can carry the $100,000 loss against the 2019 Profit of $100,000 and receive the $30,000 back as a tax refund.
So instead of having to make profit in future years and then offset your losses, you can do this now and get the tax paid as a refund.
This can go hand in hand with the Full Expensing of Assets where purchasing assets and full deducting them to create tax losses in the current year. Then the tax refund from the carry loss back can be used to fund the new asset purchases.
A point to note, if you had paid out Dividends which reduced the Franking Account (Tax Paid) to nil then you cannot get the tax refunded. So you will need to confirm that you will receive the tax refund if you plan on using it to fund the asset purchases.
Personal Income Tax Cuts
The Low and Middle Income Tax Offset that applies to the 2021 Financial Year has now been extended to the 2022 Financial Year.
What this means for Wage Earners, Partnerships, Trusts who is being personally taxed, up to $126,000 you will benefit. The Table below shows what offset you will receive at different income levels:
Low and middle income tax offset
|$37,000 or less||$255|
|Between $37,001 and $48,000||$255 plus 7.5 cents for every dollar above $37,000, up to a maximum of $1,080|
|Between $48,001 and $90,000||$1,080|
|Between $90,001 and $126,000||$1,080 minus 3 cents for every dollar of the amount above $90,000|
It is now that business owners should be looking into whether their business can benefit from any of these measures for the 2021 Financial Year.
If you have any questions or queries about your Year End Tax Planning please contact us.