The Federal Budget 2021 has been handed down and in this edition of Pulse we give you some highlights of what to expect on the tax front.

Rules and regulations for company tax constantly evolve and we have investigated the current taxation landscape to update you on recent adjustments and changes that may impact your bottom line. And lastly, we provide some business tax tips to help you navigate the end of financial year.

Federal Budget 2021 – at a glance

On Tuesday 11 May 2021, the Australian Government handed down its Federal Budget. It’s important that you take the time to understand what the Budget proposals mean – and how they might affect you personally.

We have provided a Federal Budget snapshot that explains some of the key outcomes and what they mean to you.

LMITO – the Government will retain the low and middle income tax offset for the 2022 financial year which provides a reduction of up to $1,080;
Temporary full expensing of depreciable assets – this measure will be extended by 12 months i.e. until 30 June 2023;
Loss carry-back measure will also be extended until the 30 June 2023;
The individual residency test will undergo a change with the Government will replace the existing tests for the tax residency of individuals with a primary “bright line” test under which a person who is physically present in Australia for 183 days or more in any income year will be an Australian tax resident;
The Government will also remove the cessation of employment as a taxing point for the tax-deferred employee share schemes;
Superannuation work test will be removed for voluntary non-concessional and salary sacrificed contributions for those under age 75. However, this measure will remain in place and will still apply to personal deductible contributions by those aged between 67 to 74;
The SMSF residency rules will also be relaxed by extending the central management and control test safe harbour from 2 years to 5 years and removing the active member test for both SMSF’s and small APRA funds;
Super guarantee threshold of $450 per month is to be removed from 1 July 2022;
Downsizer contributions are to be lowered from 65 to 60;
Individuals will be given two years to exit a specified range of complying retirement income income stream products, such as term allocated pensions;
The amount of super savings available to first home buyers will increase from $30,000 to $50,000;
The Government will invest $17.7 billion over five years to improve the aged care system

The New Era

Rules and regulations for constantly evolve and we have investigated the current taxation landscape to update you on recent adjustments and changes that may impact your bottom line.

Company tax rate

The company tax rate has been lowered for base rate entities from 27.5% to 26%. It is important to note that this tax rate only applies to entities that have an aggregated turnover of less than $50 million turnover and derives equal to or less than 80% of its income in the form of dividends, interest, royalties, rent and capital gains.

The franking credits on any dividends declared will need to be adjusted in line to avoid any over-franking issues.

Marginal income tax rates

The tax rates also saw a change with the 19% tax band increasing from $37,000 to $45,000 in 2021 and the 32.5% tax band increasing from $90,000 to $120,000.

Full expensing of depreciating assets

There are very specific rules in place but both, the instant asset write-off and temporary full expensing of depreciating assets is available in the 2021 year.

For businesses that turnover less than $50 million both, new and second-hand assets, can be fully expensed. And, if you happen to be a business that turns over between $50 million and $5 billion, then only new assets can be fully expensed.

Not only that but for all businesses turning over less than $5 billion, they can fully deduct any amount of improvement costs incurred between 06 October 2020 and 30 June 2021 on existing depreciating assets.

And businesses that turnover $10 million or more, or businesses that turnover less than $10 million and do not use the simplified depreciation, have a choice whether to fully expense the asset or not. The expensing becomes compulsory where businesses turning over less than $10 million use simplified depreciation rules.

Loss carry-back measures

This is a new measure that can be utilized by companies to obtain a refund when lodging their 2021 tax returns.

Companies that turnover less than $5 billion can choose to carry back their:

2020 tax losses and offset it against their 2019 income tax liability; or
2021 tax losses and offset it against their 2019 and 2020 income tax liability.

The amount of refund / offset is limited to the lesser of the amount of tax paid previously or the surplus in franking account at 30^th June 2021.

And if no choice is made under this new measure, then the loss is carried forward and, subject to the COT (continuity of ownership) and SBT (similar business test) tests being met, can be offset against any future profits.

Immediate tax deduction for start-up expenses

2021 is the first year where medium sized businesses that turnover between $10 million and $50 million will be able to claim an immediate tax deduction for start-up expenses such as legal or accounting advice to set up a new business and any prepaid expenditure on a service that will be provided within 12 months.

The income tax year 2022 will also see these businesses qualify for simplified trading stock rules, quarterly calculations of PAYG instalments, simplified accounting method for GST purposes and possible two-year amendment period for income tax returns.

Superannuation

The 2022 year see an increase in the transfer balance cap from $1.6 million to $1.7 million, an increase in the non-concessional contributions cap from $100,000 to $110,000 and an increase in the concessional contributions cap from $25,000 to $27,500.

Tax plan for the 2021 year

Make end of financial year tax planning a priority! 30 June is just around the corner and it’s important to plan properly. The following business tax tips will help you navigate the end of financial year.

Write-off bad debts before 30 June;
Document any accrued staff entitlements such as bonuses;
Consider paying super contributions before the end of financial year;
Maximize your concessional contributions cap to $25,000;
Consider deferring recognition of accrued income;
Pre-pay some expenses where applicable;
Declare dividends and reconcile any shareholder or director loans;
Ensure your trustee income resolutions are made before 30 June – always review your trust deed to determine when you actually need to make these resolutions;
Check your reporting obligations – have you got a current logbook, are you STP ready, will you need to file a taxable payments annual report.

Most importantly, how does tax form part of your investment strategy and how does it affect your estate planning. Do you have an up to date will? Have your circumstances changed – do they warrant for a new plan? Are you growing too fast – do you need to review your business structure or pricing strategies? These are all the important considerations that require your ongoing care and commitment to keep things on track and to be financially viable.

Pulse – May 2021