You hear about tax planning all the time from the likes of us, but for those small-to-medium business owners who underinvest in it, 2021 is the year to take heed. Much has been going on that will impact the amount of money in your pocket, and you can either let the 2020/21 tax cards fall however they will, or exercise some control over the hand you’re dealt.
At Nexia Australia, everything we do for clients can be brought down to three things:
- Put money in your pocket
- Prevent money leaving your pocket
- Help you sleep well at night
Tax planning encompasses all three, and more so than ever in 2021.
So, what’s going on?
The financial year to 30 June 2021 features a combination of measures never before seen that will impact the tax impost on your business. They’re supposed to reduce the tax impost, but if left unmanaged, they could ultimately increase it. These 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)
- Cash refund in your pocket for companies carrying back a tax loss to a prior year that had a tax liability
You could be excused for wondering how exactly any of the above could result in your business paying more tax, but we assure you they can – and yes, including the last one.
Sub-optimal tax outcome, if you let it happen
Until recently, there was no choice involved for the first four items above. That is, it was compulsory to claim a deduction for those amounts. This is a timing difference – the full deduction simply replaces what would have been the normal depreciation deductions spread over a few years. Even with only business-as-usual acquisitions of depreciating assets, this results in lower-than-otherwise taxable income in 2020/21 (or even a tax loss), followed by higher-than-otherwise taxable income in subsequent years.
This magnified sea swell of taxable income across consecutive years could result in your business’s 2020/21 taxable income being too low. The vast majority of small-to-medium businesses are operated through a trust, or a company owned by one or more trusts. Overly reduced taxable income in 2020/21 (or a tax loss) for such structures can mean missing out on a year’s worth of the tax-saving benefit of the tax-free threshold and the lower income tax rates amongst your family. That then flows into the higher wave of taxable income in subsequent years, which will be taxed at the highest rate you pay – up to 47%.
So, that’s how it comes to be. The compulsory bringing forward of deductions into 2020/21 can actually result in a higher overall tax impost across several years. Although you might get a tax holiday for 2020/21, it generally won’t be worth it, and the 2024 personal tax cuts are too far away to alleviate this.
Clearly, this would be a sub-optimal outcome. However, rather than simply letting those cards fall wherever they will, there are a number of measures available to counter this outcome. These include stock valuation options, bad-debt management, and utilising the catch-up rules to reschedule the timing of superannuation contributions, just to name a few. That’s where the planning comes in, and far better to do it this side of 30 June 2021. If you wait until after, possibilities quickly diminish.
This is very much about preventing money leaving your pocket.
The Federal Government realised that things were a bit too restrictive, and so it was announced that businesses will be able to opt out of measures 1 and 3 above, on an asset-by-asset basis. However, having now seen the Bill before Parliament, for many businesses, this change won’t make any difference. Firstly, measures 2 and 4 will remain compulsory. And secondly, for small businesses with group-wide turnover below $10 million who use the simplified pooling deprecation rules (which almost all do), measure 1 above remains compulsory. So, many businesses will ultimately have a full deduction or write-off in 2020/21 for all or most acquisitions and existing depreciating assets anyway.
If anything, these changes will add to the 2020/21 tax planning mix, not lessen it.