Planning for EOFY in a time of COVID
At the end of what has been a very tumultuous 12 months for many, we look at what you can do ahead of EOFY 2021 and ahead to the new financial year.
Without doubt, the 2020-21 financial year will standout for many as a challenging one, with a few defining features that we've not seen in years past. Two Federal Budgets, stimulus measures to support business through the COVID-19 recession, and a raft of other tax and stimulus initiatives. It has certainly been a year unlike any other.
As the rundown to EOFY gets well underway, we'll cover the key impacts to your tax as well as the usual housekeeping activity you should be undertaking now.
Tax rates are changing, as are franking rates
Companies with tax turnover of less than $50 million and with no more than 80% derived from passive income will pay tax at the new company tax rate of 26% for the 2020/21 tax year and from 2021/22, the tax rate will be 25%. All other companies will continue to pay tax at 30%.
If you company pays dividends, then tax credits can be applied by franking them at the standard 30% rate or the 26% rate, however the rate at which a dividend is taxed and the company's income are determined independently of each other – a problem that can lead to paying too much tax or unusable franking credits. It's important to talk to your accountant to understand the potential outcomes to plan and manage them accordingly.
Remember that JobKeeper payment are assessable.
JobKeeper payments are assessable at the time that a monthly declaration was lodged, not at the time the payments were received, which can be confusing for business owners.
Lodgements made in the 2019-20 year fall into that tax year's assessment, even if the payments were received in 2020-21.
Speak to your accountant to ensure that any payments you received were allocated to the correct tax year.
Cash boost payments are not, but beware if dividends were paid
Many businesses were able to benefit from the cash flow boost payments as part of the Government's stimulus measures, which themselves are not assessable as part of your business income. However, there may be a sting if the money was used to pay dividends. The cash flow boost payments may have been assessed based on PAYG withholding, however dividends are taxed differently to wages.
Speak to your accountant to find out more.
Making use of loss carryback
If your business is eligible, it may be able to claim a cash refund for losses based on revenue (not capital losses) from the 2019/20 and 2020/21 tax years. Turnover must be below $5 billion and the business must have paid tax in 2018/19 or later years.
This measure was designed to work hand in glove with the full expensing of depreciating assets if they were incurred after 06 October 2020. Businesses with turnover of less than $5 billion can deduct the full cost of eligible assets and full expensing can also be used for improvements to existing eligible assets.
For businesses with less than $50 million turnover, temporary full expensing applies to both new and second-hand asset. For businesses with more than $50 million turnover, full expensing only applies to new depreciable assets.
Don't forget the instant asset write-off
If your business purchased depreciating assets that cost less than $150,000, then you can utilise the instant asset write-off rule and deduct the full cost provided that:
- Your business has turnover less than $50 million and
- The asset was purchased before 6 October 2020.
While the instant asset write-off rules still apply to purchases after that date, the temporary full expensive deduction mentioned above provides an alternative means of depreciating assets.
Consider deferring income until after 30 June
The pandemic has had a significant impact on business income. If your business is expecting lower revenue for 2020/21 compared to previous years, it may be worth considering deferring income until after 30 June, provided of course that your business cashflow can do so.
Claiming normal and work-from-home deductions for 2020-21
The ATO has signalled it will look closely at work from home (WFH) deductions for the 2020-21 financial year, so it is worth understanding what you can and can't claim for yourself or any staff that have had to work from home because of lockdown. It is also important that you talk to your accountant about the best method for claiming any WFH deductions. Your accountant will be able to ensure you're claiming legitimate work from home costs and applying the best method from a tax perspective.
In addition to your WFH claims, other examples of what you can claim include:
- Employer and self-employed superannuation contributions must be paid and received by your super fund before 30 June. Ensure that any extra contributions fall within the $25,000 contributions cap.
- Assets first used or installed and ready for use before 30 June will enable you to claim depreciation.
- If your business has less than $10 million turnover, you can claim pre-paid expenses up to 12 months in advance. Larger businesses are generally limited to expenses less than $1,000.
- Ensure that you've documented any wages paid to your spouse or other family members and ensure they are reasonable for the work that has been done.
- Bad debts must be written off before 30 June.
Personal Income, Deductions and Tax Offsets
If you have term deposits, consider setting their maturity date after 1 July, provided that you have the cashflow to do so.
Consider realising capital losses if you have already realised capital gains on other assets during 2020/21.
If you have unrecouped capital losses or expect that your income will be substantially higher in 2021/22 consider realising any capital gains now. Speak to your accountant to ensure that this is the right approach.
If your income is likely to reduce in 2021/22, either because you're retiring or anticipating a reduction in your income, it's possible that deferring income to after 1 July may be beneficial, as you'll be in a lesser tax bracket.
If you've been able to make deductible donations in 2020/21, ensure they are grouped and applied in a higher income year. This applies if you're expecting a substantially higher or lower income compared to the previous tax year and ensure that your donations are made against the name of the higher income earner in your household.
Personal Superannuation Contributions
The Superannuation Guarantee rate will increase from 9.5% to 10% from 1 July, 2021 and that may impact your take-home pay depending on your employment contract.
The Federal Budget also introduced a range of superannuation measures that are expected to apply from 1 July. For more information, read our Federal Budget coverage.
Seek advice for End of Financial Year
We always recommend seeking the advice of your accountant before enacting any of the planning strategies outlined above, as your accountant is best placed to consider how they may apply in your particular circumstances. Given the complexities thrown in by COVID and the many measures to help business and workers, your accountant is best placed to ensure you're maximising the benefits for your tax return.
Please contact us on 02 9957 4033 for more information.
This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.