Albert Einstein once said “The hardest thing in the world to understand is the Income Tax.” This year COVID-19 has been changing our lives completely, but one thing that remains similar to last year is that the new financial year brings with it some new tax considerations..
Below we have listed 6 key changes from the end of 2020 financial year and onwards. Some of them require having the correct funds to spare and/or invest and others relate to changed working conditions.
2021 Company tax rate decreases for Base Rate Entities
A Base Rate Entity (BRE) is a company that generates business income and has aggregated turnover of under $50,000,000. Aggregate turnover includes connected entities and affiliates, both locally and overseas and the business income needs to represent at least 20% of total turnover. For financial year 30 June 2020, the tax rate for 2020 was 27.5%.
This rate changed on 1 July 2020 and will drop to 26%. Two important considerations in relation to this change are:
- Timing of revenue recognition and what is assessable in 2020 or 2021 for tax purposes; and
- Franking credits on dividends for June 2020 were 27.5%, but are now 26% for dividends from 1 July 2020 onwards.
Therefore this change affects both the company itself and the shareholders in receipt of dividends.
Instant asset write-off – $150,000 limit
The instant asset write-off for businesses was recently extended from 30 June 2020 to 31 December 2020. If you couldn’t have an asset installed ready for use by 30 June 2020, you don’t miss out, as you have until 31 December 2020 to take advantage of the write-off.
- The asset needs to have been purchased after 12 March 2020.
- The purchase price of each asset (excluding GST) is under $150,000.
- Aggregated turnover of the business is under $500 million. This includes grouping turnover with foreign related parties.
- The asset is installed and ready for use, so not just ordered and being delivered.
- The asset can be new or second hand.
The JobKeeper program has been the subject of much analysis, discussion and no doubt ongoing debate, with the Government due to announce findings of a review on 23 July 2020. Stay up to date with the latest COVID-19 Resources here.
One aspect of JobKeeper that needs to be considered from the employer’s point of view is that the JobKeeper payment is assessable income for tax purposes. The question for June payments is when are they assessed and included in the taxable income calculation?
The ATO has confirmed that JobKeeper payments will be assessable once a valid monthly declaration report is lodged. For the eligible fortnights in June, they will be assessable as taxable income in July and thus in the 2021 financial year, for entities with a 30 June year end.
PAYG Cash Flow Boost
In contrast to JobKeeper, the PAYG cash boost, which is essentially a subsidy for certain businesses for PAYG withheld from wages, is tax free income.
Whilst a tax free payment is good news short term, there can be some longer term implications, depending on whether or not the tax free payment is effectively invested in the business. For a company, a tax free payment can lead to paying unfranked dividends and for a unit trust it can lead to ‘tax deferred’ distributions with either short or long term CGT implications. This is what some would consider the sting in the tail.
Working from home
With many workers now working from home by choice or otherwise, the ATO has released guidance on claiming work related deductions. The ATO expounds on these options on their website here.
To summarise, there are basically two periods for working from home claims for financial year 2020. These are:
- From 1 July 2019 – 1 March 2020. For this period, there is a fixed hourly rate of $0.52 per hour, which covers utilities and furniture depreciation. In addition to that, you can claim the business use percentage of internet and phone costs.
- From 1 March 2020 – 30 June 2020. This is the new $0.80 rate and there is a choice to apply this per hour. It is to cover all costs, so utilities, phone, internet and depreciation. Alternatively, you can still use option one, but need to do more calculation around what internet/phone and depreciation you want to claim.
The option of $0.80 under point two is designed to create a shortcut for taxpayers to claim home office costs and reduce their record keeping burden.
Furthermore, when working from home there is distinction between having a home office and a place of business at home. For the former, you generally have a designated work area that is part of your house, whereas the latter is often a separate space on the property from the living area.
For a home office, you would claim running costs only consistent with the options outlined above. But for a place of business at home, you would look at also claiming occupancy costs, which can include rent, insurance, council rate and interest on borrowing to acquire the property.
However, it is important to note that being eligible to claim for a place of business means and claim occupancy costs means that you won’t get the full benefit of the CGT Main Residence Exemption when you sell your property.
Concessional super contribution catch up
An option available for certain workers, business operators and investors is to make additional superannuation contributions to utilise any unused concessional contribution caps from financial year 2019 and 2020.
There are some requirements and the obvious point being that it necessitates contributing extra funds into superannuation to support retirement. The main points for 2021 are that:
- The person has total superannuation (across all funds) of less than $500,000 at 30 June 2020.
- The person has unused concessional contributions from financial year 2019 and/or 2020
- The total available contributions for 2021 are $25,000 less current year contributions to date, plus unused contributions from 2019 and 2020.
- The person is either under 65, or if over 65 has met the works test prior to contributing.
This option also exists in the following financial years and is a relatively new measure. Any unused concessional contributions from 2021 can be carried over , subject to the points above.
It can suit people with additional income from this year due to a bonus or capital gain, but needs to be carefully considered against locking the funds in superannuation until retirement. Professional advice should be sought. To find out more on the changes to superannuation due to COVID-19.
Should you need any help or assistance, with anything above or Accru’s full range of services, please contact your local Accru advisor.