Posts Categorized: General

Instant asset write-off tips – Part 2

As I said in part 1, in all my years as a business and tax advisor to small and medium businesses, there has never been a tax incentive that attracts as much interest as the instant asset write-off.

It’s a great opportunity to manage your tax and cash flows.

the carry back of company losses.

But before doing so, please ensure you have factored in the following considerations (see part 1 last for the first 7 tips):-

  1. Your small business must own the asset. Your business either needs to pay for it or finance it by a loan, hire purchase or by way of a chattel mortgage contract.

  2. Assets that your business leases from others do not qualify for the write-off (as one does not own the asset until the final payment is made or the lease contract is paid out early).

  3. The incentive also doesn’t apply to assets that are leased by your business to others.

  4. It’s not about when you buy the asset. Your entitlement to claim is based on when you held the asset first ready for use. So for assets you need to have installed, it is not when you buy it; it is when you can first use it.

  5. Make sure you when buy an asset to have the installation date agreed upon.

  6. Installation and delivery costs comprise part of the cost of the asset.

  7. If you trade-in an asset, it is the cost of the new asset that qualifies. So if your business buys a car for $50,000 and trades in an old car for $8,000, then the deductible write-off is $50,000.

Please come back to this web page for the last of the 20 tips and traps.

20 tips to claiming the Instant Asset Write-Off

In all my years as a business and tax advisor to small and medium businesses, there has never been a tax incentive that attracts as much interest as the instant asset write-off.

And now there is no limit to what you can spent (except for cars)!

And what was to be until December 2020 a $150,000 limit for small businesses has now become a complete write of all equipment purchases for any business with turnover under $5 billion. 

In such difficult times as this, it can deliver even greater outcomes when combined with the carry back of company losses.

But before doing so, please ensure you have factored in the following 20 key considerations:-

  1. This concession originally only applied to the purchase of new assets.  However businesses with group turnover under $50 million can now deduct the cost of second hand assets.

  2. It does not apply to building or capital works.

  3. If your business sells expensive assets, this expanded concession should prove to be a major buying incentive for your customers; even more so if you offer funding solutions.  Ask us if you would like a worked example to use with your customers

  4. Only buy an asset if you need it. So, if a company registered for GST buys and asset for $11,000, it will get back $1,000 of GST and will have a tax deduction of $10,000. It will pay $2,600 less company income tax. It will still be $7,400 out of pocket. As tempting as this limit is, don’t get too carried away and buy assets that your cash flow cannot support.

  5. A tax deduction in the 2020/21 tax year will have a flow on effect as it will reduce the PAYG Instalments for 2021/22 and part way into 2022/23.

  6. An asset purchased in 2020/21 will also have a flow on effect for those small businesses paying GST under the instalment method. It will reduce the GST Instalments for 2021/22 and part way into 2022/23.

  7. Writing of large assets may be great for tax but can make your financials look ordinary, possibly disastrous to a current or future financier. For this reason, we now run two sets of depreciation schedules; one for tax and one for accounting / financial statements purposes. Effectively the tax rates are a nonsense and they should not make your financials misleading.

Please come back to this web page for a further 13 tips and traps.

Proper tax planning – includes fixing problems

As much as tax planning is about legally maximising your tax outcome it is also about fixing problems.

Some problems can be fixed by the time the Tax Return; but not all.

So what problems need to addressed now.  Some of the main ones are:-

  • The time to write off bad debts is know. Don’t think of doing it later as entries are date stamped within cloud programs.
  • Trustees need to resolve (and evidence the decision) as to who the trust income will be distributed to. If not, the income is taxed at the highest marginal tax rate.
  • Have you made a capital gain this year? If so, might be time to generate a capital loss to reduce or eliminate the tax on that gain.
  • If your income is too high you will pay more tax. You might also lose things benefits such as the Family Tax Benefit or the Senior Health Concession Card.  Might be time to prepay a few expenses or make donations or super contributions (but please do so only after receiving financial planning advice).
  • The biggest one is what is best known as Division 7A. Division 7A is the section of the Tax Act that dictates how loans by companies to individuals and trusts are treated.  Such loans must be repaid under a loan agreement with a set formula dictating repayments of both interest and principal.  If the company doesn’t make the minimum repayment then the shortfall is taxed as income in the name of the individual or trust.  So make sure you at least meet that minimum repayment.
  • For new loans, maybe they can be paid out before the end of the financial year. Or even before the 2021 Tax Return is lodged.  That way, there is no tax hit.

Proper tax planning is pivotal to maximising your situation.  And with proper tax planning you will know what your tax liabilities will be and when they will fall due.

Do you receive this level of service form your accountant?  If not you better call us.

 

Should you prepay expenses before July?

Prepaying expenses is a common tax strategy. 

If you are a small business, then paying an expense in June that is payable in July or perhaps even August makes sense.  Paying early will reduce the tax you pay on the 2020/21 year.  It will also reduce the PAYG Instalments you pay next year.

It makes even more sense for small companies with the current company rate of 26% falling to 25% come July. 

TIP

But just don’t go out any buy anything.  A company will save $250 if it spends $1,000 now – but it is $750 out of pocket.  If your marginal tax rate is 39% then your tax saving may be $390 but you are still $610 out of pocket.  Point is just buy the stuff you need.

But prepaying expenses will not be in all business owner’s best interests including:-

  • Businesses with current year losses – they won’t be paying tax anyway (but read our post on companies who can now carry back losses).

  • Businesses with profits less than the Cash Flow Boost component (as the CFB is non-taxable).

  • Those non-corporate business owners who expect to be in a higher marginal tax rate next year.

So want is best for you?  Well that depends on your overall position – and expected position next year.  Ad what si the best way to work that out – give us a call.

Be careful when claiming bad debts

A bad debt can be claimed as a tax deduction.  And with the end of financial year rapidly approaching, now is the time to determine what can be written off.

Probably the more important discussion is how to avoid bad debts in the first place.  That will be left to a future post.

To claim a bad debt, it must have already been reported as income.  That means those who report their income for tax purposes on a cash basis can’t claim a bad debt.

So for those who recognise income on an accruals basis – meaning income is recognised when the invoice is raised – they must have reached a position where all reasonable attempts to collect have failed.  It must therefore be more than doubtful. 

You then need to make an entry into your accounting system.  Those who are using a cloud file must process the bad debt in June.  Don’t fall for the trap of ding it later as cloud systems time date entries.

But what if I collect the money later?

There are genuine cases where this happens.  The customer could come into money through an inheritance or windfall and do the right thing and pay back their creditors.  In that case, you re-recognise the income as a bad debt recovered.

Beware of schemes of arrangement

Sometimes a business may not write off a debt but later accept so many cents in the dollar from a liquidator’s offer.  The problem here that accepting say 40 cents in the dollar does not entitle you to claim the other 60% as a bad debt.  So keep on top of your customers and ensure you write off bad debts as soon as you can.

Tip 

It is always a good idea to document the attempts you have made.  That way you will have some contemporaneous evidence as to your decision if the ATO start asking questions.

As I already said, the real question is what can you do to prevent bad debts in the first place – we welcome that discussion with you.

Instant asset write-off warning

 

The Instant Asset Write-Off is a great way to reduce both your 2021 tax liability and your 2021/22 PAYG Instalments.  And you won’t drain you cash flow if you finance the asset purchased.

But beware!

To be able to claim the write off in the 2021 tax year, you must have the asset installed and/or ready for sue before July.

If the car you ordered is not delivered until July then you won’t be able to claim until next tax year.

And as a footnote to the above, financing a lease will not able you to claim the write-off.  Under a lease, you are not the owner until you pay the final instalment.  This is just another trap.

If you want to know more then call us.

Is the super co-contribution good for me?

Under the super co-contribution scheme, the government will contribute $1 for every $2 of personal contributions made by an employed or self employed person.  The maximum government co-contribution is $500 (meaning that one would need to contribute $1,000 to receive the maximum entitlement of $500). 

To be qualify, one must:-

  • Be employed with their employer paying the compulsory SGC or be a self employed person running a business.

  • Have 10% or more of one’s income received from employment and/or a business.

  • Have combined assessable income (that being income before deductions), Reportable Fringe Benefits (RFBA) and employer super contributions in excess of basic SGC amount (RESC) of less than $54,837.

  • Have paid a non-deductible contribution into superannuation from after tax money by 30thJune 2021 – that is, you make the contribution out of a personal bank account.

  • Be less than 71 at the end of the financial year.

  • Not be a temporary visa holder.

  • Lodge a Tax Return for the year ending 30thJune 2021.

  • The maximum co-contribution for a personal contribution of $1,000 is $500 if your combined assessable income is under $39,87.  Thereafter it progressively reduces by 3.333 cents for every dollar in excess of $39,837 – there is no entitlement if your combined assessable income exceeds $54,837. 

  • Not have contributed more than your non-concessional cap.

  • Have a total super balance of less than $1,6200,000.

If you want to find out what you might be entitled to, click on the following link to the ATO’s calculator here

Other matters to note are:-

  • One’s own contribution and that made by the government will be preserved (that is, one will not be able to access it until one retires or satisfies another condition of release).

  • The ATO will deposit the co-contribution into one’s super account once they have reconciled one’s lodged 2021 Tax Return with the information provided by one’s super fund(s).  It is therefore likely that the vast majority of contributions will not be credited until at least January 2022.  

  • If you wish to make the contribution into a public or employer superannuation fund, you will need to ensure they accept such contributions and obtain the appropriate form and do so well before 30th For those with your own self managed super fund, your fund can only accept such a contribution if permitted by its trust deed (we will take no responsibility where a client does not consult with us beforehand). 

What is best for you depends on your circumstances and take into account a large number of considerations. 

You should therefore seek financial planning advice to ensure such a contribution will work as intended and is in your best overall interests.

 

Lockdown #4 state assistance

The Victorian State Government today announced it will provide assistance to those most affected by this current lockdown.

There will not be across the board assistance to all businesses; just to those most affected.

Brief details have been announced about 3 programs:-

  • Licensed Hospitality Venue Fund 2021 – under which $3,500 will be paid to each venue holding an eligible licence and food certificate.

  • Business Costs Assistance Program – $2,500 will be paid businesses operating in industries that cannot work during the current lockdown and cannot operate remotely.

  • Victorian Events Support Package – $20 million will be set aside to support operators in the events industry.  Further details are to be released.

It would be inappropriate not to point out that such financial support will not cover the losses for many business owners.  There would be many restaurants that have been forced to throw out $5,000+ of food.  It’s a straight hit to the bottom line when not being able to earn any income.  And it comes on top of the losses from the Valentine’s Day lockdown and the lockdowns last year.  So get out there and support your local restaurants and indeed small businesses.

What can you do now?

Applications will open on Wednesday 2nd June.  You can however register for the Business Victoria Update newsletter – to do so click here.

We will keep you updated.  Please though don’t hesitate to ask us any question you may have.

A quick lockdown update

So back into lockdown we go!

We are most sympathetic to those businesses that will suffer financially from this latest lockdown, particularly those in entertainment and hospitality.

The Maggs Reid team is now all back at home but thankfully due to modern technology, will be able to operate almost normally.  We do ask that you contact us by e-mail during this time.

Financial assistance

The state government is yet to announce any financial assistance to small businesses.  Please be assured that we will update you as soon as details are announced – but judging by one minister’s comments this morning, that, for unknown reasons that surprise me, won’t be until next week.

Compulsory QR codes

As a generalisation, businesses that deal with the public are now required to track visitors to their business electronically by using the government’s free QR service.  Such businesses could use other QR services from 30th April, but as of today, must use the government QR service.  You can read more at – https://www.coronavirus.vic.gov.au/about-victorian-government-qr-code-service.  Although we are not one stated industries that must use a QR system, we have adopted one as of yesterday as we believe it is a better system than manual sheets.

Survive and Thrive webinar

I take this opportunity to remind you that the next Survive and Thrive webinar will be held on Wednesday 9th June at 5:30 PM.  This month, we will address tax planning actions required before the end of the year.   And I’m sure all business owners will be interested in our guest speakers presentation on three legal common traps for small business owners.  You can book your place at – https://us02web.zoom.us/webinar/register/WN_l5ZhIapvTTqDqoKSSKStxg

Tax lodgements

Like all accountants, the demands of JobKeeper, rent relief applications, Land Tax applications, JobMaker, cash flow preparations to support loan applications and so on have meant that we are still to finalise and lodge a number of 2020 Tax Returns.  In fact that my accounting discussion group meeting on Wednesday night, no accountant, not one, managed to meet the required 85% lodgement deadline of last week.  Please do not be concerned as the ATO are tolerant and are rubber stamping all extension requests.  In managing our lodgement listing, we are cognisant of people’s positions and are prioritising those matters that require early retention.  We do appreciate your ongoing patience in he most unusual period. 

Portal improvement

I should again state that we have been preparing 2020 Tax Returns using new software; software that talks to other programs.  As part of this process we have been able to adopt better client portal and digital signing software.  What this also means is that the existing portal will be inaccessible after 30th June.  We assure you that we of course have copies of everything we have dropped into  your portal.  We have also saved copies of any documents that you have dropped into your portal.  You may though wish to retrieve any document you want at your electronic finger tips.

Stay safe and we look forward to seeing you soon.

What’s in the Budget for you?

What’s in the Budget for you? 

Probably significantly more than you think.

As what is now unfortunately the norm, there were plenty of pre-announcements before Budget night.  But there is much more to the Budget that was announced on Budget night or leading up to it.

In addition to some key business announcements (extension of loss carry back company rules and instant asset write-off) there were very welcome announcements to being able to getting more money into super.  Welcome I say as how can one provide for retirement with a contribution cap – which currently sists at $25,000 before being eroded by 15% tax, life insurance premiums and for some an extra 15% tax).

Also of note were the proposed changes to personal and self managed super fund residency rules.  I say welcome as the existing rules are quiet archaic in context of how people today live, work and travel – mind you we still aren’t going anywhere for a while with covid.

We will explore some of the key measures in our next survive and thrive webinar.  It will beheld at 5.30pm on Wednesday 2nd June and you can book here – https://tinyurl.com/reg0206

We will also flesh out some opportunities in upcoming blogs.

But having said all that, please keep in mind that:-

  • A Budget is only ever a series of announcements,

  • They still have to be legislated,

  • They may be changed slightly and

  • Many have start dates form July 2021 – and we may have a change of government before then.

Please though don’t hesitate to call us if you any questions.