Posts Categorized: Tax

The new improved instant asset write-off – part 3

As I said in parts 1 & 2, 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 with no upper threshold, that interest may grow.

In this the third and final part, we set out our last set of 7 tips.

Before jumping in and buying an asset , please consider these additional considerations:-

15/.   You can only claim the business portion on an asset that is used both for business and privately – such as a car or lap-top. That said, one can deduct the whole cost of cars provided the Fringe Benefit Statutory Formula method.

16/.  If your business has current or carried forward losses in excess of your intended asset purchase(s), then your business will not gain any tax saving in this financial year.

17/.  Please refer to our separate blog about using this concession to claim back company tax paid in respect of the 2019 and 2020 tax years. The results can be amazing!

18/.  Small businesses can also use this concession to deduct written down value of the depreciable (general pool) assets. As it was, a small business could write-off the carried forward written down value of assets at 1st July 2020 when less than $30,000.

19/.  As the write-offs can be large, we are now running two depreciation schedules for our business clients – one at normal rates and one with accelerated tax rates The reason for doing so is that the financial won’t show an artificially low profit which may deny a financial application or even review of existing arrangements.

20/.  It applies to tangible assets – ones you can touch. This write-off threshold does not apply to intangible assets such as web pages.

21/.  Beware of glitzy app based products as their rates tend to start above credit card rates. We can put you in contact with financiers who have access to the best deals.

With these 7 and the previous 14 common consideration, please don’t jump in and commit to an expensive asset without being absolutely assured of all of its consequences.  We therefore welcome any question you have about the instant asset write-off.  

Click here to read the first two sets of tips:-

Part 1

Part 2

 

21 tips about the new & improved instant asset write-off – part 2

As I said in part 1 last week, 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 the instant asset write-off has become even more attractive!

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

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 considerations (see part 1 last for the first 7 tips):-

8/.   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.

9/.   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).

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

11/.   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.

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

13/.   Installation and delivery costs comprise part of the cost of the asset.

14/.   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 next week for a further 7 tips and traps.

You can read our first 7 tips here.

We welcome any question you may have in the meantime.

21 tips about the new & improved instant asset write-off – 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.

And now it has become even more attractive!

And what was to be until December 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 nor software development pools or primary production assets.

  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 14 tips and traps.

We welcome any question you may have in the meantime.

 

End of instant asset write-off

If one incentive had clients jumping the last couple of years it was the instant asset write-off.  Particularly last year when the limit was increased to $25,000 and then to $30,000.

As part of the stimulus measures, it has now been increased to $150,000 to 30th June 2020.  And the small business threshold has been removed.  A business with turnover of less than $500,000,000 can now use this concession!

In today’s environment, using this incentive may not be possible for many.

But beware!

From 1st July 2020, the instant asset write-off is set to reduce to only $1,000.  

So as tough as things are, consideration should be given to buying needed business assets now to bring forward tax deductions.  Not only will this save on income tax, it will have a flow on effect with reduced PAYG Instalments payable through 2020/21.  We are not saying buy assets willy-nilly; we are simply saying seriously analyse the impact rather than dismiss it as a knee jerk reaction. 

You might also find that you get good deals over the next few months.

Who else should consider this?

Those selling major assets to larger businesses.  They might well have the cash flow to acquire assets others can’t.  Make sure you tell them about this incentive.  With much noise and unprecedented rapid, change, they may not be aware.  You might be doing them a favour by telling them.

 

ATO’s audit focus

Over the last couple of years, all one has heard is that the ATO keeps reducing its workforce; at the same time it has spent a fortune on IT and data matching.  As a result, the ATO’s audit focus has totally changed.

In recent years, the ATO has escalated the number of warning letters.  They have done so in the knowledge that it generally results in reduced claims – many people are fearful and don’t want to claim what is genuinely claimable.

Of late, the ATO’s audit focus has changed.  They are announcing visits to certain suburbs and towns; such as Bathurst just before the car race.  Moreover, they are stating that they are intending to visit 100’s of businesses at a time.  Unless they have done something like doubling their workforce or re-deploying people, I can’t see how this can be done.  How many staff do they need to visit the 800 business stated for visits in Croydon and Frankston even if the visit itself is only 30 minutes as they say?  And these visits must be undertaken over a short time frame as such visits are now being announced every month.

Businesses to be visited in Croydon will include common targets of takeaway food places, hairdressers, cleaning businesses and somewhat surprisingly management consultants and financial advisers.

Businesses to be visited in Frankston will include the common targets of again take away food places and restaurants but also real estate agents and accountants.  Would could deduce that they are trying to scare accountants and get them to put their wind up their clients.

Of particular interest is that the ATO has stated that they are not just relying on the old gold mine of tips offs but also from government regulators such as Fair Work Australia.  Under the table payments and under award payments are the very clear focus of this campaign.  Discussion topics also include payment facilities, lodgements and super obligations.

Check their identity

The ATO will notify their visit.  I strongly recommend cross checking the validity of a request to ensure it is genuine.  I say that as when the ATO were undertaking GST reviews in 2000/01, we found that one such client review was in fact a competitor trying to bluff their way in to get inside knowledge.

You can read more at the following link including details on information sessions.

https://www.ato.gov.au/Media-centre/Media-releases/ATO-to-visit-800-businesses-in-Frankston-and-Croydon-in-response-to-black-economy-warning-signs/ 

 

 

CGT hit on those who sell their home whilst living overseas

Late last week, a highly contentious bill passed which levies a Capital Gains Tax (CGT) hit on those who sell their home whilst living overseas.

It doesn’t matter how long you lived in your former Australian home.  If you sell it whilst loving overseas, you pay tax on the whole gain.  There is neither a reduction for:-

  • The time it was your home, nor
  • The 50% general CGT tax discount which non-residents are not entitled to since 2012.
We will set out more later.

In the meantime, if this affects you, family or friends, keep the following two tips front of mind:-

  • It doesn’t apply to house owned since May 2017 which are sold before July 2020.
  • Normal CGT treatment applies if the house is sold when you again become a tax resident of Australia.

In the meantime we welcome any question you may have.

 

Exemption to some non-residents selling their former Australian home after June 2020

We have addressed in previous blogs and our newsletter that former Australian residents selling their former family home will pay tax on the whole gain if the property is sold after 30th June 2020 whilst they are still living overseas.  There is no reduction for the period it was their family home.  There is however an exemption to some non-residents selling their former Australian home after June 2020; but hopefully those circumstance don’t eventuate.

Former Australian tax residents who have lived overseas for less than 6 years can claim an exemption for what are referred to as life events.

Life events include such things as:-

  • Being diagnosed with a terminal medical condition by the individual or a family member.

  • The death of certain family members.

  • A marriage or de facto relationship breakdown.

We should add that it doesn’t matter whether one still holds an Australian passport.  Residency for tax purposes is a separate concept.  Whilst there are numerous considerations, the basic position is that one ceases to be a resident of Australia for tax purposes once one has lived overseas for two years or more.

If a former home is sold by an Australian now living overseas and there is no life event exemption, then:-

  • The whole gain will be taxable – there is no reduction for the period in which it was the family home.

  • The capital gains tax general discount of 50% is not available to non-residents. In other words the whole gain is taxable.

  • Tax is payable from the first dollar at 32.5% as non-residents do not receive the tax free threshold nor the 19% marginal tax rate.

  • Under the new non-resident property withholding tax, 12.5% of the proceeds must be remitted to the ATO – meaning only $1,750,000 from the sale of a $2,000,000 property will be received at settlement; the balance will offset against the capital gain within the Tax Return.

Please refer to previous blogs for strategies to not paying this rather hefty and unfair tax.  Or better yet, calls us to discuss your situation.

Reducing tax on the former home

An often over looked way to reduce the tax paid on the sale of a former home is to use the six year absence rule.

The net rent you receive is assessable (or deductible if negatively geared) but the gain itself can be disregarded.

However, you must take care when choosing to use this method when you live in another home.  One is only entitled to one principal residence (family home) exemption so choose carefully

We would welcome the opportunity to discuss what is best for you.  We welcome your call.

Non-residents have a house sized problem!

Non-residents have a house sized problem ahead!

The bill to deny non-residents the principal residence (family home) Capital Gains Tax (CGT) exemption that elapsed before the May Federal election has now been reintroduced and passed by Parliament.

What this means that if an Australian working overseas sells their former home, they will pay tax on the entire gain.  There will be no reduction for either:-

  • The time they lived in the home nor

  • The 50% CGT general discount (which is not available to non-residents since 2012).

And was non-residents tax on the first dollar at a tax rate of 32.5%, this could equate to a huge tax bill.

Yes, it doesn’t matter how long you lived in the property, a former resident will pay tax on the whole gain.  And they will do so at comparatively high tax rates. 

So, let’s take an example of Fred, a born and bred Australian who decides to sell their former Melbourne home of say 12 years and decides to buy a home in London where they have been for living for the last three years:-

  • Home bought for $750,000.

  • Home sold for $1,500,000.

  • Gain made of 750,000.

  • No reduction for the 12 years that it was their home.

  • No CGT 50% general discount as they had become a tax non-resident of Australia.

  • No six-year absence rule.

Will result in tax payable of $319,000!

Ouch!!

There are two important carve-outs:-

  1. Houses sold before July 2020 which were owned since May 9, 2017. Please note that CGT is based off contract dates, not settlement dates.

  2. In the above scenario, there would be no tax payable by Fred if he returned to Melbourne and occupied the property as his home before selling it. This would still appear to be the case after a 20 year stay in London.

Full analysis of this new law is currently light on the ground .  We do however invite any query you may have.

 

Maximise your health insurance entitlements

The end of the year is fast approaching.  So amongst your festivity planning, make sure you maximise your health insurance entitlements.

Health funds re-set their limits for extras come January.  If you have an unused cap for things such as dental, physios and the like, you may wish to use up your health insurance entitlements before they are lost. 

Seeing the physio might be a good move if, like me, you seem to be carrying and lifting a lot of heavy things over the next 30 days!