Throughout 2020, the Federal Government introduced a range of measures to support businesses through the COVID-19 pandemic. These schemes provided a much-needed boost to cash flow, along with incentives for businesses to continue investing in growth throughout the ongoing uncertainty. 

Stuart Dall, Partner from Pitcher Partners Melbourne, outlines the limited-time grants and tax incentives that businesses can take advantage of as we approach the end of the financial year in this special report.

Capital allowance deductions

Businesses may be eligible to deduct the cost of a depreciating asset over time or accelerate the deduction using the instant asset write-off, backing business investment incentive or the temporary full expensing measures. Unfortunately, the eligibility periods overlap and there are some differences in depreciating assets that are eligible for each regime that makes working out which one applies a bit of a jigsaw puzzle.

Announced in the October 2020 Federal Budget, the temporary full expensing measure provides a 100 per cent up-front deduction for eligible depreciating assets first used or installed between 7 October 2020 and 20 June 2022 – to be extended to 30 June 2023 as announced in the May 2021 Federal Budget – for businesses with an aggregated turnover of less than $5 billion. Eligible business may choose to opt out of temporary full expensing on an asset-by-asset basis. Where a decision is made to opt out for an asset, that asset may qualify for the instant asset write-off or backing business investment incentive.

The instant asset write-off threshold was temporarily increased allowing an upfront deduction for eligible assets costing up to $150,000 per asset that were purchased by 31 December 2020 and first used or installed ready for use from 12 March 2020 to 30 June 2021. Businesses cannot opt out of the instant asset write off.

The backing business investment incentive provides a 50 per cent up-front deduction for eligible depreciating assets first used or installed from 12 March 2020 to 30 June 2021 for entities with an aggregated turnover of less than $500 million. The remaining cost of the asset can then be deducted using the normal depreciation rules. Depreciating assets deducted under either temporary full expensing or the instant asset write-off are ineligible for the backing business investment incentive.

No cost limit applies to the asset under the backing business investment incentive or temporary full expensing measures.

If your business has invested in any large depreciable assets in this financial year, check which of these capital allowance deductions you may be able to use. Businesses can opt out of the temporary full expensing or backing business investment incentive, which provides flexibility for entities who may prefer not to claim full or accelerated write-offs for all eligible assets.

If you have identified capital expenditure that does not include the cost of a depreciating asset which is otherwise deductible, you should consider whether a deduction is available as a project pool cost.

Consider whether to carry-back a current year tax loss

Eligible companies may use the loss carry back tax offset. This may be an option for companies that made a profit in the 2019 and 2020-income years. The offset may result in a business receiving a cash refund, a reduced tax liability or a reduction of debt owing to the ATO.

Corporate tax entities with an aggregated turnover of less than $5 billion that have a tax loss for the income years ended 30 June 2020 or 30 June 2021, should consider whether to elect to carry back the loss to an earlier profitable income year (being the income year ended 30 June 2019 and 30 June 2020). This will generate a refundable tax offset.

Check your corporate tax rate is either 26 per cent or 30 per cent for 30 June 2021

For the 2020-21 income year, a company can be subject to either the 26 per cent tax rate or the 30 per cent tax rate. The lower tax rate can be available where the company’s aggregated turnover for the year is less than $50 million and no more than 80 per cent of the company’s assessable income for the year is passive income.

Passive income includes dividends (including franking credits), interest, rent, royalties, capital gains as well as the assessable amount of a partnership or trust distribution to the extent that it is referable (directly or indirectly through one or more interposed partnerships or trust estates) to another amount that is passive income. All other corporate tax entities are subject to tax at a rate of 30 per cent. Care needs to be taken when franking dividends as the franking rate is based on applying the 80 per cent to the prior year. Accordingly, a company could have a tax rate of 26 per cent for 30 June 2021 yet be required to frank at 30 per cent for the same income year.

Tax deductions for individuals

There are also extra tax savings available to individuals for this financial year ending 30 June 2021, especially employees who worked from home throughout the current financial year.

Home office expenses include running expenses (heating, cooling, and lighting); depreciation of computers, phones, and desks; costs of work-related phone calls and internet usage. The ATO allows you to claim actual amounts, an amount based on a rate of 52 cents per hour (plus the decline in value of depreciating assets other than furniture) or an amount based on a rate of 80 cents per hour (covering all utility costs and depreciation of furniture and equipment).

Additional occupancy expenses (rent or mortgage interest, council rates and house insurance premiums) can only be claimed where your home office is a place of business.

Employees working from home can also claim a deduction for tools, equipment and other assets used to perform work duties. If the cost of an item is under $300, the full cost can be claimed in the financial year it is purchased. For items that cost more than $300, individuals can claim a deduction over the useful life of an item.

As announced in the 6 October Federal Budget, stage two of the personal income tax plan was brought forward to take effect from 1 July 2020. Moving this forward means that the low-income tax offset has increased and the low and middle-income tax offset is available in the 2020-21 income year.

Check your eligibility and talk to a professional

The last year has been particularly challenging for businesses and it has been encouraging to see measures introduced to help companies survive and grow. If you think your business is eligible for any of the tax savings and incentives outlined in this article, make sure you speak with a professional to ensure these measures are correctly factored into your year-end tax planning.