Preparing for tax time 2021
In the 12 months since preparing for the end of 2020 financial year, so much has changed and yet for those of us in Melbourne, some things are sadly still the same as a year ago. One thing that certainly hasn’t remained the same is our income tax laws and hence, planning for ‘tax time’ has been shaken up with a number of tax announcements over the past year which relate to getting the economy back on its feet after the worst of the COVID-19 pandemic.
2022 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. If a company meets that criteria, then the tax rate for 2021 is 26%.
This rate of tax is changing again on 1 July 2021 and will drop to 25%. Two important considerations in relation to this change are:
- Timing of revenue recognition and what is assessable in 2021 or 2022 for tax purposes; and
- Franking credits on dividends for June 2021 will be 26%, but then will be 25% for dividends from 1 July 2021 onwards.
Therefore this change affects both the company itself and the shareholders in receipt of dividends.
Instant asset write-offs
The instant asset write-off for businesses was both extended and expanded in the 2020 Federal Budget and labelled “temporary full expensing”. For businesses with turnover under $5 billion, there is no limit to the value of assets that can be written off immediately.
- The asset needs to have been purchased after 6 October 2020.
- To claim the deduction in 2021, the asset needs to be fully installed and operational before 30 June 2021. Simply ordering it and even paying for it is not sufficient.
- Otherwise, the 2021 Budget announced that full expensing will remain in place until 30 June 2022.
- Originally the full expensing was due to expire on 30 June 2022. The May 2021 Budget announced that full expensing is now intended to remain in place until 30 June 2023.
- Businesses can opt-out of claiming the immediate write off if it creates unwanted or adverse tax outcomes.
Loss carry back
Another announcement in the 2020 Federal Budget, which practically applies for the first time in preparing 2021 tax returns is the loss carry back available to corporate taxpayers. It is a rule that allows a loss made in 2021 to be offset against a taxable profit from 2019 or 2020.
It does not require that an amendment is made, but rather provides for a credit in the 2021 tax return lodgement. It is also intended to operate in tandem with the temporary full expensing of assets. If losses are not carried back and applied, then they can be carried forward under the usual tax loss rules. Being able to utilise these rules requires that there is a surplus in the company franking account at the end of 2021.
Superannuation guarantee changes
Although this is not an issue for 2021 year end in the sense of tax planning and transacting, it is an issue that requires immediate consideration, as the superannuation guarantee rate goes from 9.5% to 10% on 1 July 2021. Read our summary here: https://accrumelb.com.au/super-guarantee-increase/.
JobKeeper & PAYG Cash Flow Boost
A reminder that these two stimulus programs carried over into financial year 2021, with JobKeeper running all the way through to late March 2021. It is important to remember that:
- JobKeeper is assessable income to the recipient business
- PAYG Cash Flow Boost is tax exempt
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, which are largely the same as 2020.
This means that there are basically two options to claim working from home;
- The shortcut method of $0.80 per hour to cover all costs which was first introduced last year; or
- Using a combination of actual costs (fully substantiated by documents such as receipts) and a standard $0.52 per hour
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 2020.
- The total available contributions are $25,000 less current year contributions to date, plus unused contributions from 2019 and 2020.
- If required, the person contributing 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 to 2022, 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.