If you’re a business that made use of the instant asset write off then it’s important you have adequate tax planning in place for the upcoming end of financial year. In this blog we explore the various choice to opt out (or not) of temporary full expensing for an income year and what is meant by a loss carry-back tax offset.
Temporary Full Expensing extension explained
As announced recently on 11 May 2021 as part of the 2021-22 Federal Budget, the temporary full expensing measure will be extended in its current form for another 12 months until 30 June 2023, to further support business investment and the creation of more jobs.
This means that businesses with an aggregated turnover of less than $5 billion can immediately deduct the business portion of eligible new depreciating assets that are first held, and first used (or installed ready for use) for a taxable purpose, between 7.30pm AEDT on 6 October 2020 and 30 June 2023 (previously 30 June 2022).
All other elements of the temporary full expensing measure will remain unchanged, so businesses with an aggregated turnover of less than $50 million will also be able to apply the extended measure to the business portion of eligible second-hand depreciating assets.
Please note that this measure is not yet law, but it is expected that the amending legislation will be passed as announced.
Key takeaway of the extension
The extension will provide eligible businesses with more time to access the incentive and plan their investments, particularly those that require longer planning times.
At the same time, eligible businesses should continue to assess their situation, whether to apply the temporary full expensing measure or to opt out of the measure (not available to small businesses with simplified depreciation rules), and how the measure may provide them with earlier access to the value of any tax losses generated, under the temporary loss carry-back measure which will also be extended to the 2022-23 income year.
Is there a choice to opt-out?
Businesses can make a choice to opt out of temporary full expensing for an income year on an asset-by-asset basis (and claim a deduction using other depreciation rules) unless the business is a small business entity that has chosen to use the simplified depreciation rules (see below). The choice is irrevocable and must be made in the income tax return for the relevant income year by the time the tax return is lodged.
No choice to opt out for small businesses with simplified depreciation
If a business is a small business entity (i.e., generally a business with an aggregated turnover of less than $10 million) that has chosen to use the simplified depreciation rules, the choice to opt out is not available and temporary full expensing will apply to all assets that the simplified depreciation rules apply to.
This means that the business is required to immediately deduct the business portion of all eligible depreciating assets (that the simplified depreciation rules apply to) first held, and first used (or installed ready for use) for a taxable purpose, between 7.30pm AEDT on 6 October 2020 and 30 June 2022, and cannot add any such assets to its small business pool.
In addition, under the modified rules, the business must also deduct the entire balance of its small business pool at the end of the income year ending between 6 October 2020 and 30 June 2023 (such that the closing balance of the pool is nil after the full expensing).
Considering your options
Making a choice to apply temporary full expensing or to opt out of the measure requires careful consideration of the situation of the business. A business may not want to generate excessive deductions that will only result in a tax loss for the income year if the business wants to take advantage of the tax-free threshold (typically relevant to sole traders and businesses run through a trust with individual beneficiaries). In addition, if a trust makes a loss for the income year, it may not be able to distribute any franking credits received by the trust to its beneficiaries.
Unfortunately, there is not a choice to opt out of the temporary full expensing measure for small business entities that have chosen to use the simplified depreciation rules, so again this requires careful planning prior to year-end to ensure that the business is not adversely impacted by the measure and can optimise its tax position.
Why tax planning is important for the loss carry-back tax offset
- Interaction with the Temporary Full Expensing of Depreciating Assets may mean you are eligible for the loss carry-back tax offset even though the business is otherwise trading profitably.
- Franking credits are required to access the offset:
- Critical to review current franking account balance;
- Review dividends that will be declared at 30 June for profit share / remuneration purposes;
- Review dividends required for Div 7A loan repayments.
- Implications of depleting franking credits for future dividends may not be in the shareholders’ best interests to access the loss carry-back (this is particularly important when dividends are used to repay Div 7A loans as it would be a terrible outcome to have unfranked dividends in future years).
- Review and adjust Director remuneration strategy (for example, is a salary this year preferable to dividend profit share?) – consider the impact on both the loss and franking credits.
- Are you taking advantage of other strategies to maximise tax deductions in FY 2021 that will increase your eligibility for the Loss Carry-Back Tax Offset?
Potential impacts of fully franked dividends
It’s important to note that the 100% write off of the asset, irrespective of what election you apply to your business, can then impact your cpaacity to issue fully franked dividends. This is especiialy the case if your business claims back the PAYG instalments on company tax paid through the final year.
These are a few things to keep in mind when tax planning not only this year but in the years to come. If you’re unsure of your options or would like to know more, speak to you accountant or relevant tax professional to assist. Alternatively, contact your Ledge Finance Excutive directly, or call our offices on (08) 6318 2777 or email email@example.com, to find out more of this ever evolving subject.
Thank you to Cliff Korompis, Founder & Director at Pragma Tax Consulting for the information on the instant asset write off facility and knowing your options, and to Chris Smith, Director at Brentnalls WA for the information on the loss carry-back tax offset.