by Jason Ginns
May/June is traditionally the most important tax time of the year for businesses, and this year it’s more important than ever.
As we sit down and review the projected profit and tax positions for the year, we look to implement any tax minimisation strategies that are required pre-30 June, and project out and plan for any upcoming tax payments (or refunds).
In 2021, this process is even more relevant and critical than ever. Here’s why.
Has your business been one of the fortunate?
We’re all aware of the massive impacts of COVID-19, with more still to play out. One surprising effect is that, once the initial impacts of the lockdown periods were behind us, many industries and businesses have experienced unexpected booms in turnover and profits across the 2021 financial year.
Higher profits equal higher taxes, and that’s one of the reasons why businesses should be sitting down now and reviewing their year end tax positions and options.
However, it’s not just the increased profits that make this year more important than ever. This year, more than others, provides new and significant tax planning opportunities that can help businesses minimise their tax positions. Here are some to consider.
Instant Asset Write-Off and Depreciation
Most businesses are aware of the instant asset write-off regime, recently given the new and sexy name of “temporary full expensing” (TFE) by the ATO. This allows eligible businesses to immediately deduct the cost of eligible assets against their taxable income. In simple terms, purchase a $50,000 business vehicle, and you have a $50,000 tax deduction.
However, the details of TFE extends beyond the old instant asset write-off, and depending on the business and its situation, provides tax planning opportunities regarding the potential write-off and full deduction of your prior year depreciable asset balances, and selective TFE on an asset-by-asset basis. This could result in additional tax deductions in the thousands, tens of thousands, and potentially hundreds of thousands of dollars.
Depreciation is no longer boring, it requires planning and implementation on a case-by-case basis that is dependent on your business and its circumstances. If you get this right, the tax savings can be substantial, but if you get this wrong it could also cost you a lot of tax in the long run.
Like depreciation, superannuation has also spruced itself up, especially for those individuals who have superannuation balances under $500,000.
As in previous years, all individuals can make tax deductible contributions of up to $25,000. If you have the cash flow available, then it’s worth considering maximising your superannuation contributions, with potential tax savings of up to $8,000 per person (if you are in the top personal tax bracket).
However, if your superannuation balance is under $500,000, and you haven’t contributed the maximum $25,000 in contributions in either the 2019 or 2020 financial years, there is the opportunity to make tax deductible contributions of more than $25,000.
If you held off making additional superannuation contributions in 2020 due to the initial impacts of COVID-19, and potentially had superannuation contributions of only $10,000, you could have tax deductible superannuation contributions of $40,000 in 2021, if eligible . In this scenario, the potential tax savings are $12,000 (at the top personal tax rate).
As always, this can be a complicated area, so before you rush off and make any additional contributions, your eligibility needs to be reviewed closely.
How We Can Help
The benefits of year end tax planning in May and June, prove themselves year after year. We’ve covered a few of the new and more important areas above, but there are numerous other areas to review and consider including the new loss carry back tax offset for those businesses not so fortunate, prepayment of expenses, and the effective write-off of any bad debts.
In 2021, the potential benefits are even greater. It’s not too late to undertake this review. If you haven’t already been in contact with your business advisor to start this process, then make contact. You won’t regret it. Our advisors can be contacted below or on (02) 4969 6600.