With only three months remaining for this financial year, small businesses might be wondering how the recent stimulus changes may affect their end of year tax.
The government has introduced a range of measures to support businesses and employees through the crisis in response to coronavirus, to help small businesses that may have had to close their doors or lay off staff.
How can new and existing tax laws be used in the current challenging business environment?
Let’s look at some of the key measures:
Job Keeper wages subsidy
The Job Keeper wages subsidy allows businesses to continue to pay staff at $1500 per fortnight per employee provided eligibility requirements have been satisfied. The subsidy will be taxable to businesses but they can deduct it when paid to employees so there will be no net tax effect.
The business will also be responsible for superannuation on behalf of employees, but only on the employee’s normal wage if that was less than the $1500. The subsidy is taxable to employees so PAYG payment summaries will have to be prepared for each employee in the usual manner, with superannuation also continuing to be deductible.
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Superannuation responsibilities
With employees being stood down from their employment or taking extended leave, there is a small difference with superannuation responsibilities when leave is paid out on termination of employment. Leave paid out on termination (or retirement) is not regarded as ordinary time earnings. This means that superannuation is not required to be paid on it in such circumstances, but leave paid out in all other circumstances attracts super in the same manner as if the leave were taken.
Instant write-offs
While cash flows may be limited during these challenging times, eligible businesses (less than aggregate annual $500m turnover) can access increased instant asset write-offs. The threshold has been raised from $30,000 to $150,000, on new or second-hand assets first used or installed ready for use from 12 March 2020 to 30 June 2020.
While these tax changes have been recently legislated to help small business in these difficult times, it’s also worthwhile remembering existing tax laws that can help. These include concessions that some businesses may not have previously been able to access, but can do so now due to reductions in asset values or business turnover. Organisations that weren’t previously regarded as “small businesses” may dip below relevant aggregate turnover thresholds. Some of these concessions include:
Small business company tax rate
The small business company tax rate of 27.5 per cent is available for businesses operating through companies with an aggregate annual turnover of less than $50 million. Unincorporated small businesses with an aggregate annual turnover of less than $5 million can also access the small business tax offset, although this is capped at $1,000.
Cash accounting
Small businesses with less than $10 million aggregate annual turnover (or with aggregate net assets of less than $6 million) can also access cash accounting. This may help reduce cash outflows since tax is only paid on cash income received. The downside is that some deductions may not be available since these are based on cash payments too.
Trading stock
Another concession helps those with trading stock where it does not need to be accounted for where the difference in closing stock from 2019 to 2020 is less than $5,000.
There are depreciation concessions too where assets can be pooled (combined) together and depreciated at one rate, but these may be of little use for 2020 given the large instant asset write off.
Capital gains
Small businesses with aggregate annual turnover of less than $2 million (or aggregate net assets of less than $6 million) may be eligible for tax concessions when selling all or part of a business or other assets. Proceeds on disposal of qualifying assets that are owned for 15 years, or transferred into a complying super fund, or rolled over into replacement assets – may be completely tax free.
Efficient operations are critical at this time and restructuring a business may be beneficial to reduce costs and improve cash flows. When restructuring an eligible small business, any capital gains can be rolled over and the tax deferred until a future time where the gain is part of a genuine restructure and the underlying ownership has not changed.
With eligibility determined by aggregate annual turnover, a key question is whether the Job Keeper subsidy is considered part of a business’s turnover – it seems unlikely since it’s not from sales or services provided, however clarification to provide certainty is desirable.
Since COVID-19 affected the latter half of the 2019-2020 financial year, and especially the latter quarter, many businesses have already paid PAYG tax instalments based on business conditions that pre-dated the virus. The good news is that this could mean sizable refunds at tax time, so businesses won’t be out of pocket. It might be worthwhile considering lodging early to gain such refunds swiftly.
If business owners can’t wait until lodgement, it’s worth considering varying the final instalments for 2020. Care must be taken with this approach since penalties can apply where the variation is excessive. Business owners who don’t want to risk variation ought to lodge the 2020 return as soon as possible which also has the added benefit of reducing PAYG instalments for the 2021 year since they are based on the last lodged tax return.
Dr Rob Whait, UniSA Business
Dr Rob Whait is a Senior Lecturer in Taxation at UniSA Business. He is the founder and manager of the UniSA Tax Clinic and is responsible for the teaching of taxation law at Masters and Undergraduate levels where he has been the recipient of numerous teach awards. His research interests include tax compliance, tax avoidance and tax history as well as the tax treatment of water trading and its impact on water markets. Rob studied the history of the Australian Taxation Office’s compliance model for his PhD and has published his research in high ranking Australian and International journals.
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