Year end tax tips – Temporary Full Expensing

As the end of the financial year fast approaches it is time to take action.

Planning and action prior to 30 June could provide a business with substantial tax savings and place it well for the coming year’s operations.

Below we outline some taxation considerations which may bring welcome relief to your business’s 2021 taxation liability.

Please note that the following information is general advice only and not personalised for your unique needs, objectives or financial situation. It is important to seek professional advice before implementing any action to ensure that it is appropriate for you.

TEMPORARY FULL EXPENSING 

Temporary Full Expensing is a Covid Stimulus measure introduced by the Federal Government to allow small business to receive a 100% tax deduction for the cost of certain eligible new assets. In an extraordinary measure the ceiling on the asset cost has been removed, allowing a full income tax deduction for the entire cost of the asset. This is in vast contrast to the previous rules which required business to claim a deduction for an asset’s cost over a number of years (depreciation).

Who is eligible? Businesses with an aggregated turnover of less than $5 billion.

What assets qualify? The asset must meet the following criteria to qualify:

• The asset must be new;
• Business with an aggregated turnover less than $50m can also deduct the cost of eligible second hand assets;
• The asset must be first held and ready for use after 6 October 2020; and
• Must be used for a taxable purpose within your business.

How much deduction – 100% of the business portion of the asset’s cost. Any private portion is non-deductible.

What about cars? Cars are different to other assets in that the business can only deduct up to the “car limit”.

For the 2021 year the car limit is $59,136. It should be noted that the business’s GST claim is capped at 1/11 of the car limit.

What is a car? A vehicle designed to carry a load of less than 1 tonne and fewer than 9 passengers.

CAUTION – DON’T WASTE YOUR MONEY 

The Temporary Full Expensing measures provide a greatly expanded scope to claim tax deductions and hence, reduce the income tax liability of a business.

The opportunity to fully expense an asset may however, entice some business operators to buy assets for the sole purpose of reducing the tax position. If the business doesn’t need the asset or cannot afford the asset this may put undue strain on the business cash flow.

ONLY BUY ASSETS THAT THE BUSINESS NEEDS AND CAN AFFORD

How much tax does the business save when fully expensing? When claiming any tax deduction the tax liability of a business is reduced by:

The business portion of the asset’s cost   x    the business’s tax rate

Example: XYZ Pty Limited buys an eligible asset for $50,000. The asset is used 100% for business purposes.

The tax saved is $50,000   x 26%   = $13,000

So whilst $13,000 is saved in tax, the company is still out of pocket $37,000.

Final word: To buy assets just to save on tax, is a waste of business money and in fact, is non-deductible if the particular asset is not connected to the earning activities of the business. Only buy assets the business needs and can afford.

Cathy Hall
SumIT Accounting
cathyh@sumitaccounting.com.au