Federal Budget: The Extension of the Company Loss Carry Back

During the federal budget broadcast, the government announced an extension of one of the stimulus measures which was mentioned about a year ago, which is the company loss carry back. Just as a reminder for what this one is – if you use a company structure and you’ve been profitable (which I hope many of you who run companies are), then you pay tax in the company.

Let’s say COVID hit and then, all of a sudden, you made a loss, which is unfortunate, but one of the allowances last year was that you’re able to take that loss that you made now, and apply it on previous financial years. So we normally couldn’t do that – the rule is you can carry a loss forward, but you can’t carry a loss back. But a year ago, they said you can carry a loss back now, which is fantastic! You can go and get some of that tax that you paid in previous years back in your pocket.

So what they’ve announced in their budget is that this stimulus measure is now extended for another financial year. So you can offset losses in 2021 financial year, 2022, 2023, and you can write them back against profits as early as the 2019 financial year.

The other interesting thing is the full expensing of assets. So let’s say you’ve made $200,000 grand in profit but you want to buy a massive truck because you’re investing in the growth of your business, and that truck is $500,000 and a brand-new one. So you can write off the $500,000 truck, so you’ve made a tax loss of $300,000. So under the company loss carry back rule, you can actually take that $300,000 loss and write that back against your previous profits. So you see how the two can work hand in hand. And even that truck, you might be able to finance so you don’t have that $500,000 cashflow outlay up front.

So anyway, just food for thought and it’s interesting how these might work together. This is just a slice of a strategy that we use is things like that. So it’s not about knowing just the rules; it’s how you use them in tandem that really makes the big impact.

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What we’re seeing at the moment is times are increasing with our lenders. There’s an issue due to COVID, where the financiers sent home all the staff. So where staff were typically in the office all day long working together, they’re now working from home. So as a lot of businesses experienced, it created issues around systems, keeping an eye on people, motivating people, bringing teams together, and all of these things. So what that created at the financiers, specifically in terms of the credit approval perspective, was times blew out.

There were instances where typically I would get an approval within 24 hours – some of my lenders now are up to three weeks. So we’re getting approvals, depending on who we use and I have 24 different lenders depending on the client, what they need, age of asset, and individual circumstances – some deals I can get approved in 24 hours, some deals I can get approved in two hours, others can take several weeks.

What I’m saying to clients at the moment is, we’re seeing a huge uptick in demand. It’s as big as we’ve seen in about five, six years. We’re telling the clients now, “The approvals are generally good for 90 days. If you want to get it this side of 30 June, get your approval now. It’ll sit there until June, then you’re good to go.”

Federal Budget: Updates On The Temporary Full-Expensing Measures

Essentially, what the government has brought in was the temporary full expensing of any assets that’s purchased as a small business. If you’ve bought anything in terms of an asset, the threshold was $5 billion in turnover, which is massive! So it will cover quite a lot of the small businesses that we work with, if not all.

Essentially, it was supposed to finish in 2022 – they’ve extended that for another year, to 2023. After the 6th of October, if you bought the asset then, you’d be able to write off the full cost of that asset on your tax return. In terms of secondhand assets, it’s still at $150,000 through to the 30th of June, at the end of this financial year.

What’s cool about this is, a lot of people are investing more money into things such as equipment and cars, so that’s kind of sprucing up the economy and they’re seeing that that’s working really well – so they’re extending that for another year. However, that does mean that if you want to save tax in this financial year, you have to purchase the car ready for delivery before the 30th of June to claim for that – so in a month-and-a-half time. The car yards are pretty busy – your asset finance guys will probably run off his feet – so if you’re thinking of doing that, make sure you get in touch with them as soon as possible. If not, you still have next financial year and the financial year after that to do that, as well.

Bear in mind, there’s a bit of an asterisk here: If you do buy a car, this temporary full expensing doesn’t have a limit if it’s a business asset like a printer, equipment, or big machinery, or even commercial vans and vehicles. However if you buy a car like a sedan, there is a car limit depreciation, which limits the depreciation to $59,136. You want to make sure that you do take that into account when you do tax planning. Don’t go out and buy a Lamborghini and think you can write that $200,000 Lamborghini off – there will be a limit on that and it’s probably because of that example. We’re not buying cars that is not producing income in the business.

Tax Tip: Keep A Motor Vehicle Logbook

There used to be four ways to claim vehicles, but now there’s only two ways to claim vehicles as a business:

The first way is the cents per kilometre method, where the ATO gives you a specified amount each year, and based on how many kilometres you do for work purposes, you can actually claim the kilometre number times the cents per kilometre, which equals your deduction. Now, that’s capped at 5,000 kilometres which is just over $3,500 in deductions. So that’s option 1.

And if we have a look at option 2, which is claiming the actual expenses of running, maintaining and purchasing that vehicle and you times that by your business use, then that can give you how much tax deduction you can have.

There can be a massive difference between those two methods to your outcome from a tax perspective. So just remember, that first method is just over $3,500 in tax deduction. Now, let’s use an example where you’ve purchased a $50,000 car, you use for 80% business use, and it takes $10,000 a year in fuel, servicing, rego, insurance, interest on the loan, that sort of thing – so $10,000. So just the running cost of that vehicle, times by the business use of 80% equals $8,000 in tax deductions. The other benefit of that is you can actually claim the GST up to the business use percentage as well, which is money straight off your BAS bill, which is pretty cool, when you can’t do that with the cents per kilometre method.

So you’ve got an $8,000 deduction under the log book method versus a $3500 maximum under the cents per kilometre. Now, the kicker here is also depreciation – depreciation will make those numbers even more further apart, as well. So let’s say you bought a $50,000 car. If you purchase that in the COVID concessional period where you can write off the whole cost of an asset up to its business use, then that $50,000 car times by 80% is $40,000 in depreciation. That’s a huge number when you compare it to a maximum of $3500 in claiming under the cents per kilometre. So that $40k plus your $8,000 in deductible running cost is 48 grand versus your 3.5 grand when you add that all together. Plus, you can also claim the GST on the purchase cost of the car up to 80%, of course, if you use a log book percentage.

I’ve very rarely seen an instance where the log book method of claiming a vehicle does not outweigh the benefits of using cents per kilometre. So I’d encourage you if you don’t already, keep a log book. It has to go for 12 weeks and it has to start in the financial year that you want to start using that percentage in. So you’ve got until technically 30th of June to start that log book. Keep it for 12 weeks, and work out what kilometres you drive for business versus personal, workout what percentage overall that is, and keep them on file. If nothing substantial changes in the pattern of driving, you can keep that log book for up to five years and refer back to it before you have to keep another one.

Federal Budget: Important Changes To The Child Care Rebate Cap

Couples or as a household who earn over $189,000 combined receive a childcare rebate of $10,560 per child. This is relatively easy to do when you’ve got a profitable business, and you might be distributing $100,000 each, you’re already over that limit. The good news is the cap per child is now removed.

But if you’ve got two or more children in care, then you also get a 95% rebate on your child care, which is massive compared to what you would have ordinarily got, which is 65%. So that’s an incredible move. And I thought we wouldn’t normally talk about this stuff in the lens of business and SMSF but I do think it’s going to be relevant for at least a quarter of our clients. Keep in mind it starts in just over a year’s time. So I guess that’s the downside of this one. We’ve got to wait.

Tax Tip: Ensure Family Members Are In The Same Tax Bracket

This tax tip actually assumes that you’re using a trust, a discretionary trust maybe, or a company that might be owned by a trust to be able to distribute some dividends around and be able to have the flexibility to distribute to different family members. So what we want to see with this tax tip is all the family members within a similar tax bracket, meaning no one’s in a really high tax bracket, while someone else is in a really low tax bracket.

Let’s take the example of my own, where I actually work full time, and my wife is actually on maternity leave at the moment so she’s not actually earning any income from working. So if I go and distribute all the income to me, that might take me into that highest tax bracket of 47% tax or maybe more, while my wife with no employment income might be earning literally $0 taxable income and still have a tax-free threshold of $20,000 that’s unused. So what we’re suggesting here is, let’s say we’ve got $200,000 in income, instead of giving it all to me, we might give $100,000 to me and $100,000 to her so that we even that out and we use her lower marginal tax rates to pay a little bit less taxes if we gave that extra $100,000 to me.

The key here is we don’t want to see a huge discrepancy in tax bills or taxable incomes because of the marginal tax rates of individuals, which says the more that you earn in Australia as an individual, that the higher your tax rate as a percentage. So there’s a bit of an art and a science to this one. And the bulk of our tax planning is doing what we can here, from a legal tax planning perspective, to keep that tax bill as low as possible.

Federal Budget: This Superannuation Change Is Pretty Amazing

This is relevant for those who have an SMSF or a super fund.

When it comes to contributions, there’s an age limit in which you can contribute your Super into.

Now, in the 2021 federal budget, they’ve updated this one rule called the work test rule. If you’re 67 years old, you couldn’t contribute into Super if you’re not working a certain amount of hours in a week or month. Now they’re going to scrap that rule. Essentially, it doesn’t matter whether you work or not, you will be able to make that contribution.

So what that releases is this ability for you to put in more contribution into the Super fund. Now this only applies to the non-concessional after tax contributions and salary sacrifice contributions itself. So what that means is if you’re 67 and you have to go back and prove that you work to make further contributions into your Super fund, you don’t have to do that. This is from 1st of July, 2022. You have to wait a little bit for this but I would start planning that because if you’re thinking, “Oh my gosh, I better put as much as I can to Super before I turn 67,” July 2022, that opens up. Well, assuming that it doesn’t change by then, it will open up, and it means that you can contribute more to Super, And the reason for this is also to kind of battle the costs of age care and also age pension that the government kind of bears. They’re trying to give more and more incentive for people to put money into their own Super funds, to get a tax benefit. And that’s the big thing here. It’s essentially the tax benefit that you get when you contribute to Super as a tax deduction. Amazing rule.

Federal Budget: Super Limits Are Changing

This was announced before the Federal Budget. Essentially, there’s some exciting news about super contribution limits. Prior to 1st of July, 2021 (this finance year we’re in), you can contribute $25,000 maximum concessional contribution, which is tax deductible – that’s pre-tax money into super fund.

Now from 1st of July, that’s going to be increased to $27,500 per person. You can shift an extra $2,500, which is pretty awesome.

And your non-concessional contribution, which is after tax, goes from $100,000 to $110,000 from 1st of July as well.

They’re trying to encourage people to put more money into their super fund, put more money for their retirement and they’re doing things to make sure you get a tax break.

Your caps are then increased so that you can do it sooner or quicker so that you’re not limited per year, which is really, really exciting to see considering that we have another $2,500 in cash that we can put into super fund and save quite a bit of tax on that as well.

And that’s just the contribution that is being indexed. As far back as I can remember, they always have been indexed. Let’s say the $27,500 one was $25K, it gets indexed each year and then it only tips over once it hits that $2,500 limit. So the next increase, if nothing else changes, we should see from $27.5K to $30K, but that might take a few financial years to get to.

Tax Tip: Establish An SMSF

This tax tip is about establishing a SMSF, or self-managed super fund. I’m not going to give you advice whether you should do this from a personal perspective, but I’ll just outline some tax saving tips that you can actually do if you have a self-managed super fund.

A super fund is another option for holding your superannuation, and that’s the 9.5% currently, is the rate of any salaries paid to yourself. But if you’ve worked for another company, then you probably have got some sort of balance there.

An SMSF is an alternative to another company managing your super for you, so it gives you a little bit more control over how you invest your funds. But also, running an SMSF means you’re basically the administrator of your fund, and there’s a couple of things we can do, from even a super contribution if you run a business yourself. So I’ll give you an example…

There’s a rule where a super fund has 28 days to allocate a contribution to a member. One of the strategies we do is actually double someone’s contributions in a financial year. For example, let’s say a $50,000 contribution is the doubled amount – so we’ve got $25k for two financial years. The 50 grand goes from the business account, into the self-managed super funds account. And what we do from the self-managed super fund perspective, is we allocate $25,000 to that member in the current financial year it was received, and then we allocate the remaining 25 grand to the next financial year (we actually don’t allocate it because we’ve got 28 days to do that step). This only works with contributions made from, I think, the 3rd or 4th of June onwards in each financial year, because we need that 28 days or early July before we go and allocate to that member, and so we don’t go over their annual concessional contribution cap of $25,000.

So that’s how we can get the tax deduction, because super is tax deductible when it’s paid – and that might be to the business owner, or to the person as a concessional personal contribution. But the contribution cap gets used up when the fund allocates that money to the member. So again, we get the $50,000 deduction to the business or to the person in the current financial year when it’s paid, and then we allocate $25k for this financial year and $25k for the next. So that’s a really cool example of the flexibility that you might get from self-managed super fund. Apart from really being able to be onto it when it comes to accessing pensions, or even doing your estate planning (which is an example of a purpose that you might be able to use your super for) and because it’s to do with death or retirement, then you can use your superannuation funds to go and get your wills sorted, as an example – so that’s another pretty cool use of a self-managed super fund’s flexibility.

One of the biggest reasons why people set up a self-managed super fund is that flexibility of what they invest into. In particular, direct property is an investment type that you can’t actually do with one of those big, huge superannuation providers. You can’t go and buy the house down the road (so to speak), and rent that out with one of those big super funds, but you can do it under certain conditions and meeting certain requirements with self-managed super.

It’s pretty cool when it comes to flexibility, and they can help you out from a tax perspective. So definitely consider it. Again, this is not financial advice to go and set one up, but please consider if it might be a good fit for you. You can always go and get that financial advice and assistance of whether you should set one up.

Tax Tip: Prepaying Expenses

As a small business in Australia, there’s a special rule around prepayment of expenses – what you’re able to do is claim up to 12 months’ worth of prepayments.

Let’s say your business rents an office, or a building, or a warehouse, you can actually claim up to 12 months’ prepayments. So if you pay six months in advance of, let’s say 5 grand a month, thats $30k in rental payments. If you make them by 30 June in the financial year, you can claim them even though they apply for future months. So, again, the rule is 12 months – If you pay two years in advance, it doesn’t quite work, but up to 12 month prepayment is pretty cool.

So, things we normally see here are, if you know you’ve got travel coming up, then you might look at booking flights and accommodation in advance. If you need to top up the printer, paper or stationery cupboard a little bit earlier than you might need to, knowing that you’ll have those expenses over the next few months anyway.

You can even prepay your accounting fees, so it’s pretty cool. So keep in mind, 30% of whatever you earn is your tax rate. For every $10,000 that you prepay, that’s 3 grand in tax savings for the current year. So keep that all in mind when you’re looking to prepay or bring forward expenses.