The Small Business Pool Write Off

Another announcement is the ability to deduct your pool. Now, I don’t mean actually going and building a pool in your backyard. But under the simplified depreciation rules that are allowable for small businesses, you can actually deduct your closing balance of your pool.
Now this has been around for ages. The deduction of the pool is limited by what the instant asset write off is each year. What I mean by closing pool balance is, if you were to buy a $100,000 asset, let’s say it’s a piece of machinery, if you can’t instantly write that off because your purchase is over the limit, you actually have to write that off under special rules, which is claiming 15% in the first year and then 30% every year after that.

Let’s say year one, you buy a $100,000 asset, it’s now worth $85,000. So that $85,000 is what we call your closing pool balance, including all the other assets that are written off over time is your closing pool balance. Let’s say your closing pool was $85,000, previously we couldn’t claim that size pool balance until the 2020 financial year because that’s when the instant asset write off was over the pool balance of $85,000.

What we kind of get access to, with writing off your pool is, because our proposed limit of the instant asset write off is now infinity – they’re basically saying you can write the whole thing off. If your turnover is less than $10 million, you can just claim the whole thing.

I do want to say there’s a little bit of a warning here. It is now optional. It used to be forced. We were a little bit concerned that we were going to be forced to be writing off everyone’s pool balances at the end of the 2020 financial year. The reason why I’m concerned is that banks don’t like losses. Let’s say you’re forced to claim that $85,000 which takes you into a loss. That’s not going to look great for a bank when you go for finance for a property purchase. So it is an optional claim now.

Changes To The Immediate Asset Write Off

This applies to assets such as cars, laptops, computers, machinery – assets that you purchase in your business, but under normal rules, you can’t write off as soon as you buy them such as consumables. You actually have to write them off over a number of years.
So what have they changed them to now?

It’s incredible, there’s actually no limit anymore!

If you want to spend a million dollars on a truck, you can claim the whole thing. You can buy a $700,000 bus and claim the whole lot which is pretty cool.

In terms of the eligibility, your turn over has to be under $5,000,000,000. That’s not a spelling mistake, that’s 5 billion dollars in turnover.

You need to buy the assets between 7th of October 2020 to 30 June 2022. I might just add, it’s for new depreciating assets. Unless your turnover is less than $50,000,000, where it also includes second hand assets. Most people’s turnover is going to be less than $50,000,000. This means you can buy second hand assets and still be eligible for the no limit thing. It also includes improvements to existing eligible assets.

Now this depreciation doesn’t apply to property. That’s a separate set of rules in terms of claiming your construction costs, which as far as I’m aware, it hasn’t changed. You still claim construction over 40 years. That’s 2.5% a year which is not a high deduction. This would include things like, let’s say you’re a dentist, to fit out a dentist room can cost $80,000 to $100,000 of equipment. It’s that sort of thing where they’re assets that you’d write off or things like furniture and computers.

How the Tax Loss “Carry Back” Can Benefit You

If your business is making losses now because of COVID and if you’re structured as a company, then you can actually offset your 2020, 2021 or 2022 financial year.

This is fantastic news if you’re in the unfortunate position of making losses at the moment.

Normally tax losses are only carried forward – we can’t go and apply them against previous profits.

Let’s say you made $100,000 loss in the 2020 financial year, but you had a profit of $200,000 in 2019. You can reduce your 2019 income by $100,000. If you’re a small business, you’ll get $27,500 as a tax refund which is pretty substantial.

This only applies to companies. Sole traders, partnerships and trusts won’t be able to access this benefit.
This tax refund will be available as a choice to be made when a company lodges its 2021 and 2022 Tax Returns.

Is Your Company Eligible For Up To $200/wk/employee JobMaker Hiring Credit?

Employer eligibility key criteria:

📩 You need to be up to date with tax lodgements. You can’t have any overdue or outstanding tax returns.
📝 You also need to be registered for Pay As You Go (PAYG) withholding, which is a requirement of employing people.

💻 You need to report payroll through Single Touch Payroll. That’s been a requirement for a while now with a couple of exemptions but, you do need to be registered for Single Touch Payroll.

👤You also need to have met the additionality criteria. What that broadly means is that, you can’t just fire half your workforce and replace them with people who meet the eligibility conditions. If you’ve got 10 people, you can’t fire 5, hire 5 and then be eligible. You need to increase your head count to be able to claim.

📁 Have kept adequate records. You also need to pay them at least 20 hours a week. They can’t be casual for a few hours to be able to get this, and you need to keep records of this stuff. If you’re using something like Xero, or a payroll software to pay them, it should be pretty easy to do that.

If you need to have a chat with an Accountant about your business – book in a free Strategy Chat with an Inspire Life Changing Accountant today.

Can we operate a business from Super?

There’s no specific law that says you cannot run a business from Super. Often, it is impractical because you might break another rule to run a business from Super.

How we get business profits to Super is, we don’t run the business in the Super Fund, we own the shares or the units in the entity that runs the business.

That’s much safer, much simpler and my blood pressure will stay at an appropriate rate if you do that rather than run a business in the Super Fund.

Practical Steps for JobKeeper 2.0

To do before end of this month

If you are already part of JobKeeper 2.0, you don’t need to re-enrol for the December 2020 extension and March 2021 extension.

You don’t need to re-assess your employees eligibility or ask your employees to agree to be nominated again.

The practical thing you can do is if you have Xero, you can actually run through your payroll page. There’s a payroll support page that will outline all your employees that are eligible. With JobKeeper 2.0, it will actually ask which tier are they on, assuming that you are eligible as a business and you meet the decline in the turnover test first.

You don’t need to do re-enrolling but there will be a lot of testing around how many hours your employees work, which tier do they belong in, testing around your actual turnover of September 2020, versus 2019, or alternative tests. You have to reassess your employees.

You also don’t need to meet any further requirements if you are claiming as a business participant. If you are already claiming as before, you don’t need to change that over, assuming you are eligible as a business. You still need to test your turnover first before you move forward.

What's the difference between a salary and a drawing?

The difference between the two is basically the way that you take money out of your business structure.
Now, there’s three ways to take money out of a company and a trust. The one you need to do depends on your family structure, what your business does and what we’ve got to work with.

The first way to take money out of a company is to pay a salary. Just like if you are working for someone else as an employee, you’ve got to take taxes out as you go which is called “pay as you go withholding.” You also have to pay super. Even though you might be a director, you have to pay super on your own wages or director’s fees. That amount is 9.5% at the moment and scheduled to go up over the next few years.

If you’ve got a trust, the first way to take money out of a trust is also a salary with the same requirements; pay as you go withholding and super.

With a company, the second way to take money out is a loan. If you’ve got a company and you’re taking loans out, you might have heard this term from your accountant before, “division 7A,” or “director’s loan account.” They can be problems if you take too much out as a loan. There’s also a requirement to pay them back in seven years. So we use them at Inspire, but they need to be done with caution and carefully.

Drawings is the second way to take money out of a trust. There’s no requirements like division 7A to repay that money in a certain timeframe and there’s no interest required. You literally take the drawings out of the trust. Keeping in mind that’s before-tax money. So tax hasn’t been paid on it.

A trust doesn’t pay tax in its own right. It gives it to people in the family group and then they pay the tax for that trust. You can also give it to another company or another entity as well from a trust. The trust doesn’t pay tax, other people do and that’s why you’re taking drawings pre-tax.

The most popular from a company is a salary. The most popular or easiest way from a trust is a drawing.
With a company, the third way is dividends. Dividends is a payment of prior year profit. So you pay tax on the profit in the company. Companies do pay tax unlike a trust and then you pay that out to the company shareholder the year after.

With a trust, the third way is distributions. Which is a distribution of the trust’s profit at the end of the year.
So that’s something that needs to be done usually with your accountant, every June. You need to decide who receives the money there or who pays the tax.

Why Property Development In Super Is So Attractive

It’s hard to get access to bank money to fund projects especially when you’ve got no experience at property development.

The attractive point of property development is that you can often, especially if you’ve got friends who are cashed up in their super funds, you can pool money together, and as long as you structure it right, you can access millions of dollars worth of funding to go and carry out property development.

The other benefit, like everything with Super, is that they’re usually very light with tax. So there’s some good reasons to do it.

Enroll for free and watch the full webinar at https://learning.benwalker.com/courses/getting-the-most-out-of-your-self-managed-super

Important Details About The 20-hour Test For Employees

In terms of the 20-hour test, we actually look back to February, 2020 – just before COVID made things a bit weird in the world. Tier one is for employees who have worked on average 20+ hours per week. Tier two is for employees who have worked below 20 hours on average per week.

Now, there is also discretion to look at the month of June. If you had someone start after March in your business who was employed at 1 July, they could be eligible for JobKeeper now. They wouldn’t have been working in February if they’d been hired after the 1st of March. So for cases like that, you test their average hours worked in June, which is actually pretty nice.

There is ATO discretion to be applied to alternative tests if the employee’s hours were not usual during February, 2020. Imagine things like sick leave, maternity leave, off work with an injury or something like that. We can have a look at seeking out some discretion there. Let’s say they’ve picked back up since, in hours, that might be a really good evidence to show. Then the employer must nominate which payment rate is being claimed for each employee which will be done in the JobKeeper reporting. In the initial reports, we said, “hey, look, here’s our eligible employees.” We had to list all their names. Some payroll software like Xero did a lot of the heavy lifting for you. Now, we’ll need to go and further declare which rate that people are on, including the business participant.

Now, if they don’t meet the 80 hour test or 20 plus hours per week, there are alternative tests. That’s where it gets a little bit complex but there are ways where they will look at your circumstances and then see whether the employee is meant to be in Tier one or Tier two. Or, if they should get paid more or not. There’s a little bit more complexity in there in drilling down whether your employee is in Tier one or Tier two.

Save Money With These Super Fund Strategies

If you’ve got excess money outside of super that you don’t need to live on, you could invest that outside of super such as property, shares or, you can put it into super and invest it through your super fund.
The benefit of doing that is, when your investments earn a return, you’re going to pay 15% or 0% tax on the earnings in the super fund versus 34%, 39%, or a bucket company at 30% where you’re paying at least twice the amount of tax outside of super.

Where we’ve got clients with more wealth than they need to live on outside of super, we encourage that the super fund is a way better strategy for reducing their tax on investment income. It is a longer-term play.

You can own commercial properties and all sorts of things in super, as well as outside. Developments are the tricky thing, but that’s something you can structure where if you’ve got other parties in that development with you, you can use self-managed super fund money for that as well.