Due to the COVID-19 Pandemic, the 2020-21 Budget was deferred from May to October. Over those six months, the changing economic landscape has created a recession and arguably the most severe economic crisis since the Great Depression.
The economic downturn has been less severe in Australia, although, our deficit is expected to balloon to an eye-watering $213.7bn or 11% of GDP.
The government has set this budget to drive a business-led recovery, with a focus on new investment by business and a mantra of jobs, jobs, and more jobs.
Tax measures that will impact your business are many, but the instant asset write-off is front and centre. This provides an immediate tax write-off for expenditure on depreciable assets that would otherwise be subject to annual deprecation claims under the capital allowance rules. These measures apply immediately from 6 October 2020.
Instant asset write off
The instant asset write-off is eligible for new and second-hand assets installed and ready for use before 30 June 2022. For primary producers, this could include sheds and eligible farm buildings.
For example, Daffy Duck Pty Ltd turns over $6m in the 2021 financial year and purchases a new header for $850,000, and has a closing small business depreciation pool balance of $1.2m.
The company will qualify for:
- $850,000 immediate write-off on harvester and
- $1.2m immediate write-off on closing pool balance
- A total of $2.05m tax deduction or approx. $533,000 income tax saving at 26 cents in the dollar.
If the company is in a loss position, Daffy Duck Pty Ltd may also be eligible to offset the loss against the previous years’ income tax paid.
Loss carry back
This was another announcement for small businesses – called the loss carry back measure. It delivers the opportunity for corporates to carry back losses to an earlier year when taxes were paid, in many cases pre-COVID 19. The 2018 tax year was a huge one for many in agriculture, so this gives an opportunity to offset losses against previous taxable years back to 2018-19 and you can request a refund of income taxes in those earlier years. This measure is in place until 2022.
- The extension of concessional loans to assist farmers to prepare for, manage through, and recover from drought. These loans are accessible through the Regional Investment Corporation.
- An extension of the on-farm emergency water infrastructure rebate scheme, including additional funding through the Future Drought Fund to establish drought resilience and adoption hubs.
There is much in this budget which is applicable to many readers.
Many of you would have heard the saying – ‘be careful what you wish for’ – yes, you will get accelerated tax deductions but, it is bringing forward years of depreciation, reducing taxable deductions in future years.
To extend my example with Daffy Duck Pty Ltd, where they purchased the header in 2020/21 and got the total deduction of the header and the depreciation pool balance, all deductible in 20/21 – if the company sells the header in 2023/24 there is no written down tax value, so whatever the trade-in price is, say $350,000, that will all be assessable income in that year.
As we don’t have a crystal ball to know what other changes may be in the tax system pipeline in future years, we need to maximise this opportunity.
HOW CAN RSM HELP?
If you have any questions or concerns please contact your local RSM adviser to plan this year.