EOFY planning for Small and Medium Enterprises (SMEs) – Are ‘Instant Asset Write-Off’ deductions the only opportunity?

The end of yet another financial year is just around the corner, and business owners are asking themselves, how much tax is the right amount of tax?  Proper EOFY planning for SMEs is much more than simply taking advantage of the generous instant asset write-off concessions that are available to manage taxes.

It is about making key business decisions based on a combination of the following:EOFY planning for SMEs

  • Current year results and forecasts,
  • Plans for the future and most importantly,
  • Available cashflow. 

 Business owners are usually the best judge of their business.

Listed below are some key tips that will assist them in taking such decisions:

Bring Forward Expenditure

Based on the size and industry you operate in, there could be some large expenses coming up in the first quarter of the new financial year 2021-22. If the growth for 2021-22 isn’t expected to be as high as 2020-21, it would be worthwhile bringing forward the relevant expenditure in the month of June 2021 itself subject to cash availability. It will assist in providing the business with the relevant income tax deductions and will also assist to smoothen the cashflow over a longer period.

Such expenditure may include the following:

  • Purchases (Stock and Consumables) - If you are running a business that deals with a high amount of stock and consumables, review your purchases to see the purchase of consumables can be brought forward prior to the end of the financial year.

Old and obsolete stock which no longer exist need to be reviewed and written off.

Businesses can value their stock at the lower of cost or net market value for income tax purposes.

Businesses can also choose a different method for different items of stock.

  • Repairs and Maintenance – Repairs and maintenance expenditure on existing assets planned for July 2021 onwards, may be brought forward prior to the 30th of June 2021. 
  • Prepayments – SMEs can prepay expenses for FY 2022 in FY 2021. Small businesses are eligible to deduct expenses in full if they are for a period of less than 12 months or if the expenses are $1,000 or less. As a result of the 2021 federal budget changes, businesses with an aggregated turnover of less than $50 million will also be able to access the prepayment concessions.

Examples of expenses which could be prepaid include ; rent, interest, insurance and professional membership fees.

Superannuation Guarantee Contributions (SGC)

A simple way to avoid paying any superannuation late would be to consider paying them every month which will avoid any late payments and expenses for each quarter.

Ensuring that all employee superannuation contribution is paid by the 28th of each quarter to a complying superannuation fund can assist both the employer and its directors from adverse consequences.

The June quarter expense, which is only payable by 28 of July 2021, can be brought forward to ensure it reaches the employees superfund prior to 30 June in order to get the deduction for 2020-21.

As the superannuation guarantee percentage increases from 9.5% to 10% in 2021-22, businesses should factor in the additional amounts in its cash flow forecasts especially. if it has a large workforce to ensure it can meet its obligations on time.

Bad Debts

In the current uncertain economic environment, businesses have been doing it tough and there have been many that have not been able to survive. As a business, if you have amounts of unrecoverable debt from such customers, it is a good time to review and write off the debt as a ‘bad debt’ prior to the 30th of June 2021 if the business is unlikely to recover the funds after unsuccessful attempts.

Merely making a provision for such amounts in the financial statements is not enough to get the deduction for income tax purposes. It needs to be written off as ‘bad debt’ and any GST paid can be claimed in the BAS.

Assets – Full expensing

Concessions such as the ‘Instant Asset Write-Off’ and ‘Temporary Full Expensing of Depreciating Assets’ are timing deductions by nature as it allows the business owners to deduct the cost of the purchase of their eligible assets in full by bringing forward the deduction.

Where eligible businesses decide to opt of such deductions, it can still claim ‘depreciation’ as a business expense over the life of the asset. 

Business owners that are considering the concessions in FY 2021 should be mindful of the following:

  • The deduction is limited to the business portion of the asset only and any private use needs to be apportioned for accordingly
  • The car limit for FY 2021 is $59,136
  • SBE entities using the simplified depreciation rules, must deduct the balance of their small business pool by the end of the income year i.e. FY 2021EOFY planning for SMEs
  • Entities operating as a discretionary trust that have received large franked dividends during FY 2021 may effectively lose the benefit of the imputation credits attached to the franked dividends if the trust does not have income to distribute at the end of the financial year as a result of the ‘Instant Asset Write Off’ deductions
  •  It may also trigger cost base adjustments for unit holders of a unit trust

Business owners need to be mindful of avoiding excessive expenditure on business assets that may not be required for the sake of claiming income tax deductions. In such instances, business owners will find themselves paying $1 to save 26 cents* in tax (*average tax rate - companies).

Purchase of assets - Financing

Funding the purchase of business assets can be a key consideration for businesses especially from a cashflow perspective. If the business has unutilised cash in its trading account, it can be tempting for businesses to fund the purchase outright i.e. via cash. However, given the competitive interest rates that are available in the market, financing may be a better option. From an income tax perspective, it is beneficial for business owners to be mindful of the key differences between the types available:

 Operating Lease:  

  •  Businesses cannot claim the instant asset write-off deduction for the purchase as the entity will not legally own the asset; and
  •  Lease payments are deductible.EOFY planning for SMEs

 Hire Purchase/Chattel Mortgage/Specific Security Agreement:  

  •  Businesses can claim the instant asset write off deduction for the purchase as the entity will legally own the asset; and
  • Principal payments are not deductible, but the interest payment is.

 Borrowing funds – Trading entity

Business owners would have probably heard the term ‘Division 7A’ from their accountant at some point in time.

With a gradual increase in confidence in the property market, shareholders or their associates may find themselves borrowing funds from their trading entity to invest and get into the market. 

Withdrawals of such nature if not repaid within a certain timeframe may cause adverse consequences for the shareholder and/or their associate especially where there is a company involved unless it falls under specific exclusions of the relevant Act.

In instances where there is no other external borrowing on the property, the shareholder may secure the funds borrowed by a mortgage over the property that has been funded.  

The maximum term will be 25 years which allows the shareholder/related entity to make smaller repayments with interest over a period of time similar to an arrangement when borrowed from a bank.

The maximum term for any other loan is usually seven years.

Temporary loss carry-back rules

Eligible entities with an aggregated turnover of less than $5 billion can choose to carry back their loss made in 2020, 2021 and 2022 against prior years income tax liability in the 2019, 2020 and 2021 financial year.

The loss offset is limited to the income tax liability in the years the entity made a profit, and the balance of the franking account should also be in a surplus at 30 June 2020 or 30 June 2021.

 Other Year End Reminders : FY 2021EOFY planning for SMEs

  • Cash Flow Boost where received by eligible businesses is non-assessable, non-exempt income (“NANE”) for Income Tax Purposes
  • JobKeeper payments where received by eligible entities are assessable for Income Tax Purposes
  • Business owners operating their businesses as a discretionary trust should review their trust deed for eligible beneficiaries
  • As a result of the 2020 income tax returns being lodged on 15 May 2021 for most SME taxpayers, the ATO may issue catch up payments for the June 2021 quarter PAYG Instalment. This needs to be factored in the above discussions particularly for cashflow purposes

Finally, business owners in their capacity as trustees of discretionary trusts or directors of a trustee company must make a resolution by 30 June to determine how the trust income will be distributed for that year.

The above points should be a good basis to engage in meaningful discussions with your trusted adviser if you haven’t already. 

How can RSM help?

We can provide further assistance and guidance so that you are aware of your estimated tax position for FY 2021 and assist based on your individual circumstances. Contact your local RSM adviser today.