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Shared from Reliable AccountantsIt has been difficult to determine the tax treatment of payments made to businesses and individuals in relation to COVID-19 over the last couple of years, especially because some payments are subject to specific rules that guarantee that they are tax-free.
Payments to Business Entities When it comes to cash grants paid to businesses, the ATO has confirmed that these payments (both ongoing payments and lump sums) should be included in the business entity’s assessable income. TR 2006/3 also delivers thorough guidance on the government payments tax treatment to industry, which can help businesses continue, start, or stop operating. Payments related to ongoing business activities are usually assessable as ordinary income or under the rules governing bounties and subsidies. Payments made in connection with starting or stopping a business may still have tax implications. However, the tax consequences of specific payments related to COVID-19 may differ. This is due to a bill that was passed by Parliament late in 2020, allowing certain state government payments received in the 2021 income year to be treated as the recipient’s NANE income. The amendments permit the Treasurer the authority to declare that defined grants are NANE income. Only businesses with an annual turnover of less than $50 million are eligible for this treatment. In general terms, if certain conditions are met, the Treasurer can decide that payments are NANE income.
The payments that can qualify as NANE income at the time of writing if the basic conditions outlined above are met are as follows: ACT State Grants
While cash flow boost amounts and other specific COVID-19 payments can be treated as NANE income by the entity receiving the funds, this does not mean that the funds can be paid out tax-free. If these funds are paid out of the business, the tax treatment will be determined by the method of payment. If the money is paid as a salary, bonus, wage, or director’s fee, it should be taxed in the recipient’s hands and trigger PAYGW and SG obligations for the business. If the amount is paid to someone who is engaged in the company’s business activities, and is not being paid for work on a capital project, the company should be able to deduct it. If the money is distributed as a dividend, the shareholders will be taxed on it. While franking credits may be attached to the dividend, it is usually an unfranked dividend because the company has not paid any tax on the amount. In most cases, the company would not be able to deduct the dividend. If the funds are lent to a related party who is a company shareholder or an associate of a shareholder, Division 7A issues must be addressed to avoid a deemed unfranked dividend for tax purposes. FBT issues must be considered if the loan is made to an employee (or their associate) who is not a shareholder or an associate of a shareholder. If the organisation has earlier borrowed money from someone, it may be able to repay part or all of that debt. This is unlikely to cause any immediate tax issues. Section 47 ITAA 1936 permits certain amounts to be paid out as capital returns to shareholders if the company is wound up, but only if the amounts are not classified as the company’s income (i.e., not assessable income and not ordinary income). In most cases, these amounts are taxed as dividends. While cash flow boosts amounts and other COVID-19 grants may not be assessable income, if they are received in connection with the organisation’s business activities, they may be treated as ordinary income. We brought this up with the ATO last year, and we were told that they were working on a public ruling to address the problem. However, we have recently been informed that the ATO will no longer be issuing a ruling on this matter. Informally, the ATO has suggested that these amounts are still income under ordinary concepts and would most likely be taxed as a dividend when paid out to shareholders upon the company’s dissolution, but taxpayers can seek their own private ruling if they want more clarity on this point.
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Nina Hendy May 17, 2022
The lead up to the end of the financial year is the ideal time to contemplate whether or not you could benefit from the Instant Asset Write-Off. The Instant Asset Write-Off is one of the most discussed tax breaks out there for businesses, because it enables businesses to acquire assets and claim an immediate tax deduction. But that doesn’t mean you should necessarily rush off and start spending ahead of EOFY. This article steps you through what the Instant Asset Write-Off is, as well as how it’s applied, with some updates on other technicalities like Temporary Full Expensing. What is the Instant Asset Write-Off?This measure enables eligible businesses to claim an immediate deduction for the business portion of the cost of an asset in the year the asset is first used or installed ready for use. This form of accelerated depreciation enables a business to reduce its taxable income by deducting eligible purchases – resulting in a cashflow benefit relative to the rate that you have been taxed at. Best of all, it can be used for multiple assets if the cost of each individual asset is less than the relevant threshold, or for new and second-hand assets. Small businesses need to apply the simplified depreciation rules in order to claim the Instant Asset Write-Off and it cannot be used for assets that are excluded from those rules. How does the Instant Asset Write-Off work?This tax break is not a cash handout. It’s a deduction that reduces your taxable profit. If you operate as a company and spend, for example, $30,000 on a capital purchased you need to run your business, then assuming a tax rate of 27.5 per cent, the company will receive a 27.5 percent deduction, which equates to an $11,000 reduction in tax. This means that the company will still have a net cash outlay of $29,000 on this purchase. Plus, be sure you pro-rate the deduction for any private use – to claim the full deduction, the asset has to be used solely for business purposes. What’s the purchase threshold for the Instant Asset Write-Off?Good news. During COVID, the threshold increased from $30,000 to $150,000 per asset acquired. That means businesses with an aggregated turnover between $50 million and $500 million may be eligible to deduct the full cost of eligible second-hand assets costing less than $150,000 that are purchased by 31 December 2021 and first used or installed by 30 June 2022. It works by enabling eligible businesses to claim a deduction straight away for the portion of the cost of an asset first used or installed ready for use. Make sure you check your business’s eligibility and that you apply the correct threshold amount depending on when the asset was purchased, first used and installed ready for use. How do you claim the Instant Asset Write-Off?If you’re a small business, you will need to apply the simplified depreciation rules in order to claim the Instant Asset Write-Off. The measure cannot be used for assets that are excluded from those rules, and sole traders are also eligible for it. MYOB recommends consulting with a qualified tax practitioner regardless of the size and complexity of your business in order to maximise your tax return and maintain compliance with the law. What’s Temporary Full Expensing?The Instant Asset Write-Off has been extended with a measure dubbed ‘Temporary Full Expensing’. You can claim your deduction when lodging your 2021-22 or 2022/23 tax returns. It’s estimated that millions of Australian businesses will be eligible for the scheme in a move set to encourage spending among businesses. Temporary Full Expensing allows for an immediate deduction for purchases of new, eligible depreciating assets (for businesses with an aggregated turnover under $5 billion), eligible second-hand assets (for businesses with an aggregated turnover under $50 million) and the balance of a small business pool at the end of each income year in the period (for businesses with an aggregated turnover under $10 million). Again, this measure is designed to support businesses and encourages investment, as eligible businesses can claim an immediate deduction for the business portion of the cost of an asset in the year it’s first used or installed ready for use for a tax purpose. What’s the catch with tax write-offs?Businesses just need to follow certain rules to make sure they can claim the cost of any asset. The asset needs to be purchased and installed within the time period the Government specifies – in this case, from 6 October 2020 up to June 2022. It goes without saying, but it needs to be ready for use – you can’t just have it lying around and then plan to install it a couple of years from now. Of course, you have to be in business to claim the Instant Asset Write-Off. Having an ABN is not enough. It’s another reason why it’s so important for businesses to have their expense tracking and documentation under control.
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 Good record keeping throughout the year (knowing what records you need to keep and making sure they are complete and accurate) will make things easier when it's time to do your tax. Learn the five rules for record keeping at ato.gov.au/recordkeeping |
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