CLAIMING A TAX LOSS FOR YOUR BUSINESS

With the challenges posed by the COVID-19 pandemic and the recent floods, many businesses have sustained severe losses. The ATO has issued some guidance that our professional advice should augment.

Before you claim a tax loss, make sure you have correctly claimed the expenses that you are entitled to. Overclaiming expenses can put your business in an incorrect tax loss situation.

It’s also important to remember to apportion your expenses correctly so that only the business portion of the expense is claimed and not any personal component of the expense.

Keeping accurate and complete records will help you keep track of your tax losses. It can help you avoid incorrectly carrying back a tax loss or carrying forward tax losses to deduct in future years.

If your business makes a tax loss in the current year, you can generally carry forward that loss and claim a deduction for your business in a future year.

You may be able to offset current year losses if you’re a sole trader or an individual partner in a partnership and meet certain conditions.

If you’re an eligible corporate entity (company, limited corporate partnership or public trading trust), you may be able to claim the loss carry-back tax offset. You can check your eligibility for this tax offset using the ATO loss carryback offset tool.

CENTS PER KM RATE: DRAFT LEGISLATIVE INSTRUMENT

On 3.3.2022, the ATO issued draft Legislative Instrument LI 2022/D8TD, which applies to eligible taxpayers who elect to use the cents per kilometre method and then calculate income tax deductions for their work-related car expenses. The Commissioner has determined that the rate is 75 cents per kilometre. It will apply to the income year commencing 1.7.2022 and remains applicable to subsequent income years until it is varied.

ELIGIBILITY AGE CHANGE FOR DOWNSIZER CONTRIBUTIONS

The ATO has issued a reminder on downsizing contribution.

As part of the 2021–22 federal Budget, the Australian government announced it would reduce the eligibility age for downsizer contributions from 65 to 60 years old. This measure has now become law, with the Treasury Laws Amendment (Enhancing Superannuation Outcomes for Australians and Helping Australian Businesses Invest) Bill 2021 received royal assent on 22 February 2022.

What does this mean?
From 1 July 2022, eligible individuals aged 60 years or older can choose to make a downsizer contribution into their superannuation of up to $300,000 per person ($600,000 per couple) from the proceeds of selling their home. There are no changes to the remaining eligibility criteria.
For contributions made before 1 July 2022, eligible individuals must still be aged 65 years or older when making their contribution.

What is the purpose of downsizer contributions?
The downsizer measure began on 1 July 2018, increasing the flexibility of older Australians to contribute to their super. This allows eligible individuals to contribute up to $300,000 from the proceeds of the sale of their home without impacting their contributions caps.

VARYING PAY AS YOU GO INSTALMENTS AND TAX SUPPORT

PAYG instalments allow you to make regular repayments towards the expected tax on your business and investment income throughout the year. By paying regular instalments throughout the year, you should not have a large tax bill when you lodge your tax return.

You can vary your PAYG instalments if you think your current payments will result in you paying too much or too little tax for the income year. You must make variations on or before the payment due date, and your varied amount will apply to all your remaining instalments unless you make another variation before the end of the income year.

If you continue to be affected by COVID-19, the ATO will not apply penalties or charge interest to varied instalments relating to the 2021-22 income year. This applies if you have taken reasonable care to estimate your end of year tax liability.

You must make variations on or before the payment due date. Your varied amount or rate will apply for the remaining instalments for the income year or until you make another variation.

The ATO recognises that many businesses in local government areas in Queensland and New South Wales have been affected by the floods. The ATO aims to support the community’s recovery efforts during this difficult time by providing administrative support to help taxpayers.

The ATO encourages taxpayers to regularly review their PAYG instalments so the amount you prepay is closer to your expected tax for the year.

Support is available if your small business is having financial difficulties and can’t pay tax or super on time. The ATO may be able to set up an affordable payment plan or offer interest-free periods for eligible overdue activity statement amounts.

If you have outstanding debt, can meet the requirements of a payment plan, or require additional assistance, contact them for further help. The ATO may ask for evidence that your business is experiencing financial difficulty to support your claim, such as:

• bank notices (for example, overdraft call)
• an eviction notice
• a disconnection notice
• a repossession notice
• a notice of impending legal action
• staff pay records
• contract payment schedules
• legal documents

They take many factors into account when assessing a claim. Sometimes the ATO may change their requirements depending on your circumstances.

Even if you can’t pay on time, keeping lodgements up to date is important. This will give you a clear idea of your tax position, and the ATP can tailor help, such as advice, payment plans, or deferrals, to your situation.

DIGITAL GAMES TAX OFFSET

On 21.3.2022, the Federal Government released draft legislation and explanatory material to implement a new Digital Games Tax Offset (DGTO).

As part of the Digital Economy Strategy, the government announced a 30 per cent refundable tax offset which will be capped at $20 million per year. The DGTO will be available to eligible companies that spend a minimum of $500,000 on qualifying Australian development expenses related to the development of new games or the expansion of existing eligible games. The DGTO will apply from 1 July 2022.

The DGTO will strengthen the domestic digital games industry and make Australia a more attractive and competitive destination for international games development. It will also support investment and highly skilled, transferable jobs.

The government is seeking stakeholder views on the draft legislation and explanatory memorandum to ensure that it is fit for its purpose and meets the aims of the DGTO.

Further information on the draft bill and explanatory memorandum can be found, and submissions can be made through the Treasury website.

DISCLOSURE OF BUSINESS TAX DEBT

The ATO has started writing to all their clients that may be eligible to have their tax debts disclosed to credit reporting bureaus (CRBs). This is to raise awareness of the actions they can now take under the Disclosure of Business tax debts measure. The letter will be sent to all clients with business tax debts that currently meet the criteria for disclosure.

This letter provides information on how to engage with them to manage their debt effectively. Taxpayers can avoid disclosure by making payments in full or negotiating a payment plan.

If you do not take steps to manage their debt actively, they will remain eligible for disclosure. Before the ATO take any final action to disclose their tax debt, they will issue a formal Intent to Disclose Notice.

If you receive an Intent Notice asking to ‘Act now or your tax debt will be reported to credit reporting bureaus’, you must contact the ATO within 28 days of receiving the notice to avoid the debt being reported. The ATO will then work with you to manage their debt or help them understand the next steps.

There is information on the ATO website if you need help with paying and support in difficult times. You must engage with the ATO early before your debts become unmanageable.

You can access the payment plan estimator to work out an affordable plan.

 

 

DIRECTOR PENALTY NOTICES

In March, the ATO began contacting relevant clients via letter about their potential personal liability for company tax debts under the Director Penalty Notice (DPN) program.

The letter will be sent to directors of companies if the company has not met their debt obligations regarding PAYG withholding, Superannuation Guarantee Charge and GST.

Directors will be notified that the ATO is considering issuing them with a DPN, which makes them personally liable for their business debts if the company does not actively manage their debt.

The ATO’s focus is on making directors aware of their obligations and personal liabilities and the actions that may be taken if they don’t engage. The ATO maintains it will be providing clear pathways for clients to re-engage, work with them, and avoid escalation.

There is information on their website if a director needs help with paying and support in difficult times. You must engage with the ATO early before their debts become unmanageable.

You can access the ATO payment plan estimator to work out a plan.

Generally, general interest charges continue to apply when you have a debt. It is essential to bring all their lodgments up to date to avoid further penalties.

While your client has a debt, general interest charges continue to apply. Encourage your client to bring all their lodgments up to date to avoid further penalties.

CASH FLOW SUPPORT AND RED TAPE REDUCTION TO HELP SMALL BUSINESSES

On 23 March 2022, the government announced a package of new measures to slash red tape and provide cash flow support for millions of small and medium businesses.

Treasury and the ATO will consult on the following measures to automate tax administration:

• Aligning instalment payments with financial performance and Improved cash flows through an improved pay as you go instalment system
• Smarter reporting of taxable payments
• Digitalising trust income reporting

Consultation with the community, tax practitioners and digital service providers to finalise the policy scope, design and specification will take place over the coming months. Further information on the consultation process will be provided shortly.

Subject to completion of consultation and advice from software providers about their capacity to deliver, the measures are proposed to apply from 1 January 2024 for Aligning instalment payments with financial performance, and Improved cash flows through an improved pay as you go instalment system; and 1 July 2024 for Digitalising trust income reporting.

 

 

Lowering tax instalments in 2022–23

The government will set the GDP uplift rate that applies to pay-as-you-go (PAYG) instalments and GST instalments to two per cent for the 2022–23 income year. This measure will apply to instalments due after 31 March 2022. This measure is now law.

Facilitating pre-filling of payroll tax returns through data sharing

The government will facilitate sharing of single touch payroll data with State and Territory Governments on an ongoing basis to cater for pre-filling payroll tax returns.

Aligning the excise and other reporting requirements

The government is lowering the costs of doing business for manufacturers, importers and distributors in the alcohol and fuel sectors by enabling businesses with an annual turnover of less than $50 million to lodge and pay excise and excise-equivalent customs duty on a quarterly basis, from 1 July 2023. This measure is not yet law.

FEDERAL BUDGET 2022-2023 KEY ISSUES OVERVIEW

Cost of living relief

The government is introducing a new temporary, targeted, and responsible cost of living package to take the pressure off household budgets.

• One-off Cost of Living Tax Offset – From 1 July this year, more than 10 million individuals will receive a one-off $420 cost of living tax offset. As a result, eligible low- and middle-income earners will be up to $1,500 better off for a single income household or $3,000 better off for a dual-income household.
• One-off Cost of Living Payment – To help Australians most in need, the government is providing a one-off, income-tax-exempt payment of $250 to 6 million eligible pensioners, welfare recipients, veterans and eligible concession cardholders in April 2022.
• Temporary fuel excise relief – The Government will reduce fuel excise by 50 per cent for six months. This will see excise on petrol and diesel cut from 44.2 cents per litre to 22.1 cents per litre. The excise reduction will flow through to lower petrol prices over the next two weeks, as petrol stations replenish their stocks.

Backing small businesses

Small businesses will have access to a new 20 per cent bonus deduction for eligible external training courses for upskilling employees.

The Skills and Training Boost will apply to expenditure incurred from Budget night until 30 June 2024, providing $550 million in tax relief.

The government also provides $1 billion for a new Technology Investment Boost to encourage small businesses to go digital.

Small businesses will be able to deduct a bonus 20 per cent of the cost of expenses and depreciating assets that support digital uptake.

This new measure will support spending up to $100,000 per year, which applies from Budget night until 30 June 2023.

One-off cost of living tax offset

From 1 July this year, over 10 million individuals will receive a one-off $420 cost of living tax offset. Combined with the low and middle-income tax offset (LMITO), eligible low- and middle-income earners will receive up to $1,500 for a single income household or up to $3,000 for a dual-income household.

Case Study

Kate and Dan live together in their house in Toowoomba. Dan works in construction and is earning $63,000 in 2021‑22, and Kate works as an emergency nurse earning $90,000 in 2021‑22. With the one-off cost of living tax offset, Kate and Dan will receive a total reduction in their tax liability of $3,000 when they lodge their tax return, $840 more than they would have received without the increase. With the cost of living tax offset, and the Government’s Personal Income Tax Plan, Kate and Dan will pay $5,295 less tax when compared to the 2017‑18 tax settings.

Comment

While taxpayers will undoubtedly be grateful for this tax relief, this is confined to the year ending 30 June 2022. Of course, the “one-off” tax benefit of $420 will not continue, but LMITO will not continue until 2022-23.

Tax relief to support investment and create jobs

The coalition maintains its record on providing relief to small businesses is a follows:

Cutting taxes for small businesses

• Reduced the company tax rate for small businesses from 30 per cent in 2013‑14 to 25 per cent from 2021‑22.
• Introduced the unincorporated small business tax discount, and lifted the rate from 5 per cent in 2015‑16 to 16 per cent from 2021‑22 (up to a cap of $1,000).
• Combined, these changes will deliver more than $21 billion in tax cuts to small businesses from 2015‑16 to 2024‑25, with around $2.6 billion flowing in 2022‑23.

Encouraging business investment and supporting cash flow

• Reducing the GDP uplift rate for 2022‑23, delivering $1.85 billion in cash flow support for 2.3 million taxpayers, including small businesses.
• Introduced rules to allow businesses with annual turnover or total income less than $5 billion to instantly write‑off assets to strengthen business investment and create more jobs, and extended them to 30 June 2023.
• Enabled companies with annual turnover of less than $5 billion to offset losses against previously taxed profits to generate a refund and extended it to include the 2022‑23 income year.

Greater access to tax concessions

• Expanded access to 10 small business tax concessions by lifting the annual turnover threshold from $10 million to $50 million, providing tax relief and reducing red tape.

Incentives to upskill staff

The government continues to deliver for small businesses by introducing the Skills and Training Boost.

Small businesses with an annual turnover of less than $50 million will have access to a new bonus of 20 per cent deduction for the cost of external training courses delivered to their employees by providers registered in Australia.

The boost will apply to eligible expenditures incurred from Budget night until 30 June 2024, such as a cyber security course delivered by a registered training provider.

This initiative will provide $550 million in tax relief for small businesses, supporting them in investing in their employees and growing their businesses.

Case Study

Andrew owns a transport company, Distribute R Us Pty Ltd, that has an annual turnover of $30 million and 120 employees.

In April 2022, Distribute R Us pays for a registered training provider to upskill their employees to run supply chain training courses, costing $200,000.

Distribute R Us pays for its employees to undertake specialist logistics training, costing a further $400,000, across 2022‑23 and 2023‑24 income years.

Under the government’s new Skills and Training Boost, Distribute R Us can claim a bonus deduction of $120,000, reducing its tax bill by $30,000. This is extra money that Distribute R Us can use to reinvest and grow the business.

Supporting businesses to go digital

The government is providing $1.0 billion to support small businesses to go digital by introducing the Technology Investment Boost.

Small businesses with an annual turnover of less than $50 million will have access to a new bonus of 20 per cent deduction for the cost of expenses and depreciating assets that support digital uptake, up to $100,000 of expenditure per year.

Around 3.6 million small businesses are eligible to access the new boost, which will apply from Budget night until 30 June 2023.

These changes will benefit small businesses by supporting them to invest in items such as an online sales platform, cyber security enhancements, cloud computing and digital tracking for livestock.

The government is also investing in digital capabilities through its Digital Economy Strategy. This will support businesses in boosting productivity, becoming more globally competitive, and generating rewarding and high-paying jobs.

Case Study

Harley owns a furniture manufacturing company, Star Sofas Pty Ltd, that has an annual turnover of $35 million and 120 employees.

In April 2022, as part of an overseas expansion, Star Sofas invested $100,000 to develop an online presence and build a digital inventory tracking system.

In July 2022, Star Sofas purchased multiple software subscriptions to enhance customer data analytics and marketing. Star Sofas incurs a total expenditure of $100,000.

The government’s new Technology Investment Boost means that Star Sofas can deduct an extra $40,000, reducing their tax bill by $10,000. The company can use the extra money to reinvest and grow.