It’s tax time again!
Your business has to lodge its income tax return for the 2020–21 income year by 31 October 2021 (unless you have a substituted accounting period). If you use a registered tax agent to lodge your return, it is likely that they can lodge the return at a later date, even as late as May 2022 in some cases.
Lodging a tax return
Are you a sole trader?
- Even if your income is below the tax-free threshold ($18,200), you still need to lodge a tax return.
- Do you pay PAYG instalments? Lodge your activity statements and pay all your PAYG instalments before you lodge your tax return so your income tax assessment takes into account the instalments you’ve paid throughout the year.
Are you a partnership?
If you operate your business in a partnership:
- the partnership lodges the partnership tax return, reporting the partnership’s net income or loss (assessable income less allowable deductions).
As an individual partner, you report on your individual tax return:
Are you a trust?
- If you operate your business through a trust, the trust reports its net income or loss (this is the trust’s assessable income less allowable deductions).
- The trustee is required to lodge a trust tax return.
- As a trust beneficiary, you report on your individual tax return any income you receive from the trust.
Are you a company?
- If you operate your business through a company, you need to lodge a company tax return.
- The company reports its taxable income, tax offsets and credits, PAYG instalments and the amount of tax it is liable to pay on that income or the amount that is refundable.
The company’s income is separate from your personal income.
This has been a difficult year, and your business may have made a tax loss.
A tax loss is when the total deductions you can claim, excluding gifts, donations and personal super contributions, are greater than your total income for the income year.
If your business makes a tax loss, you may be able to:
- offset the loss in the same income year against other assessable income;
- carry forward the loss and claim it as a business deduction in a later income year; or
- carry the loss back to an earlier income year (but not before 2018–19) in which the business has an income tax liability and receive a tax offset (the loss carry back tax offset is available only to companies).
Meeting the ‘non-commercial loss’ tests
If you’re a sole trader or in a partnership of individuals and want to offset a tax loss, first check if the business activity meets at least one of the ‘commerciality’ tests under the non-commercial loss rules. (Those rules do not apply to losses made by primary producers and professional artists whose income from other sources is less than $40,000, or to losses made by companies and trusts.)
If you meet one of the ‘non-commercial loss’ tests, you can offset the loss against other assessable income (such as salary or investment income) in the same income year.
If you don’t meet any of the ‘non-commercial loss’ tests, you can defer the loss or carry it forward to future years. For example, you can offset it when you next make a profit.
Non-commercial losses made by an individual whose adjusted taxable income exceeds $250,000 are quarantined.
The rules for record keeping still apply when it’s related to business losses. You need to keep records for 5 years for most transactions. However, if you fully deduct a tax loss in a single income year, you only need to keep records for 4 years from that income year.
Tip! Talk to CMA Accounting and Taxation Services about the best way to utilise tax losses.
Personal services income
If you operate your business through a company or a trust, income earned by the company or trust from the provision of your personal services (personal services income or PSI) will be attributed to you unless:
- the company or trust is carrying on a personal services business (PSB); or
- the PSI was promptly paid to you as salary or wages.
The company or trust will be carrying on a PSB if at least one of a number of tests are satisfied. These are the:
- Results test (this is the primary test) — this is based on common law criteria for characterising an independent contractor (in contrast to an employee/employer relationship);
- Unrelated clients test — this requires the PSI to be earned from at least two unrelated clients who contract your services as a direct result of making offers or invitations (for example, by advertising) to the public to provide your services;
- Employment test — this requires at least 20% (by market value) of your work to be performed by employees;
- Business premises test – this requires you to use business premises that meet certain conditions (eg you have exclusive use of the premises and the premises must be physically separate from any premises you use for private purposes).
If 80% or more of your PSI (with certain exceptions) is income from one client (or the client and their associate(s)) and the results test is not met, the company or trust will need to obtain a PSB determination from the ATO.
The company or trust cannot deduct amounts that relate to gaining or producing your PSI, unless you could have deducted the amount as an individual or the company or trust received the PSI in the course of carrying on a PSB.
Even if you don’t use a company or trust to derive your PSI, there are limitations on the deductions that you may claim against your PSI. For example, you may not be able to deduct certain home office expenses, eg occupancy expenses such as mortgage interest or rent.
The PSI rules are complicated, so talk to CMA Accounting and Taxation Services if you provide your services through a company or trust.
A lot more people are working from home because of the COVID-19 pandemic. If you operate your business from a home office, you can deduct the expenses of running that office. A home office is a room in your home that is used exclusively (or almost exclusively) for business activities.
Expenses you can claim a deduction for include:
- Occupancy expenses – these include rent, mortgage interest, water rates, land taxes and house insurance premiums. Occupancy expenses are usually calculated by apportioning the expenses between the home office and the rest of the property on a floor area basis (there can be capital gains tax implications when you sell your home if you have claimed occupancy expenses);
- Running expenses – these are the increased costs from using your home for your business, including electricity or gas charges for heating, cooling and lighting, cleaning costs and the decline in value and the cost of repairs of deprecating assets such as furniture, furnishings and equipment; and
- Work-related phone and internet expenses, including the decline in value of the handset – an apportionment will be required if the phone or computer is not used exclusively for work.
To make it easier for people to claim deductions for working from home due to the COVID-19 pandemic, the ATO allows a rate of 80 cents per hour for running expenses incurred from 1 March 2020 until 30 June 2021. Under this ‘shortcut’ method, you don’t need a dedicated work area in your home. You need to have kept a record of the hours you have worked from home, such as a diary. Of course, you can still make a claim based on your actual running expenses if it produces a larger deduction.
If you have a home office, talk to CMA Accounting and Taxation Services about how to calculate your deduction and the records you must keep.
Company tax rate
The standard company tax rate is 30%.
The tax rate for 2020–21 for companies whose aggregated annual turnover is less than $50m and whose passive income is not more than 80% of the total assessable income (called ‘base rate entities’) is 26%. The rate reduces to 25% for 2021–22 and future income years.
If more than 80% of a company’s assessable income is ‘base rate entity passive income’ (eg dividends, rent, interest, royalties and net capital gains), or its aggregated annual turnover is $50m or more, the company’s taxable income will be taxed at the standard 30% rate.
Small business income tax offset
If you are a sole trader, an individual who is a partner in a business partnership or an individual who is a beneficiary of a trust that carries on a business, you may qualify for the small business income tax offset if the business’ turnover is less than $5 million (yes, $5 million and not the general $10 million small business threshold). The offset is not available to an individual acting as a trustee of a trust.
The tax offset for 2020–21 is equal to 13% of the income tax payable on the sole trader’s or other individual’s taxable income that qualifies as their net small business income (the offset rate is 16% for 2021–22). The offset is capped at $1,000.
Taxable payments annual report
Businesses that pay contractors or sub-contractors for certain services may need to lodge a taxable payments annual report (TPAR) with the ATO. The services are:
- building and construction services;
- cleaning services;
- courier or road freight services;
- IT services; and
- security, investigation, or surveillance services.
The TPAR for 2020–21 should have been lodged by 28 August 2021.
What were some of the more significant 2020–21 tax changes for businesses?
Temporary full expensing of depreciating assets
This is an outright deduction for the cost of a depreciating asset first acquired after 7:30pm on 6 October 2020 and first used, or installed ready for use, by 30 June 2022 (although the Federal Government has announced a 12-month extension to 30 June 2023).
It is important to note that:
- The asset must be located in Australia and principally used in Australia;
- Small and medium businesses (aggregated turnover of less than $50 million), but not larger businesses, can use temporary full expensing for second-hand assets;
- Temporary full expensing is not available if your business disposes of the asset in the same income year you acquire it;
- Your business can opt out of temporary full expensing for an income year on an asset-by-asset basis, unless your business is a small business entity that uses the simplified depreciation rules.
A consequence of temporary full expensing is that, in 2020–21 and 2021–22 (and 2022–23 when the 12-month extension for temporary full expensing becomes law), small business entities must deduct the full amount of the balance of its general small business pool (provided it is greater than zero).
Loss carry back
A company (but not a sole trader, trust or partnership) can carry back a tax loss made in the 2019–20, 2020–21 or 2021–22 income year to an earlier income year (but not before 2018–19). This will generate a refundable tax offset called a ‘loss carry back tax offset’. This is an alternative to carrying a tax loss forward to set off against profits in a future tax year.
The Government has announced that the loss carry back will be extended by 12 months so that a company will also be able to carry back a tax loss made in the 2022–23 income year.
A medium business is one whose aggregated turnover is at least $10 million but less than $50 million. The following small business concessions were extended to medium businesses from 2020–21:
- the prepayment rules; and
- the immediate deduction for certain start-up expenses.
As noted above, other small business concessions started to apply to medium businesses from 1 July 2021.
Tax changes from 1 July 2021
A number of changes apply from 1 July 2021. These include:
- Medium businesses (aggregated turnover of at least $10 million but less than $50 million) can use the simplified trading stock rules, the GDP-adjusted notional tax method to work out PAYG instalments and the simplified GST accounting method.
- Single Touch Payroll (STP) reporting:
- STP applies to small employers (1–19 employees) in relation to closely-held payees (eg family members and directors and shareholders if the employer is a company); and
- The quarterly reporting concession for micro employers (1–4 employees) only applies to employers who report through a registered tax professional and where exceptional circumstances exist.
Note that STP Phase 2 (requiring employers to provide additional payroll information through STP) begins on 1 January 2022.
- Amending assessments – the standard time limit for amending assessments is reduced from 4 years to 2 years for medium businesses (applicable for income years commencing on or after 1 July 2021) – this is the same as for small businesses.
- Superannuation guarantee – the superannuation guarantee charge percentage increased to 10% (it is legislated to gradually increase each year until 1 July 2025 when it becomes 12%). The maximum contribution base for 2021–22 increased to $58,920 (from $57,090).
- R&D tax offset – changes in how the offset is calculated, an increase in the expenditure threshold from $100 million to $150 million and new clawback rules.
- Film incentives – once the relevant legislation is passed by Parliament, some of the rules about qualifying Australian production expenditure (QAPE) will change, the producer offset for films that are not feature films released in cinemas will increase to 30% of total QAPE and there will be various threshold and integrity changes across the 3 different offsets (location, producer, Post, Digital and Visual Effects (PDV)).
- Exemptions – the fringe benefits tax (FBT) exemptions for car parking and work-related electronic devices available to small businesses have been extended to medium businesses (aggregated turnover of at least $10 million but less than $50 million) from 1 April 2021.
- Retraining – retraining and reskilling benefits provided by an employer to redundant employees to enable them to obtain new employment are exempt from FBT, provided the employer complies with any redundancy obligations under the Fair Work Act 2009. The exemption does not extend to relatives of the employer or, if the employer is a company, shareholders, directors and their relatives. The exemption does not cover tertiary education fees and HELP loan repayments.
Contact CMA Accounting and Taxation Services to find out about any changes that might affect your business.
No GDP adjustment for 2021–22
The GST and PAYG instalment amounts are usually adjusted every year using a formula known as the gross domestic product (GDP) adjustment.
However, the ATO has announced that the GDP adjustment to work out quarterly GST and PAYG instalment amounts for the 2021–22 income year is nil. It was also nil for 2020–21.
Key tax dates
|21 Sep 2021||August monthly BAS due|
|30 Sep 2021||Finalisation due date by payers of PAYG withholding payments reporting through STP for closely held payees|
|21 Oct 2021||September monthly BAS due
Payment of annual PAYG instalment for 2020–21
|28 Oct 2021||September quarter BAS due
Payment of first PAYG instalment for 2021–22 by quarterly payers
|31 Oct 2021*||2020-21 income tax return due|
|PAYG withholding annual reports due (no ABN withholding; interest, dividend and royalty payments paid to non-residents; and payments to foreign residents)|
|21 Nov 2021*||October monthly BAS due|
* These dates fall on a Sunday, so the due date is the next business day.
|TaxWise® News is distributed by professional tax practitioners to provide information of general interest to their clients. The content of this newsletter does not constitute specific advice. Readers are encouraged to consult CMA Accounting and Taxation Services for advice on specific matters.|