The 2021 Federal Budget has delivered a range of tax incentives for small to medium-sized businesses, designed to help the economy continue its recovery from the COVID-19 pandemic.
Most notably, extensions to temporary full expensing and instant asset write-offs will provide businesses with a combined $20.7 billion in tax relief. The changes come as the corporate tax rate for small and medium-sized businesses is scheduled to fall from 27.5% to 26% on 1 July 2021.
It’s likely your business clients will be looking to you as their accountant for support in navigating these measures, in addition to the 12-month extension of the low and middle income tax offset and the raft of changes to superannuation announced in the Budget.
Let’s look at the five most significant business tax incentives and changes announced in this year’s Budget.
1. Instant asset write-off extended for a further 12 months
Otherwise known as temporary full expensing, this measure allows businesses with an annual turnover of less than $5 billion to fully write off the value of eligible depreciating assets.
When originally enacted last year, businesses were able to fully write off the value of depreciating assets that were first used between 6 October 2020 and 30 June 2022.
The government has announced that this eligible period has been extended to 30 June 2023.
Other than the 12–month extension, the instant asset write–off scheme remains unchanged.
For more information on the instant asset write-off, please visit the ATO website.
2. 12-month extension of loss carry-back scheme
The temporary loss carry-back scheme allows businesses with an annual turnover of less than $5 billion to offset current-year losses against tax paid in prior years.
When introduced in last year’s Budget, the scheme allowed eligible businesses to offset losses incurred in the 2021-22 income year against previously taxed profits made in or after the 2018-2019 income years.
The extension announced in the 2021 Budget extends the eligibility period so that businesses can offset losses incurred in the 2022-2023 income year against profits made in the 2018-2019 to 2021-2022 income years.
Eligible businesses will receive a tax refund when they lodge their tax returns in the loss-making year.
For more information on the loss carry-back scheme, please visit the ATO website.
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3. Changes to the effective life of intangibles
From 1 July 2023, businesses will be able to self-assess the effective life of eligible intangible depreciating assets like in-house software, patents, registered designs, and copyrights.
Currently, the effective life of intangible assets are dictated by tax legislation.
The change means businesses will be able to bring depreciation deductions forward if they self-assess intangible assets as having a shorter effective life than what is stipulated in tax legislation.
This change will be especially beneficial for businesses in industries where technological advances are replacing products faster than the effective life stipulated in tax legislation.
4. Digital Games Tax Offset introduced
To help stimulate growth in the local game development industry, the government announced a 30% Digital Games Tax Offset for local and international businesses that develop digital games in Australia.
The offset will commence on 1 July 2022 for eligible businesses that spend a minimum of $500,000 on qualifying Australian games. It will be available to resident companies and foreign resident companies with a permanent establishment in Australia.
Games won’t be allowed to have a gambling element and will need to have a classification. The Government will consult with the game development industry to define classification criteria.
5. Proposed corporate tax residency rules revised
In the 2020 Budget, the government announced legal amendments would be made to the corporate tax residency test to address uncertainty around companies that are incorporated offshore.
This test will deem a foreign incorporated entity an Australian tax resident if it has a ‘significant economic connection to Australia’ and satisfies the following:
- The company’s core commercial activities are undertaken in Australia; and
- Its central management and control is in Australia.
In the 2021 Budget, the government announced that it will consult on extending this amendment to include trusts and corporate limited partnerships.
The amendments will come into effect from the first income year after the date the legal amendments receive royal assent.
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