The generous depreciation in its final days

This month’s federal budget confirmed that temporary full expensing (TFE) is now in its final days. To recap, TFE will cease and be replaced by a $20,000 instant asset write-off (IAWO) from 1 July 2023.

Under this change, small businesses (aggregated annual turnover of less than $10 million) can immediately deduct the full cost of eligible assets costing less than $20,000 that are first used or installed ready for use between 1 July 2023 and 30 June 2024. Assets valued at $20,000 or more (which cannot be immediately deducted) will be placed into the small business simplified depreciation pool and depreciated at 15% in the first income year and 30% each income year thereafter.

The write-off threshold for larger businesses is cut to $1,000 from 1 July 2023.

Eligibility for TFE

TFE, which allows eligible businesses with a turnover of less than $5 billion to deduct the full cost of eligible depreciable assets of any value, is, however, still available until 30 June 2023. To take advantage of it, and assist your cashflow, note the following dates for 2022-23, whereby an eligible business can claim a deduction for the business portion of the cost of-

• eligible new assets first held first used, or installed ready for use for a taxable purpose between 1 July 2022 and 30 June 2023 with a turnover of less than $5 billion
• eligible second-hand assets where both were first held, first used or installed ready for taxable purposes between 1 July 2022 and 30 June 2023 for entities with an aggregated turnover of less than $50 million.

Ineligible asset for TFE

Most business assets are eligible, including machinery, tools, furniture, and equipment. There are, however, some ineligible assets, as follows.

• buildings and other capital works for which a deduction can be claimed under the capital works provisions in division 43 of the Income Tax Assessment Act (ITAA) (1997)
• trading stock
• CGT assets
• assets not used or located in Australia
• where a balancing adjustment event occurs to the asset in the year of purchase (e.g. the asset is sold, lost or destroyed)
• assets not used for the principal purpose of carrying on a business
• assets that sit within a low-value pool or software development pool, and
• certain primary production assets under the primary production depreciation rules (facilities used to conserve or convey water, fencing assets, fodder storage assets, and horticultural plants (including grapevines)).

Tips

TFE assists cash flow. No extra deductions are available under TFE; however, they are available sooner, which helps a business’s cash flow. Because extra deductions are not available, your business should continue to only purchase assets within your business plan – rather than purchasing assets just because of TFE.

Cash flow maximization for businesses

The predicted slowing of the economy in 2023/24, along with the payday super guarantee (SG) proposal, are sure to make cash flow more important than ever for businesses over the coming months and years, noting that it is one of the biggest difficulties faced by businesses.

To recap, from 1 July 2026, employers will be required to pay their employees’ super simultaneously as their salary and wages. Currently, SG is payable quarterly – allowing the business more time to make provisions for this obligation.

Strategies to improve cashflow

There are a number of strategies that may improve the cash flow of your business.

• PAYG instalment assistance

In the recent federal budget, it was announced that there is PAYG instalment relief on the way. Currently, most small to medium-sized businesses are required to make pay-as-you-go (PAYG) instalments that go towards their annual income tax liability.  Entities that are liable to pay GST may also elect to pay by instalments.

A 6% GDP uplift rate will apply to small to medium-sized businesses (and some individuals) who are eligible to use the relevant instalment method (this being up to $10 million aggregated annual turnover for GST instalments and $50 million annual aggregated turnover for PAYG instalments) for instalments relating to the 2023-24 income year and which fall due after the enabling legislation receives royal assent.

This uplift factor is lower than the 12% rate that would have been applied under the statutory formula, freeing up cash for businesses.

• Reconsider the terms on which you deal with customers 

If a customer regularly cannot pay or cannot pay the full amount, you should consider the terms you deal with that customer. For instance, to protect yourself against future non-payment, you might like to only deal with that customer on an upfront payment basis. Decisions in this regard should be made on a case-by-case basis.

• Send invoices immediately

By delaying the filling out of your invoices until the end of the week or the end of the month, for example, you are unnecessarily creating cash flow problems for yourself. When you make the supply, send out the invoice.

• Bank amounts that you receive 

By banking amounts, as soon as you receive them, you will be better able to monitor your true cash situation at any point in time. Not banking amounts lead to estimation and confusion as to the true cash position of your business.

• Discounts for early payers 

Offer discounts to customers who pay early. A word of caution – it is important to strike a balance between a reasonable discount and your desire for early payment. Offering sizeable discounts for money that may have been paid in full a few days later will end up causing its own cash flow problems! In most cases, it is best to keep the discounts small and require the payment well before the due date.

• Insurance for debtors 

If you are a business that relies heavily on a few clients, you should consider taking out insurance. By insuring against the failure of your major debtors, you can safeguard against their potential collapse.

• Increase your time to pay 

Try to get creditors to extend their due dates for payment, for example, from 14 days to 30 days, from 30 days to 60 days, or from 60 days to 90 days. Any extra time you must pay amounts owing is effectively interest-free. It also allows you to collect your money before paying the amounts owed.

• Consider charging deposits 

Consider charging deposits for significant orders. Not only does this guarantee at least part payment, but it also makes customers think twice before cancelling their orders for goods that are in the process of being made available.

• Excess stock 

Businesses need to make sure that they do not have excessive stock. Ideally, businesses should aim to have enough stock to keep customers happy and not have (if applicable) their store looking empty. Beyond that, any excess stock is merely tying up cash.

Year-end deductible, personal super contributions

As we approach the end of the financial year, are you looking to optimise your tax position and provide for your retirement? You may be able to claim a tax deduction for personal super contributions that you made to your super fund from your after-tax income – for example, from your bank account directly to your super fund.

Before you can claim a deduction for your personal super contributions, you must give your super fund a Notice of intent to claim or vary a deduction for personal contributions and receive an acknowledgment from your fund.

People eligible to claim a deduction for personal contributions include those who get their income from

• salary and wages
• a personal business (for example, people who are self-employed contractors or freelancers)
• investments (including interest, dividends, rent and capital gains)
• government pensions or allowances
• superannuation
• partnership or trust distributions
• a foreign source.

The personal super contributions that you claim as a deduction will count towards your concessional contributions cap. When deciding whether to claim a deduction for super contributions, you should also consider the super impacts that may arise from this, including whether –

• You will exceed your contribution caps
• Division 293 tax applies to you
• you wish to split your contributions with your spouse
• it will affect your super co-contribution eligibility.

If you exceed your cap, you must pay extra tax, and any excess concessional contributions will count towards your non-concessional contributions cap. If you are 75 or older, you can only claim a deduction for contributions you made before the 28th day of the month following the month you turned 75.

Suppose you are under 18 at the end of the income year you contributed. In that case, you can only claim a deduction for your personal super contributions if you also earned income as an employee or a business operator during the year. Various other conditions may apply, and timing is important to claim a deduction and optimise your tax position this financial year. Chat with us for more information.

ATO Tax Time focus areas

The ATO has announced its three key focus areas for this 2022/23 Tax Time – rental property deductions, work-related expenses, and capital gains tax (CGT). To maximise your claims in this area and protect yourself from ATO audits and adjustments, be sure to keep the appropriate records.

Work-related expenses

This year the ATO is particularly focused on ensuring taxpayers understand the changes to the working-from-home methods and are able to back up their claims. To claim your working-from-home expenses as a deduction, you can use the actual cost or the revised fixed rate method, provided you meet the eligibility and record-keeping requirements as follows.

 

RECORD-KEEPING –   REVISED FIXED RATE METHOD	RECORD-KEEPING – ACTUAL COST METHOD
A record of all the hours you work from home for the entire year (e.g. a timesheet, roster, diary or similar document)	You will need to keep a record of every expense you claim
evidence you paid for the expenses covered by the revised fixed rate method (for example, if you use your phone and electricity when you work from home, keep one bill for each of these expenses)	receipts, bills or invoices which show the supplier, amount of the expense, nature of the goods, date it was paid and the date of the document
records for items you claim as a separate deduction	evidence of your personal and work-related use of the items or services you buy and use
From 1 July 2022 to 28 February 2023, the ATO will accept a record that represents the total number of hours worked from home (for example, a four-week diary).	You can work out your work-related expenses using records for the entire year or over a four-week period that represents your work use – for example, using a diary or itemised bill
From 1 March 2023, a record of all the hours you worked from home is required.

In relation to the depreciating of assets and equipment, you will need records that show the following.

• When and where you buy the item and its cost
• When you started using the item for a work-related purpose
• How do you work out your percentages of work-related use, such as a diary that shows the purpose and use of the item for work.

Chat with us if you have any questions about which method to use and the records to keep.

Capital gains tax 

Capital gains tax (CGT) occurs when you dispose of assets such as shares, crypto, managed investments or properties. Inform us as your accountant if you have disposed of such assets from 1 July 2022 to 30 June 2023. On the disclosure front, be mindful that the ATO has extensive data-matching capabilities and, as such, will likely be able to detect the sale of most CGT assets.

Rental property deductions

Many landlords expect large amounts of deductions to be claimed when their returns are lodged. However, your record-keeping will significantly impact the deductions that can be claimed. Talk with us about the record-keeping requirements if you are unsure. Keep records of the following.

• bank statements showing the interest charged on money you borrowed for the rental property
• loan documents
• land tax assessments
• documents or receipts that show the amounts you pay for
  • advertising (including efforts to rent out the property)
  • bank charges
  • council rates
  • gardening
  • property agent fees
  • repairs or maintenance

• documents showing details of expenses related to

• the decline in value of depreciating assets
• any capital work expenses, such as structural improvements

• before and after photos for any capital works
• travel expense documents, if you are eligible to claim travel and car expenses such as

• travel diary or similar that shows the nature of the activities, dates, places, times and duration of your activities and travel (you must have this if you travel away from home for six nights or more)
• receipts for flights, fuel, accommodation, meals and other expenses while travelling
• receipts for items you use for repairs and maintenance that you bought when you travel to or stay near the rental property.

• documents that show periods of personal use by you or your friends
• a document that shows periods the property is used as your main residence
• loan documents if you refinance your property
• documents, receipts and before and after photos for capital improvements
• tenant leases
• when you sell a property
  • contract of sale
  • conveyancing documents
  • sale of property fees.

This year, the ATO is particularly focused on interest expenses and ensuring rental property owners understand how to correctly apportion loan interest expenses where part of the loan was used for private purposes (or the loan was refinanced with some private purpose). 

Director penalty notices

If your company is falling behind with the payment of certain taxes, directors may be held personally liable. There are a number of advantages to operating a business through a company structure. Chief among them is asset protection. Because a company is a separate legal entity, it is liable for any debts incurred while trading.

Directors, it is widely believed, are protected – they have no personal liability for the debts or actions of the company they run, and therefore their personal assets are not at risk from creditors if their business folds or is sued. While this is largely true, Director Penalty Notices (DPNs) stand as an exception to this general rule and can see directors held personally liable for certain ATO-related debts owed by their company.

Liabilities under the DPN regime

Originally, the DPN regime applied only to PAYGW liabilities. These include PAYGW amounts withheld (or that should have been withheld) from payments made to –

∙ Employees (from salary, allowances etc.)

∙ Other workers that you have a PAYGW voluntary agreement with, such as contractors, and

∙ Businesses that failed to quote their ABN but were required to do so.

In 2012, the DPN regime was extended to Superannuation Guarantee (SG) amounts from the 1 April 2012 quarter onwards. SG amounts can be payable to not only employees but also certain contractors. The DPN regime also now applies to outstanding GST, Luxury Car Tax, and Wine Equalization Tax (WET) as part of Activity Statements.
 

Applicability of DPN

DPNs can be issued to directors in relation to liabilities/debts that arose prior to their appointment as well as after their appointment. New directors have 30 days (commencing on the day of their appointment) before they become liable for the above types of debt. Given this strict liability regarding amounts that pre-date appointment, prospective directors need to do the company’s due diligence before accepting their appointment. Does the company have DPN amounts or lodgments outstanding?

The DPN regime can also apply to former directors. If you are no longer a director, you remain liable for director penalties equal to the unpaid PAYG withholding or SGC liabilities of the company that were due before the date of your resignation.

The DPN will typically be posted to either the director’s home or business address held by ASIC. The 21-day deadline commences from when the DPN is posted (not from when it’s received). Even if it is not actually received (for example, the directors may not have updated their address), liability applies from 21 days after the DPN is posted. It’s important. Therefore, the director’s addresses with ASIC remain up to date. 

Defence against director penalty notices

Directors will not be liable for amounts contained in a DPN if they successfully invoke any of the following three defences.

1. You did not take part (and it would in the circumstances have been unreasonable to take part) in the management of the company during the relevant period because of illness or another good reason
2. Corrective action is taken by taking all reasonable steps to ensure one of the following three things happens.

• The company paid the outstanding liability
• An administrator was appointed to the company, or
• The directors began winding up the company (within the meaning of the Corporations Act).

3. In the case of unpaid SG, the company interpreted the law as applying in a way that could be reasonably argued was in accordance with the law. For example, a defence may be available if a company has not paid an employee SG because it reasonably believed that the worker was a contractor.

Take-home message

• Company owners are not immune from liability for certain ATO-related debts owed by their business
• Ensure SG, PAYGW, GST/LCT/WET payments and lodgements are up-to-date
• Before becoming a company director, do due diligence and ensure payments and lodgements are up-to-date
• Keep address details up-to-date with ASIC
• Explore the option of reimbursement from the company or other directors if you have paid a DPN personally
• The ATO is cracking down on outstanding liabilities

If you have outstanding debts of this type or receive a DPN, contact us if you need assistance.