We trust you are all well and that you are looking forward to a long weekend.
As we approach June, it is a busy time in our office as we commence discussing with you plans for tax optimisation for the end of the tax year. And with the impact of COVID-19 we expect those discussions to be different this year for many of you. In this email I thought I would put a few thoughts together about the impacts on taxable income for an Australian business.
Why do we tax plan? To optimise the tax outcome for the year? Or to set a guide for the tax position and budget required cash needs?
We tax plan to help you achieve some certainty in your business, to balance the blend of profit or loss and the resulting tax outcome, which in most cases is less than a third of the profit. In 2020 we will also be looking at those businesses reporting a loss and talking about how to preserve the loss for future use.
Here are 9 things to consider as we enter tax planning this June.
1. Cash flow
We know many businesses are focused on surviving and cash flow management is front of mind. You have two elements to manage, cash and time. The longer the time the more options can be utilised for securing cash. In our earlier emails we spoke about the need for a regular cash flow forecast to be prepared and then assessed weekly. We hope you are keeping those cash forecasts going as we feel they will be increasingly necessary as the economy restarts and the business world doesn’t all gear back up at the same rate. What happens when COVID-19 stimulus reduces or stops?
Nobody has a crystal ball, but this question is critical to the success of our clients. Weaning Australian businesses off COVID-19 stimulus will not be easy. There is obvious business planning, cashflow forecasting and restructuring discussion points. We can assist you with setting new strategic directions. How about doing a simple SWOT analysis for your business? And watch out for any new post COVID-19 ‘road to recovery’ measures from Canberra and at our State level.
2. How are your COVID-19 related business records looking?
We know that life has been hectic lately, as you have been determining eligibility and applying for COVID-19 support measures. We know there are assurances around tolerating honest mistakes, reasonable care and using best estimates, but regulators are empowered to seek documents and check entitlements using 20-20 hindsight. As you get your year-end documents together consider doing a review to ensure your records are complete so that any future reviews are easy to manage. And if your business is not currently accessing the Job Keeper subsidy, then remember that you can still apply by assessing your entitlement in the months of May, June, July, August and September and the quarters ended 30 June and 30 September.
3. Trading stock
What if you have hard to sell stock? Reducing year-end trading stock values is tax planning 101. Our tax law provides options to value stock on hand at the lower of cost or market value. But just what is market value in COVID-19 times if consumer demand is COVID-19 impacted such that stock take sales are a fizzer? Attention is likely to focus on year end stock valuation alternatives such as market selling value. Determining market value in this environment can be tricky and our people are ready to guide you through this maze.
4. Decommissioning depreciating assets still held
With some businesses in “hibernation” and unsure if they will ever re-start, COVID-19 will focus attention on the balancing adjustment event that occurs when a business stops using a depreciating asset, or stops having it installed ready for use, and expects never to use it or have it installed ready for use.The chances of actually selling second hand depreciating assets in the current economic environment could be pretty slim. While the value of an asset needs to be on an arm’s length basis, there may be opportunities to reduce the carrying value of depreciating assets.
5. $150,000 instant asset write-off
It’s unclear whether the government will decide to continue the exceptionally generous $150,000 instant asset write-off for eligible businesses after 30 June 2020.
For clients able to open their wallets by 30 June 2020 however, the total write-offs on an asset by asset basis could be huge and ATO scrutiny is highly likely. For example, expect some tension around distinguishing qualifying from non-qualifying assets. Intangible assets (including in-house software claimed outside of the software pooling rules in Subdiv 40-E ITAA 1997) are prima facie eligible and have long been seen within ATO circles as a key risk area.
6. Where are the depreciating assets I ordered?
Clients with cash to buy depreciating assets who want to access the enhanced instant asset write-off may find that the disruption to supply chains means the ordered equipment isn’t delivered in time to qualify (i.e. the taxpayer must ‘hold’ the asset in the year it is first used or installed ready for use for a taxable purpose.
The problem is most severe for imported equipment but could also arise in a domestic context where Australian suppliers are COVID-19 impacted or transport companies are flat out.
There is also the backing business investment \ accelerate depreciation measure which applies for both the current and the following tax years.
7. Empty the pool
As a result of the Coronavirus Economic Response Package Omnibus Act 2020, if the balance of an eligible SME’s general small business pool is less than $150,000 at the end of an income year that ends on or after 12 March 2020 but before 1 July 2020, the taxpayer can claim a deduction for the entire balance of the pool. This is a neat way of getting a deduction this year and cleaning up the asset ledger at the same time.
8. It’s obvious some debts are bad, right?
Does COVID-19 impact the prospect of recovering a debt? The ATO have rulings on the steps required to write off a debt and caution is recommended as these adverse economic circumstances may not be enough proof to warrant claiming the deduction.
9. What if I have losses
Some businesses will unfortunately have trading losses this year resulting from COVID-19. The Tax Act is very specific about losses and the ability to use them in future years. If you are in this situation we can talk with you about some of the required steps to preserve the value of loss for future years. This is critical if you are considering a restructure of your business as the loss could end up being “lost” and no one wants that to happen.
We look forward to speaking with you this June on tax planning. Until then stay safe as our barriers come down and life resumes its more active pace.