Tax Planning Opportunities from COVID-19 Federal Budget Measures

The COVID-19 Federal Budget announced on 6 October 2020 has given way to new measures that can create tax planning opportunities for businesses. This includes new loss carry back rules and temporary 100% instant depreciating asset write off.
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Loss Carry Back Rules
The new loss carry back rules enable corporate tax entities to obtain a tax refund in the form of a loss carry back tax offset. Eligible businesses can carry back their tax losses made in the 2019-20, 2020-21, and 2021-22 financial years to a prior year’s income tax liability from the 2018-19 financial year onwards when lodging its 2020-21 and 2021-22 income tax returns. The earliest a corporate tax entity can obtain the tax refund from the offset is July 2021 when lodging its 2020-21 income tax return.
This offset only applies to non-capital losses and is limited to the lesser of:
  • loss carry back tax component for the year the loss is carried back to; and
  • the entity’s franking account balance at the end of the year which the tax offset is claimed.
To be eligible, corporate tax entities must have:
  • less than $5 billion turnover in a relevant loss year; and
  • lodged an income tax return for the current year and each of the 5 years immediately preceding it, unless not required to lodge.
100% Instant Depreciating Asset Write Off
This temporary measure allows business entities (not limited to corporate tax entities) to deduct the full costs of eligible depreciating assets (excluding luxury cars and capital works) that are first held, and first used or installed ready for use for a taxable purpose, between 6 October 2020 and 30 June 2022. Businesses can also deduct the full cost of the improvements made to the depreciating assets incurred during this period.
There are additional benefits that vary depending on the size of the business as well. Through this asset write off measure, small and medium sized businesses entities will be able to deduct the full cost of any secondhand eligible depreciating assets during the period covered. Small business entities will also be able to deduct the entire balance of their general small business pool.
To be eligible:
  • Business entities must have an aggregate turnover of less than $5 billion; and
  • The assets must be located and principally used in Australia for the main purpose of carrying on a business.
Tax Planning Opportunities
The conjunction of these new measures and the existing 12 month prepayment rules for small business entities presents a number of tax planning opportunities:
  • Eligible businesses planning to purchase depreciating assets should purchase and start using the assets before 30 June 2021 to utilise the 100% instant asset write off measures.
  • When making purchasing decisions, businesses should consider the tax refund from the loss carry back measure on the entity’s franking account and the ability to pay franked dividend in the future.
  • Businesses should also consider cash flow projections when taking advantage of these measures, particularly the timing of the expense and expected tax refunds, e.g. be sure to purchase depreciating assets AND start using it by June 2021 and lodge 2020-21 tax return in July 2021 to obtain the tax refund from the loss carry back measure.
Still have questions about these tax planning opportunities or the COVID-19 Federal Budget? Reach out to our experienced accountants for assistance by contacting us on our website.