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Tax changes that may impact your 2021 EOFY planning

Roelof van der Merwe
15/04/2021

Over the past financial year, the Government has announced several changes that may impact your year-end tax planning for 2021. With the end of the financial year only a few months away, here are some of the main new developments businesses and individuals may need to consider when preparing for year-end.

Company tax rate

In 2021, the company tax rate for base rate entities has been lowered from 27.5% in 2020 to 26%. A base rate entity is a company with aggregated turnover of less than $50 million that derives 80% or less of its income from dividends, interest, royalties, rent and net capital gains.

The lowering of the corporate tax rate for such base rate entities means the effects of over-franking (e.g. if profits are taxed at 26% but franking occurs at 30%) or under-franking (e.g. if profits are taxed at 30% but franking occurs at 26%) are even more pronounced than in previous years.

Marginal income brackets

The 2021 upper limit of some marginal income brackets for individuals have also increased, with:

  • The 19% tax band increasing from $37,000 in 2020 to $45,000; and
  • The 32.5% tax band increasing from $90,000 in 2020 to $120,000.

Full expensing of depreciating assets

Subject to specific rules, both the instant asset write-off (IAWO) and full expensing of depreciating assets (FEDA) is available for taxpayers in 2021.

Businesses with an aggregated turnover of less than $5 billion that purchased and first used/installed depreciating assets after 6 October 2020 can fully expense the cost of:

  • New and second-hand assets for businesses with an aggregated turnover that is less than $50 million; or
  • New assets only for businesses with an aggregated turnover equal to or more than $50 million but less than $5 billion.

All businesses with a turnover of less than $5 billion can also deduct in full any amount of improvement costs incurred between 6 October 2020 and 30 June 2021 on existing depreciating assets. Businesses with an aggregated turnover of $10 million or more, or businesses with an aggregated turnover of less than $10 million that do not use simplified depreciation, have a choice whether to apply FEDA or not. However, full expensing is compulsory for businesses with an aggregated turnover of less than $10 million that use simplified depreciation rules.

Loss carry-back measures

2021 is the first year the new loss carry-back measures can be used to provide a refund to companies when they lodge their 2021 tax returns.

Companies with an aggregated turnover of less than $5 billion can choose to carry back their:

  • 2020 tax losses and offset it against their 2019 income tax liability; or
  • 2021 tax losses and offset it against their 2019 and 2020 income tax liability, noting the amount of refund/offset is limited to the lesser of the amount of tax paid previously or the surplus in the franking account at 30 June 2021.

If no choice is made to use the loss carry-back measures, the loss is carried forward and can be offset against future profits provided either the continuity of ownership or similar business tests are met.

Immediate tax deduction for start-up expenses

2021 is the first year that medium sized businesses with an aggregated turnover of $10-50 million will be able to claim an immediate tax deduction for:

  • Start-up expenses such as legal or accounting advice to set up a new business.
  • Prepaid expenditure on a service that will be provided within 12 months.

Previously, these concessions were only available for small business entities with an aggregated turnover of less than $10 million.

From the 2022 income tax year, medium sized businesses will also qualify for:

  • Simplified trading stock rules (i.e. they may sometimes not be required to do a stock-take at the end of the year) and quarterly calculations of PAYG instalments by the ATO;
  • A simplified accounting method for GST purposes;
  • A possible two-year amendment period for income tax returns; and
  • The ability to settle excise duty and excise equivalent customs duty on eligible goods monthly.

Superannuation

From 2022, the superannuation general transfer balance cap will increase from $1.6 million for 2021 to $1.7 million. The non-concessional contributions cap will increase from $100,000 for 2021 to $110,000 and the concessional contributions cap will increase from $25,000 for 2021 to $27,500.

These are just a summary of the key changes you or your business may need to consider for 2021 year-end tax planning. To find out more detail or discuss your personal circumstances, please talk to your adviser or contact the Crowe Tax Advisory team.