Written by Hudson Adviser Phillip McGann
Generous Incentives for Small (and Large) Businesses to get Kick Start Investing in their Businesses
The Treasurer has pulled out a lot of rabbits from his hat this year to try and stimulate the business sector. He figures if business is encouraged via the tax system to spend, this will hopefully flow through to more job creation.
Business large and small have been the target – along with the tax cuts – to stimulate job creation including in two very targeted ways;
Instant Tax Write Off:
This has been a favourite of the government for many years as it plays to their core constituency. By helping small business spend it stimulates aggregate demand and leads to a virtuous cycle of demand and job creation.
From budget night 6th of October 99% of business will be able to deduct the full cost of eligible capital asset assets that are installed by 30 June 2022.
The aim is to turbo charge business investment in productive assets. The government is hoping businesses will be encouraged to buy new assets and perhaps employ staff to use the assets. A reasonable amount will probably be businesses bringing forward future activity but this is fine if it jolts the economy back to life.
Carry Back Tax Losses:
This is a clever addition to the government’s stimulus efforts and has been well received. It is focused on helping businesses use their tax losses more effectively to create cash flow from previous years tax payments. Instead of carrying forward losses you carrying them back to previous years.
Eligible companies are able to “carry back” losses. For tax years 2019/20, 2020/21 and 2021/22 the company can carry back losses to offset taxed profits in the 2018/19 or later financial years.
This will then create a refundable tax offset in the year in which the loss was made. The amount carried back can not exceed the earlier taxed profits.
This will provide a means for businesses to utilize current losses and turn them into tax refunds by offsetting them against profits from previous years.
Bogong Builders Pty Ltd has an aggregated annual turnover of $60 million for the 2021/22 income year. On 1 July 2021, Bogong purchases a truck-mounted concrete pump for $1 million, exclusive of GST. Bogong’s taxable income for 2021/22 was $600,000 before the purchase. Without temporary full expensing, Bogong would claim a tax deduction of around $300,000, resulting in a taxable profit of $300,000, and a tax bill of $90,000. Under temporary full expensing, Bogong will instead deduct the full cost of the asset equal to $1 million, resulting in a tax loss of $400,000. Under temporary loss carry-back, Bogong offsets this tax loss against profits in the 2018/19 financial year, resulting in a tax refund of $120,000. Without the refund, the company may have had to defer the investment until their cash flow position recovered, or they may not have purchased the new pump at all.
Source: Budget 2020-21, Economic Recovery Plan for Australia, JobMaker – Creating jobs and rebuilding our economy, Commonwealth of Australia 2020