As we start to get a better understanding of the new ‘Business as usual’ operating landscape and the initial urgency around business disruption dissipates, Practice owners should now shift focus to ensure they have the ongoing support and strategies in place for the medium to long term time periods. By building resilience and taking full advantage of the options available to them, Practice owners now have the opportunity to finesse, pivot and diversify to best position themselves for the future. One of the strategies I encourage all business owners to adopt is to ensure that they are across the tax changes implemented during the initial Covid-19 lockdown as well as those changes we can now expect to see come into play post election.
Paying provisional tax based on standard uplift may not be the most cost effective option for you moving forward. Below I will look to provide an overview of the key tax changes that all SME owners need to ensure that they are across so that they are prepared for any future opportunities.
Increased minor asset write-off thresholds
In March, the government lifted the threshold for writing off the purchase cost of minor assets. Previously set at $500, Practices can now claim in full at the time of purchase for assets with a cost of up to $5,000 in the year they were purchased. This threshold increase is only temporary and expires on 17 March 2021. However, the threshold will only drop to $1,000, remaining double what it had been in 2019.
Loss carry back provisions
The Government’s new “carry back” rule has been implemented to help businesses recover some past tax losses and put that recovered cash flow toward future recovery efforts. This rule is more complicated than other changes discussed in this column, and you should consult with your tax accountant to help calculate how this change may be applied in your business.
Tax losses in 2020 and 2021 can be offset against profits earned the previous year (2020 and 2019, respectively). These losses can be based upon a filed tax return or by provisional tax estimates. Estimates need to be based upon extensive analysis and reasonable forecasts and businesses may be charged interest if payments are underestimated.
New Personal Tax Rate
The new Government has proposed the introduction of a new personal tax rate of 39% on income earned in excess of $180,000. This increases the gap between the company tax rate and PIE tax rate of 28% and the trustee rate of 33% which will bring out its own implications and opportunities.
We expect this rate to be introduced from 1 April 2021, so for those of you who own your Practices or who are part of this group, we suggest contacting your adviser and undertake the following action points.
- Review your business ownership structure and consider if it is fit for purpose. For example, if you own the shares in your company, should they be owned by a trust?
- Check if you should pay out a fully imputed dividend from the company prior to the change in shareholding.
- Review how you remunerate your senior people and see if there is an opportunity for some tax efficiencies.
When the top tax rate was last at 39% there was a change in tax payer behaviour which Inland Revenue regarded as being of an avoidance nature. Whether this was the use of a trading trust to conduct business or the suppression of remuneration below market value, care will need to be taken in navigating around the case law precedent and legislation that followed when undertaking the above reviews.
If you consider paying a dividend prior to the change in tax rate remember the company must be able to satisfy the solvency test and there will be a RWT cost of 5% when the dividend is paid.
If you consider transferring shares in your company from individual ownership to a trust, remember this will create a change in shareholder continuity for the carry forward of imputation credits and tax losses.
This provides a nice segue into one other tax change we can expect to be introduced and that is the carry forward of tax losses under a same business test. While not legislated yet, the announced changes in this area will provide some flexibility.
Claiming depreciation on buildings
One tax support measure following COVID-19, is the reintroduction of tax depreciation on (non-residential) commercial and industrial buildings and the allowance for tax depreciation on newly acquired buildings and capital improvements made to existing buildings from the 2020/21 tax year. The tax depreciation rate will be 1.5% straight line or 2% diminishing value.
For entities that had previously been claiming depreciation on their non-residential buildings, this change will see reduced taxable income levels following from recommencing a claim for depreciation from the beginning of the 2021 tax year. You may want to consider the impact of this claim when you are considering the amounts you need to pay for provisional tax.
Recovery is about seizing opportunities
Businesses can’t leave money on the table when funds are tight. Thanks to these changes, there is now a range of tax benefits available to help small to medium-sized businesses move into the 2021 year as positively as possible. Given that payment dates for tax are often staggered throughout the year, it is important that you take stock of the changes that were implemented and consider how these may influence your tax responsibilities.