Maximising Your Tax Return

May 25, 2021

The countdown is on for the end of financial year. Many business owners are looking for tax minimising advice, and there is one thing I want you to be wary of- “End of Financial Year” advertising, promising you a tax deduction if you buy before 30 June. Buyers beware! If you spend money on tax-deductible expenditure, you can receive a tax saving, not all of the money back – your income is reduced and your tax is reduced, spending $1,000 doesn’t mean you will receive $1,000 back. The spend results in a percentage of the cost as a tax saving.

Instant asset write off’s – where you receive the full amount of the purchase taken off your tax for this financial year, are only for things purchased before 31st of Dec 2020.   The temporary full expensing of depreciation assets has replaced the Instant Asset Write off, and allows for the purchase of new and second-hand assets (with some exceptions) by businesses from the 6th December 2020. In order to receive the tax deduction for the 30 June 2021 year, then the asset needs to be held or installed by 30 June 2021.  This provision extends to assets purchased up to 30 June 2023 (as a result of the announcement in the May 2021 budget), but clearly the date of purchase will determine the date of the deduction.

Let’s look at the scenario of a company buying equipment for a cost of $85,000 (excluding GST) purchased on 13th March 2021.  The company would ordinarily pay tax at 30%.  By electing the full expense of the equipment, the tax saving to the company is $25,500.  This means that you would have to spend or commit to $85,000 in order to save paying tax of $25,500. You would also need to keep in mind that if you ever sold the asset, after claiming the full expense, you will pay tax on the sale proceeds, so paying tax at 30% on any amount you sold the asset for.  (e.g. Sell the equipment for $60,000, the tax bill would be $18,000).

This is different from a tax offset. 

A Tax offset allows for a $1 for $1 refund of tax paid. Meaning if you qualify for a tax offset of $1,000 – you receive a refund or credit of $1,000.  If you haven’t paid tax though, then the tax offset is of little use, it is non-refundable and, in most instances, does not carry forward to the next financial period.

In 2021, there is a new provision that allows companies to claim a tax offset if they incur a tax loss in the current year, and they have paid tax in previous years (2020 onwards).  It is a little complex, but essentially means that you will receive a tax refund or credit on previous year’s tax paid (only applicable to companies).

There is some strategy in purchasing a new depreciating asset, the write off of which results in the company incurring a tax loss, and then claiming the tax offset if you paid tax in the 2020 financial year – however again this could be risky if your company is not financially viable as a result of the tax loss or having insignificant cash resources. However, this is clearly a measure that could result in additional cash back in to the company upon lodgement of the tax return.

The biggest take away is that unless you review your current situation prior to the end of financial year, then advantages such as the one above could go unused.

If you have any questions at all about tax minimisation, and preparing for the end of financial year- it’s not too late to book an appointment, I’d love to hear from you.

Keep up the great work, you’re nearly through another big year.