Small businesses must start planning as two key tax measures are set to end on June 30

With the end of the financial year just around the corner, it is now time to start thinking about spending, holding off on spending, and what incentives will be ending that would affect a business’ financial position and ultimately its tax position.

So what should you be doing in the next six weeks?

Well, the first thing is really going back to basics and understanding a few tax measures that are ending, and working out the best course of action for your business. This could (and should) be different from the next business, so you need to be engaging with your accountant to get tailored advice (and not rely on pub whispers for tax-related matters).

Temporary full expensing

There is often mass confusion around temporary full expensing where business owners see it as an “easy way to reduce tax by $20,000”. So firstly, let’s just discuss the facts before we look at the impact of this tax incentive ending on June 30, 2023.

Temporary full expensing allows businesses to obtain a full tax deduction (different from tax reduction) for the cost of eligible assets, regardless of value. But these assets need to be installed and ready for use (so in your hot little hands) and obviously be for a business purpose before June 30, 2023 to meet the criteria.

What we see business owners do is go out and buy assets — equipment, machinery, computers, vehicles etc — on June 29 and most of those big assets are not immediately available or in stock. They are delivered in July (or potentially even later) meaning it is already too late to meet the temporary full expensing criteria. Even if you ordered and paid for the asset in June, if you don’t have it in your possession ready to use for a business purpose before June 30, 2023, it is a no.

So timing is critical.

From July 1, 2023, if temporary full expensing will no longer apply, it means those large assets will be deprecated over time. So an immediate deduction will no longer be allowed, and instead the deduction is spread over a number of years based on the asset itself. From a cash flow point of view, this is challenging as the initial outlay has been made, often of significant value, however the tax deduction is spread over numerous future periods.

However, the federal government has announced a new (or updated) instant asset write-off scheme, with a limit of $20,000, which will be available to eligible businesses that have an annual turnover of less than $10 million. Importantly, this version of the instant asset write-off scheme will be in place for only 12 months, from July 1, 2023, to June 30, 2024. To use the measure, businesses must have assets installed and ready to use between July 1, 2023, and June 30, 2024.

Now while most business owners would love an immediate tax deduction of $20,000 for assets purchased, for this tax incentive to truly be beneficial, businesses need to first understand their tax position in advance by answering the following questions:

• What is the underlying benefit of buying more assets now?
• Do you need those assets?
• What are the actual tax implications? 
• What is the cash flow implication?

All of those things need to be looked at in unison to form an educated opinion on when the assets should be purchased, or if the assets should be purchased. Timing is really so critical.

Loss carry back provisions

The loss carry back provisions were introduced in the federal budget delivered back in October 2020. The main theory behind this was to encourage spending and large capital investment after a few very difficult years for businesses across the country. The government realised that large-scale spending would potentially put some businesses into a tax loss position, and so the loss carry back provisions allowed those losses to be applied to prior year profits, resulting in refunds of tax previously paid.

Ultimately, a cash flow timing benefit arose by using current losses to offset prior profits, rather than carrying losses forward to future years. A massive blessing for those businesses trying to recover from the pandemic situation.

However, there are only certain income years that these rules apply to, plus there are certain turnover rules that must be met and this is also only available to certain entity types. The devil is in the detail.

Similar to temporary full expensing, these loss carry back rules will cease from June 30, 2023.

Get planning

So what should business owners be thinking about right now?

Tax planning. Yes, tax planning in advance.

Ask yourself:

• Are you currently in a loss position?
• What does the business look like beyond 2023? (It is time to dust off the crystal ball);
• What structure are you operating under and is this even applicable to you?
• What tax was paid in prior years that would be eligible if you are currently operating in a loss situation, and do you need a cash flow benefit now or in the future?

This is not something that you can ‘guess’, and having ‘surprise’ tax bills or tax losses is never anyone’s intended outcome. So before the end of the financial year hits, make sure your accounting software and financial numbers are accurate so that calculations, forecasts and assessments can be done in advance. Waiting until after the end of the financial year, or possibly even six months after to change your tax position, or to even understand your tax position, is simply too late.

Like with any tax rebate, tax offset or tax incentive, the best person to have in your corner is your accountant or tax advisor. While the end of the financial year is often an extremely busy and stressful time, plan a meeting with them now. Lock it in. Ask for a review of the year and what you should be doing (or in some cases what should you not be doing) to get the best outcome for your business.

Stacey Price is a financial coach, accountant, BAS agent and the founder of Healthy Business Finances.