Small Business Tax Planning 2021

Tax planning in 2021 will have a signifcant impact on your small business wealth creation.

By Travis Bacon

January 17, 2021

The 2021 financial year has seen significant changes to Australian legislation for small businesses from JobKeeper & Instant Asset Write-Offs through to R&D Incentives. The tax changes present a unuiqe opportunity for small businesses to start thinking about saving tax and making smart business choices.

While there may be advantages to purchasing new equipment, that might not be the most beneficial business move.

TaxDigital provides tax planning services which considered well-rounded business advise and not just saving tax. There is no argument that tax planning is a fundamental element in business wealth. By structuring your tax affairs correctly, you can save significant money on your annual tax bill.
Some of the common strategies to adopt before the end of the year are listed below:

  • Consider deferring income until after 30 June;

  • Ensure bad debts are written off in your accounts before 30 June;

  • Pay Employer or self-employed superannuation contributions before 30 June. Note the fund must receive the money before 30 June for a tax deduction to apply;

  • Review your asset schedules and scrap any obsolete item before 30 June;

  • Review valuations of trading stock in the lead up to 30 June for the most tax-effective method;

Outlined below are some of the new legislation pieces for the 2021 income tax year that directly impact small business entities.

Corporate Tax Rate 2021

For the 2020/21 year, the reduced corporate tax rate has been reduced to 26%, down from 27.5%, eligibility for the reduced corporate tax rate remains unchanged and applies to base rate entity companies with an aggregated turnover of less than $50m.

 The lower company tax rate for base rate entities will reduce 25% for the 2021/22 income year.

Small Business Income Tax Offset

The small business income tax offset has been increased to 13%, up from 8%. The tax offset is a 13% discount of the income tax payable on the business income received from a small business entity (other than a company) with an aggregated turnover of less than $5m, up to a maximum of $1,000 a year.

Temporary Full Expensing of Assets

From 7.30 pm AEDT on 6 October 2020 until 30 June 2022 the temporary full expensing allows:

  • Eligible business entities with an aggregated turnover less than $5 billion or corporate tax entities that satisfy the alternative test, can immediately expense the cost of eligible new depreciating assets; or
  • Eligible businesses with an aggregated turnover under $50 million can immediately expense the business portion of the cost of eligible second-hand assets; or
  • Businesses with an aggregated turnover under $10 million can immediately expense the balance of a small business pool at the end of each income year in the period.

Accelerated Depreciation Turnover less than $500m

An immediate deduction is available for entities with an aggregated turnover of less than $500m for assets first used or installed ready for use between 12 March 2020 until 30 June 2021 and purchased by 31 December 2020, cost less than $150,000 up from $30,000. 

Note that the general small business pool's balance is also immediately deductible if the balance is less than $150,000 on 30 June.

Backing Business Investment – Accelerated Depreciation

From 12 March 2020 until 30 June 2021, the government has provided an investment incentive to support businesses with an aggregated turnover of less than $500 million by introducing accelerating depreciation deductions. The rules are outlined below (some exclusions apply):

  • Small business entities using the simplified depreciation rules can claim 57.5% of the cost of a new depreciating asset (for those assets which exceed the instant asset write-off amount) in the first year they add it to the SBE general pool. Existing rules apply for the balance of the asset.
  • For small business entities not using the simplified depreciation rules, they can claim a deduction of 50% of the cost of a new depreciating asset. Existing rules apply for the balance of the asset.

It is important to note that a business cannot claim a backing business investment – accelerated depreciation deduction if that business uses temporary full expensing or instant asset write-off deductions for the same asset.

Expanded Access - Small Business Concessions

From 1 July 2020, businesses that are not small businesses because their turnover is $10 million or more but less than $50 million can also access an immediate deduction for certain start-up expenses and for prepaid expenditure. As a reminder, these concessions also exist for Small Business Entities with a turnover of less than $10 million.

 From 1 July 2021, businesses that are not small businesses because their turnover is $10 million or more but less than $50 million can also access these small business concessions:

  • Simplified trading stock rules; and

  • PAYG instalments concession; and

  • A two-year amendment period; and

  • Excise concession.

Anti-Avoidance Warning

Tax planning is legal when you do it within the intent of the law. However, the Australian Taxation Office (ATO) imposes harsh penalties for those businesses that undertake tax minimisation schemes outside the spirit of the law. The ATO refers to these schemes as tax avoidance schemes or arrangements.

The ATO broadly defines a tax avoidance scheme that involves the deliberate exploitation of our tax and superannuation systems.

Contact Us

As there are many factors contributing to tax planning and overall business decisions, it is important to obtain professional advice regarding your businesses tax planning strategy.

If you would like some personalised advice on the best tax planning strategy, feel free to reach out to us on 0407 438 849orcontact@taxdigital.com.au.

This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or seek personalised tax advice from us at TaxDigital. Information is current at the date of issue and may change.