On 24 March 2020 the Federal Government’s COVID-19 stimulus package was enacted into law. This blog follows on from our previous summary and looks at the tax elements of the package comprise a cash flow boost for SME employers and accelerated depreciation. This blog looks in more detail at the conditions an SME business needs to meet to access these stimulus measures. (Please click here to see a comprehensive diagram outlining the government’s incentives on a Federal and state-by-state basis.)
Cash Flow Boost (‘Boost’) for Employers Which is Available Now
The Boost is a tax free cash credit to SME businesses to encourage them to continue to employ their employees during the COVID-19 economic crisis.
The Boost will be paid in 2 funding rounds namely for the periods covering:
- 1 March 2020 to 30 June 2020; and,
- 30 June 2020 to 30 September 2020.
Eligible employers who pay salary and wages on which PAYG withholding tax applies, will receive in each funding round a Boost credit equal to the higher of $10,000 or 100% of the amount withheld up to a maximum payment of $50,000.
Eligible employers who pay salary and wages but who are not required by law to withhold tax, will receive a Boost credit of $10,000 in each funding round.
If an eligible employer lodges on a monthly basis then the Boost credit they get on for March 2020 is the higher of three times the amount of PAYG withholding tax withheld for March 2020, or the minimum $10,000. For the months of April, May and June 2020 such a monthly lodger then receives a Boost credit equal to the PAYG amount withheld in that month, but subject to a total cap of $50,000.
An eligible employer who lodges on a quarterly will receive a Boost credit in the quarter ending 31 March 2020 equal to the higher of $10,000 or the amount of PAYG withholding tax withheld, but capped to $50,000. For the June 2020 quarter, such employer receives a Boost credit equal to the PAYG amount withheld in that quarter, but subject to a total cap of $50,000.
In the second round of the Boost, a monthly employer will receive in each of the months of June, July, August and September a Boost credit equal to 25% of the total Boost credits they received in the first round subject to a minimum of $10,000 and a maximum of $50,000.
For a quarterly employer they will receive in the second round of Boost, in each of the June and September 2020 quarters a Boost credit equal to 50% of the total Boost credits they received in the first round subject to a minimum of $10,000 and a maximum of $50,000.
There seems to be an overlap for June 2020 in the funding rounds and the ATO has discretion under law to adjust the Boost credit so the $50,000 maximums in each funding round are adhered to.
Contrary to popular ‘lore’ the Boost does not necessarily generate an automatic cash payment for an SME business, rather the ATO has the power to direct how the Boost is paid. It is expected that the ATO will offset the Boost payment against an eligible employer’s current tax liabilities in their current activity statement, meaning an eligible employer would pay less in tax to the ATO. It would only be if the employer’s running balance account is in a refund position that a cash payment would be paid by the ATO. Refund payments are intended to be made within 14 days of the ATO receiving the employer’s relevant activity statement. It may be only in later months that cash payments are actually made to many eligible employers.
Even if the Boost does not generate a cash payment, it ‘saves’ an eligible employer cash which they would have otherwise used to pay their tax and so is a concession well worth pursuing.
What are the conditions I have to meet to claim this?
An employer can claim a Boost credit in the first round if they meet all of the following conditions:
- the employer has an aggregated annual turnover under $50 million (based on the prior year turnover i.e. 2019 income year);
- the employer makes a payment of salary, wages or remuneration that is subject to PAYG withholding (even if no withholding is legally required);
- the employer was ‘active’ as at 12 March 2020 in that they held an ABN on that date; and either:
- derived assessable business income in the 2018/2019 income year; or
- made a supply for consideration in the course of an enterprise carried on within Australia in the tax periods starting from 1 July 2018 and ending before 12 March 2020, and notice of such income or supplies was held by the ATO on or before 12 March 2020 (e.g. income tax return or activity statement lodged); and,
- the integrity provisions are not triggered. These provisions are triggered if an entity, associate or agent of the entity enters into a scheme for the sole or dominant purpose of becoming entitled to, or to increase, the Boost. Adding people to the payroll where they are not real employees would be a scheme caught by the integrity provisions.
To access the Boost in the second round, an eligible employer only needs to meet the active requirement above and the integrity provisions. This takes into account the fact that an employer may need to let go employees in later months.
Charities and not-for-profits may access the Boost even if they do not carry on a business. Charities registered with the Australian Charities and Not-for-profits Commission do not have meet the active requirement. This caters for new charities who have been set up to deal with the crisis.
Significantly, to be eligible to receive the second round Boost credits an employer must receive the first round Boost. The aggregate second round Boost credits provided to an eligible employer is equal to the aggregate amount that they received in the first round Boost.
To claim the Boost employers need to lodge their activity statement with the ATO for the relevant time periods (outlined above).
To receive the Boost as soon as practicable eligible employers should contact their tax agent to ensure that their March activity statement is lodged promptly.
Expanded Instant Asset Write Off (IAWO) Up Until 30 June 2020
For the period from 12 March 2020 to 30 June 2020, the IAWO has been expanded in two ways:
- the threshold has been increased from $30,000 to $150,000 GST-exclusive; and,
- businesses with an aggregated annual turnover of less than $500 million (up from $50 million) are able to claim the IAWO.
What are the conditions to claim the expanded IAWO?
To claim the expanded IAWO in the 2020 income year a business taxpayer needs to meet all of the following:
- the taxpayer’s annual aggregated turnover must be less than $500 million; if:
- the taxpayer’s aggregated annual turnover is less than $10 million (i.e. small business entity), the depreciating asset must be “first acquired” at or after 7.30 pm (ACT time) on 12 May 2015;
- the taxpayer’s aggregated annual turnover is $10 million or more but less than $500 million (i.e. medium size business) the depreciating asset must be “first acquired” in the period from 7.30 pm (ACT time) on 2 April 2019 to 30 June 2020;
- the taxpayer must first start to use the depreciating asset, or have it installed ready for use, for a taxable purpose (e.g. to produce assessable income) in the period from 12 March 2020 to 30 June 2020; and,
- the depreciating asset’s cost must be less than $150,000 GST-exclusive.
After 30 June 2020, the IAWO shrinks back to a $1,000 GST-exclusive threshold and will only be available to businesses with an aggregated annual turnover less than $10 million.
The expanded IAWO can apply both to acquisitions of new depreciating assets and second hand depreciating assets. Improvements to depreciating assets which are not immediately tax deductible as a repair (e.g. adding to a tray to a ute) are also eligible for the expanded IAWO.
Small business entities who have placed depreciating assets, which could not be immediately deducted under the old IAWO rules, in the small business simplified depreciation pool are under existing rules allowed to depreciate them at 15% in the first income year and then 30% for each subsequent income year. To the extent that pool balance is less than the $150,000 GST-exclusive at 30 June 2020 then the COVID-19 stimulus measures allow an immediate deduction of the balance of that pool.
What is the benefit of the IAWO?
The IAWO essentially provides a timing benefit by accelerating depreciation deductions and it will not be of immediate benefit to businesses which are making losses. It is, however, relevant to note since it is available for extremely large businesses and if a business is already having to incur plant and equipment costs (e.g. acquiring more plant equipment to enable workers to work from home or getting packaging equipment to facilitate takeaway sales) then it will be beneficial in reducing taxable income.
Backing Business Investment (BBI) incentive – Accelerated Depreciation up to 30 June 2021
The BBI runs in parallel with the IAWO providing accelerated depreciation up to 30 June 2021.
What are the conditions to claim the BBI?
To claim the BBI on a depreciating asset all of the following conditions need to be met:
- the taxpayer’s aggregated turnover must be less than $500 million;
- the asset must be new (i.e. not second hand);
- the taxpayer must not have claimed depreciation deductions on the asset and Division 40 must apply to the depreciation of the asset;
- the asset must be first held by the taxpayer, and first used or installed ready for use for a taxable purpose between 12 March 2020 and 30 June 2021 inclusive;
- the asset must be located in Australia and principally used in Australia for the principal purpose of carrying on a business; and
- the taxpayer must have made no commitment to the asset before 12 March 2020. A commitment would be made if the taxpayer entered into a contract to buy the asset, started to construct the asset or started to hold the asset in another way.
There is no asset threshold limit to the BBI.
The accelerated depreciation offered by the BBI applies in the first income year of depreciation deductions and differs depending on whether the taxpayer uses the simplified depreciation rules for small business entities (i.e. turnover less than $10 million).
For a taxpayer who does not use the simplified depreciation rules, the accelerated depreciation is broadly calculated as the sum of:
- 50% of the cost of the depreciating asset; plus
- the normal depreciation deduction which can be claimed for the period after reducing the cost of the asset by 50%.
For example, if a depreciating asset cost $1 million and its normal depreciation rate is 25% then the BBI allows for an accelerated deduction of $625,000 (i.e. 50% x $1 million + 25% x ($1 million – 50% x $1 million).
For taxpayers who use the simplified depreciation rules, the accelerated depreciation that they can claim in the first income year is 57.5% (as opposed to 15%) of the depreciating asset’s value on entry into the small business simplified depreciation pool. In the income years subsequent depreciation would be claimed at 30%.
What is the benefit of the BBI?
The BBI also only provides a timing benefit, but it may yet be helpful for business to manage their overall tax liability.
If you require any assistance in relation to the COVID-19 Economic Plan, please do not hesitate to contact a lawyer in Coleman Greig’s Taxation Advice team.