02Asset 4

Coronavirus stimulus package. How will this help cashflow for Small Business?

The package includes:

1. an instant asset write-off extension;

2. a 50% asset investment incentive;

3. a cash payment to employers of between $2,000 to $25,000;

4. a 50% wage subsidy for apprentice’s or trainee’s wages;

5. support to regions and communities impacted by the coronavirus, including ATO payment support; and

6. a one off $750 payment to certain concessional recipients.

Due to the limited time in which the package applies, taxpayers should immediately consider whether they qualify for these measures and the impact of each of the measures on their business and cash flow.

Below, we explore each of the measures in more detail.

1 | The instant asset write-off extension

From 12 March 2020, the Federal Government will increase the instant asset write-off threshold for depreciating assets from $30,000 to $150,000. While the deduction was previously limited to small and medium-sized businesses (being those businesses with an aggregated annual turnover of less than $50 million), the revised limit will be extended to businesses with an aggregated turnover of less than $500 million. The increased asset and turnover thresholds will apply immediately until 30 June 2020. The announcement is currently silent on whether the measure applies to assets acquired from 12 March 2020, or assets installed ready for use from that day if acquired earlier.

How could this potentially impact cash flow?

Entities should consider whether they (or related entities within the group) have paid PAYG instalments during the 30 June 2020 income year and whether the new measure could assist in reducing the overall tax payable for the entity (or related entities within the group) for the current income year. In such a case, taxpayers could re-estimate their tax payable and seek to reduce their future PAYG instalments or (alternatively) lodge their 30 June 2020 tax returns shortly after year-end to receive a refund of overpaid instalments. Varying the PAYG instalment to zero may also give rise to a refund of instalments paid in previous quarters (i.e. in September and December of 2019). Further details on this have been provided by the ATO (see measure 5).

Taxpayers should also consider whether asset purchases should occur in a company (which could give rise to future unfranked dividends) as compared to a trust (which may result in tax preferred distributions). Where asset acquisitions occur in a trust, the funding of those acquisitions will need to be considered (e.g. Division 7A compliance versus external loan funding).

In addition, where tax is ordinarily payable by a base rate company (i.e. at the lower corporate tax rate), the new measures may have the effect of deferring taxable income to a later year, which may be subject to lower corporate tax rates (i.e. 26% for 30 June 2021).

2 | The 50% investment incentive

The Federal Government announced that, from 12 March 2020, it would introduce an investment incentive, being effectively an accelerated depreciation allowance on eligible assets. The measure will allow businesses with turnover of less than $500 million to immediately deduct 50 per cent of the cost of an eligible asset. Existing depreciation rules would continue to apply to the balance of the asset’s cost. The incentive will be available until 30 June 2021, to support business investment and economic growth through the short term. The announcement is silent on whether turnover would constitute aggregated turnover. Furthermore, the Prime Minister’s announcement and the Treasurer’s announcement differ on the start time – the former states the measure will apply to an asset based on “purchase” time, while the latter states it is based on “installation” time.

How could this potentially impact cash flow?

Similar to the instant asset write-off, the new measure could significantly impact the income tax payable of the group for the 30 June 2020 income year, which may provide opportunities to reduce PAYG instalments for the current income year and (or) seek refunds of income tax as soon as possible after year end.

One of the main benefits of this measure is that there is no asset capping rule. Accordingly, it could be available, for example, to a listed company start-up with no turnover that acquires a $10 million asset.

3 | Cash payments to employers

The Federal Government has announced cash payments to employers to assist with the cost of salary and wages. Eligible businesses are those that employ staff and have a turnover of less than $50 million. It is not clear how the Australian Taxation Office (ATO) will be able to assess whether the employer meets the $50 million turnover test. Such businesses, whether companies, trusts, partnerships or sole traders can receive payments between $2,000 and a maximum of $25,000. The receipt of the amount will be tax-free to the employer.

The amount of the payment is said to be 50 per cent of the PAYG withheld from salary and wages as reported on the employer’s Business Activity Statement (BAS) or Instalment Activity Statement (IAS) over the 6-month period from 1 January 2020 to 30 June 2020. Smaller employers who may withhold minor amounts or none at all (e.g. employs staff who earn below the tax-free threshold) could still potentially receive the minimum $2,000 payment.

The payments to eligible employees are stated to be made within 14 days of lodgement of the 28 April 2020 BAS or IAS (i.e. for the period ending 31 March 2020). It is not clear how this will apply to those who lodge a monthly BAS for January and February 2020. Presumably, the PAYG withheld for these months would also be considered with no further payments to be made once the $25,000 cap is reached.

How could this potentially impact cash flow?

The announcement only refers to employers and does not refer to grouping rules. Therefore, it is possible that this measure may apply to multiple employers within the same group (e.g. where each of those entities are registered for payroll and make relevant payments). However, if the group has formed a GST group then this may prevent multiple entities in the group benefitting (e.g. if the measure is based on the BAS and only one is lodged for the entire group).

Contractors and business owners who operate through companies or trusts may consider paying themselves a salary or bonus rather than taking a dividend or trust distribution in order to take advantage of this measure. In doing so, employers should consider the on-costs including payroll tax, WorkCover and the superannuation guarantee.

Employers should also beware of integrity measures relating to private companies, whereby remuneration for services of a person associated with the company that is excessive of a reasonable amount may not be deductible to the company.

Furthermore, a trust employer may have the additional benefit of receiving a tax-free amount that it may be able to on-distribute tax-free, to its beneficiaries, as compared to a company which may be required to pay an unfranked dividend.

Note, partners of partnerships may not be able to take advantage of these measures given that partners are not considered employees of the partnership, with payments to them representing drawings or an advance of future profits rather than salary and wages.

4 | Subsidies for apprentices and trainees

Eligible businesses can apply for a wage subsidy of up to 50% of an apprentice’s or trainee’s wages for the 9‑month period from 1 January 2020 to 30 September 2020.

The announcement is silent on the meaning of the term “small business”. Presumably, it applies to those that meet the definition in the Income Tax Act, being an entity with an aggregated turnover of less than $10 million.

The subsidy is stated to be available to new employers who retain apprentices of another small business where that other small business could not. It is not clear whether the new employer also needs to be a small business themselves.

How could this potentially impact cash flow?

Businesses should consider whether future employment can be provided through an apprenticeship or a traineeship. While the subsidy only covers the period to 30 September, this may result in a significant cash flow saving to a business looking to make an investment in certain skilled workers.

Unlike the cash payment to employers, the measure does not state whether the subsidy will be tax-free and may therefore be assessable to the small business. This may have the effect of clawing back the deduction obtained for originally paying the relevant part of the wage.

5 | Support to regions and communities most affected

The Federal Government has set aside $1 billion to support regions and communities disproportionately affected by the economic impacts of the coronavirus. This includes those heavily reliant on industries such as tourism, agriculture and education.

The measure will include the waiver of fees and charges for tourism businesses that operate in the Great Barrier Reef Marine Park and the waiver of entry fees for Commonwealth National Parks. It will also aid with identifying alternative export markets or supply chains, with targeted measures to further promote domestic tourism.

On a case-by-case basis, the ATO will look to provide administrative relief for some tax obligations for people affected by the coronavirus outbreak.

How could this potentially impact cash flow?

Taxpayers should assess whether they are in industries directly affected by the coronavirus. While the announcement specifically lists the tourism, agriculture and education, many other industries are significantly affected where, for example, supply chains are through China. The ATO has announced a number of specific concessions that may be available, including:

– deferring (by up to four months) the payment date of amounts due through the BAS (including PAYG instalments), income tax assessments, fringe benefits tax assessments and excise;

– allowing businesses on a quarterly reporting cycle to opt into monthly GST reporting to get quicker access to GST refunds;

– allowing businesses to vary PAYG instalment amounts to zero for the April 2020 quarter.

Businesses that vary their PAYG instalment to zero can also claim a refund for any instalments made for the September 2019 and December 2019 quarters;

– remitting any interest and penalties, incurred on or after 23 January 2020, that have been applied to tax liabilities; and

– working with affected businesses to help them pay their existing and ongoing tax liabilities by allowing them to enter into low interest payment plans.

The ATO has stated that employers will still need to meet their ongoing super guarantee obligations for their employees (as they do not have the ability to defer payments).

6 | Payments to certain concessional recipients

The Federal Government will provide a one-off $750 payment to social security, veteran and other income support recipients and eligible concession card holders, with around half being pensioners. Eligible recipients will be entitled to a single tax-free payment which will not count as income for Social Security, Farm Household Allowance and Veteran payments.

What are the next steps?

The time period in which entities can access the stimulus package is limited and therefore action should be taken immediately. It is therefore critical to consider your position, whether you can qualify for the measures and the potential impact of the measures and how the rules apply. Many of these measures could assist clients in accessing much needed cash in the short term.

Please call or email us to discuss how these changes will affect you.

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