Year-end tax planning Part 4 – 2020-21 full expensing and accelerated depreciation; maturing UPE ‘sub-trust’ arrangements; Div 7A Minimum Yearly Payment Covid relief again; ‘working from home’ deductions; first ‘loss carry back’ offset year

The Tax Institute’s Scott Treatt, CTA, General Manager, Tax Policy and Advocacy, contributes the 4th of its year-end tax considerations articles – in its weekly TaxVine newsletter (No. 23 on Friday 25.6.21).

Year-end considerations — Part 4

This preamble provides a general overview and broadly explains some year-end matters you may wish to consider when advising your clients.

Capital allowances

The capital allowance provisions have been anything but steady over the past few years, with:

• multiple changes to the dates and amounts relating to the instant asset write-off; and
• the introduction of, and subsequent amendments to, the Temporary full expensing measure and the Backing Business Investment (BBI) measure.

BBI, or accelerated depreciation, was introduced as a COVID-19 economic stimulus measure and is contained in Subdivision 40-BA of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A). It applies to a depreciating asset if, in the period beginning on 12 March 2020 and ending on 30 June 2021, the entity starts to hold the asset and starts to use it, or have it installed ready for use.

An entity is eligible for BBI if it has an aggregated turnover (within the meaning in s328-115 of the Income Tax Assessment Act 1997 (ITAA 1997) of less than $500 million. To benefit from BBI in 2020–21, an eligible entity will need to first hold and use (or install ready for use) the asset by 30 June 2021. An asset is not eligible for BBI if it is a second-hand asset or if the Temporary full expensing measure applies to the asset. Entities can choose whether to apply BBI on an asset-by-asset basis.

There are a range of other exclusions from BBI in s40-120 and s40-125 of the IT(TP)A, including assets held under a commitment entered into before 12 March 2020 and assets not located in Australia.

Division 7A

Unpaid present entitlements under sub-trust arrangements

Division 7A of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) continues to feature in our year-end commentary.

The Tax Institute has advocated for an extension of Practical Compliance Guideline PCG 2017/13 to cover those Option 1 (7-year) sub-trust arrangements maturing in the 2020–21 income year, as well as any Option 2 (10-year) sub-trust arrangements maturing in the 2020–21 income year for the first time. The PCG currently applies only to sub-trust arrangements maturing in the 2016–17, 2017–18, 2018–19 or 2019–20 income years.

The PCG explains that the Commissioner will accept that a 7-year loan on complying terms in accordance with s 109N of the ITAA 1936 may be put in place between the sub-trust and the private company beneficiary prior to the private company’s lodgment day. This will provide a further period for the amount to be repaid with periodic payments of both principal and interest.

We expect that the Commissioner is likely to extend the compliance position taken in the PCG, however this may not happen before 30 June 2021.

Relief for those struggling to make MYRs

In June 2020, the ATO released guidance that set out how those who were unable to make a minimum yearly repayment (MYR) on a complying Division 7A loan by the end of the 2019–20 income year due to the effects of COVID-19 could seek the Commissioner’s discretion under s 109RD of the ITAA 1936 to obtain an extension of time to make the repayment. Any deferred repayments are due by 30 June 2021.

The ATO has advised that:

If you don’t meet this deadline, you will need to either obtain a further extension of time for the 2019–20 MYR outside the streamlined process or amend your 2019-20 tax return to include a dividend.

Updated ATO guidance was released on 21 June 2021 that sets out how those who are unable to make a 2020–21 MYR due to the ongoing effects of COVID-19 can seek the Commissioner’s discretion via a streamlined approach under s 109RD.

Shortcut method for claiming working from home expenses

Due to COVID-19, working arrangements for millions of employees across the country have changed over the past year. In response, and recognising the importance of allowing employees who are working from home (WFH) a simple way to calculate WFH expenses with minimal record keeping requirements, the ATO has made available a temporary shortcut method.

The shortcut method is available to calculate WFH expenses for the period from:

• 1 March 2020 to 30 June 2020 — for the 2020 income tax return; and
• 1 July 2020 to 30 June 2021 — for the 2021 income tax return.

Employees can claim their WFH expenses under one of three methods:

1. Shortcut method (at the rate of 80 cents per work hour and includes some items in addition to those covered by the fixed rate method);
2. Fixed rate method (at the rate of 52 cents per work hour); or
3. Actual cost method.

It is important to carefully check which method is most appropriate for the employee, having regard to the substantiation rules, the extent to which they worked from home, the extent of taxable use of equipment and whether there is a dedicated work area (which is not necessary for the shortcut method).

Further information about the 2021–22 income year will be provided by the ATO soon.

Loss carry back

While technically not a measure that ends on 30 June 2021, it is pertinent to mention the loss carry back tax offset which is available in 2020–21 for the first of what will be three income years.

Corporate tax entities with an aggregated turnover of less than $5 billion can currently carry back a revenue loss made in the 2019–20 to the 2021–22 income years (this will be extended by legislative amendment to the 2022–23 income year) against tax paid on profits from the 2018–19 to the 2020–21 income years (this will be extended by legislative amendment to the 2021–22 income year).

The loss carry back tax offset is claimed in the 2021 or 2022 income tax return (and will also be available to be claimed in the 2023 income tax return), subject to the amount of previous income tax paid and the balance in the company’s franking account.

 

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