With both state and Federal governments announcing a range of stimulus packages over the last 4 months, businesses and individuals have been receiving a number of different income streams, which has led to a number of queries as to how these are treated from a tax perspective.
COVID-19 Cash Flow Boost
The Cash Flow Boost is a subsidy to assist employers by covering the PAYG withholding amount in March to September BAS. The Cash Flow Boost is non assessable, non exempt income which means it is not taxable income for the entity receiving it.
If you receive the amount in a company or unit trust and you then distribute the cash (via a dividend or distribution) to another entity there may be tax consequences for the recipient. The Cash flow boost is not an amount that is subject to GST
JobKeeper Payment Scheme
Job Keeper payments for a business are not subject to GST; however, they are taxable income to the business.
As you were required to pay your employees first before receiving JobKeeper payments, you will be claiming the wages as a tax deduction.
If your business received JobKeeper as a eligible business participant (Sole Trader, Director, etc.), the payment will be included as taxable income for the business entity. Again, there may also be tax consequences if the cash was paid out to a shareholder as a dividend.
As an employee receiving JobKeeper these amounts are taxable and should be included in your salary/ wage amount.
Recipients of JobSeeker payments, including supplement payments will be taxed on these payments and will receive advice from Centerlink as to the amount that needs to be reported in their returns.
If you were a recipient of a Queensland Adapt grant (or similar from interstate), this grant income will be considered as taxable income, however the grants do not include GST.
For the Adapt Grant, you will be required to fully expense the grant amount which will mean your taxable income will not be impacted.
Early Release of Super
If you met the eligibility criteria and withdrew up to $10,000 (for 2020) from your super account, the amount received is tax free.
If you did not meet the COVID-19 early release eligibility criteria and still applied, you may be required to declare the amount withdrawn as taxable income in your tax return, and pay tax at your marginal tax rate. The ATO may also impose fines and penalties where it determines intentional breach of requirements.
Commercial landlords will need to consider the tax implications of any agreed rent waiver or deferral, and in particular the timing of the taxing point of rent that is agreed to be deferred e.g. is the deferral structured as a deferral of cash but has still been accrued and is therefore still assessable, or is the taxing point also deferred to a later time?
The GST position for any rent deferrals may also have important cash flow implications. For example does a deferral of rent leave landlords needing to pay GST on rental amounts they not yet received.
For businesses that continued trading through COVID there have been some changes to allow additional deductions which may help to reduce your taxable income:
These changes are applicable to employees, individual/business owners, specific to business, and those who own a rental property.
Home Office Expenses
For those employees who were required to perform all work duties from home during COVID you may be entitled to an increased claim for home office use.
There are three methods which can be used to claim:
Fixed rate: The ATO allows a rate of 52c per hour for the full year where you have a dedicated work area such as a home office.
Shortcut Method: The rate has been increased to 80cents per hour from 1 Mwill related to 2021 financial year). This method does not require you to have a dedicated work area:
Actual costs: You can record the additional costs for electricity, phone, internet, consumables and office equipment or furniture for you dedicated home office.
Where you use the shortcut method you cannot also claim the actual costs.
Taxpayers working in jobs that require physical contact or close proximity with customers or clients during COVID-19 measures may be able to claim a deduction for items such as gloves, face masks, sanitiser, or anti-bacterial spray.
The business can claim these as an expense if they are using in the workplace and/or providing to their staff; or individuals can claim if they have paid for the items and not been reimbursed.
Instant Asset Write Off
For business owners, the threshold has increased dramatically to allow full deduction for purchase of a business assets – increasing the deductible amount for each asset up to $150,000 from $30,000 (some exclusions apply)
The eligibility has also increased for businesses with an aggregated turnover less than $500 Million (up from $50 Million). These temporary changes are in effect from the 12th March 2020 through to 31st December 2020.
To claim in 2020 financial year, you must have had the asset delivered and installed prior to 30 June.
Interest Deduction on Deferred Loan Repayments:
The ATO has confirmed that if interest continues to accumulate on your loan, it will be an expense that you have incurred and is therefore deductible.
Interest remains deductible on the loan even if the bank defers the repayments.
You can continue to claim your rental property expenses, if your property was rented and your tenant has not been making rent payments during COVID.
However, if you decide to take your property off the rental market or use it personally (to quarantine for example), you may need to apportion you claim for expenses during the year.
In addition to income and deduction changes there are some other issues as a result of Covid that could have different tax implications for a business.
Impact of Deferred PAYG Instalments on lower franking credits
As part of Federal stimulus package, the ATO offered a business the ability to vary future PAYG instalments to NIL as well as vary any prior instalments for 2020 year to NIL to obtain a refund.
This will mean any tax liability is essentially being deferred until lodgement of the tax return (which can be in May 2021)
In addition, for a company the varied PAYG Instalments will mean there are limited franking credits available to allow a company to pay a franked dividend to its shareholders. When companies have declared dividends it may result in a franking account deficit at year end or has left the company in a position to only pay unfranked dividends (which will result in higher tax for the shareholder)
Divisional 7a Loans
Where shareholders have drawn money from a company (without reporting as income themselves) or without having an appropriate loan balance, the ATO can determine that there is money owing to the company and what the ATO calls a Div 7A loan.
Where managed properly by having an appropriate loan agreement and making minimum repayments each year, the tax implications can be mitigated.
The ATO has recognised that due to COVID, shareholder may have difficulty making the appropriate minimum repayments. As mentioned above, franking credits will be limited to manage payments by way of dividend.
As such, the ATO has allowed that minimum repayments normally required within the 2020 financial year can be extended until 30 June 2021 to make the repayment without the consequence of an unfranked dividend.
The 2020 shortfall payment is still required to be made by the end of the 2021 financial year and interest will accrue.
Tax Residency Complications
Where you have been forced to stay in Australia for a lengthy period or don’t intend to return overseas due to COVID, this can cause complications relating to tax residency.
You will need to assess your circumstances and determine your residency status based on all facts, which will determine your tax requirements. you have any residency queries or concerns, please contact our resident tax specialist Ian McGinniss to discuss.
How can Walsh Accountants Help?
Now more than ever, the team at Walsh Accountants are positioning ourselves to help business owners prepare for what is ahead of them. If you have any concerns about the income and tax implications of any COVID-19 stimulus packages you have recieved, please do not hesitate to contact our office and speak with one of our Accountants.