Summary of important concessions
Instant asset write-off
For assets first used or installed ready for use between 12 March 2020 until 30 June 2021, and purchased by 31 December 2020, the instant asset write-off: Threshold amount for each asset is $150,000 (up from $30,000). Eligibility extends to businesses with an aggregated turnover of less than $500m (up from $50m).
Temporary full expensing (TFE)
From 7.30pm AEDT on 6 October 2020 until 30 June 2022, TFE allows a deduction for:
1 The business portion of the cost of new eligible depreciating assets for businesses with an aggregated turnover under $5b or for corporate tax entities that satisfy the alternative test.
2 The business portion of the cost of eligible second-hand assets for businesses with an aggregated turnover under $50m.
3 The balance of a small business pool at the end of each income year in this period for businesses with an aggregated turnover under $10m.
Eligible corporate entities that previously had an income tax liability in a relevant year and have subsequently made taxable losses can claim a refundable tax offset up to the amount of their previous income tax liabilities. The measure interacts with the government announcement on the JobMaker plan — temporary full expensing to support investment measure. This will allow new investment to generate significant tax losses, which can then be carried back to generate cash refunds for eligible businesses.
Eligible corporate entities with less than $5b turnover in a relevant loss year can carry back losses made in the 2019–20, 2020–21 and 2021–22 income years to a prior year’s income tax liability in the 2018–19, 2019–20 and 2020–21 income years.
Going concern judgements
Many businesses are experiencing reduced revenues and profitability, as well as liquidity squeezes, caused by COVID-19. This may raise questions about their ability to continue as a going concern.
“Given the current environment, a greater degree of judgement than usual may be required to determine whether it is appropriate to prepare financial statements on a going concern basis, as well as appropriate disclosures relating to how that assessment was performed and its results,” says Aletta Boshoff, national leader IFRS Advisory, BDO in Australia.
At EOFY 2020–21, she says many of the indicators of impairment may continue to exist due to the effects of COVID-19, including declines in quoted asset values, operational disruptions to supply chains and decreases in revenue and profitability. “Many entities will have to perform impairment calculations, and these calculations may need to be significantly more detailed than have been prepared at previous period ends, for example, the inclusion of multiple probability weighted scenarios,” says Boshoff.
“Entities may also be required to prepare impairment calculations after they have begun recovering from COVID-19. Impairment charges for most assets other than goodwill are reversed in subsequent periods if indications exist that previous impairment may have reduced or be eliminated. This may occur if actual cash-flows are more positive than what was originally included in an impairment model, including asset values recovering, uncertainty relating to the effects of COVID-19 being resolved and entities able to resume operations to their pre-COVID-19 levels.”
Many new government initiatives were announced at both the federal, state and local government level in response to COVID-19. According to Alex Demetriou, partner in charge of accelerating business growth at KPMG, the initiatives take advantage of local markets and increased public support for “Australian made”.
“New strategic priorities around protecting critical infrastructure and promoting Australia’s long-term capabilities and independence are also evident,” he says. “The shift in global politics has had a significant impact on Australia’s trade profile with increased exports to aligned trade partners compensating for the downturn with China.”
One initiative, announced in last year’s federal Budget, is a new research and development (R&D) program, which applies from 1 July 2021. According to Demetriou, it’s simpler and offers companies with turnover of less than $20m a refundable offset pegged at 18.5 percentage points above the corporate tax rate. “For example, for a 30 per cent tax rate you would get a 48.5 per cent refundable offset (five per cent more than the previous program),” he says.
Companies turning over more than $20m also benefit. “There’s now a simpler two-tiered intensity threshold (as opposed to three) and the benefits range from 8.5 per cent to 16.5 per cent. The current program continues in its present form, meaning companies can now enjoy a level of certainty regarding their investment into R&D programs moving forward.”
Other measures featured in the federal COVID-19 response include changes to the provisions for instant asset write-off (IAWO) and temporary full expensing (TFE) of depreciating assets (see breakout). “These have significant implications for business from a finance, balance sheet and cashflow perspective,” says Demetriou.
Good and bad news around IFRS 16
Demetriou notes that a one-year extension to the practical expedient for COVID-19-related rent concessions under IFRS 16 Leases has been published by the International Accounting Standards Board (IASB). It aims to make it easier for lessees to account for COVID-19-related rent concessions, such as rent holidays and temporary rent reductions, while continuing to provide useful information about their leases to investors. Lessees, however, need to be aware of the potential transition issues relating to previously ineligible rent concessions.
When it comes to accounting for IFRS 16 Leases, Boshoff says the standard is creating challenges due to the requirements to continuously update the measurement of lease liabilities due to reassessments (for example, CPI or market reviews), modifications of leases (for example, change in scope or reduction in lease term), early terminations of leases and/or COVID-19-related rent concessions. She says many entities have struggled with the determination of lease term that is not necessarily limited to the term outlined in the legal lease agreement — for example, month-to-month leases can have a much longer lease term for the purposes of IFRS 16.
“Given the current environment, a greater degree of judgement than usual may be required to determine whether it is appropriate to prepare financial statements on a going concern basis...” Aletta Boshoff, national leader IFRS Advisory, BDO Australia
Entities have also wrestled with the appropriate accounting treatment when they enter into new lease agreements to continue to use the same property. These, for example, are often treated as modifications and not new leases.
Financial reporting and AGMs
The Australian Securities and Investments Commission (ASIC) says it does not intend to extend the deadline for lodgement of financial reports for balance dates after 7 January 2021. ASIC has also announced further “no-action” relief in relation to AGMs. “This relief facilitates the use of electronic notices to convene a general meeting; supports the holding of meetings using appropriate virtual technology; and extends the two-month deferral of AGMs for financial years up to 7 April 2021,” says Demetriou. “This updated relief will remain up until the earlier of 31 October 2021 or the date further legislative measures are passed by parliament.”
Director identification number (DIN)
This unique identifier that a company director will keep forever is a new requirement. Australian Taxation Office Assistant Commissioner Andrew Watson says directors don’t need to do anything yet. The ATO will soon start testing the new application process in a private beta, in which some AICD members have been invited to participate. The DIN will help prevent the use of fictitious director identities and make it easier for regulators to trace directors’ relationships with companies over time. It will also help curb unlawful activity such as illegal phoenixing.
Special Purpose Financial Statements
Entities who currently prepare Special Purpose Financial Statements (SPFS) need to assess whether they are required to prepare General Purpose Financial Statements (GPFS) from the 2022 financial year. If so, Boshoff says they need to consider whether to transition to GPFS in the 2021 financial year in order to utilise the available transitional relief.
When transitioning from SPFS to GPFS, entities will need to assess whether they should apply AASB 1 First-time Adoption of Australian Accounting Standards or AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors.
From the 2022 financial year, entities that currently prepare GPFS using the Reduced Disclosure Requirements will need to switch to Simplified Disclosures as outlined in the new AASB 1060 General Purpose Financial Statements — Simplified Disclosures for For-Profit and Not-for- Profit Tier 2 Entities.
“To avoid director penalties, we recommend directors take steps to
ensure these lodgements and payments are fully up to date and contact us as soon as possible.” Andrew Watson, ATO Assistant Commissioner
Grants to consider
“There are a large number and diverse range of grants for business with key themes being aligned with government priorities such as manufacturing and existing strengths such as medical research,” says Demetriou.
“The circular economy and low emissions and renewable technologies to address climate and environmental risks is a major theme. Digitisation initiatives such as improving data security further align with priorities in defence, sovereign capability and securing supply chains. There are also specific grants to support tourism, exporters, regions and women in business.”
Demetriou says some of the grants include:
Grants of up to $1m aimed at accelerating commercialisation of technology across all industry sectors. Small growth grants to engage external expertise to help businesses implement their growth plans are targeted towards specific sectors, including advanced manufacturing. External expertise can include specific business planning or research expertise.
Modern Manufacturing Initiative (MMI)
With $1.3b in grant funding, the MMI was announced in last year’s federal Budget as part of the government’s $1.5b Modern Manufacturing Strategy. The program provides co-funding for large manufacturing projects that have broad sectoral benefits across national manufacturing priorities. These priorities include resources technology and critical minerals processing, food and beverage manufacturing, medical products, clean energy and recycling, defence and space.
Boost for skills training
A tax concession to retrain employees and a hiring credit to help support spending on HR resourcing and position businesses for the future. “Businesses are being encouraged to retrain or reskill employees who are moved to a different role in the business, as they will no longer have to pay fringe benefits tax (FBT) on this,” says Demetriou. “SMEs with an aggregated annual turnover between $10m–$50m have access to up to 10 tax concessions, including an exemption from FBT on a number of items.”
In addition, eligible employers who can demonstrate that a new employee will increase overall employee headcount and payroll will receive up to $10,400 if they hire an eligible employee aged 30–35 years.
Export Market Development Grant
This provides up to 50 per cent of eligible expenditure (to a maximum of $150,000) to defray the costs associated with setting up an overseas office and employing an overseas representative, including the cost of overseas office rent and on-costs, says Jason Robinson, a director of Future Advisory. The program also reimburses the cost of engaging overseas marketing consultants, attending trade shows and conferences, creation and dissemination of promotional literature and free samples, and IP registration and insurance costs.
The ATO is back on its beat
Meanwhile, Watson warns businesses not to delay lodging their activity statements if they’re eligible for the cashflow boost. It provides between $20,000 to $100,000 in a cashflow to eligible businesses and NFPs. The September 2020 activity statement was the last to receive the boosts, but if entitled, companies will still receive the boost when they lodge eligible activity statements up until two years after the due date.
Watson adds that Single Touch Payroll (STP) Phase 2, which is designed to reduce the reporting burden for employers who need to report information about their employees to multiple government agencies, has a mandatory start date for January 2022. “Employers can start reporting earlier if their payroll solution is ready,” he says. “Once a payroll solution has been updated to offer Phase 2 reporting, there will be some initial steps to set it up. These will be dependent on the payroll solution being used.”
Watson notes directors are responsible for ensuring the company meets its PAYG withholding, GST and superannuation guarantee charge obligations. If they fail to meet these, directors will become personally liable for penalties equal to the unpaid amounts.
“To avoid director penalties, we recommend directors take steps to ensure these lodgements and payments are fully up to date and contact us as soon as possible if there are any issues,” says Watson.
Tips for small business owners
“Heading into the EOFY, small business owners need to understand their net asset position and be able to read a profit and loss statement, especially given the year we’ve had with the ATO cashflow boost, JobKeeper payments and different government grants and incentives,” says Robinson. “It’s important you understand what your tax payable position is and how much of the cash on the balance sheet can be distributed to shareholders. You also need to grasp your cashflow situation and how you can go about getting funding before you actually need it. It’s much easier to get funding when your business is healthier. You also need to know what grants you’re paying tax grants on and what grants you’re not. Having a good tax planning meeting with your accountant as soon as possible would be useful.”
Billson agrees. “You really need to understand your figures at this stage. Where are your strong revenue streams and the expenses accompanying those? Conduct a financial health check on the business so you can implement any changes of strategy or actions that will help you start the next financial year with the best prospects in sight.”
He notes various tools are available, including a business viability assessment tool on the ATO website, and tools to find out what assistance and grants are available to small businesses on ASBFEO website. “Also, have a sober reflection on what impact COVID-19 has had on your business, the market sectors you are in and the customers that you aim to delight,” he says. “Consider what you have learnt from COVID-19 to see how that could prepare you for further setbacks, should they arise. I’m hoping people will have improved business continuity plans and bounce-back tool kits for future adverse conditions. Where have you made adjustments for COVID-19 and what adjustments do you want to keep? The last financial year and beyond was the year of the ‘pivot’. I’d say the coming financial year will be the year of the ‘hybrid’ where you blend successful business models and strategies with things you’ve learned and found to be successful in a COVID-19 environment — and meld those strengths together as part of a forward strategy.”
Billson believes small business owners should also ensure they are emotionally well-placed post COVID-19 to provide the best leadership they can for their businesses. It’s important for enterprise owners to also consider their mental health and to reach out if they are not coping.
“Small business owners have endured a lot over the past 12 months, particularly those hardest hit by the COVID crisis,” he says. “My Business Health is an excellent support tool and it now links to Beyond Blue’s NewAccess for Small Business Owners program.”