SME tax measures set to mobilise business recovery

13 May 2021

The Australian Federal Budget announcement for the 2021/22 fiscal year provided several new measures for small and medium enterprises (SMEs).

Whilst the impact of COVID-19 remains evident in the Australian economy, the country is on the road to recovery, bouncing back quicker than most economists had estimated. Following months of significant investment into businesses through schemes such as JobKeeper and the Company Cashflow Boost, the Treasury is now looking to incentivise SMEs in a bid to improve the business landscape and encourage sustainability.

ATO debt recovery

Small business entities with an aggregated turnover of less than $10 million will be able to apply to the Small Business Taxation Division of the Administrative Appeals Tribunal (AAT) to pause or modify ATO debt recovery actions where the debt is being disputed in the AAT.

Currently small business entities wanting to pause or modify ATO debt recovery actions are only able to do so through the court system, which is a costly and lengthy process.

The changes will allow the Small Business Taxation Division of the AAT to pause or modify any ATO debt recovery actions, such as garnishee notices and the recovery of General Interest Charge or related penalties until the underlying dispute is resolved by the AAT.

Temporary full expensing

The temporary full expensing measures bought in during the 2020-2021 income year have been extended to 30 June 2023 to encourage continued business expenditure to help uplift the economy.

As such, eligible businesses with an aggregated annual turnover of up to $5 billion will continue to be able to deduct the full cost of eligible depreciable assets. Assets must be acquired from 7:30pm AEDT on 6 October 2020 and first used or installed ready for use by 30 June 2023.

From 1 July 2023, normal depreciation rates will apply.

Temporary loss carry-back

The temporary loss carry-back rules introduced in the 2021 income year have also been extended by one year, allowing companies to carry-back tax losses from the 2022-2023 income year to offset previously taxed profits as far back as the 2018-2019 income year.

As a result, companies with an aggregated annual turnover of up to $5 billion can now elect to utilise tax losses incurred during the 2019-20, 2020-21, 2021-22 and the 2022-23 income years to offset tax paid in 2018-19 or later years. The tax loss that can be carried back is limited by the amount of earlier taxed profits and cannot generate a franking account deficit.

Employee share schemes

In an environment where more and more SMEs incentivise employees with equity rather than cash, the Government has announced a change to the Employee Share Scheme (ESS) rules by removing the cessation of employment taxing point for tax-deferred ESS available to all companies.

Under existing rules, if certain conditions are met, employees may defer tax on an eligible ESS interest until a later tax year (known as the deferred taxing point). Hence by removing the cessation of employment taxing point, the measure will result in tax being deferred on eligible ESS until the earliest of the remaining taxing points:

  • In the case of shares, when there is no risk of forfeiture and no restrictions on disposal.
  • In the case of options, when the employee exercises the option and there is no risk of forfeiting the resulting share and no restrictions on disposal.
  • The maximum period of deferral of 15 years.

This new measure provides many benefits to SMEs looking to attract top new talent, as termination or resignation from a place of business will no longer come into consideration for prospective employees. Assuming the legislation is passed, this will apply to all ESS interests issued on or after 1 July 2021.

In addition to the change in the taxing point for an ESS, the following regulatory changes will also be made where employers do not charge or lend to employees under the ESS:

  • Disclosure requirements will be removed, and the offer will be exempted from licensing, anti-hawking and advertising prohibitions.
  • For shares in an unlisted company, the maximum value of shares that can be issued to an employee with the simplified disclosure requirements and above exemptions will be increased from $5,000 to $30,000 per employee per year (no such value cap exists for listed companies).

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