We have summarised key legislative changes that need to be taken into consideration for tax planning for doctors, dentists and other health professionals in 2021.
Individual Income Tax Rates changes
As part of the 2020-21 Federal Budget, delivered 6 October 2020, the Government brought forward the second stage personal income tax cuts by two years. The new individual tax rates, that were originally proposed to take effect from 1 July 2022, will now apply retrospectively from 1 July 2020.
The changes to the Individual Tax Rates include the following:
– an increase in the top income threshold of the 19 per cent tax bracket from $37,000 to $45,000;
– an increase in the top income threshold of the 32.5 per cent tax bracket from $90,000 to $120,000.
|Taxable income||Tax on this income|
|0 – $18,200||Nil|
|$18,201 – $45,000||19 cents for each $1 over $18,200|
|$45,001 – $120,000||$5,092 plus 32.5 cents for each $1 over $45,000|
|$120,001 – $180,000||$29,467 plus 37 cents for each $1 over $120,000|
|$180,001 and over||$51,667 plus 45 cents for each $1 over $180,000|
The above rates do not include the Medicare levy, which will remain unchanged at 2%.
Working from home expenses
Shortcut method allowing employees to claim 80c per hour for working from home was extended till 30 June 2021. The shortcut method include ALL of your work-related home expenses, including decline in value of your work-related equipment, phone and internet expenses. You cannot claim these expenses separately if you are using the shortcut method. If you claim depreciation for equipment, work-related phone and internet use, it is likely you would be better off choosing to use the Flat Rate calculation of 52 c per hour.
The 52c per hour rate covers expenses for electricity, gas heating, decline in value and costs of repairs of home office furniture. This method does not include depreciation of your work-related equipment such as laptops, computers, phones etc., which can be claimed separately.
Foreign residents – CGT Main Residence Exemption
From 1 July 2020, CGT Main Residence Exemption for foreign residents has been removed.
The new law removing the exemption applied retrospectively from 9 May 2020. However, transitional provisions allowed foreign residents to access the concession if the property was held prior to 9 May 2017 and the disposal happened before 30 June 2020. Despite calls by tax profession to extend the transitional provisions period due to Covid-19, the transitional period was not extended.
According to the new law, eligibility for the main residence exemption depends on a tax residency status of the individual at the time of the CGT event happening to the property (e.g. the time of contract if the property is sold). If you are a foreign resident at the time of disposal, you will not be entitled to Main Residence Exemption at all as the law does not allow apportioning the exemption.
If an individual who ceased to be a resident re-establishes his or her residency before CGT event happens, the main residence exemption will be available.
The measure has obvious impact on expats who sold their family homes while being stranded overseas due to Covid-19 travel ban. The mere fact that a person is overseas for extended period of time does not suggest the person has become a foreign resident but sale of a family home may be a factor indicating there was no intention to return to Australia. Ultimately, tax residency is a question of fact and needs to be assessed with reference to all relevant circumstances.
Corporate Tax Rates changes
Corporate tax rates applying to base rate entities will reduce from 27.5% to 26% in 2021 income year.
For 2019 onward, company is classified is a base rate entity if:
– It has aggregated turnover of less than $50 million, and
– 80% or less of its assessable income is base rate entity passive income.
All other entities are subject to corporate tax rate of 30%.
Temporary Loss Carry Back
Eligible corporate entities with aggregated turnover of less than $5 billion that previously paid corporate income taxes in 2019, 2020 or 2021 income years and made tax losses in 2020, 2021 or 2022 can carry back losses to earlier years by way of claiming loss carry back tax offset.
Losses carried back cannot exceed taxed profit made in the relevant years. The amount of tax offset available is limited to a franking account surplus on the last day of the income year for which the loss is claimed.
Claiming loss carry back tax offset is optional. You may choose to utilise losses against profit in subsequent years.
Instant Asset Write Off and Temporary Full Expensing of Depreciating Assets
Instant Asset White Off (IAWO)
Instant asset write off threshold for small businesses has been increased to $150,000 and the eligibility has been expanded to include businesses with aggregated annual turnover of less than $500 million.
Different acquisition and first use time requirements apply to small business entities (SBE) and other entities with turnover under $500 million.
For small businesses electing to apply simplified depreciation rules, the $150,000 instant asset threshold applies to assets that:
– were acquired on or after 12 May 2015; and
– were first used or installed ready for use by the business for taxable purpose between 12 March 2020 and 30 June 2021.
Depreciable assets acquired and first used on or after 7:30 pm 6 October 2020 and before 30 June 2022 are subject to Full Expensing measures.
Temporary Full Expensing of Depreciating Assets (FEDA)
From 6 October 2020 to 30 June 2022
Temporary full expensing is available to businesses with aggregated turnover of less than 5 billion. To be eligible for temporary full expensing, the asset must be:
– first held by you at or after 7.30pm AEDT on 6 October 2020
– first used or installed ready for use by you for a taxable purpose between 7.30pm AEDT on 6 October 2020 and 30 June 2022.
Second-hand assets are eligible for full expensing for entities with an aggregated turnover under $50 million.
Certain assets are not eligible for temporary full expensing. Ineligible assets include, without limitation, assets allocated to low value pool or software development pools, capital expenditure deductible under Division 43, assets that will never be located or used for business purpose in Australia.
It is important to note that larger tax deductions created by instant asset write off threshold and temporary expensing measures may have adverse tax consequences for certain businesses. Examples where full deduction may not be beneficial include situation where:
– the deduction creates losses in a trust entity (e.g. a service trust);
– the individual who is ultimately taxed on the income (sole trader or beneficiary) is driven into a lower tax bracket.
Recently, amendments have been introduced to allow opt-out of full temporary expensing on asset by asset basis. However, opt-out has no practical effect for small businesses electing to use simplified depreciation regime.
Small businesses that opted to use simplified depreciation under Division 328, need to allocate assets above instant asset threshold to general small business pool, which is be required to be written off in 2021.
Taxpayers should carefully consider their options available under the new legislation for tax planning purposes. If you have invested, or are planning to invest, in equipment for your medical or dental practice during accelerated depreciation period, one of the most important consideration you need to make is whether you should opt out of simplified depreciation regime.
Making the right choices in relation to equipment is absolutely crucial in tax planning for doctors and dentists.
Small Business Turnover threshold increase for certain concessions
As a result of the 2020-21 Federal Budget changes, certain small business concessions previously available only to small businesses, were extended to businesses with an aggregated turnover less than $50 million.
The tax concessions will apply to newly eligible businesses as follows:
From 1 July 2020:
– Immediate deduction of certain start-up expenses under s 40-880
– Immediate deduction for certain prepayments
From 1 July 2021:
– simplified trading stock concession
– option to pay PAYG instalment amounts calculated by the ATO based on prior year return
– two years amendment period for tax returns for income tax years starting on or after 1 July 2021
From 1 April 2021:
– FBT exemption for car parking benefits if the parking is not provided in a commercial car park
– FBT exemption for multiple work-related portable electronic devices
Many medical and dental practitioners suffered significant decline in turnover when all elective surgeries were suspended following the order made by National Cabinet in March 2020. As a result, many of them satisfied eligibility criteria for Jobkeeper payments.
The original Jobkeeper rules allowed those entities who satisfied 30% drop in turnover in earlier period to continue claiming Jobkeeper payments without having to retest the decline in subsequent periods up until 27 September 2020.
When elective procedures resumed, many affected practitioners saw their turnover returning back to normal but they could continue claiming Jobkeeper payment for the period until 27 September 2020, provided all other eligibility criteria were met.
Jobkeeper payments were subsequently extended to apply from 28 September 2020 to 31 March 2021, but the new rules required to retest decline in turnover in each relevant quarter.
Remember that Jobkeeper payments are taxable payments and have to be included in taxable income of the entity to which they were paid and not the individual in respect of whom they were claimed (unless the entity is a sole trader). Employees receiving top up payments as a result of Jobkeeper stimulus measure receive them as part of their normal wages reported under PAYG system.
Cash Flow Boost
Eligible businesses employing workers, or otherwise making payments subject to PAYG withholdings, in March and/or June 2020 quarter were automatically eligible to receive cash flow boost payments upon lodgment of activity statement for the relevant period.
If an entity was eligible for the first cash flow boost payment (for the periods from March 2020 to June 2020), it was automatically entitled to the second cash flow boost payment for the amount equal to the first cash flow boost payment even if the circumstances changed.
Cash Flow Boost is a non-assessable non-exempt (NANE) income, which means it is tax free to the entity.
However, if the entity is a company, distributing tax-free payments to ultimate shareholders is likely to result in payment of unfranked dividends. The payment will be taxable in the hands of shareholders at their personal marginal tax rates.
Jobmaker Hiring Credits
The JobMaker Hiring Credit scheme is new incentive for businesses to employ additional employees aged 16–35 years hired between 7 October 2020 and 6 October 2021.
The credits will be paid at the rate of up to $200 per week for each eligible employee aged 16-29, and up to $100 per week for each eligible employee aged 30 to 35, based on their age when they start employment.
The aim of Jobmaker is to create new employment, not to subsidise the cost of existing employment. You must create new employment positions by increasing the headcount in your payroll.
There are number of eligibility conditions applying to both the employer and the employee, including that the employee must have been receiving certain government income support payments for at least 2 out of 6 fortnights prior to starting employment. Close associates, including relatives of the business participants, are not eligible employees for the purpose of JobMaker.
Is it worthwhile to participate in the scheme? The answer will ultimately depend on whether there is a real commercial reason to hire the employee in the first place and if the employee is likely to add value.
Self Managed Super Funds (SMSF’s)
SMSF rent relief deferral (Inhouse Asset exclusion)
Due to impact of Covid-19, some tenants had to provide rent relief in the form of deferral, waiver or reduction to tenants experiencing financial difficulties. However, if the landlord is an SMSF and the tenant is a related party, providing such relief would ordinarily be a breach of superannuation law.
To address this concern, the ATO issued a determination stating that if an SMSF allows a related party tenant to defer rental income due to financial impact of Covid, the deferral will not result in breach of an in-house asset rule.
The determination does not apply to waivers or reductions of rent. However, the ATO stated that that they will not take any compliance actions for the 2019–20 and 2020–21 financial years if an SMSF gives a temporary rent reduction or waiver to a related party because of the financial effects of COVID-19 during this period.
NSW State Measures
Land Tax relief for residential and commercial leases
Land tax relief may be available to landlords who provided rent reduction to tenants financially impacted by Covid-19.
For 2020 land tax year, up to 50% land tax reduction is available for landlords who have reduced the rent for eligible commercial or residential tenants for any (or both) of the following periods:
– 1 April 2020 and 30 September 2020
– 1 October 2020 and 31 December 2020
For 2021 land tax year, up to 25% of land tax reduction is available to commercial landlords who have provided reduction of rent to eligible tenants for the following period:
– 1 January 2021 and 28 March 2021.
Landowners can be eligible for land tax relief for either, or both 2020 and 2021 land tax year, provided all eligibility requirements are met.
Payroll Tax rate reduction and threshold increase
If you are an employer who pays wages in NSW above payroll tax threshold, you are required to register for and pay payroll tax.
For 2021 and subsequent financial years, the threshold has been increased to $1,200,000.
Payroll tax rate has been reduced to 4.85 per cent for the 2020/21 and 2021/22 financial years.
These changes apply retrospectively from 1 July 2020.
With so many significant changes introduced in 2020-2021, it is important to revise your tax strategy early. A qualified tax adviser who is up-to-date with the current and proposed tax legislation will help you navigate those changes and find tax planning opportunities to achieve the best outcome.
Prism Accounting offers tax planning for doctors, dentists and allied health professionals. Contact us today to make an appointment with our specialist tax adviser.