Tax time tips for construction businesses

There are a number of tax time challenges for Australian businesses in the 2019-20 financial year as we count the costs of a catastrophic bushfire season and the coronavirus pandemic.

In a normal year, you would pool all your receipts and books together, take them to a tax agent, report your income, claim your expenses, calculate your capital gains and so forth. Overall, a fairly straightforward process every year.

But the 2019-20 financial year has presented businesses with some unusual tax considerations, said CPA Australia tax policy adviser, Elinor Kasapidis.

"With COVID, what we're finding is that businesses are facing challenges such as losing money for the year, having bad debts, being stuck with excess trading stock that they hadn't planned for, because they just can't get rid of it," she said.

"Some may have renegotiated loans with the banks or have debtors who can't pay them, and they're renegotiating some of the terms of those debts."

To make things hopefully a little easier for you, here are some tax considerations that may concern you for the 2019-20 financial year:

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If your business has received support through JobKeeper, you need to be aware that all JobKeeper payments are assessable income.

According to the Australian Taxation Office (ATO), "the normal rules for deductibility apply in respect of the amounts your business pays to its employees where those amounts are subsidised by the JobKeeper payment."

However, the payment is not subject to GST. Find out more about JobKeeper and tax implications here.

Temporary cash flow boosts were introduced to support small and medium businesses and not-for-profit organisations during the economic downturn caused by COVID-19. Eligible organisations who employ staff can receive between $20,000 and $100,000 in cash flow boost amounts by lodging their activity statements up to the month or quarter of September 2020.

You do not need to pay tax on the amount of the cash flow boost. However, the ATO advises that if you distribute the boost from your business to another entity (for example, making a trust distribution or paying a dividend to shareholders) there may be tax consequences for the recipient.

The cash flow boost is not subject to GST as you are not making or agreeing to make a supply for the payment, and there is no effect on tax paid by employees with respect to their salary and wages.

More information is available here.

"While you're doing your income tax, you might just want to look at the GST side of things as well," Kasapidis said.

"So, if you've had contracts cancelled or had to cancel sales or refund purchases you might need to adjust your GST to reflect this."

The ATO has worksheets to assist in calculating GST adjustments for sales, purchases, bad debts, creditable purpose and adjustments summary. You can download them here.

The Morrison Government’s beefed-up instant asset write-off program – with a $150,000 threshold amount for each asset and available to businesses with an aggregated turnover of less than $500 million – was scheduled to end on June 30 but has been extended to December 31.

"Businesses now have a bit of breathing space," Kasapidis said. "If you haven't had the opportunity or the funds to take advantage of it for this tax year, you'll still have another six months to take advantage of that in the next financial year."

Also bear in mind that, from January 1, 2021, the threshold will be a mere $1000 and the write-off will only be available for small businesses with a turnover of less than $10 million.

Measures introduced by the ATO in March 2020 allow businesses with aggregated turnover of less than $500 million to deduct the cost of depreciating assets at an accelerated rate of up to 57.5 per cent for the 2019–20 and 2020–21 income years.

The accelerated depreciation deduction applies in the income year that the asset is first used or "installed and ready for use for a taxable purpose".

In the following income years, the usual depreciating asset arrangements will apply.

There is no limit on the number of eligible assets for which you can claim accelerated depreciation, but they cannot be second-hand goods or have already been claimed under the instant asset write-off program.

During the pandemic, many contractors or businesses might have faced issues with payments due to clients’ inability to pay their invoices. While that affects your cash flow, it also means that you can report less income this year.

However, if you operate under an accrual basis you still have to report the income.

"If you invoice for it and you put it on what we call an accrual basis, you're still going to have to pay tax on that, even if you haven't received it," Kasapidis said.

"And that may cause challenges."

Only claim for expenses made within the financial year, regardless of the projects that did or did not happen.

"If you continue to operate, you're carrying expenses, but obviously the timing of delivery may be changing and you might be renegotiating parts of the project that you're working on," Kasapidis said.

"What you had planned might not actually be occurring right now. These are circumstances beyond anyone’s control so there's a lot of uncertainty."

Your registered tax agent can help you identify bad debt that you can write off, which will reduce your tax, Kasapidis said.

"So if you're not going to be able to recover those debts and you want to write them off your books, that can be a deduction."

The debt must still exist at the time it is written off for a deduction to be available. So you won't be able to claim a deduction if the debt has been forgiven or compromised.

More details on writing off bad debt can be found here.

Where you have inventory that might have lost its value, or you're stuck with a little bit more than you had planned, you can use different methods to value that stock.

Many businesses use the simpler trading stock rules if the value of their trading stock doesn’t vary by more than $5000 a year. But if your sales and inventory levels have been significantly affected by the coronavirus pandemic, then it might be more tax-effective to use the market selling value or replacement value basis for your calculations.

Again, speak to your tax agent to figure out the best method for you.

"One of the messages from the ATO is that they are expecting a drop in travel and car expense claims because they don't expect people to be moving around as much," Kasapidis said.

"However, if you work in building and construction and you kept going as per normal, you are still entitled to those expenses."

You need to keep records of the KMs travelled and related expenses so you can prove to the tax office that your claims are legitimate.

As always, you can claim a deduction for protective clothing and footwear that protect you from illness or injury posed by the activities undertaken to earn an income.

If you were required to buy protective items such as gloves, face masks and hand sanitisers to protect yourself against COVID-19, and you can prove that these were connected to your employment, you can deduct them as well.

CPA Australia pointed out that there are significant capital gains tax savings "potentially available to small business where an eligible active asset used in a business is sold for a profit, and the taxpayer can satisfy either the $6 million maximum net asset value test immediately before the CGT event or the $2 million CGT small business entity test for the 2019 year".

There are now extra conditions to be met if you dispose of an active asset such as a share in a company or an interest in a trust.

If you make payments to contractors for building and construction services, there's a separate report – the Taxable Payments Annual Report (TPAR) – you need to submit to the ATO by August 28 each year.

The report helps the ATO identify contractors who have not included all their income on their tax return or have not lodged tax returns or activity statements.

Examples of building and construction services are bricklaying, cable laying, demolition, earthworks and pile driving. Click here for more information.

If you're having difficulty paying your tax, the ATO may be able to help you by deferring your income tax, FBT and excise payment due dates up to September 12, 2020.

They can also stop interests from accruing on your tax liabilities, and also help arrange for low-interest payment plans etc.

Kasapidis highly recommends using a registered tax agent to help you lodge your tax returns to make sure you're not losing out or paying too much.

You can find a Certified Practising Accountant through the CPA Australia website.

Note: These tips do not constitute financial advice. Speak to a registered tax accountant for advice on your specific circumstances.