Tax time tips for construction businesses 2021

It has been over a year since Australia and the rest of the world were hit by the coronavirus pandemic and sadly, no one is really out of the woods as of yet.

Although Australia is in a much better position than most other countries in terms of managing the virus and the economy, plenty of damage has been done nevertheless to not just the construction sector but most industries in general.

The construction sector was even on the brink of collapse last year before stimulus packages and incentives jolted the sector back to life. In particular, the HomeBuilder stimulus provided a much-needed boost to the sector that propelled it to new heights and levels not seen in decades.

With all that in mind, it is important to look at your entitlements carefully in order to lodge your tax accurately and maximise your return this 2020-21 financial year.

A lot of policies and incentives in place since last year, designed to provide businesses relief from the effects of the pandemic and natural disasters have not changed but in fact increased in some cases.

RELATED: Tax time tips for construction businesses 2020

We spoke to CPA Australia senior manager of tax policy, Elinor Kasapidis, to understand tax policies construction businesses need to be aware of this financial year.

One of the biggest changes this year, especially for businesses, is a reduction in the corporate tax rate.

For companies with aggregated turnover of less than $50 million a year, the tax rate will fall from 27.5 per cent to 26 per cent for their 2020-21 return. From the 2021-22 tax year, the corporate tax rate falls further to 25 per cent.

What that means is essentially more money back in the pocket.

Personal tax cuts also take effect this year as the Stage 2 tax cuts have been brought forward to 2020-21.

SEE ALSO: Budget 2021: What’s in it for construction businesses

For businesses operating through a company structure and have made a loss in 2021, they can get a refundable offset for tax paid in previous years rather than having to carry the loss forward.

Kasapidis said it is important that the company has a sufficient surplus in their franking account to cover the claim and the ATO will be checking to make sure this is correctly accounted for.

The Government has also extended the temporary loss carry back scheme to businesses with turnover up to $5 billion to offset losses from the 2022-23 income year against profits going back to 2018-19 on which tax has been paid, to generate a refund.

The latter is essentially an enhanced version of the former.

The first enhanced Instant Asset Write-Off (IAWO) scheme was introduced in March 2020 in response to COVID-19, where the asset value threshold has been increased from $30,000 to $150,000. Business eligibility was also expanded to include those with an annual turnover of under $500 million, from $50 million. That scheme was extended several times in 2020 to now having an end date of June 30, 2021.

However, in October 2020, a supersized asset-write off program - named temporary full expensing (TFE), was introduced, which allows businesses with turnover of less than $5 billion to purchase and write their assets off instantly in the year they purchased and used them, with no asset value limit applied.

The TFE currently has an end date of June 2023.

“The temporary loss carry-back scheme and the asset write-offs that were in place in 2019-20 have been extended through to 2022-23, so it’s more about taking advantage of those if you haven’t already,” Kasapidis said.

“For businesses with aggregated turnover of less than $50 million, the assets can be second-hand and this includes cars and motor vehicles.

“Be aware of the car limit which is $59,136 for 2020-21, increasing to $60,733 for 2021-22.

“The government has announced extending the time period for purchasing assets, so that will be beneficial for people who may previously not had the time or cash to purchase a lot of these assets. It’s highlighting that these incentives remain available.”

Under the backing business investment incentive, up to 57.5 per cent of the cost of the asset can be depreciated.

However, the question is, does this still apply with programs like the IAWO and TFE in place?

According to Kasapidis, the IAWO and TFE will likely be used by the majority of businesses for the 2020-21 year.

“Small businesses using the simplified depreciation rules can’t opt out of the temporary full expensing rules, meaning they will have to immediately deduct the business portion of the asset’s cost.”

But not all assets can be depreciated, Kasapidis warned.

“The three depreciation incentives also exclude buildings and other capital works that can be deducted under Division 43 of the Income Tax Assessment Act 1997 which deals with capital works related to buildings including extensions, alterations or improvements," she said.

If your business has received support through JobKeeper or you have taken the government up on its 50 per cent apprentice wage subsidy scheme, you need to report all payments accordingly as all subsidies are considered taxable income.

However, the payments are not subject to GST.

The ATO states that “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.”

During the pandemic, many contractors or businesses might have faced issues with payments due to clients’ inability to pay their invoices. While that affects 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."

Specifically, how is it adjusted and in what situations?

“GST adjustments are needed when the price of a sale or purchase changes, goods are returned, there’s a change in the use of a purchased good or transactions have been classified incorrectly,” Kasapidis explained.

“Businesses will generally make the adjustment in their next Business Activity Statement (BAS), or they can revise earlier BAS.”

“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.

According to Kasapidis, some challenges facing businesses include financial losses, bad debts and having unplanned excess trading stock.

“Some construction businesses have renegotiated loans and terms with their financiers and are renegotiating some of the terms of debts with trade debtors. This can raise tax issues so it’s best to check with a tax agent.”

The tax agent can help identify bad debt that you can write off, which will reduce your tax, Kasapidis added.

“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.

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 pandemic, then it might be more tax-effective to use the market selling value or replacement value basis for your calculations.

It is best to run this past your tax agent to figure out the best method for your circumstances.

This is essentially tax you pay when making money from selling capital assets such as real estate or shares.

Kasapidis said 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.”

However, people should be aware that there are specific conditions that have to be met if they dispose of an active asset such as a share in a company or an interest in a trust.

There are also some complications when calculating capital gains tax (CGT) on properties and the amount depends on a range of factors. 

“You don’t need to pay CGT on properties purchased before September 20, 1985 (i.e. pre-CGT assets) although significant improvements or renovations after that date may be treated separately,” Kasapidis said.

“There is a 50 per cent discount on the capital gain for properties held by individuals for more than 12 months.

“There are also a range of small business CGT concessions which may apply to properties that form part of a business and we recommend speaking to a tax agent before selling to get the best outcome.

“Also, make sure you calculate the cost base (i.e. the amount that you deduct against the proceeds of the sale to calculate your capital gain or loss) correctly and have good records to support these claims.”

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.

Remember to 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.”

With the construction sector returning to normal post pandemic, tradies and workers are travelling around more than ever to carry out jobs. And yes, you can claim those travel and car expenses.

Just make sure you keep records of the distances travelled and related expenses so you can prove to the tax office that your claims are legitimate.

Workers can still 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.

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

The ATO can also stop interests from accruing on your tax liabilities, and also help arrange for low-interest payment plans if required.

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.

A Certified Practising Accountant can be found 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.