Navigating the tax landscape can be challenging, especially in light of the unique financial circumstances many businesses have faced due to COVID-19 and natural disasters. One area that businesses should be particularly attentive to is the tax implications of receiving government support grants or payments.
Assessable Income and Grants
Firstly, businesses that have received government support must determine whether the grant they received needs to be included in their assessable income. In many cases, these grants are indeed considered as assessable income. What this means for businesses is that they might need to report this as income on their tax return. It’s essential to keep accurate records of these transactions to ensure compliance.
However, there’s an upside. If the grant money is reinvested into the business, taxpayers may be eligible to claim deductions. For instance, deductions can be claimed if the grant money was used to:
- Purchase replacement trading stock or invest in new assets that will assist in generating income for the business.
- Conduct repairs on business premises or upgrade and renovate the workspace.
- Cover other day-to-day business operating expenses.
Non-Assessable, Non-Exempt (NANE) Income
On the other hand, certain grants are designated as non-assessable, non-exempt (NANE) income. Businesses fortunate enough to receive such grants do not need to include them in their tax return, given they satisfy specific eligibility criteria.
Some examples of NANE grants are:
- COVID-19 business support payments: These were introduced to provide immediate relief to businesses grappling with the effects of the pandemic.
- Natural disaster grants: Often provided to businesses impacted by events such as floods, fires, or hurricanes, helping them get back on their feet.
- Water infrastructure payments: Typically for businesses in agricultural sectors to improve water efficiency or address drought conditions.
For NANE grants, businesses should note that they can only claim deductions for expenses directly linked to generating their assessable income, encompassing categories like wages, dividends, interest, and rent.
Non-Deductible Expenses
Lastly, while government grants can offer much-needed financial relief, it’s crucial for businesses to remember they cannot claim expenses incurred in the process of obtaining the grant. For example, if a business sought the services of an accountant or consultant to secure a grant, those fees would not be deductible.
As always, tax issues can be intricate and ever-evolving. For businesses that have received government support payments or grants, understanding their tax obligations is crucial. If unsure, always consult with an accounting professional to ensure all tax obligations are met and to maximize potential deductions.
If you’re unsure how to navigate this space, contact our office to discuss with one of our experts.
