From Stimulus to Recovery – Federal Budget Overview

Jobs, Jobs and more Jobs  – the Trillion Dollar National COVID Bandage

8 October 2020

Anticipated as the most important Budget for the Nation since World War II, on 6 October 2020 the Federal Treasurer, Josh Frydenberg, delivered a delayed Budget geared towards creating jobs and rebuilding the nation, not dissimilar to his compatriots in 1945. 

In order to achieve this, including the unemployment rate being below 6% by 2024, it is expected that Australia will have total national debt to the tune of nearly $1 trillion, factoring in the announced Budget measures, as well as all previously enacted COVID-19 measures (such as JobKeeper and JobSeeker). 

The Government’s overall response and recovery support for COVID-19 is expected to total $507 billion since the onset of the pandemic, over half of which is direct economic support.  With the bulk of the stimulus measures already provided as a direct response to the pandemic, this Budget is geared towards providing incentives to create jobs and to continue to steer the country through recovery.

WHAT IT MEANS FOR YOU

Our summary of the 2020/2021 Federal Budget covers the announced tax initiatives and what it means for you.

  • It is a great Budget for the young, anyone still working and businesses.
  • Self-funded retirees received nothing directly – but if the share market improves due to this budget stimulus then they should receive returns over the next 12 months.
  • The massive Government spending, tax cuts and wage subsidies will lead to higher spending throughout the economy and greater business investment.
  • In turn, the hope is this will lift business confidence and increase job creation with economic growth. This positions company revenue and profits on a steroids program resulting in rising share prices.

The key areas we would like to make you aware of are:

  1. Businesses
    • Immediate deductions for business investment in capital assets
    • Changes to how companies manage losses
    • Extend SME’s with up to $50M in turnover access to tax concessions
    • R&D walk-back
    • Corporate tax residency test revisited​
  2. Employers
    • Job Maker Hiring Credits
    • Apprentice and Trainees Wage Subsidy
    • FBT and reduced red tape
  3. Individuals
    • Personal tax cuts
    • Your Superannuation

BUSINESSES  

The most significant impact out of the budget is aimed at supporting businesses. There has been a recognition that following the end of the temporary measures to support businesses through COVID-19, that many small businesses may still be distressed and will require support to restructure their business to get through the crisis without further financial support.

To support Australian businesses, who employ 80% of Australians, the following initiatives have been announced.

Extension and expansion of the instant asset write-off

New Assets Acquired

  • An Instant Asset Write Off will be available to businesses with turnover up to $5 billion. 
  • Such businesses will be able to deduct the full cost of eligible depreciable assets of any value.
  • Qualifying assets need to be acquired after 4:30pm WST on 6th of October 2020 and must be first used or installed by 30th June 2022.
  • Businesses who acquired new assets less than $150,000 before 6th October 2020 can still obtain the instant write off where first used or installed by 30 June 2021.

Second-Hand Assets Acquired

  • For businesses with annual turnover of less than $50 million, they will also be able to fully expense the acquisition of second-hand assets acquired post 6th October 2020 regardless of cost.
  • Businesses with turnover of between $50 to $500 million can still fully expense second-hand assets that cost less than $150,000 acquired pre 31 December 2020 where first used or installed by 30 June 2021, under the previously announced instant asset write off measures.

Simplified Depreciation Pool

  • Small business entities that have a turnover of less than $10 million using the simplified depreciation rules can claim as an expense the balance of their simplified depreciation pool at the end of the 2021 year.
  • This is great because it gives business owners a tax deduction for the full amount of non-depreciated assets they have purchased in prior years, so does not require any further cash outlay in order to access the tax benefit.

These changes mean for example, an earth moving business buys a new grader for $250,000 will benefit from a 100% tax deduction in year one.

Important reminder:this does NOT mean that you get $250,000 back in tax. You effectively save tax at say for a company on the 26% tax rate, being $65,000 in tax savings.

Tax loss “carry back”

If your business is making losses now because of the COVID-19 recession, you can get a tax refund out of the taxes you have paid on profits going back to the 2019 year. You can benefit from this “carry back loss” opportunity in your 2021 and 2022 tax returns.

Specifically, a company can carry back losses from the 2020, 2021 and 2022 financial years to offset previously taxed profits in the 2019, 2020 and 2021 financial years.

However, this only applies to companies, corporate limited partnerships and public trading trusts that are taxed as companies. Trusts or individuals won’t be able to access this benefit.

This tax refund will be available as a choice to be made when a company lodges its 2021 and 2022 tax returns.

The refund would be limited as follows:

  1. Carry back is not more than the earlier taxed profits;
  2. Carry back does not generate a franking credit deficit.

For example:  ABC Pty Ltd has the following profit history:

At the time of lodgement of ABC’s 2020/2021 tax return, it will be able to offset the 2020/2021 loss against the profit from 2019/2020 and receive a refund of tax with respect to that loss, being 26% of the loss, or $26,000.  Loss carry back is optional, enabling the company to choose if, or how much of its losses it wishes to carry back. As the offset is based on the corporate tax rate in the loss year, not the profit year, there may be disparity for base rate entities between the tax refund and the taxes previously paid, given the reducing tax rate between the years. 

Planning opportunity

Businesses that incur tax losses as a result of the increased deductions that can be claimed under the expanded instant asset write off rules for the cost of new assets purchased up to 30 June 2022, will be in a position to claim a refund of taxes paid in the earlier income year. As such, the ability to cash in the tax effect of the losses (up to the level of taxes previously paid) sooner than later will ensure that businesses are not discouraged from purchasing new assets, where they would otherwise incur tax losses which would not realise a more immediate benefit from an outright tax deduction, when weighing up the cost of outlaying cashflow to fund new asset purchases.

Words of caution

  1. In order to be entitled to carry back losses, the company must have lodged its income tax returns for the current loss year and each of the 5 preceding income years (unless not required to lodge a tax return), and have turnover of less than $5 billion in the loss year. 
  2. If a company has derived exempt income for the income year, the loss carry back amount is to be adjusted for this in order to determine the appropriate tax offset.
  3. A company will not be able to carry back a tax loss to the extent that it is a loss that has been transferred to the head company by a subsidiary member joining a tax consolidated group, or otherwise where the loss was generated by a company converting excess franking credits into a tax loss. It is clear that the losses to be carried back must be economic losses incurred by the company as a result of its own operations in the 3 test years.

Extending access to small business concessions

The turnover threshold for Small Business Entities (SBEs) will be increased to taxpayers with an aggregated annual turnover of under $50 million.

This means an additional 20,000 business will be able to access the small business tax concessions over a staggered start period, including:

  • From 1 July 2020
    • Immediate deductibility of certain start-up expenses and prepaid expenses;
    • Access to simplified trading stock rules;
  • From 1 July 2021
    • Ability to pay PAYG instalments based on GDP adjusted notional tax, rather than using the instalment rate method;
    • Ability to have a two-year amendment period, excluding if you have significant international dealings or complex affairs;
    • Simplified accounting method for GST purposes expanded to apply to businesses up to $50 million turnover.

We do not anticipate that any extension will be made to the turnover threshold applying to the small business CGT concessions.

Research and Development tax incentives enhanced

The Government has backflipped on previously proposed cuts to research and development tax incentives.

For small companies (turnover less than $20 million) the refundable R&D tax offset will be set at 18.5% above the company tax rate and there won’t be any cap on annual cash refunds.

Companies with annual turnover of $20 million or more will still face a tiered intensity approach that will now see 2 tiers instead of 3.  The marginal research and development premium will be 8.5% percentage points above the claimant’s company tax rate for research and development expenditure between 0% and 2% R & D Intensity.

For companies with R & D expenditure above 2%, R & D Intensity will see the premium rise to 16.5%.

The government will also defer the start date for the changes to 1st July 2021 giving certainty to businesses that R & D tax claims made in relation to the 2019/20 and 2020/21 income years would be subject to current enacted legislation.

Corporate tax residency test

In a very welcome announcement, technical amendments will be made to the corporate residency tests under the income tax law, such that an offshore company will be treated as an Australian resident for tax purposes if it has “significant economic connection to Australia”.  This will be satisfied where both:

  • The company’s core commercial activities are undertaken in Australia; and
  • Its central management and control is in Australia.

This measure is in response to industry feedback and a Board of Taxation review following the ATO’s decision to withdraw a tax ruling in 2017 regarding the residency of foreign incorporated companies, which was withdrawn following the decision in Bywater Investments Ltd v Commissioner of Taxation in 2016, with the ATO departing from their longstanding position on the definition of a corporate resident.

This new interpretation created much uncertainty as a result, with potentially more foreign resident companies being brought into the Australian tax net.  The outcome of this technical amendment to the law will be to reflect the tax position prior to the Bywater decision, which should provide more comfort and certainty for many corporate taxpayers, in particular to Australian companies with foreign subsidiaries.

EMPLOYERS

In an effort to promote employment, the Government has committed to $4 billion to JobMaker Hiring Credits and a Job Trainer Fund to promote job opportunities for young Australians. These programs will co-exist with the JobKeeper and JobSeeker programs.

JobMaker hiring credits

The JobMaker hiring credit will be available to eligible employers over 12 months from 7 October 2020 for each additional new job they create for an eligible employee.

Employers will receive $200 a week for hiring someone aged 16 to 29 and $100 a week for taking on someone aged 30 to 35.

To be eligible, the employee will need to have worked for a minimum of 20 hours per week averaged over a quarter, and have received the JobSeeker Payment, Youth Allowance or Parenting Payment for at least one month out of the three months prior to when they are employed.

The JobMaker hiring credit will be paid quarterly in arrears and will be available for 12 months from the date of employment with a maximum amount of $10,400 per additional new position created.

Employers will need to prove that the new employee will increase overall employee headcount and payroll.

Businesses already claiming JobKeeper will be ineligible for the JobMaker Hiring Credit subsidy.

Apprentices and trainees wage subsidy

A business that takes on a new or recommencing Australian apprentice will be eligible for a 50% wage subsidy. The subsidy is paid in arrears and is available for wages paid from 5 October 2020 to 30 September 2021, up to a maximum amount of $7,000 per quarter.

Fringe benefits tax (FBT)

Several FBT measures were announced to be aware of, although only proposed to take effect from 1 April 2021, so do not apply to the current FBT year.

  1. FBT exemption for retraining and reskilling benefits provided to redundant, or soon to be redundant employees by their employer, compared to current rules, where such training is generally subject to FBT where the retraining is not related to the individual’s current employment.
  2. A reduction in record keeping requirements for employers with respect to their FBT returns.  This is designed to allow employers, where they have alternative records, to rely on those records, rather than requiring additional employee declarations or travel diaries etc in order to reduce the compliance burden on employers. This measure is not expected to change the FBT liability for employers.
  3. The existing exemptions on car parking and multiple work-related portable devices for small business entities will now be extended to businesses with an aggregated turnover of up to $50 million. As a reminder these car parking exemptions are typically for parking on the business premises only, that is, it is not available for parking provided at third party commercial parking facilities, and that the existing exclusion for listed companies will continue to apply.

Watch this space – In order to enable more cash in hand to workers sooner than later, a Bill has been introduced into Parliament yesterday to implement the bring forward of the cuts to personal tax rates.  The ATO has since advised that it will publish updated tax withholding schedules once either the amendments pass Parliament, or otherwise there is bipartisan support for the Bill. The ATO will be working closely with the various providers of payroll software, so that businesses are equipped to pass on these tax savings to their employees as soon as is practicable. This may not occur until November or December. There will be no adjustment in the tax tables for any “over-withholding” that occurred in the earlier months of the year, prior to these changes.

INDIVIDUALS

Personal tax cuts

In an attempt to kick start the economy, the Government is introducing tax cuts totalling $50 billion backdated to 1 July 2020.

There are 2 key parts to it. An offset which will get paid in a lump sum after July next year as part of your tax refund when you lodge your 2021 Tax Return (or otherwise to reduce your tax liability payable on lodgement), and an immediate reduction in the tax taken from your wages as soon as this legislation passes Parliament.

Below summarises the tax cuts you will receive:

The taxpayers that will benefit most from these changes will be the middle income earners, with those earning $120,000 around $2,430 better off compared to the tax rates that currently apply in the 2020/2021 income year.

Take for example a working couple on around $120,000 each can expect a combined tax cut of up to $4,860. This is significant. The big question is if people will spend these tax cuts or reduce their home mortgages or save them.

The Government have also announced that they will undertake consultation to consider whether to extend deductions to be claimed by individuals personally, where they undertake additional training and education not related to their current employment, consistent with the proposed changes to FBT for employers. Deductions are currently similarly limited for individuals in respect of their current employment only. 

Your superannuation

Superannuation funds face an annual performance test, public ranking by the Australian Taxation Office and the loss of an easy source of new members under a trio of budget measures designed to weed out poor performing superannuation funds.

The Your Future, Your Super package from 1 July 2021, at a cost of $159.6 million, will;

  • enable your super to follow you to a new job whereby employees will automatically keep their existing super fund when switching jobs;
  • This is something that really makes sense. Under this measure, an individual’s super account will be “stapled” to them as they change jobs. New super accounts will no longer be automatically created every time someone starts a new job;
  • provide an interactive online YourSuper comparison tool to encourage competition and make it easier for members to choose a fund;
  • hold Funds accountable, whereby they will have to meet an annual objective performance test, and if they are a consistent underperformer they will prohibited from taking on new members.

This is the first budget in a number of years that has not introduced any adverse changes at an SMSF level nor affecting contributions or benefits, in a welcome relief for members that have been craving stability in the sector after many changes in recent years.

SUMMARISING COMMENTS

The current economic environment and recovery requirements are not dissimilar to those post World War II.  This Budget has a similar overall intention and plan to recover – building the economy through investment and job creation.  The level of National debt incurred post WW II has only recently been repaid by Australia, and it is hoped that the debt level to fund the COVID-19 stimulus and recovery can be repaid more quickly particularly in light of current low interest rates, although will remain an intergenerational situation. 

It is noted that some of the announced measures will act as a deferral of Government revenue, whereby in future years, that revenue will (in theory) increase.  For example, the carry back loss provisions will mean that when those companies generate a profit in future years they will then be paying tax, as they would have used their losses in this measure, rather than being able to carry them forward. 

The Government has forecasted a GDP growth of 4.75% in 2020/2021. There remain concerns about how that growth will be achieved given the lack of population growth from immigration, reduction in birth rates, lower international students and stunted tourism due to border closures. 

Therefore, most of that growth will need to be internally generated or through expanded export markets.  For businesses to invest in new equipment and hire staff they need to have confidence in the recovery. 

Although this Budget will result in a substantial spend to lead the country through recovery, it is in our view a missed opportunity to overhaul the tax system to the level we were hoping.

  • There was an opportunity to be strategic regarding tax reform and take longer term improvements to the tax system;
  • Tax effective childcare to encourage increased female workforce;
  • Removing FBT on entertainment to prop up the disseminated hospitality and arts industries;
  • Removal of the car luxury tax to stimulate spending;
  • Simplify the administration surrounding private companies and loans to shareholders;
  • Incentivisation to contribute back into superannuation by lifting the deductible contribution limits.

We are hopeful that in the next federal Budget in May 2021, which will likely be an election Budget, that some of these areas may be addressed, or will be addressed in the shorter-term. 

NEXT STEPS 

If you have any questions about how the 2020/2021 Federal Budget affects you – please contact your Cooper Partners engagement team.

In the meantime, as further legislation is released with respect to any of the above measures we will keep you informed. 

This newsletter is current as of 8 October 2020, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve.  Before acting upon the content of this newsletter, please contact us to discuss how the above applies to your specific circumstances.

This information is general advice only and neither purports, nor is intended to be advice on any particular matter.
No responsibility can be accepted for those who act on the contents of this publication without first contacting us and obtaining specific advice.
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