Thinking | 7 October 2020
Federal Budget 2020-21: what does it mean for you?
This year’s highly anticipated Budget sets in motion key aspects of the economic recovery plan through a mixture of tax cuts, business concessions and bold measures to stimulate spending and investment.
The Budget is built on key assumptions, including a vaccine for COVID-19 next year and no future lockdowns. It is critical that domestic borders are open sooner than later.
Businesses will welcome the substantial new expensing of capital expenditure regime and loss carry-back measures. Cash availability for households will be boosted by the accelerated personal income tax cuts.
Australia’s economic recovery will rely upon businesses and households spending, rather than saving, the additional cash available.
In this article, we examine the key announcements and how the Budget may impact your business.
A significant announcement for investment in capital assets by business has been outlined in the Budget and it’s a 'game changer'.
Businesses with an aggregated annual turnover of up to $5 billion are able to deduct the full cost of eligible capital assets acquired after 7.30 pm on 6 October 2020 (Budget night) and, importantly, used or installed ready for use by 30 June 2022. Eligible capital expenditure will apply to new depreciable assets and the cost of improvements to existing eligible assets. For businesses with an aggregated annual turnover of less than $50 million, full expensing also applies to second-hand assets.
Businesses with an aggregated annual turnover between $50 million and $500 million can deduct the full cost of eligible second-hand assets under $150,000 purchased by 31 December 2020. Businesses that hold assets eligible for the enhanced $150,000 instant asset write-off will have an extra six months, until 30 June 2021, to first use or install those assets.
Small businesses (aggregated turnover of under $10 million) can deduct the balance of their simplified depreciation pool at the end of the income year while full expensing applies. Provisions preventing small business from re-entering the simplified depreciation regime for five years will continue to be suspended.
This is a massive announcement for businesses that are trading and have the ability to finance capital expenditure.
Importantly, the eligibility for businesses will be key – the assets must be acquired from 7.30 pm on 6 October 2020 (Budget night), and must be first used or installed ready for use by 30 June 2022.
This is a pragmatic decision, recognising that COVID-19 has caused international supply and distribution chains to be disrupted and that significant capital assets can have a significant 'lead time' to be used and be available for use by business.
The question of when a capital asset is used, or installed ready for use, is a factual question and we expect that, as we get closer to the key date of 30 June 2022, substantiation will be key. A business could get caught if, for example, the capital asset has been received and stored by the business, but is not yet fitted for its intended use. The ability to put the capital asset to use, or have it installed ready for use, may be affected by extraneous and unanticipated factors. Proper planning will be necessary to ensure that this requirement is satisfied.
Further, the full expensing will apply in the first year of use, and not the year of purchase. This means that expenditure on the capital asset may be deductible in either the 2021 or 2022 financial years.
There is little guidance at this stage as to what is an ‘eligible capital asset’ for the purpose of this announcement.
It is surprising that the small business threshold in this announcement has an aggregated annual turnover of less than $10 million, which is inconsistent with other Budget announcements that increase the small business entity threshold from $10 million to $50 million.
For small business, the ability to deduct the balance of their simplified depreciation pool will be a welcome announcement.
Companies will be able to carry-back tax losses incurred in the income years ending 30 June 2020, 30 June 2021 and 30 June 2022 to offset income from the income year ended 30 June 2019 onwards. Currently, companies can only carry tax losses forward to offset income from a future income year.
The temporary measure will be available to corporate tax entities with an aggregated turnover of less than $5 billion. A refundable tax offset will be generated in the year the loss is made. However, the refund will be limited so that the amount carried back is not more than the taxed profits of the earlier year and does not generate a franking account deficit.
Companies will make the election to use the loss carry-back provisions when lodging their tax return for the income years ending 30 June 2021 and 30 June 2022.
The current tax loss rules allowing taxpayers to carry forward tax losses will remain unchanged.
Australia is following the recent lead of overseas economies, such as the US, UK and New Zealand, in introducing loss carry-back rules. However, for Australia, it's a case of back to the future. The previous Labor government introduced loss carry-back rules in mid-2013, before they were repealed in mid-2014 by the incoming Coalition government when the minerals resource rent tax was repealed.
The temporary loss carry-back rules are a welcome relief for eligible companies that have been impacted by COVID-19. The measures effectively represent a cash flow benefit to these businesses by allowing them to reclaim some of the tax paid in limited previous years when they were profitable. The Government is also banking on these businesses using that cash flow benefit to invest under the super-charged instant depreciable asset write-off also announced in this Budget.
Taxpayers should also note that eligibility for the carry-back loss provisions is based on an aggregated turnover of less than $5 billion – including not only the turnover of the company claiming the tax loss, but all of its connected entities and affiliated entities (local and overseas). This means that a small company that is part of a larger group may be excluded from the rules if the turnover of the group exceeds the $5 billion threshold. The measures only apply to corporate tax entities and do not apply to trusts or partnerships – and so excluding many small businesses from benefiting under the measures.
The Budget announced clarifying changes to the corporate tax residency test. A company incorporated offshore will be regarded as an Australian tax resident where it has 'significant economic connection to Australia'. The core elements of this test requires the company’s core activities to be undertaken in Australia and its central management and control to be in Australia.
The measure is expected to apply from the first income year after the legislation receives Royal Assent. Taxpayers will also have the option of applying the new rules from 15 March 2017, being the date that the ATO withdrew their previous ruling on this issue.
This measure effectively reflects the residency position for foreign incorporated companies prior to the court decision in 2016 (Bywater case) and follows the recommendation from the Board of Taxation (Review of Corporate Tax Residency) report in 2020.
The finer details of the rules will be released in due course and we expect further guidance to be provided on the Australian economic connection requirements.
The Government has announced an increase to the small business entity turnover threshold from $10 million to $50 million for the following specific tax concessions:
- From 1 July 2020, eligible entities below the threshold will be able to immediately deduct certain start-up expenses and certain prepaid expenditure.
- From 1 April 2021, eligible entities below the threshold will be exempt from the 47 per cent fringe benefits tax on car parking and multiple work-related portable electronic devices (such as phones or laptops) provided to employees.
- From 1 July 2021, eligible entities below the threshold will be able to access the simplified trading stock rules, remit pay as you go (PAYG) instalments based on GDP adjusted notional tax, and settle excise duty and excise-equivalent customs duty monthly on eligible goods under the small business entity concession.
Additionally, the limited amendment period within which the Commissioner of Taxation can amend income tax assessments will be reduced from four years to two years for entities that fall below the threshold. The Commissioner of Taxation’s power to create a simplified accounting method determination for GST purposes will also be expanded to apply to businesses below the threshold.
The increase to the small business entity turnover threshold from $10 million to $50 million is welcome, and it’s expected that more business will be able to now benefit from the specific concessions and simplified rules. The Government has predicted that this change will simplify eligibility and reduce red tape for around 20,000 businesses.
However, the increase to the threshold is only relevant for the specific concessions that are noted above. That is, the eligibility turnover thresholds for other small business tax concessions (such as the small business CGT concessions and the small business restructure rollover) will remain at their current levels.
This will create further confusion and uncertainty for practitioners as even more turnover thresholds will apply for different concessions; $2 million, $10 million and $50 million, depending on the relevant concession. This flies in the face of the original concept of having a simplified taxation system consisting of a range of concessions available to a small business entity; as measured by reference to a single turnover threshold.
The Budget confirms that certain Victorian Government business support grants, which were announced by the Victorian Government under the third round of Victoria’s Business Resilience Package, will be treated as non-assessable, non-exempt (NANE) for income tax purposes. State-based grants are generally treated as assessable income. Given the circumstances that Victorian businesses have faced recently, this concessional treatment is a welcome announcement.
This is a positive announcement for businesses in Victoria, which have faced significant disruptions as a result of COVID-19 restrictions. As state government grants are generally treated as assessable income, they would normally be included in business turnover and subject to tax.
Importantly, the announcement only relates to the third round of grants announced on or after 13 September 2020, and payments made between 13 September 2020 and 30 June 2021. As these grants will be treated as NANE income, businesses will not be required to include them in their particular annual turnover figures. For businesses that received a grant under the first and second rounds of the Business Support Fund and other grants announced by the Victorian Government, this concessional treatment will not apply.
The third round of grants from the Business Support Fund provides grants of up to $20,000 to businesses in specific industry sectors that were restricted, heavily restricted or closed as a result of continued restrictions in Victoria’s roadmap for reopening, and those restrictions did not change or ease between the first and second step of the roadmap. The specific industries are based on the primary business activity of the business.
The Budget also notes that this arrangement will be extended to all states and territories on an application basis, where businesses face similar circumstances to Victorian business. Practically, it will be implemented by a change to the legislation permitting regulations to be made to ensure that specific grants are NANE income. This change was originally announced last week by Prime Minister Scott Morrison.
The Budget announced a two-year extension to 30 June 2023 of the previous 2017-18 Budget measure regarding funding for addressing serious and organised crime in the tax system. Under this announcement, the Government will provide $15.1 million to the ATO to target serious crime in the tax and superannuation system. These measures are estimated to result in a $136.8 million gain over the forward estimates period.
Although merely an extension of a previous initiative, it is important to note that this will result in increased compliance activity by the ATO. This will ensure that the ATO is adequately resourced to investigate those that have attempted to take undue advantage of COVID-19 relief measures, including the JobKeeper scheme, and the tax and superannuation systems generally.
The Government has announced two key changes to complement its Personal Income Tax Plan announced (and legislated) in 2018.
Personal income tax cuts
Previously, from 1 July 2022, the 19% personal income tax bracket was to apply to a taxpayer’s income between $18,201 and $45,000 and the 32.5% bracket was to apply to a taxpayer’s income between $45,001 and $120,000. These measures remain unchanged, but have been brought forward to take effect from 1 July 2020 (ie the varied brackets will take effect in the current income year).
The tables below summarise the changes over the coming years.
|Years ending 30 June 2021 to 30 June 2024|
|Taxable income||Tax on this income|
|$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|
|Income years ending 30 June 2025 onward|
|Taxable income||Tax on this income|
|$18,201–$45,000||19 cents for each $1 over $18,200|
|$45,001–$200,000||$5,092 plus 30 cents for each $1 over $45,000|
|$200,001 and over||$51,592 plus 45 cents for each $1 over $200,000|
The Low Income Tax Offset (LITO), a non-refundable tax offset for low income taxpayers, will increase from $445 to $700 for the current income year. The Low and Middle Income Tax Offset (LMITO), a non-refundable tax offset of up to $1,080 per annum for low and middle income taxpayers, will be retained at current rates for the income year ending 30 June 2021.
These offsets are to be received as a lump sum on assessment after an individual lodges their tax return.
The income tax bracket changes bring forward the government’s legislated Personal Income Tax Plan, which is designed to lower taxes, consolidate the personal income tax brackets and to limit bracket creep.
These measures had been ‘telegraphed’ well in advance and come as no surprise. Of course, as the personal marginal tax rates reduce (in comparison to the company tax rate, which is also on the path to reducing considerably in the medium to long term), the considerations which drive tax planning and structuring decisions are also affected.
Although not a surprise as it was set out the day before, the Budget has announced that a capital gains tax exemption will apply to the creation of formal written granny flat arrangements. This exemption is set to commence from the income year following Royal Assent.
This change aligns with recommendations by the Board of Taxation and Australian Law Reform Commission, attempting to encourage families to formalise these kinds of arrangements in aid of combatting elder abuse.
It will be interesting to see the extent of the capital gains tax exemption and whether it applies to all capital gains incurred over the life of the granny flat arrangement, or only to those incurred as a result of CGT event D1 only, where a right of occupancy is granted. For instance, will it apply to variations or cessations of arrangements or disposals of granny flats?
Further information will be needed to ascertain how this exemption is intended to operate. Watch this space for further information when the draft Bill is announced.
The Budget announced further enhancements to the R&D tax incentive to promote businesses to commit further expenditure to R&D activities as part of Australia’s economic recovery plan.
Small companies with aggregated turnover of less than $20 million can access a tax offset of 18.5% above their company tax rate, importantly with no cap on cash refunds (which was previously proposed). Larger companies with aggregated turnover of $20 million or more will be rewarded for committing a greater proportion of R&D expenditure through the reduction of the existing R&D intensity tiers (the proportion of R&D expenditure to total expenditure) from three to two, being 0-2% intensity (8.5% offset premium) and above 2% intensity (16.5% offset premium).
Effectively, the lowered and simplified intensity thresholds allow eligible taxpayers with access to greater R&D offset claims. The start date for the program is expected to apply to income years starting on or after 1 July 2021.
This measure will provide taxpayers with greater certainty and simplicity with the previously proposed R&D intensity tiered system, while encouraging R&D expenditure for businesses to access greater cash refunds where commitments are maintained or increased.
The Government has announced two key changes in the area of Fringe Benefits Tax (FBT).
FBT exemption to support retraining and reskilling
Currently, FBT is payable by an employer who provides training to redundant (or soon to be redundant) employees, where that training does not have sufficient connection to their current employment.
The Budget announces that these benefits will be exempt from FBT from 2 October 2020. However, this exemption will not extend to retraining acquired by way of a salary packaging arrangement or for Commonwealth-supported places at university.
Reducing the compliance burden of record keeping
The FBT legislation currently prescribes that employers must keep records in a particular form and, in certain circumstances, compels them to produce certain records, in order to comply with their FBT obligations.
To reduce compliance costs, these rules will be relaxed to allow the Commissioner of Taxation to accept ‘adequate alternative records’ in place of the required documents. Practically, this will allow the Commissioner to accept existing corporate records, removing the need for employers to produce additional records.
The intention behind the FBT exemption is to incentivise employers to retrain and reskill redundant employees to prepare them for their future career.
The announcement regarding the record keeping rules is a minor measure, but helpful for businesses who are no doubt struggling to manage compliance costs in the current climate.
The list of jurisdictions which have an effective information sharing agreement with Australia will be updated. Residents of these listed jurisdictions benefit from a concessional Managed Investment Trust (MIT) withholding tax rate of 15% on certain distributions, rather than 30%.
From 1 July 2021, Australia will add the Dominican Republic, Ecuador, El Salvador, Hong Kong, Jamaica, Kuwait, Morocco, North Macedonia and Serbia to its listed jurisdictions, as they have recently entered information sharing agreements with Australia. Kenya will be removed from the list as it has not yet entered into an information sharing agreement.
Information sharing agreements are one of many measures introduced over the past few years to improve tax transparency and protect Australia against offshore tax avoidance and evasion. Providing a reduced MIT withholding rate to residents of jurisdictions that agree to work with Australia to reduce tax avoidance is a way to encourage more jurisdictions to enter information sharing agreements with Australia.
The expansion of the list of jurisdictions able to benefit from the reduced MIT withholding rate also encourages residents in those jurisdictions to invest in Australia.
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