The 2020/21 Federal Budget is unashamedly a job creation blueprint.
It has a three-prong approach:
- The Budget focuses on incentives for employers to re-employ those who have lost their jobs due to the Pandemic, or retain those employees currently on JobKeeper when this Government Wage Subsidy finishes in March 2021;
- The retrospective drop in individual tax rates effective 1 July 2020, is a welcome relief for all taxpayers. The aim is to put the tax cuts back into the economy by encouraging spending; and
- Several expenditure related tax breaks are aimed at encouraging business to expand their capital capacity in the hope that it will generate more jobs by increasing demand for such products.
What is reassuring is that there were no changes to
superannuation concessions, or tax nasties announced for
Reduction in Individual Tax Rates
As foreshadowed, the Morrison Government announced they will bring forward Stage Two of their personal income tax plan by two years. These changes are targeted personal income tax cuts focused at low- and middle-income earners. The reduction in individual income tax rates has been backdated to 1 July 2020 and is designed to inject cash quickly back into the economy.
The Low-Income Tax Offset has increased by $255 to $700. The Low-and Middle-Income Tax Offset (LMITO) up to a maximum of $1,080 and has been extended for a further twelve months.
The Treasurer also confirmed there will be no bringing forward of the further previously announced Stage Three individual tax cuts and these will commence on 1 July 2024.
As a result of tonight's announcements, the effective tax free threshold where an individual will pay no income tax is $21,900.
If you qualify for the Seniors and Pensioner Tax Offset the tax-free threshold is up to $30,300.
Below are the proposed new resident Australian tax tables from 1 July 2020.
Post Budget 2020/21 Resident Australian Tax Tables 1 July 2020
|% on Excess||Medicare||Total|
|0 – 18,200||Nil||Nil||0%||0%|
|18,201 – 45,000||Nil||b||19%||2%||a||21%|
|45,001 – 120,000||5,092||c||32.5%||2%||34.5%|
|120,001 – 180,000||29,466||d||37%||2%||39%|
a: Medicare is not payable where your taxable income is less
than $22,801 (2019/20).
b: Low Income Tax Offset (LITO) of $700 (previously $445) available to taxpayers whose taxable income is less than $45,000.
c: Low Middle Income Tax Offset (LMITO) of up to $1,080 is carried over from the 2020 tax year to taxpayers whose taxable income is between $48,000 and $90,000.
d: Low Middle Income Tax Offset (LMITO) phases out at the rate of $0.03 per dollar between $90,000 and $126,000.
Revisiting my Financial Structure for passive investments
Can I reduce my overall tax burden by having passive investments taxed outside the Superannuation System? For example, via a trust or individual names?
For those with passive investments in the Superannuation System above the $1.6 million pension cap and in pension phase, consideration should be given to identifying where such investments should be held. You could consider accessing a portion of this accumulation balance and investing the proceeds outside of the superannuation environment. This could result in you gaining access to the reduced personal tax rates and therefore lowering your overall family tax rate.
Accessing retained earnings from Private Companies
For those with private companies, strategies that utilise those companies to hold passive investments need to be revisited. Overlaying the reduced personal tax rates announced tonight (refer above) may cause you to consider accelerating the accessing of these profits.
With the 2021 Company tax rate of 26% already in effect from 1 July 2020 for companies in receipt of income from carrying on active businesses, now is the time to consider how you optimise the accessing of the retained profits of your Company, especially if there are available Franking Credits.
For those small businesses utilising corporate structures, care needs to be taken due to the changes in corporate tax rates from 1 July 2020, to ensure that you are effectively managing your Company's Franking Account.
Below is an example of how tonight's announced personal tax changes could impact the payment of a fully franked dividend from a Company:
Tax Rate Impact of receiving accessing Fully Franked Dividends from a Private Company
If your taxable income was comprised of only fully franked dividends from a Private Company, the following is an example of the Budget impact of the reduction in personal tax rates on the cash dividend:
|Cash Dividends Received||
|Franking Credit at 26% (27.5% – 2020)||
|Tax and Medicare||
|Less: Imputation Credit||
|Cash Dividend Difference:||
No changes in the Division 7A Anti Avoidance Provisions for Private Companies
The 2018–19 Budget, announced it would further clarify the operation of Division 7A.
However, on 30 June 2020, the Government announced that the start date for the previous Budget announcements will be revised. They will now apply from income years commencing on or after the date of Royal Assent of the enabling legislation.
Tonight's announcements have not altered the uncertainty around Division 7A. We hope that clarification of the rules will happen at some time this year. We will keep you posted.
Business Tax Changes
There were many incentives for businesses announced in tonight's Federal Budget.
We have detailed those in the below Appendix.
Private Health Insurance changes
The Government announced that it will increase the age of dependants from 24 to 31 years and remove the age limit for dependants with a disability. This means if you have children still living at home and studying aged over 24, they can remain on your Family Private Health Insurance.
Aged Care – Increase in availability of at home packages
The Government announced an increase of 23,000 in the availability of home-care packages over the next 3 years.
This should reduce waiting times for such packages.
Superannuation – No news is good news
There were no other superannuation announcements tonight impacting Self-Managed Superannuation Funds.
This means the Government has maintained the reduction in the minimum pension withdrawal by 50% for the 30 June 2021 year.
For Public Offer Superannuation Funds, the Government has announced the following changes:
- The Government will introduce systems to reduce multiple superannuation accounts held by individuals.
- Individuals will be able to access benchmarking information in relation to performance of Public Offer Superannuation Funds, to ensure they become more transparent and accountable for their fees and investment performance. Funds will have their fees and performance available on a new Government website and performance tests will be applied.
We will await the Opposition's response to the proposed individual tax rate reductions.
In the meantime, you should take the opportunity to revisit your own personal financial strategy and the impact tonight's announcements may have on it.
Appendix: Federal Budget 2020/21 Business Tax Changes
Temporary Loss Carry Back Measures
Corporate tax entities with an aggregated turnover of less than $5 billion that incur an income tax loss in the 30 June 2020, 2021 or 2022 income tax years may carry back that loss and apply it against previously taxed profits of the 30 June 2019 or later income years.
The loss carry back is able to generate a refundable tax offset in the year in which the loss is made. The tax refund is limited by requiring that the amount carried back is not more than the earlier taxed profits and that the carry back does not generate a franking account deficit.
Companies that do not elect to carry back losses under this measure can still carry losses forward as normal.
Temporary Instant Asset write-off
Businesses with aggregated annual turnover of less than $5 billion will be able to deduct the full cost of eligible capital assets of any value acquired from 7.30pm AEDT on 6 October 2020 and first used or installed by 30 June 2022.
Businesses with aggregated annual turnover between $50 million and $500 million can still deduct the full cost of eligible secondhand assets costing less than $150,000 that are purchased by 31 December 2020 under the current enhanced instant asset write-off. 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 for use.
It is unclear whether businesses with aggregated turnover between $500 million to $5 billion will be able to claim the instant asset write off on secondhand assets as the budget announcement is silent on this group of businesses or whether the write off will apply at all to secondhand assets acquired after 31 December 2020.
Businesses with aggregated turnover of less than $10 million can deduct the balance of their simplified depreciation pool (STS pool) at the end of the income year while the full expensing applies. The provisions that prevent small business from re-entering the simplified depreciation regime for five years if they opt out will continue to be suspended.
In principle, it appears that the temporary instant asset write off will allow corporate tax entities to acquire capital assets and install ready for use by 30 June 2022 to the point where the deduction places the company in a loss position. That loss can then be carried back and claimed against income tax paid in the 2019 or later income tax years.
Victorian Government Business Support Grant classified as non-assessable, non-exempt income
The Victorian Government Business Support Grant extension (3rd tranche of the Grant) announced on 13 September 2020 will be classified as non-assessable, non-exempt (NANE) income for tax purposes. This differs to the tax treatment applicable to the first two tranches of the Victorian Government Business Support Grants. The first two tranches of the Grant continue to be considered taxable income of the recipient business.
The Government may extend the arrangement to support payments made by other States and Territories provided after 13 September 2020.
Expanding Access to Small Business Entity Tax Concessions to businesses with a turnover of between $10m and less than $50m
The following taxation concessions will now be available to business entities with a turnover of between $10m and less than $50m effective from the start dates noted in the table.
|From 1 July 2020|
|Immediate deductions for start-up costs and prepaid business expenses||An immediate write-off is available for certain start-up
capital expenses. We expect those expenses to include the costs of
creating a trust, incorporating a corporate trustee or registering
a business name.
An immediate tax deduction is available for prepaid business expenses if the eligible service period is 12 months or less.
|Lower corporate tax rate||Currently 26% provided 20% or more of the turnover is from non-passive income or from capital gains.|
|From 1 April 2021|
|FBT Exemptions||The Car Parking fringe benefits exemption applied to car
parking provided to employees. The current FBT Exemption does not
apply to commercial car parking station fees. The budget
announcement is silent on whether the exemption will be limited to
the current FBT exemption or whether it will be extended to
commercial car parking stations fees as well.
Multiple work-related portable devices per year such as phones, laptops provided to employees are considered exempt.
|From 1 July 2021|
|PAYG instalments based on GDP-adjusted notional tax||PAYG instalments are based on GDP-adjusted notional tax, which removes the risk of incurring penalties from under-estimating or over-estimating PAYG instalments|
|Two-year amendment period||The time limit for reviewing an assessment is two years excluding entities that have significant international tax dealings or with particularly complex tax affairs which was not defined in budget announcement.|
|Simplified Trading stock rules||Choice not to do an end of year stocktake if the value of stock changes by less than $5,000.|
|Excise duty and excise-equivalent duty||Settle Excise and Excise-equivalent duty monthly on eligible goods.|
|GST Simplified Accounting Method||The Commissioner can determine simplified GST accounting methods where there is a mixed supply of GST Free or input tax and GST taxable supplies. Currently there is only one industry that has GST Simplified Accounting methods being Retailers who sell Food.|
Fringe Benefits Tax Changes applicable to all taxpayers
Exemption for retraining, reskilling to redeploy employees to a different role in the business.
From 2 October 2020, employer provided retraining and reskilling for employees who are redeployed to a different role in the business will be exempt from FBT. The training costs do not have to be connected with the employee's current role.
The exemption will not extend to retraining acquired by way of salary packaging arrangement or retraining provided through Commonwealth supported places at universities.
Reducing the compliance burden of record keeping
The Government will provide the Commissioner of Taxation the power to allow employers to rely on existing corporate records, rather than employee declarations and other prescribed records to finalise their Fringe Benefits Tax returns. The measure will have effect from the start of the FBT year, 1 April after the legislation has received Royal Assent.
Wage subsidy of up to $7,000 per quarter for new apprentices or trainees
From 5 October 2020 up to 30 September 2021, businesses that employ a new or recommencing Australian apprentice or trainee will be eligible for a 50% wage subsidy regardless of geographic location, occupation, industry or business size.
The subsidy is capped at $7,000 per quarter ($28,000 per annum) and will be available for the first 100,000 apprentices employed by all Australian businesses eligible for the subsidy.
Job Maker Hiring Credits up to $200 per week per employee to accelerate youth employment
From 7 October 2020 eligible employers, who are not receiving JobKeeper payments, may be able to claim $200 per week for each additional eligible employee hired for a new position aged 16 to 29 at the time of start date of their employment and $100 per week for each additional eligible employee aged 30-35.
The key criteria are:
- the employee must have received JobSeeker, Youth Allowance or the parenting payment in one of the three months prior to employment.
- The new position must increase total employee headcount and payroll for the reporting period compared to the three months ending 30 September 2020.
- The credits are only available to employers using Single Touch Payroll (STP) and have all ATO lodgment obligations up to date.
- The new employee must work on average 20 paid hours per week for the full weeks they are employed over the reporting period.
Registration of new employees is open from 7 October 2020 to 7 October 2021. The Job Maker Hiring Scheme credit may be claimed by the eligible employer from 1 February 2021 for new jobs created for the period 7 October 2020 to 6 January 2021. The claim must be submitted within 3 months after the opening of the claims period. The credit is paid quarterly in arrears for 12 months from the date of employment.
We gratefully acknowledge the work that David Bilston-McGillen (Oxygen Private Clients) and Noel Beharis (tax consultant to Logie-Smith Lanyon) have given us with this article. We are immensely grateful for their assistance.