On Tuesday, 6 October 2020, Federal Treasurer Josh Frydenberg handed down what was billed as one of the most significant Australian budgets since World War II (after being delayed from the usual May delivery). The COVID-19 crisis has already called for unprecedented government support for business, families and individuals and the budget includes a continuation of that theme.
The 2020-21 budget is geared towards building – jobs, infrastructure and business confidence – as a means for the Australian economy to stabilise and be sustained with the ultimate aim of growth to be realised as the COVID-19 health crisis eventually subsides.
However, the spending measures that will support the repair to the economy will come at a significant cost. The budget deficit for 2020-21 is forecast to reach $213.7 billion. Net debt will reach $703 billion in 2020-21 (36% of GDP), rising to a height of $966 billion by June 2024 (44% of GDP).
Below are some of the more significant changes from the budget that will impact on business and investment, with good news on the tax front for business and individual taxpayers.
Business tax changes
The budget contains a range of tax relief measures for business, some temporary and some permanent.
The following temporary measures will apply until 30 June 2022 to entities with an aggregated turnover of less than $5 billion:
- Full expensing of the cost of eligible capital assets and capital improvements acquired from 7.30 pm AEDT on 6 October 2020 and first used or installed by 30 June 2022. The new measure will not apply to second-hand assets for entities other than those with an aggregated turnover of less than $50 million (although the previous immediate deduction rules for assets costing less than $150,000 may now apply up to December 2020). This is one of the more costly measures announced in the budget.
- Carry-back of losses for corporate tax entities from the 2019-20, 2020-21 or 2021-22 income years to offset previously taxed profits in the 2018-19 or later income years, generating a tax refund (i.e. a refundable tax offset). Corporate tax entities with aggregated turnover of less than $5 billion will be eligible. However the amount carried back cannot exceed the earlier taxed profits or generate a franking deficit: companies that have paid out taxed profits as franked dividends to shareholders may therefore find the measure has some inherent difficulties. The other details of this measure when enacted will be important to understand. Many such measures include integrity rules and such limitations may also be a feature here.
- COVID-19 business support grants for small and medium business from the Victorian government announced 13 September 2020 will be exempt from income tax, for payments between 13 September 2020 and 30 June 2021. Other States and Territories may apply for exemptions for similar grants.
The permanent measures include:
- A change to the Australian tax residency test for foreign incorporated companies, which will return to the position before the ATO decided to change long-standing practice on 15 March 2017 as a result of the High Court decision in Bywater. Such companies will be Australian tax resident only if they have a 'significant economic connection to Australia', where both the company's core commercial activities are undertaken in Australia and its central management and control is in Australia. Companies will be able to apply this measure as from 15 March 2017. These changes will be particularly relevant in the current and post-COVID environments and considering the way in which many companies are likely to change the way that they conduct their business.
- The current fringe benefits tax (FBT) exemption for staff training related to the current employment will be extended to retraining and reskilling for redundant employees that relates to potential new careers. The government will also consult on whether the income tax law should be amended to allow individuals a deduction for self-education that is not related to their current employment.
- FBT compliance will be made easier by authorising the Commissioner of Taxation to allow businesses to use corporate records rather than employee declarations and other prescribed records to finalise FBT returns.
- Certain small business income tax concessions that currently apply to businesses with a turnover of up to $10 million will be extended to businesses with a turnover up to $50 million. These include immediate deductions for start-up and pre-paid expenses (from 1 July 2020); FBT exemptions for car-parking and portable electronic devices (from 1 April 2021); simplified trading stock rules, GDP notional tax Pay As You Go (PAYG) instalments, a 2 year limit on amendment of assessments and simplified accounting methods for goods and services tax (GST) reporting purposes (from 1 July 2021).
- The list of 'information exchange countries' for which managed investment trust distributions qualify for the reduced 15% withholding tax instead of 30% will be updated from 1 July 2021; importantly Hong Kong will be added to the list.
- The R&D tax incentive will be enhanced with effect from 1 July 2021. For companies with aggregated turnover of less than $20 million, the refundable tax offset will be set at 18.5 percentage points above their company tax rate, and the previously announced $4 million cap on refunds will not proceed. For larger companies (i.e. with aggregated annual turnover of $20 million or more) the non-refundable tax offset based on 'incremental R&D intensity' (i.e. R&D expense as a percentage of total expense) will be the company tax rate plus 8.5 percentage points for intensity between 0 and 2 percent and plus 16.5 percentage points for intensity above 2 percent.
Personal income tax changes
In the 2019 Federal Budget the government announced a three stage plan of income tax reductions effected by changes to the tax rate scale, the low income tax offset (LITO) and the low and middle income tax offset (LMITO). Stage 1 was implemented from 1 July 2019 while stage 2 and 3 were proposed for 1 July 2022 and 1 July 2024.
In the current budget, bringing forward personal income tax cuts is seen as a means to stimulate the economy by encouraging spending, with the flow on impact of building business confidence.
- Stage 2 will now be brought forward under this budget to 1 July 2020; stage 3 will still commence 1 July 2024.
- The tax free threshold remains $18,200.
- The 19% tax rate that has applied to incomes from $18,201 to $37,000 will now apply to incomes from $18,201 to $45,000.
- The 32.5% tax rate that has applied to incomes from $37,001 to $90,000 will now apply to incomes from $45,001 to $120,000.
- The 37% tax rate that has commenced at $90,001 will now commence at $120,001 and apply to incomes up to $180,000, with the top rate of 45% still applying to incomes above $180,000. (Under stage 3 in 2024, a 30% rate will apply to incomes from $45,000 to $200,000 with the top 45% rate applying to incomes above that.)
- The LITO will increase from $445 to $700 for incomes up to $37,500, and then be withdrawn under changed taper rates, reducing to nil at an income of $66,668.
- The LMITO will be retained. It is worth $255 for incomes up to $37,000; increases at 5 cents per dollar of income to a maximum of $1,080 for incomes between $45,000 and $90,000; then tapers down, reducing to nil at an income of $126,001.
The benefit of the personal tax rate changes under this budget is therefore directed at incomes in the range from $37,000 to $126,000.
It is worth pausing to observe that the Federal Budget is usually the staging ground for the government of the day to announce measures to implement elements of a broader tax reform agenda. However, the current environment does not afford that luxury. This budget will be seen by many as being the budget that we had to have. Although the need for genuine tax reform should not be forgotten, as the economy must first stabilise before returning to growth as we find a 'COVID normal' it may also be some time before we seen a return to 'normal' with respect to tax reform.
Stay tuned – we will be sharing additional insights around the key reforms outlined in this year's budget announcement and what these mean for business, industry and the nation at large.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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