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Federal Budget Implications

October 7, 2020

On 6 October, the Federal Government handed down, what has been described as the most significant Budget since World War II, following the significant impact of COVID-19 on the economy.

The announcements included in the 2020-21 budget are aimed at encouraging hiring, business investment and spending, household spending and economic growth. Some of the key announcements are:

  • The bringing forward the income tax cuts that were scheduled for 2022
  • Temporary full expensing of assets acquired to encourage business investment
  • Tax changes to help businesses offset their tax losses against past profits.
  • Support for organisations taking on new employees or apprentices
  • Changes to superannuation laws designed to benefit super fund members

The Budget announcements are still only proposals at this stage. Each of the proposals must be passed by Parliament before they’re legislated.

Tax

Personal tax cuts

Effective 1 July 2020, the Government has announced it will bring forward, by two years, stage two of the previously legislated tax cuts that were due to take effect from 1 July 2022. As a result, from 1 July 2020:

  • The Low Income Tax Offset (LITO) will increase from $445 to $700. The increased LITO will be reduced at a rate of 5 cents per dollar for taxpayers that have taxable incomes between $37,500 and $45,000. The LITO will then be reduced at a rate of 1.5 cents per dollar for taxpayers that have taxable incomes between $45,000 and $66,667.
  • The top threshold of the 19% tax rate will increase from $37,000 to $45,000, and the top threshold of the 32.5% tax rate will increase from $90,000 to $120,000. The Government has also announced that the Low and Middle Income Tax Offset (LMITO), which was due to be removed with the commencement of the stage two tax cuts on 1 July 2022, will be maintained for the 2020-21 year only. The following chart shows the tax cuts individuals are proposed to receive this financial year (2020- 21) based on their income levels and current tax settings.
  • The Government made no announcements in relation to also bringing forward the effective date of the stage three tax cuts that were due to take effect from 1 July 2024. Under these tax cuts, the 37% tax rate will be abolished and the 32.5% tax rate will reduce to 30% and will apply from $45,000 to $200,000.

Exempting granny flat arrangements from capital gains tax (effective 1 July 2021)

The Government will provide a capital gains tax (CGT) exemption for granny flat arrangements where there is a formal written agreement in place. This measure will come into effect from the first income year after the date of Royal Assent of the enabling legislation (i.e. as early as 1 July 2021 subject to the passing of legislation). A granny flat arrangement can provide a solution for an older or disabled person who may not be able to continue living an independent lifestyle and would like to move closer to a relation and under the proposed measure, CGT will not apply to the creation, variation or termination of a formal written granny flat arrangement providing accommodation for older Australians or people with a disability.

Business Tax Incentives

Temporary full expensing – Effective 6 October 2020

Businesses with aggregated annual turnover below the relevant threshold, will be able to claim a tax deduction for the full cost of eligible capital assets acquired from 7:30pm AEDT on 6 October 2020 (Budget night) and first used or installed by 30 June 2022.

  • Full expensing in the year of first use will apply to new depreciable assets and the cost of improvements to existing eligible assets for businesses with aggregated annual turnover of less than $5 billion.
  • Full expensing also applies to second-hand assets for small and medium-sized businesses with aggregated annual turnover of less than $50 million. Full expensing does not apply to second-hand assets for businesses with aggregated annual turnover of $50 million or more.

Enhanced instant asset writing-off – First used and installed 30 June 2021

Business with aggregated annual turnover between $50 million and $500 million can still deduct the full cost of eligible second-hand assets costing less than $150,000 that are purchased by 31 December 2020 under the existing expanded instant asset write-off measure. The existing enhanced instant asset write-off measure requires an eligible asset to be first used or installed by 31 December 2020 to qualify. The Government announced that 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.

Temporary loss carry-back – Effective from 2019-20

Under the existing rules, companies are required to carry forward their tax losses to offset profits in future years. The Government has announced that it will allow companies with aggregated annual turnover of less than $5 billion to carry back tax losses from 2019-20, 2020-21 or 2021-22 income years to offset previously taxed profits in the 2018-19 or later income years.

Eligible corporate tax entities can elect to apply tax losses against taxed profit in a previous year, generating a refundable tax off set 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 profit, and cannot result in a franking account deficit. The tax refund will be available on election by eligible companies when they lodge their 2020-21 and 2021-22 tax returns. Companies that do not elect to carry back losses under this measure can still carry losses forward as normal.

It is important to note, that although an eligible business is able to carry back their 2019-20 income year losses to the earlier year to generate a tax refund; under this proposal, the information announced by the Government appears to suggest that the earliest time a company is able to receive the cash refund is after lodgement of the company’s 2020-21 income tax return (which usually occurs after 30 June 2021).

Expanded access to certain tax concessions for small business – staggered from 1 July 2020)

The Government will extend access to a range of small business tax concessions by increasing the small business entity turnover threshold for these concessions from $10 million to $50 million.

Businesses with an aggregated annual turnover of $10 million or more, but less than $50 million, will for the first time have access to up to 10 further small business tax concessions in three phases:

  • From 1 July 2020, eligible businesses will be able to immediately deduct certain start-up expenses and certain prepaid expenditure.
  • From 1 April 2021, eligible businesses will be exempt from the 47% 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 businesses will be able to:
    • access the simplified trading stock rules;
    • remit pay as you go (PAYG) instalments based on GDP-adjusted notional tax;
    • settle excise duty and excise-equivalent customs duty monthly on eligible goods under the small business entity concession;
    • have a two-year amendment period apply to income tax assessments for income years starting from this date. In addition, from 1 July 2021, the ATO will have the power to create a simplified accounting method determination for GST purposes for these businesses.

Deferring the start date of proposed Division 7A amendments Effective – income year commencing on or after Royal Assent

The Government will defer the start date of the proposed 2018-19 Budget measure, which was set to simplify and clarify the operation of Divison7A, from 1 July 2020 to the income year commencing on or after the date of Royal Assent of the enabling legislation.

The Government issued a consultation paper in October 2018 seeking stakeholder views on the proposed implementation approach for the amendments to Division 7A of the Income Tax Assessment Act 1936. The Government indicated that it has received valuable feedback from stakeholders which highlighted that this is a complex area of the tax law and raised implementation issues that warrant further consideration. Delaying the start date will allow additional time to further consult with stakeholders on these issues and to refine the Government’s implementation approach, including to ensure appropriate transitional arrangements so taxpayers are not unfairly prejudiced.

Given the previous set of proposed changes were set to commence on 1 July 2020, the ATO had not issued guidance in relation to how the current rules apply to certain loans (Sub Trust loans) with maturity dates after 30 June 2019. We are hopeful that in response to this deferral, the ATO will issue updated guidance as to the application of the current Division7A rules, as they apply to loans maturing in the 2020 and future income years.

Jobs and manufacturing

JobMaker hiring credit – Over three years from 7 October 2020

To support organisations hiring new employees, the Government proposes to pay a hiring credit for up to 12 months for each new job created. This is available from 7 October to employers who hire eligible employees age 16 to 35.

The credit will be paid quarterly in arrears at the rate of $200 per week for those age 16 to 29, and $100 per week for those age 30 to 35. Eligible employees are required to work a minimum of 20 hours per week and had received the JobSeeker Payment, Youth Allowance (other) or Parenting Payment for at least one month out of the three months prior to when they are hired.

To be eligible, employers will need to demonstrate an increase in overall employee headcount and payroll for each additional new position created.

Apprenticeships wage subsidy – From 5 October 2020

From 5 October 2020 to 30 September 2021, businesses of any size will be able to claim a new Boosting Apprentices Wage Subsidy for new apprentices or trainees who commence during this period. Eligible businesses will be reimbursed up to 50% of an apprentice or trainee’s wages worth up to $7,000 per quarter, capped at 100,000 places.

Modern manufacturing strategy – Over five years from 2020-21

The Government will provide $1.5 billion over five years from 2020-21 to support the building of competitiveness, scale and resilience in the Australian manufacturing sector. Investment and support will focus on creating manufacturing strength and capability in six areas of comparative advantage and strategic interest. These six are: resources technology & critical minerals processing; food & beverages; medical products; recycling & clean energy; defence; and space.

Superannuation Reform

There have been a raft of changes announced by the government that effect trustees of superannuation funds and super fund members. For business with employees, the ‘Super stapled to a member’ announcement is relevant.

Super ‘stapled’ to a member – Effective 1 July 2021

When a person starts a new job and does not nominate a super fund, employers will be required to contribute to the employee’s existing super account, rather than the employer’s default super fund.

Under this measure, the existing super account will be ‘stapled’ to the member so that they keep their current super fund when they change jobs. The aim of this measure is to improve member outcomes by reducing unintended multiple super accounts that erode member balances through unnecessary fees and insurance premiums.

Employers will be able to obtain the new employee’s existing super fund details from the ATO’s online services. It is important to note that the opportunity to nominate a chosen fund is still available under this reform.

We are here to help

For more information about the budget measures and how they apply to you and your business, contact our team today on 07 3217 2477.