2020-21 Federal Budget

Joshua Easton Tax

Introduction…

Budgets should not be only about cold hard figures or politics, but about people and creating quality life choices.

As a nation, we welcome large financial injections to increase business investment which is constantly argued as the foundation for the recovery and ongoing job creation.

By shifting from emergency support to targeted spending, the budget will help employers get back to business and get on with urgently creating the new jobs needed for the recovery in  getting Australians back to work and getting businesses back on track.

Please read on for your copy of our budget summary 2020-21…

The investment incentive and its application to small, medium, and large businesses and its broader base will create new purchasing opportunities and jobs by encouraging businesses to immediately expand, innovate, update technology, and buy new plant and equipment.

The government’s loss carry back initiative is another vital step in improving business confidence by supporting cash flow. Moving forward, this is about keeping people working and giving businesses the cash flow to hire more people.

This budget continues the important process of rebuilding the skills system with 100,000 extra new apprenticeships and thousands of additional short courses which will help retrain and reskill people faster. 

The government’s commitment to wage subsidies is also welcomed, particularly as it is targeting young Australians who are at the highest risk of unemployment and helping them into the workforce.

Thank you for your ongoing support.

2020 FEDERAL BUDGET TAX OVERVIEW

THE ROAD TO RECOVERY

As usual we confine our analysis to taxation measures, government incentives and tax planning opportunities.

Income tax rates

Key changes include:

  • raising the 19% bracket from $37,000 to $45,000, and
  • raising the 32.5% bracket from $90,000 to $120,000.

The proposed income tax brackets from 1.7.2020 are as follows.

MinimumMaximumTax on minimumTax rate on excess
$18,2000%
$18,201$45,00019%
$45,001$120,000$5,09232.5%
$120,001$180,000$29,46637%
$180,001and above$51,66645%

The above rates will apply until 30.6.2024.

Personal tax offsets

With the commencement of phase 2 of the personal income tax plan from 2020/21, changes to the low-income tax offset (LITO) are to be brought forward two years to 1.7.2020.

From 1.7.2020, LITO will increase from $445 to $700. Individuals who have a taxable income below $37,500 will be entitled to the full non-refundable tax offset. Above this amount, LITO is tapered off at two different levels. Individuals with taxable incomes between:

  • $37,500 and $45,000 will be tapered off at 5 cents per dollar, and
  • $45,000 and $66,667 will be tapered off at 1.5 cents per dollar.

Phase 2 of the plan previously marked the end of LMITO, introduced as a temporary measure in the 2019/20 Federal Budget. Despite phase 2 being brought forward, LMITO will remain in place for the 2020/21 income year. The LMITO rates are as follows:

Taxable incomeLow- and middle-income tax offset
Less than $37,000$255
Between $37,000 and $48,000Increasing by 7.5c per $1, capped at $1,080
Between $48,000 and $90,000Maximum $1,080
Between $90,000 and $126,000Reducing from maximum at 3c per $1
Above $126,000$0

The new effective tax-free threshold for individual Australian tax residents is $23,226 for the 2020/21 income year.

BUSINESS TAX INCENTIVES

The government has announced incentives support to business to invest, grow and create more jobs through targeted tax incentives.

Temporary full expensing

Business with aggregated annual turnover below the relevant threshold will be able to deduct the full cost eligible capital asset acquired from 7:30pm AEDT on 6.10.2020 and first used or installed by 30.6.2022.

  • 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 30.6.2021

Business with aggregated annual turnover between $50 million and $500 million will still be able to deduct the full cost of eligible second-hand assets costing less than $150,000 that are purchased by 31.12.2020 under the existing expanded instant asset write-off measure.

This incentive will now be extended to 30.6.2021.

Temporary loss carry-back effective 1.7.2019

Under the existing rules, companies are required to carry losses forward 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 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 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.

RESEARCH AND DEVELOPMENT TAX INCENTIVE

The Government announced further enhancements to the Research and Development Tax Incentive.  The changes will apply for income years starting on or after 1.7.2021:

  • for companies with an aggregated turnover below $20 million, the refundable R&D tax offset rate will be increased to a 18.5% premium to the company’s corporate tax rate.

Note the previously proposed cap on $4 million annual cash refunds will not proceed.

  • for companies with aggregated turnover of $20 million or more, the number of R&D intensity tiers (which measures the company’s R&D expenditure as a proportion of total expenses for the year) will be reduced from three to two, and the non-refundable R&D tax offset will be increased as follows:
R&D intensityNon-refundable R&D tax offset
0-2%Corporate tax rate + 8.5%
>2%Corporate tax rate + 16.5%

Reforms from the 2019-20 MYEFO announcement will be retained, including the proposal to increase the limit for R&D expenditure which is eligible for the R&D tax incentive from $100 million to $150 million per annum. 

REMOVING CAPITAL GAINS TAX FOR GRANNY FLATS

In a move aimed at supporting older and disabled Australians and their families The Federal Government is providing a targeted Capital Gains Tax (CGT) exemption for granny flat arrangements where there is a formal written agreement in place.

Tax consequences can be a key impediment to families creating formal and legally enforceable granny flat arrangements.

When faced with a potentially significant CGT liability, families may opt for informal arrangements which can leave open the risk of financial abuse and exploitation, for example following a family or relationship breakdown.

Under the 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 disabilities. 

The measure will commence as early as 1 July 2021 subject to the passing of legislation.

This change will only apply to agreements that are entered into because of family relationships or other personal ties and will not apply to commercial rental arrangements.

Currently there are around 3.9 million pensioners and around 4 million Australians with a disability who would be eligible for this exemption under this change.

The measure is consistent with the Government’s National Plan to Respond to the Abuse of Older Australians announced on 19 March 2019, the Board of Taxation’s Review of Granny Flat Arrangements, and the 2017 Australian Law Reform Commissions Report: Elder Abuse a National Legal Response.

As part of the 2020-21 Budget, this will boost the construction industry, stimulate demand for new housing and support tradies’ jobs at a time when the economy needs it most.

BOOST FOR SKILLS TRAINING WITH FRINGE BENEFITS TAX EXEMPTION

The Morrison Government will provide an exemption from Fringe Benefits Tax (FBT) for employer-provided retraining and reskilling, for employees who are redeployed to a different role in the business. The exemption will apply from 2.10.2020.

Removing costly barriers to training as the economy rebuilds is essential to ensure Australian employees have the opportunity to reskill or retrain for the jobs that will come back as the economy reopens.

Currently, FBT is payable if an employer provides training to its employees that is not sufficiently connected to their current employment. For example, a business that retrains their sales assistant in web design to redeploy them to an online marketing role in the business can get hit with FBT. By removing FBT, employers will be encouraged to help workers transition to new employment opportunities within or outside their business.

The exemption will not extend to retraining acquired by way of a salary packaging arrangement or training provided through Commonwealth supported places at universities, which already receive a benefit.

In addition, the Government will consult on potential changes to the current arrangements for workers that undertake training at their own expense. The current rules, which limit deductions to training related to current employment, may act as a disincentive for Australians to retrain and reskill to support their future employment needs.

These changes will provide further support for training, building on the $1 billion JobTrainer program which will provide up to an additional 340,700 training places across the country for school leavers as well as provide opportunities for job seekers to upskill and reskill and get back to work as quickly as possible.

EXPANDING ACCESS TO SMALL BUSINESS TAX CONCESSIONS TO SUPPORT JOBS

The Morrison Government is continuing to support businesses through COVID‑19 by providing further tax relief to attract and retain workers and reduce red-tape as part of their economic recovery plan.

For the first time, businesses with an aggregated annual turnover between $10 million and $50 million will have access to up to ten small business tax concessions. The changes are estimated to support an additional 20,000 businesses and their employees.

The expanded concessions, as part of the 2020-21 Budget will apply 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 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 businesses 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. Eligible businesses will also have a two-year amendment period apply to income tax assessments for income years starting from 1 July 2021.

In addition, from 1 July 2021, the Commissioner of Taxation’s power to create a simplified accounting method determination for GST purposes will be expanded to apply to businesses below the $50 million aggregated annual turnover threshold.

This announcement builds on the extensive support provided for small and medium sized businesses during the COVID-19 crisis that has included JobKeeper, extending the Instant Asset Write Off, providing a Cash Flow Boost of up to $100,000 for employing small businesses, and boosting access to capital through the COVID-19 SME loan Guarantee Scheme.

HELPING AN ADDITIONAL 10,000 FIRST HOME BUYERS

As part of the Government’s economic recovery plan, an additional 10,000 first home buyers will be able to purchase a new home sooner under our First Home Loan Deposit Scheme.

The First Home Loan Deposit Scheme has already helped almost 20,000 first home buyers purchase a home this year with a deposit as low as 5 per cent. 

An additional 10,000 places will be provided from 6 October 2020 to support the purchase of a new home or a newly built home.

The Government recognises that saving a deposit has become a more significant barrier to entering the housing market than the ability to service a home loan.

Under the existing First Home Loan Deposit Scheme, eligible first home buyers can purchase a modest home with a deposit of as little as 5 per cent.

Building on the success of the existing scheme, an additional 10,000 first home buyers will be able to obtain a loan to build a new home or purchase a newly built home with a deposit of as little as 5 per cent.

The additional guarantees will be available until 30 June 2021 and will drive more construction and support jobs as part of the Economic Recovery Plan.

Eligible first home buyers will also be able to take advantage of the Government’s First Home Super Saver Scheme and HomeBuilder, and first home buyers may also be eligible for state and territory grants and concessions.

Combined, the First Home Loan Deposit Scheme, HomeBuilder and First Home Super Saver Scheme represent an unprecedented level of Government support for home buyers and the construction industry alike.

JOBMAKER HIRING CREDIT

From 7.10.2020, the Government will pay a hiring credit for up to 12 months for each new job. 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 receive the JobSeeker Payment, Youth Allowance or Parenting Payment for at least one month out of 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 5.10.2020 to 30.9.2021, employers will be able to claim a new Boosting Apprentices Wage Subsidy for new apprentices of 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.

SUPERANNUATION REFORMS

Currently Australians are paying $30 billion per year in superannuation fees.

By 2034, it is estimated that Australians could be paying $45 billion in superannuation fees.

At the same time, Australians hold 3 million accounts in underperforming funds managing over $100 billion of their retirement savings.

Commencing 1.7.2021, the Your Future, Your Super package will improve the superannuation system by:

  • Having your superannuation follow you: preventing the creation of unintended multiple superannuation accounts when employees change jobs.
  • Making it easier to choose a better fund: members will have access to a new interactive online YourSuper comparison tool which will encourage funds to compete harder for members’ savings.
  • Holding funds to account for underperformance: to protect members from poor outcomes and encourage funds to lower costs the Government will require superannuation products to meet an annual objective performance test. Those that fail will be required to inform members. Persistently underperforming products will be prevented from taking on new members.
  • Increasing transparency and accountability: The Government will increase trustee accountability by strengthening their obligations to ensure trustees only act in the best financial interests of members. The Government will also require superannuation funds to provide better information regarding how they manage and spend members’ money in advance of Annual Members’ Meetings

INSOLVENCY REFORMS TO SUPPORT SMALL BUSINESSES RECOVERY

The Federal Government will undertake the most significant reforms to Australia’s insolvency framework in 30 years as part of their economic recovery plan to keep businesses in business and Australians in jobs.

The reforms, which draw on key features from Chapter 11 of the Bankruptcy Code in the United States, will help more small businesses restructure and survive the economic impact of COVID-19. As the economy continues to recover, it will be critical that distressed businesses have the necessary flexibility to either restructure or to wind down their operations in an orderly manner.

Key elements of the reforms include:

  • The introduction of a new debt restructuring process for incorporated businesses with liabilities of less than $1 million, drawing on some key features of the Chapter 11 bankruptcy model in the United States.
  • Moving from a rigid one-size-fits-all “creditor in possession” model to a more flexible “debtor in possession” model which will allow eligible small businesses to restructure their existing debts while remaining in control of their business.
  • A rapid twenty business day period for the development of a restructuring plan by a small business restructuring practitioner, followed by fifteen business days for creditors to vote on the plan.
  • A new, simplified liquidation pathway for small businesses to allow faster and lower cost liquidation.
  • Complementary measures to ensure the insolvency sector can respond effectively both in the short and long term to increased demand and to meet the needs of small business.

The reforms will cover around 76 per cent of businesses subject to insolvencies today, 98 per cent of whom who have less than 20 employees.

These changes aim to reduce costs for small businesses, reduce the time they spend during the insolvency process, ensure greater economic dynamism, and ultimately help more small businesses get to the other side of the crisis.

On 22 March 2020, the Government announced temporary regulatory measures to help financially distressed businesses get to the other side of COVID-19. On 7 September 2020, the Government announced a further extension of this relief to 31 December 2020.  The new processes will be available for small businesses from 1 January 2021.