CHAPTER 1
The Australian Tax System
Update
JOBMAKER PLAN – BRINGING FORWARD THE PERSONAL INCOME TAX PLAN
While the tax scales contained in our annual publication were correct at the date of publication, COVID-19 resulted in the Federal Government delaying its 2020-21 Federal Budget until 6.10.2020. Here are the changes.
The Government has announced that stage 2 of its Personal Income Tax Plan will be brought forward and apply for the 2020–21 income year. The low- and middle-income tax offset will continue to be available for the 2020–21 income year but will not apply for the 2021–22 income year and later years.
Threshold changes
If enacted the measure will:
- increase the low-income tax offset (LITO) from $445 to $700 and adjust the phase out rules
- increase the top threshold of the 19% personal income tax bracket from $37,000 to $45,000, and
- increase the top threshold of the 32.5% personal income tax bracket from $90,000 to $120,000.
These changes will result in the following tax rates for the 2020–21 income year for individuals who are Australian residents.
| Resident tax rates for 2020–21 | |
| Taxable income | Tax on this income |
| 0 to $18,200 | Nil |
| $18,201 to $45,000 | 19cents for each $1 over $18,200 |
| $45,001 to $120,000 | $5,092 plus 32.5cents for each $1 over $45,000 |
| $120,001 to $180,000 | $29,467 plus 37cents for each $1 over $120,000 |
| $180,001 and over | $51,667 plus 45cents for each $1 over $180,000 |
Note: Changes are also proposed for the thresholds of foreign resident individual taxpayers and working holiday makers. If enacted the new tax rates will be as shown in the following table.
| Foreign resident tax rates for 2020–21 | |
| Taxable income | Tax on this income |
| $0 – $120,000 | 32.5cents for each $1 |
| $120,001 – $180,000 | $39,000 plus 37cents for each $1 over $120,000 |
| $180,001 and over | $61,200 plus 45cents for each $1 over $180,000 |
| Working holiday maker tax rates 2020–21 | |
| Taxable income | Tax on this income |
| 0 to $45,000 | 15% |
| $45,001 to $120,000 | $6,750 plus 32.5cents for each $1 over $45,000 |
| $120,001 to $180,000 | $31,125 plus 37cents for each $1 over $120,000 |
| $180,001 and over | $53,325 plus 45cents for each $1 over $180,000 |
There are also changes proposed to the phase out rules.
| Proposed phase out rules | |
| Taxable income | Tax on this income |
| $37,500 or less | $700 |
| Between $37,501 and $45,000 | $700 minus 5cents for every dollar above $37,500 |
| Between $45,001 and $66,667 | $325 minus 1.5cents for every dollar above $45,000 |
Low income tax offset
The proposal would also increase the low-income tax offset (LITO) from a maximum amount of $455 to $700 per annum for the 2020–21 income year and future years.
As a non-refundable offset, any unused low-income tax offset cannot be refunded. The low-income tax offset will directly reduce the amount of tax payable but does not reduce the Medicare levy. If not all the offset is used to reduce the tax payable, there is no refund of any unused portion.
Low- and middle-income tax offset
Under the previous legislation, the low- and middle-income tax offset (LMITO) was to be repealed when the relevant threshold changes came into effect and the LITO was increased. Under the Government’s announcement, LMITO will continue to be available for the 2020–21 income year then removed for the 2021–22 income year and later years.
There are no changes to the amount of LMITO or the eligibility thresholds and as such LMITO is applied as outlined in the following table:
| Low and middle tax offset | |
| Taxable income | Offset |
| $37,000 or less | $255 |
| Between $37,001 and $48,000 | $255 plus 7.5cents for every dollar above $37,000, up to a maximum of $1,080 |
| Between $48,001 and $90,000 | $1,080 |
| Between $90,001 and $126,000 | $1,080 minus 3cents for every dollar of the amount above $90,000 |
As a non-refundable offset, any unused low- and middle-income tax offset cannot be refunded. The low- and middle-income tax offset will directly reduce the amount of tax payable but does not reduce the Medicare levy. If all of the offset is not used to reduce the tax payable, there is no refund of any unused portion.
2020–21 administrative treatment
PAYG Withholding
The ATO has published updated tax withholding schedules subsequent to the amendments passing Parliament.
This has allowed the tax cuts to be reflected in people’s take-home pay.
The ATO has published updated tax withholding schedules at ato.gov.au/taxtables.
The ATO has continued to work closely with providers of payroll software and employers to ensure that the reduced withholding associated with the threshold changes and the increase of LITO is reflected in software.
PAYG instalments
The proposed changes to thresholds have not been included when calculating PAYG Instalment shown on the September quarter Activity Statements. The changes will be reflected in the December Activity statements if the legislation is enacted or if there is clear bipartisan support for the measure. In most cases this will result in a wash-up of any over payments that occurred for earlier periods.
Vary your PAYG instalments
In line with their current position, if you chose to vary your PAYG instalments for the 2020–21 income year to reflect the proposed tax cuts the ATO will not apply penalties or charge interest for excessive variations if you have made your best attempt to estimate your end of year tax liability. General interest charges may apply to outstanding PAYG instalment balances.
You should review your tax position regularly throughout the year and vary your PAYG instalments as your situation changes.
BUDGET CHECKLIST
The 2020-21 Federal Budget was handed down on 6.10.2020 and our detailed analysis was uploaded on our website the following day.
How are you able to benefit from the changes?
- The amended income tax rates and changes to tax offsets are included in this edition. Depending on your earnings, you could have an additional $50-$60 a week in your pocket. Subject to the $25k contribution limit, if you salary sacrifice this amount into superannuation you will benefit in retirement.
- There is temporary full expensing for the purchase of capital assets between 6.10.2020 and 30.6.2020. If your business has a genuine need for new equipment, you could directly benefit from this. 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.
- If your company incurred losses in the year ended 30.6.2020, you may be delaying seeing your accountant. In the event your company had a tax liability for the FY 2019, it may be worth seeing your accountant sooner than later. This is because of the temporary loss carry-back effective 1.7.2019 which could result in a “clawback” of the company tax paid for FY 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.
4. Consider taking advantage of the 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.
- If applicable consider taking advantage of the apprenticeship’s wages 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.
- Make family members aware of the first home loan deposit scheme. 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.
- Give your staff retraining without having to pay fringe benefits tax (FBT). The 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.
- If you genuinely engage in research and development (R+D), take advantage of the enhanced R+D tax offset.
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 intensity Non-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.
- Consolidate your superannuation into one account safe in the knowledge you will never have the hassle of dealing with multiple accounts.
This is because 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
- If you are a medium sized business with a turnover of between $10 million and $50 million, for the first time you 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.