2020-21 Federal Budget

 

A summary of the key items released in last night’s Federal Budget:

Josh Frydenberg’s 2020-21 Federal Budget announced a forecast budget deficit for the year of $213.7 billion and then continued deficit’s over the following three years - $112 billion in 2021-22; $87.9 billion in 2022-23; and $66.9 billion in 2023-24. The economy’s real GDP (inflation adjusted) is forecast to decline by 1.5% in this current year but then grow by 4.75% in 2021-22; 2.75%  in 2022-23; and by 3% in 2023-24.
 
Unemployment is expected to be 7.25% by 30 June 2021; 6.5% at 30 June 2022 and thereafter reduce by 0.5% each year through to 5.5% at 30 June 2024. Inflation is expected at 1.75% for 2020-21; 1.5% for 2021-22; 1.75% for 2022-23; and 2% for 2023-24.
 
Net federal government debt is forecast for the 2020-21 year at $703.2 billion (36.1% of GDP) and will increase over the following three years - $812.1 billion (40.4% of GDP) in 2021-22; $899.8 billion (42.8% of GDP) in 2022-23; and $966.2 billion (43.8% of GDP) in 2023-24.       

The key revenue measures comprise: 

  • Personal income tax cuts
  • Expanded instant asset tax write-offs
  • Increased turnover to qualify for some small business tax concessions
  • Temporary loss carry-back for companies   
  • No changes to the taxation of superannuation
It is important to remember that what follows is a series of proposals that must be passed by Federal Parliament before they become law.


 
PERSONAL TAX MEASURES








Personal Income Tax Cut 

The income tax rates for resident individuals will be reduced and backdated to 1 July 2020 (they were previously legislated to commence 1 July 2022):  
 

  Taxable Incomes (T.I.)

   Rate

  Tax Payable
   Up to $18,200

   0%

    $Nil
   $18,201 to $45,000

   19%

    $Nil + 19% over $18,200
   $45,001 to $120,000  

   32.5%

    $5,092 + 32.5% over $45,000
   $120,001 to $180,000 

   37%

    $29,467 + 37% over $120,000
   $180,001 and above

   45%

    $51,667 + 45% over $180,000
 
The previously legislated resident individual income tax rates to apply from 1 July 2024 will remain:
 

  Taxable Incomes (T.I.)

   Rate

  Tax Payable
   Up to $18,200

   0%

    $Nil
   $18,201 to $45,000

   19%

    $Nil + 19% over $18,200
   $45,001 to $200,000  

   30%

    $5,092 + 30% over $45,000
   $200,001 and above

   45%

    $51,592 + 45% over $200,000

Low and Middle Income Tax Offset
 
This will be retained for the current 2020-21 year.  The maximum non-refundable annual tax offset will be $1,080 and the base offset will be $255 for resident individuals. This offset benefit will be calculated as follows:
 

  Taxable Incomes (T.I.)

   Offset
   Up to $37,000

    $255
   $37,001 to $48,000

    $255 + 7.5% over $37,000 to a maximum
   benefit of $1,080
   $48,001 to $90,000  

    $1,080 maximum
   $90,000 to $126,000 

    $1,080 – 3% over $90,000
   $126,001 and above

    Nil
 
The offset will not be incorporated into the Pay As You Go Withholding tables, instead it will be credited as a lump sum on the annual income tax assessment.

Low Income Tax Offset
 
From 1 July 2020 the maximum non-refundable annual tax offset will increase from $445 to $700 for resident individuals and will be withdrawn at the following rates:
 

  Taxable Incomes (T.I.)

   Withdrawal Rate

   $37,500 to $45,000

    5 cents per dollar
   $45,001 to $66,667  

    1.5 cents per dollar

Medicare Levy to Remain at 2%
 
The Medicare Levy will remain at 2% and there will be the usual indexation of the Medicare Levy low income thresholds.
 
CGT Exemption For Granny Flat Arrangements
 
There will be a targeted exemption from 1 July 2021 where there is a formal arrangement in place with the homeowner residing at the property and an older person or a person with a disability is residing in a granny flat on that property.
 
Under the current CGT provisions, the home owner partly loses their CGT main residence exemption on the property where rent is received for the granny flat and an immediate capital gain arises where the homeowner is paid a lump sum to build a granny flat on their property.


 
BUSINESS MEASURES









Instant Asset Write Off Extended
 
All businesses with an annual aggregated turnover of less than $5 billion will be able to deduct the full cost of eligible depreciable assets acquired from 7.30pm AEDT on 6 October 2020 and first used or installed by 30 June 2022. 
 
The full tax deduction of the cost in the first year of use will apply to new depreciable assets and to the cost of improvements to existing eligible assets.  For business with an aggregated annual turnover of less than $50 million, eligible assets will also include purchased second-hand assets. 
 
Increased Turnover Limit To Qualify As a Small Business   
 
The Government has expanded access to a number of the small business tax concessions by increasing the qualifying annual aggregated turnover threshold from $10m to $50m as follows:
 

   Concession

    Start date
  Immediate deductions for start-up expenses

    1 July 2020
  Immediate deductions for eligible prepaid expenditure

    1 July 2020
  Exemption from fringe benefits tax on car parking
  provided to employees

    1 April 2021
  Exemption from fringe benefits tax on multiple work
  related portable electronic devices, such as phones and
  laptops, provided to employees

    1 April 2021
  Simplified trading stock rules

  1 July 2021
  Remit PAYG Instalments based on GDP adjusted
  notional tax

  1 July 2021
  Settle excise duty monthly on eligible goods
  (normally weekly)

  1 July 2021
  Settle excise-equivalent customs duty monthly on
  eligible goods

  1 July 2021
  Two year amendment period for income tax assessments

  1 July 2021
  Commissioner will have power to create simplified
  accounting method determinations for GST purposes

  1 July 2021
 
Fringe Benefits Tax
 
An exemption from FBT will apply for employer provided re-training and re-skilling to redundant, or soon to be redundant, employees where the benefit is not related to their current role.
 
As a simplifying measure, the government will provide the ATO with the power to allow employers to rely on their existing business records rather than needing employee declarations and other prescribed records each year in order to prepare annual FBT returns.

JobMaker Hiring Credit
 
From 7 October 2020, eligible employers who hire eligible employees aged 16-35 will be able to claim the new JobMaker Hiring Credit.  The credit is set at $200 a week for additional eligible employees aged 16-29, and $100 a week for those aged 30-35, where that employee has worked at least 20 paid hours per week. Where eligible, the Credit is available for up to 12 months from the date the new position is created.
 
The Hiring Credit will be paid quarterly in arears from the ATO from 1 February 2021.  Registrations are expected to open from 7 December 2020, noting an employer does not need to be registered at the time of hiring, only at the time of claiming.
 
To be eligible, employers must have an ABN, be up to date with all tax lodgement obligations, be registered for PAYG withholding, report payroll via Single Touch Payroll, maintain adequate records of paid hours worked, meet the ‘additionality’ criteria and be claiming in respect of eligible employees.
 
An eligible employee is one that is aged 16-35, and was in receipt of the Jobseeker Payment, Youth Allowance (other) or Parenting Payment for at least one of the three months prior to the time of hiring.
 
The additionality criteria requires that the employee must be in an additional job created between 7 October 2020 to 6 October 2021. To prove this, an employer must be able to show an increase in: 

  • the business’ total employee headcount as compared to the reference date of 30 September 2020 and
  • the payroll of the business for the reporting period as compared to the three months to 30 September 2020.
The amount of the Hiring Credit claimed cannot exceed the amount of the increase in payroll for the reporting period.
 
New businesses created after 30 September 2020 are not excluded, but they will be subject to a minimum headcount of one – meaning the Credit cannot be claimed for the first employee hired, but can be claimed in respect of the second and subsequent eligible employees.
 
It should be noted that the following employers are not eligible for the JobMaker Hiring Credit:

  • Commonwealth, state and local government agencies, and entities wholly owned by these agencies
  • Sovereign entities
  • Entities in liquidation or who have entered bankruptcy
  • Employers who are claiming the JobKeeper payment
  • Employers subject to the major bank levy.
Finally, a JobMaker Hiring Credit cannot be claimed for employees for whom the employer is also receiving a wage subsidy under another Commonwealth program.


 
COMPANY TAX MEASURES









Temporary Loss Carry-Back Provisions
 
Companies with an annual aggregated turnover of less than $5 billion will be allowed to carry-back losses from the 2019-20, 2020-21 and 2021-22 years against their taxable incomes from the 2018-19, 2019-20 or 2020-21 years.
 
The loss that is carried back against a taxed net income from a previous year will generate a refundable tax offset in the year in which the loss is made.  Eligible companies can elect to claim the tax refund when they lodge their 2020-21 and 2021-22 tax returns.
 
The tax refund will be limited in two ways:

  • The amount of the loss carried back must not be more than the earlier taxed net income: and
  • The carry-back must not cause a franking account deficit.
Eligible companies that do not elect to carry-back their loss can still carry forward their loss in accordance with the existing provisions.   
 
Research And Development
 
The as yet unlegislated changes that were originally expected to apply for the 2020 year have been amended and are now proposed to take effect from 1 July 2021.
 
For companies with an annual aggregated turnover of less than $20m, the refundable R&D offset rate will now be set at 18.5% over the company’s tax rate. In the first year of application, being the year ended 30 June 2022, the company tax rate for small businesses is set to be 25%, producing an R&D offset rate of 43.5%. These companies will not be subject to any cap on the available annual cash refund. 
 
For companies with an annual aggregated turnover of $20m or more, the R&D premium is dependent on R&D intensity, that is the proportion of R&D expenditure as compared to total expenditure.  The changes in this Budget have reduced the number of intensity tiers (from 3 to 2).
 
Where R&D intensity is between 0% and 2%, the R&D premium will be 8.5% over the company’s tax rate (effectively 33.5% or 38.5%, depending on whether or not the company is a small/medium taxpayer, or a large taxpayer).
 
Where R&D intensity is over 2%, the R&D premium becomes 16.5% over the company’s tax rate (effectively 41.5% or 46.5%).
 
Finally, for these larger companies, the annual cap on eligible R&D expenditure will increase from $100m to $150m.
 
Company Tax Residency Test
 
There will be changes made to the residency test for companies so that a company that is incorporated offshore will be a tax resident of Australia if it has a “significant economic connection to Australia”. This test will be satisfied where the company’s:

  • Core commercial activities are undertaken in Australia; and
  • Central management and control is in Australia.  
Companies will have the option of either applying this new test back to 15 March 2017 or the first income year after the amending legislation receives Royal Assent.  
 
Proposed Division 7A Private Company Loan Rules
 
The previously announced proposed changes to the Division 7A rules contained in the Government’s Consultation Paper in October 2018 which were said to apply from 1 July 2019 and which were subsequently announced to be deferred to 1 July 2020, are now noted in the Budget Papers to only start in the first year of income after the amending legislation receives Royal Assent.   
 
Those previously announced changes included: 

  • simplified rules to make it easier to comply with Division 7A;
  • clarification that unpaid present entitlements from trusts (UPE’s) do come within the score of Division 7A; 
  • a self-correction mechanism providing taxpayers whose arrangements have inadvertently triggered Division 7A with the opportunity to voluntarily correct their arrangements without penalty;
  • new safe harbour rules, such as for use of assets, to provide certainty and simplify compliance for taxpayers; and  
  • amended rules, with appropriate transitional complying Division 7A loans to have a single loan duration of 10 years and better aligning calculation of the minimum interest rate with commercial transactions.


 
SUPERANNUATION








The taxation of superannuation has been left untouched in the 2020-21 Federal Budget.
 
The government has though announced some measures with a view to reducing costs and fees within public offer superannuation products.  
 
The measures to start from 1 July 2021 will:

  • Prevent the creation of unintended multiple superannuation accounts when employees change jobs;
  • Give members access to a new online Your Super Comparison Tool which will encourage fund’s to compete harder for members’  savings;
  • Impose a requirement that superannuation products meet an annual objective performance test and those that fail will be required to inform members. Persistently underperforming products will be prevented from taking on new members;
  • Increase trustee accountability and obligations to only act in the best interests of members.


 


Disclaimer

The material contained in this newsletter is in the nature of general comment and information only and neither purports, nor is intended, to be advice on any particular matter. Readers should not act or rely upon any matter or information contained in or implied by this newsletter without taking appropriate professional advice.