The 2020-2021 Australian Federal Government budget brings enormous stimulus to promote recovery of an economy devastated by natural disasters and the global COVID-19 pandemic.
The Government is forecasting a record deficit of $213.7 Billion (11% of GDP) and gross debt to be 44.8% of GDP for the 2020-21 budget period. Further smaller deficits will arise over the forward estimate period, but these are predicated on a COVID-19 vaccine being developed and deployed towards the end of 2021. The Government is committed to initially stimulating and stabilising the economy and then reducing debt as a share of GDP.
The stimulus includes further investment in infrastructure, education and upskilling the workforce, encouraging hiring of younger people through a JobMaker Hiring Credit, supporting investment in manufacturing and R & D and encouraging businesses to spend through significant tax incentives.
This Mazars Budget Tax Brief summarises the key Budget tax and stimulus announcements that we expect will most affect Mazars individual and business clients. The dates in square brackets indicate the proposed start date for the announced change.
Please note that as these are just announcements they cannot be regarded as law until legislated.
Personal Tax Cuts [effective from 1 July 2020]
Personal income tax cuts that were legislated to commence on 1 July 2022 will be brought forward to commence from 1 July 2020.
This means that the effective tax-free threshold for singles will be $22,800 – the income threshold where the Medicare Levy commences.
CGT Exemption for Granny Flats [effective from 1 July 2021]
Currently, the creation of a formal arrangement where money is provided to a homeowner to build a granny flat with the proviso that the person providing the money has a right of occupancy in the flat, with a return of money when the residence is sold, can cause a CGT event for the home owner with no exemptions or discount.
A specific CGT exemption will be provided in such circumstances. This will provide certainty to home owners and certainty to vulnerable older people who will receive certainty of tenure.
Business is certainly the big winner from this budget with many measures reducing tax to provide business with cashflows to keep spending to stimulate the economy.
Small Business Threshold Expanded
The definition of a ‘small business’ will be extended to businesses with an aggregated turnover of up to $50 Million (from $10 Million) for the purpose of certain small business tax concessions.
This will provide access to concessional tax treatments including the following:
Immediate deduction for start-up expenses and prepaid expenses [effective from 1 July 2020]
FBT exemption for car parking benefits and multiple electronic devices [effective from 1 April 2021]
Other rules [effective from 1 July 2021]
Simplified trading stock rules
Remitting PAYG on GDP adjusted notional tax method
Settle excise customs duty on monthly basis
Two-year amendment period
Simplified accounting method determination for GST
While the above measures are welcomed, other ‘small business’ measures such as simplified depreciation will retain the original turnover threshold of $10 Million. Multiple ‘small business’ definitions could create confusion and uncertainty for businesses.
Instant Asset Write-off [effective from 6 October 2020]
An expansion of the already generous COVID-19 stimulus will mean that any business with aggregated turnover of up to $5 Billion will be allowed to deduct the full cost of new depreciable assets (and improvements to existing assets) acquired after 6 October 2020 and installed by 30 June 2022.
Business with an aggregated turnover of < $500 Million can acquire second hand assets costing less than $150,000, purchased by 31 December 2020 and installed by 30 June 2021 and claim a deduction for the full cost.
Small businesses (turnover < $10 Million) will be able to write-off the balance of their existing ‘small business pool'
Company Loss Carry-Back [effective from 1 July 2020]
A temporary loss carry-back mechanism will be introduced for companies with aggregated turnover of < $5 Billion.
Losses incurred in the 2019-20, 2020-21 and 2021-22 years will be allowed to be carried back and deducted against taxable income generated in the 2018-19, 2019-20 and 2020-21 years.
The loss carry back will generate a refundable tax offset in the year the loss is made. The offset will be limited to the amount of the prior year’s taxable income and also the tax-offset must not generate a franking deficit.
The loss carry-back measure will not apply to businesses that trade through other structures such as sole traders, trusts and partnerships.
Victorian Government business support grants – tax free [effective from 13 September 2020]
Victorian Government’s business support grants paid between 13 September 2020 and 30 June 2021 will be treated as non-assessable, non-exempt (NANE) income. This may also be extended to other States for similar support grants made.
Research & Development (R & D) Tax Incentive
The R & D Tax Incentive rules will be enhanced to encourage more investment in R & D.
Proposed changes to apply from 1 July 2021 include:
Refundable Tax Offset of 18.5% above company tax rate (turnover below $20 Million)
Removal of prior announced $4 Million cash refund cap
Non-refundable tax offset for companies with turnover > $20 Million to apply as follows:
Base rate of 8.5% above company tax rate where R & D expenditure is up to 2% of total expenditure.
16.5% above company tax rate where R & D expenditure is > 2% of total expenditure.
Other announced but unenacted R & D changes to proceed.
These measures will provide more certainty to business to encourage investment in R & D.
Corporate Tax Residency [Royal Assent]
Technical Amendments will be made to the corporate residency test such that a company incorporated overseas will be treated as an Australian resident where:
Core commercial activities are undertaken in Australia; and
Central management and control is in Australia.
This announcement is welcome as the prior corporate residency rules were challenged by the High Court decision in Bywater Investments Ltd v FCT HCA 45 which significantly broadened the scope of the rules.
The requirement to have core commercial activities being undertaken in Australia should provide more certainty to foreign companies.
Tax Treaty & Information Exchange Expansion
The Government will “prioritise refurbishing Australia’s treaties with key strategic partners”. It will also seek to expand the treaty network to eliminate double taxation and attract foreign investment.
It will also update the list of jurisdictions with an effective information sharing agreement to include 9 further jurisdictions including Hong Kong. This helps to protect against global tax avoidance. Investors from countries with information sharing agreements are able to access concessional Managed Investment Trust withholding tax rate of 15%. [effective from 1 July 2021]
Fringe Benefits Tax (FBT)
Retraining & Reskilling workers
Exemption for retraining and reskilling workers. Where a business provides retraining or reskilling benefits to workers that have been, or will be made redundant from their current position, those benefits will be exempt from FBT. [effective from 2 October 2020]
Currently such benefits not sufficiently connected with current employment would be subject to FBT.
The Government will also reconsider the tax deductibility of similar expenditure incurred by the individual (currently not deductible).
The ATO will be provided with power to rely on existing corporate records rather than employee declarations to access certain exemptions or reductions. Currently employers must request formal declarations from employees, in order to access certain concessions. Allowing the use of existing corporate records will remove red tape and paperwork.
Other Key Measures
In addition to encouraging business spending through tax cuts and concessions, the Government has many other measures to stimulate the economy.
JobMaker Hiring Credit
To encourage business to take on additional employees, the Government will provide a ‘Hiring Credit’ for each eligible employee for 12 months from 7 October 2020.
Employers must demonstrate the new employee will increase overall headcount (from reference date of 30 September 2020) and payroll (over quarter ended 30 September 2020).
Employers will receive $200 per week per eligible employee aged between 16 and 29 years and $100 per week per eligible employee aged from 30 to 35 years, but is capped at the increase in payroll over the reporting period.
Employees will need to work a minimum of 20 hours per week (averaged over the quarter) and have received Jobseeker payment, youth allowance or parenting payment for at least one month in the last three prior to hiring.
Employers who are claiming Jobkeeper payment are ineligible.
Employers can claim the JobMaker hiring credit quarterly in arrears. It is expected the JobMaker hiring credit will be assessable income to the business.
100,000 new apprenticeships or traineeships will receive support of 50% of the wages from until 30 September 2020. This builds on the earlier apprentice support announced as part of the initial COVID19 stimulus.
Insolvency Reforms [effective from 1 January 2021]
Significant corporate insolvency reforms have been proposed to allow small business to quickly and more efficiently restructure. These include:
Debt restructuring process (modelled on US Chapter 11) for business with liabilities of less than $1 Million. This should allow debtors to restructure their debts, while remaining in control of their business;
Introduction of a small business restructuring practitioner to develop a restructuring plan (subject to creditor vote);
Access to a faster, shorter, lower cost liquidation pathway;
Provision of temporary insolvency relief while waiting for small business restructuring process
Please contact your usual Mazars advisor about how these changes may affect you or your business, or alternatively contact our Tax specialists via phone or the form below:
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2020/2021 Federal Budget superannuation brief
With the impacts of COVID-19 continuing to cause havoc across the world, this year’s Federal Budget focused mainly on jobs and getting the economy going again. This left superannuation to take a back seat with the Government holding to their election promise that there would be no adverse tax changes to the superannuation system.