Josh Frydenberg’s 2020-21 Federal Budget, inevitably shaped in response to the COVID-19 crisis, has revealed some distinct winners and losers. Given the unprecedented events that have unfolded this year, the Australian Government’s 2020-21 Federal Budget was always going to outline a path to economic recovery. Handed down last night, the Budget’s key initiatives include:
- Personal income tax cuts from 1 July 2020;
- A $4 billion JobMaker Hiring Credit to encourage businesses to take on additional employees aged 16 to 35 years old;
- $110 billion in infrastructure investment over 10 years;
- Immediate deductions for business investment in capital assets;
- Changes to how companies can manage losses; and
- Access to generous tax concessions for a wider range of businesses.
The Budget also features two additional Economic Support payments to pensioners and other eligible recipients to drive money back into the economy.
Some of the measures introduced are aimed at addressing the harsh lessons COVID-19 has taught us, seeking to return production to Australia to ensure our industries can be self-reliant.
Outside of the big-ticket tax measures, what is striking about this Budget is the sheer volume of initiatives it funds – too many to itemise in this update – with many of the initiatives aiming to improve Government relations between the broader community and businesses.
Treasurer Frydenberg’s final comments last night painted a cautionary tale. The focus right now is on the path to growth and stabilising debt in an effort to boost consumer and business confidence. However, once “recovery has taken hold and the unemployment rate is on a clear path back to pre-crisis levels” of below 6%, the second phase will kick in: the deliberate shift from providing temporary and targeted support to stabilising debt.
As widely predicted, the Government has brought forward Stage 2 of its planned income tax cuts by two years. Originally intended to apply from 1 July 2022, the tax cuts will come into effect from 1 July 2020 (subject to bipartisan support and the passage of the legislation).
At a cost of $17.8 billion over the forward estimates, the Government argues that the measure will “boost GDP by around $3.5 billion in 2020-21 and $9 billion in 2021-22 and will create an additional 50,000 jobs by the end of 2021-22.” Others in Parliament believe the measure rewards higher income earners and the money could be better spent elsewhere. The Senate will decide whether the Government’s plan comes to fruition.
Stage 3 of the Personal Income Tax Plan that simplifies and flattens the personal income system remains scheduled for 2024-25.
Bringing forward the Personal Income Tax Plan will:
- Increase the top threshold of the 19% tax bracket to $45,000, up from $37,000;
- Increase the top threshold of the 32.5% tax bracket to $120,000, up from $90,000; and
- Increase the Low Income Tax Offset (LITO) from $445 to $700.
In addition, the LMITO (Low and Middle Income Tax Offset), which provides a reduction in tax of up to $1,080 for individuals with a taxable income of up to $126,000, will be retained for 2020-21. This measure was to be removed at the commencement of Stage 2 of the reforms from 2022-23.
Economic Support Payments
Two additional economic support payments of $250 each will be made to eligible Commonwealth support recipients and health care card holders. The payments are exempt from taxation and will not count as income support for the purposes of any income support payment.
Capital Gains Tax removed from Granny Flats
Announced pre-Budget, this measure provides a targeted CGT exemption for granny flats under certain conditions. Under the arrangement, 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.
10,000 additional places in the First Home Loan Deposit Scheme
Announced pre-Budget, from 6 October 2020 until 30 June 2021, an additional 10,000 places will be available for first home buyers under the First Home Loan Deposit Scheme to support the purchase of a new home or a newly built home. The scheme enables first home buyers to purchase a home with a deposit of as little as 5% without incurring lender’s mortgage insurance. There are currently 27 participating lenders across Australia offering places under the First Home Loan Deposit Scheme.
Aged Care support and monitoring
As previously announced, the Government has committed to a broad package of aged care funding predominantly focussed on helping older Australians remain at home. $1.6 billion has been provided over four years from 2020-21 to release an additional 23,000 home care packages across all package levels. The number of home care packages will also have increased threefold from around 60,300 in 2013 to around 185,500 in 2021.
An additional $400 million will see an injection in cash for infrastructure supporting the aged care industry including a new serious incident response scheme and monitoring services.
In efforts to simplify superannuation administration, from 1 July 2021, superannuation fund accounts will be “stapled” to individuals, with the reform aimed at ensuring individuals continue to use their existing superannuation fund when they change jobs. The initiative seeks to prevent the duplication of superannuation fund accounts when changing employers and limiting the administration and other fees paid by holders of multiple accounts.
From 1 July 2021:
- If an employee does not nominate an account at the time they start a new job, employers will pay their superannuation contributions to their existing fund;
- Employers will obtain information about the employee’s existing superannuation fund from the ATO, doing so by logging onto ATO online services and entering the employee’s details. Once an account has been selected, the employer will pay superannuation contributions into the employee’s account; and
- If an employee does not have an existing superannuation account and does not make a decision regarding a fund, the employer will pay the employee’s superannuation into their organisation’s nominated default superannuation fund.
The Government expects that future enhancements will enable payroll software developers to build systems to simplify the process of selecting a superannuation product for both employees and employers through automated provision of information to employers.
For Businesses and Employers
JobMaker Hiring Credit
The JobMaker Hiring Credit will be available to eligible employers over 12 months from 7 October 2020 for each additional new job they create for an eligible employee.
Eligible employers will receive:
- $200 per week if they hire an eligible employee aged 16 to 29 years; or
- $100 per week if they hire an eligible employee aged 30 to 35 years.
The JobMaker Hiring Credit will be paid quarterly in arrears. It will be available for up to 12 months from the date of employment of the eligible employee with a maximum amount of $10,400 per additional new position created.
Employers will need to demonstrate that the new employee will increase overall employee headcount and payroll.
To be eligible, the employee will need to have worked for a minimum of 20 hours per week, averaged over a quarter, and 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.
Immediate deductions for investment in capital assets
Aimed at encouraging businesses to invest, this measure enables businesses with an aggregated turnover of less than $5 billion to fully expense the cost of new depreciable assets and the cost of improvements to existing eligible assets in the first year of use. This means that an asset’s cost will be fully deductible upfront rather than over the asset’s life.
While many businesses were already eligible for an instant asset write-off for asset purchases of up to $150,000, this measure does not cap the asset’s cost, and eligibility for the higher instant asset write-off has been significantly broadened and extended (the existing $150,000 instant asset write-off applies to businesses with turnover less than $500 million and will not apply to purchases after 31 December 2020).
For businesses with an aggregated turnover under $50 million, full expensing also applies to second-hand assets.
Businesses 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 enhanced instant asset write-off. 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.
Small business pooling
Small business entities (with aggregated annual turnover of less than $10 million) using the simplified depreciation rules can deduct the balance of their simplified depreciation pool at the end of the income year while full expensing applies. The provisions which prevent small businesses from re-entering the simplified depreciation regime for five years if they opt-out will continue to be suspended.
Companies with an aggregated turnover of less than $5 billion will be able to carry back losses from the 2019-20, 2020-21 and 2021-22 income years to offset previously taxed profits in the 2018-19, 2019-20 and 2020-21 income years.
Under this measure, tax losses can be applied against taxed profits in a previous year, generating a refundable tax offset in the year in which the loss is made. The amount carried back can be no more than the earlier taxed profits, limiting the refund by the company’s tax liabilities in the profit years. Further, the carry back cannot generate a franking account deficit meaning that the refund is further limited by the company’s franking account balance.
The tax refund will be available on election by eligible businesses when they lodge their 2020-21 and 2021-22 tax returns.
Currently, companies are required to carry losses forward to offset profits in future years. Under the proposed amendments, companies that do not elect to carry back losses can still carry losses forward as normal.
This measure will interact with the Government’s announcement to allow full expensing of investments in capital assets. The new investment will generate significant tax losses in some cases which can then be carried back to generate cash refunds for eligible companies.
(Carry-back rules were introduced some years ago by the Gillard government. The rules were repealed and were only operational in the 2012-13 year.)
For the Economy
The Biggest Loser
The COVID-19 pandemic has resulted in Australia’s economy experiencing its largest hit since World War II. As a result, this year’s Federal Budget was always anticipated to result in a deficit, the significance of which the Treasurer anticipated would be $213.7 billion in 2020-21 and $66.9 billion by 2023-24.
Australia’s economy contracted by 7% in the June 2020 quarter.
Gross national debt will increase to $872 billion (45% of GDP) this year and stabilise at around 55% of GDP in the medium term.
Net debt will increase to $703 billion (36% of GDP) this year before peaking at 44% of GDP in June 2024 and declining to less than 40% of GDP over the medium term.
GDP is forecast to fall by 3.75% this calendar year and the unemployment rate is forecast to peak at 8% in the December 2020 quarter. Next calendar year, GDP is forecast to grow by 4.25%, and the unemployment rate is forecast to fall to 6.5% in the June quarter 2022.
For Your Future
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