On 6 October 2020, in delivering his second budget, the Treasurer, Josh Frydenberg, unveiled an estimated budget deficit for 2020–21 of $213.7 billion. This month, I take a close look at the key tax announcements contained in the Federal Budget 2020–21.
The economic forecast
After a more than $90 billion blow-out in the underlying cash balance (commonly referred to as the surplus or deficit) from the pre-COVID-19 estimates made by the government for 2019–20, the budget estimates substantial but reducing deficits over the forward estimates period. The budget also projects gross debt will arise to $1.138 billion by 2023–24.
The Treasurer has indicated that “budget repair” will not take place until the unemployment rate falls below 6 per cent, which is not expected before 2023–24.
The tax measures
A number of the key tax measures announced in the budget have been introduced into Parliament, and are contained in the Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Bill 2020.
These measures are discussed below.
Personal income tax cuts
Tax cuts worth nearly $30 billion will be made available to more than 11 million individual taxpayers two years earlier than previously legislated. Stage 2 of the Personal Income Tax Plan, legislated to apply from 1 July 2022, will now take effect on 1 July 2020. The upper threshold of the 19 per cent tax bracket will increase from $37,000 to $45,000, and the upper threshold of the 32.5 per cent tax bracket will increase from $90,000 to $120,000.
Further, low- to middle-income earners will receive additional support through an increase in the low income tax offset (LITO) from 1 July 2020 from $445 to $700 as well as access to the low and middle income tax offset (LMITO) for 2020–21.
Accordingly, in 2020–21, someone earning $50,000 will have an additional $2,160 in post-tax earnings, and someone earning $120,000 will have an additional $2,745 in post-tax earnings.
The ATO has confirmed that the PAYG withholding tables will be adjusted to reflect the personal tax cuts for 2020–21. However, the ATO does not consider it would be appropriate to adjust the tables for any over-payments of tax in the first four months of the income year and further reduce the PAYG withholding in the remaining eight months of the year. There is a risk of under-withholding when trying to squeeze 12 months of tax cuts into eight months for people with variable employment patterns. Unquestionably, under- and over-payments of tax will result from the mid-stream change in the income thresholds, but this will balance out upon lodgement of the 2020–21 tax return. This has created the perception for some that the tax cuts will not have an immediate benefit for taxpayers. However, this overlooks the reduction in PAYG withholding amounts that will affect payroll amounts as soon as the tax cuts can be reflected in the ATO’s PAYG withholding tables and payroll software updates.
Expanded access to small business tax concessions
Ten small business concessions that are currently available to businesses with an aggregated annual turnover less than $10 million will be made available to businesses with an aggregated annual turnover less than $50 million. The concessions are listed below with their corresponding start dates.
From 1 July 2020:
• Immediate deduction for certain start-up expenses
• Immediate deduction for certain prepaid expenditure
From 1 April 2021:
• FBT exemption for car parking benefits
• FBT exemption for multiple work-related portable electronic devices
From 1 July 2021:
• Simplified trading stock rules
• Remit PAYG instalments based on GDP-adjusted notional tax
• Settle excise duty monthly on eligible goods (instead of weekly)
• Settle excise-equivalent customs duty monthly on eligible goods (instead of weekly)
• Two-year amendment period
• Simplified accounting method determination for GST purposes
Depreciable asset measures
Extension to ‘first use’ date for existing $150,000 IAWO
Businesses with an aggregated annual turnover of less than $500 million seeking to claim the existing $150,000 instant asset write-off (IAWO) have another six months, until 30 June 2021, to first use or install ready for use assets acquired by 31 December 2020.
Temporary full expensing
Businesses with an aggregated turnover of less than $5 billion will be able to fully expense depreciable assets acquired on or after 7.30pm on 6 October 2020 that are first used or installed ready for use by 30 June 2022. Businesses with an aggregated turnover of less than $50 million turnover may deduct the cost of acquiring second-hand assets, but larger businesses will only be allowed to deduct the cost of new assets or the cost of improving an existing asset.
The following points should be noted:
• The car limit ($59,136 for 2020–21) still applies to cars.
• Buildings and Division 43 capital works cannot be fully expensed.
• Assets covered by Subdivisions 40-E and 40-F of the ITAA 1997 (about low-value pools, software development pools and primary production assets) cannot be fully expensed.
• Small business entities will be required to fully expense any general small business pool balances as at 30 June 2021.
• Businesses do not have a choice as to whether they fully expense eligible assets. The deduction is calculated under the new temporary rules.
Loss carry back
Much of the design of this new measure is an iteration of the 2013 rules, which were repealed in 2014 by the Abbott government.
Corporate tax entities (CTE) with an aggregated turnover of less than $5 billion may choose to carry back all or some of a tax loss made in 2019–20, 2020–21 or 2021–22 against the tax paid on profits from 2018–19, 2019–20 or 2020–21.
The following points should be noted:
• Sole traders, partnerships and trusts are ineligible for loss carry back.
• The loss carry back tax offset is a refundable tax offset.
• The offset is claimed in either the 2020–21 or the 2021–22 tax return.
• The offset is limited by the amount of tax paid in earlier years and the balance in the CTE’s franking account.
• The loss carried back is converted into a tax equivalent amount by multiplying the loss (after reducing it by any exempt income) by the entity’s corporate tax rate for the loss year. Base rate entities will use 27.5 per cent, 26 per cent and 25 per cent for 2019–20, 2020–21 or 2021–22, respectively. CTEs that are not base rate entities will use 30 per cent.
• If a CTE chooses not to carry back an eligible loss, it may carry the loss forward and recoup according to the normal rules.
• The offset cannot be claimed for capital losses.
• The CTE must have lodged a tax return for the year of claim and each of the five years immediately preceding it.
• An integrity rule will apply to schemes entered into for a purpose of obtaining the offset.
Other key budget measures
• Certain state and territory government business support grants will be treated as non-assessable non-exempt income, where they are paid between 13 September 2020 and 30 June 2021.
• Foreign-incorporated companies will be treated as tax residents if they have a “significant economic connection to Australia”. This will provide long-awaited certainty for corporate taxpayers.
• Further design changes will be made to the R&D tax incentive, which will take effect from 1 July 2021.
• FBT exemptions will apply for employer-provided skills training of redeployed redundant, or soon-to-be-redundant, employees.
• The Commissioner of Taxation will be given the power to allow employers to rely on their existing corporate records instead of maintaining separate FBT records, although the scope of this is yet to be determined.
• A CGT exemption will be available for the creation, variation or termination of formal written granny flat arrangements, where the property is the “principal home” of the taxpayer.
• A new JobMaker hiring credit will be available to employers who take on eligible previously out-of-work employees aged 16 to 35 years between 7 October 2020 and 6 October 2021. The credit will be up to $10,400 per position and calculated at either $100 or $200 per week depending on whether the employee is aged under 30 years.
Concerns with aggregated turnover test
Most of the budget measures are based on an entity’s aggregated turnover which includes the annual turnovers of affiliates and entities connected with the taxpayer. The concept of “aggregated turnover” originated in the Simplified tax system in 2001, the predecessor to the current small business entity regime. It was designed as an integrity measure to prevent larger businesses from forming smaller separate entities to become eligible for the concessions.
While the threshold was initially, and remains at, $2 million (now solely for the purposes of the small business CGT concessions), the construct of the threshold has been more widely applied for many other tax purposes. Threshold of $5 million, $10 million, $20 million, $50 million, $100 million, $500 million and now $5 billion, apply for a range of tax concessions and measures not contemplated when the original concept was conceived.
Small businesses with a turnover of less than $2 million are not usually foreign-owned, but it is commonplace for many medium and large companies operating in Australia to have substantial foreign ownership. Where the foreign interest is 40 per cent or more, the turnover of the foreign entity is grouped with that of the Australian entity. This outcome will, in many cases, result in the $5 billion threshold being exceeded even though the Australian turnover may be substantially lower than that. This will prevent many businesses, which would otherwise be eligible for the temporary full expensing of depreciable assets and the loss carry back, from accessing these measures. These concerns are being raised by business groups with the Treasury.
There was no mention of Division 7A reforms in the budget, or a number of other announced and unenacted measures from previous budgets. The government has delivered a sensible and gentle federal budget for the times, but the need for genuine tax reform remains and should not be forsaken due to the ubiquitous, difficult economic conditions.
Let us hope that the 2020–21 budget measures are an appetiser for the main course which ultimately must be holistic tax reform.
Robyn Jacobson, senior advocate, The Tax Institute