The 2020 Federal Budget announced last night is possibly best described as the budget we had to have. The impact of COVID-19 has meant the Government’s prior plans had to be thrown out the window, and they’ve started again with massive stimulus to kick start the economy.
This budget sets the road to recovery. It digs deep into deficit, but provides good incentive for spending as the way out of recession.
The budget revealed a net operating deficit for FY20 of $92.3 billion, with net debt estimated to reach $966 billion by 2023-24, unemployment tipped at 5.5% and inflation at 2.0%.
The government has focused on immediate tax relief for individuals and instant asset write offs for businesses of all sizes to invest in capital equipment. Both announcements are incentives to spend, with the spending domino effect being exactly what the economy needs. A welcome change is the proposal to carry-back tax losses, but unfortunately, this only applies to companies. Nevertheless, this is a favourable initiative.
It’s good news that the Government has not put its hands in your superannuation pocket this year - there are no announcements that have a negative impact on wealth creation via super. In addition, no changes to SMSF’s … yeah!
Don’t forget that the proposed changes need to pass through Parliament before becoming law.
Let’s see how these changes impact you.
Personal Tax Cuts
The Government announced that they will bring forward Stage 2 of the proposed personal tax cuts that were due to start on 1 July 2022 to start on 1 July 2020. This means that individuals will start receiving the benefits as soon at the legislation receives Royal Assent
Under the proposal the upper income threshold of the 19% personal tax bracket will increase from $37,000 to $45,000 and the upper income threshold of the 32.5% will increase from $90,000 to $120,000
This means that individuals who earn between $45,000 and $90,000 will have an additional $1,080 annually of after tax income, and if you earn more than $120,000, an additional $2,430 after tax
The low and middle income tax offset (LMITO), worth up to $1,080 has been extended to 30 June 2021. Individual earning between $48,000 and $90,000 will receive the maximum benefit, which then reduces and cuts out if your income reached $126,000. The LMITO is received when you lodge your tax return.
Stage 3 of the proposed tax cuts is scheduled to commence from 1 July 2024 and will introduce a 30% bracket to replace the 32.5%, and 37% brackets to apply for taxable incomes of $45,001 - $200,000. This is still a long way off!
These changes are illustrated below (excluding medicare levy):
Instant Asset Write-Off
The instant asset write-off concession will be available to businesses with an aggregated annual turnover of less than $5 billion, enabling them to deduct the full cost of new eligible depreciating assets acquired from 7.30 pm on 6 October 2020 and first used and installed by 30 June 2022
Small and medium sized businesses (turnover less than $50 million) can also deduct the full cost of second hand assets
Businesses with aggregate 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, but installed by 30 June 2021
Small Business Asset 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.
Company Loss Carry-Back
The Government will re-introduce a loss carry-back process that will allow companies with aggregated turnover of less than $5 billion who have paid tax in the past, but who are now in a tax loss position, to carry their tax loss back to the past years to obtain a tax refund.
Losses in FY20, FY21 & FY22 income years can be carried back to offset against taxable incomes from FY19 and subsequent years
Companies can elect to claim the tax refund when they lodge their FY21 & FY22 tax returns
The loss carried back must not be more than their earlier taxed profits
The tax refund created by the carry-back cannot generate a franking account deficit. This means if the company has paid franked dividends that have used up the franking account balance the loss carry-back provisions cannot be utilised
Unfortunately as many small businesses are conducted outside a corporate structure, this proposal does not provide these taxpayers any support by way of refund of tax previously paid.
JobMaker Hiring Credit
Eligible employers will be able to claim $200 a week for each additional eligible employee they hire aged 16 to 29 years old and $100 a week for each additional eligible employee aged 30 to 35 year old. This will apply to new jobs created from 7 October 2020 to 7 October 2021 and will attract the credit for 12 months from the date the position is created. The maximum credit is $10,400 for each new position created and cannot exceed the increase in payroll.
Eligible employees must:
Have worked 20 paid hours per week on average for the full weeks they were employed
Have received the JobSeeker payment, Youth allowance or Parenting payment for at least one month within the past three months before they were hired
Be in their first year of employment with this employer and must be employed for the period that the employer is claiming for them
Can be permanent, casual or fixed term
The Government declared that business support grants by the Victorian Government announced on 13 September 2020 in response to the economic impact of COVID-19 will not be assessable
Proposed changes to R&D have been deferred to income years commencing from 1 July 2021. The existing R&D tax incentives remain in place to encourage companies to participate in R&D activities
The Government will amend the law to treat a company that is incorporated offshore as an Australian resident for tax purposes only if it has a significant economic connection to Australia. This law may be retroactive to 15 March 2017
There will be a CGT exemption for granny flats constructed at your principal place of residence, such exemption commencing from 1 July following the date or Royal Assent. Applicable to family arrangements only, not commercially rented granny flats
FBT exemption for car parking benefits and multiple work related portable electronic devices for FBT year commencing 1 April 2021
There will be an extension of the First Home Loan Deposit Scheme to provide an additional 10,000 guarantees to eligible first home buyers to build a new home or purchase a newly constructed home with a deposit of 5%
Two additional support payments of $250 each aimed at pensioners, carers and disability card holders will be paid from November 2020 and again early in 2021 to eligible recipients, including people in receipt of age pension, disability support pension, carer payments, FTB payments and Commonwealth Seniors Health Card payments
The maximum age of dependants allowed under private health insurance policies will increase from 24 to 31 years of age and the age limit of dependants with disabilities will be removed
The government has committed more than $12.5 billion in additional infrastructure funding across the country, allocated across various programs.
There are no changes to superannuation contribution or pension rules
Your super will follow you when you change jobs and thus prevent unintended multiple superannuation accounts
APRA will benchmark superannuation products annual net investment performance
This budget is a “spend your way out of recession” budget that is designed to stimulate the economy with “shock” treatment. The Government is relying on increased jobs and the following increased taxes and GST collections, whilst borrowing in a low interest rate environment. Support has been thrown behind businesses to get them moving. We welcome this budget and look forward to seeing the benefits of the budget initiatives flow through the economy.
For more information on how this budget affects you and your business, please contact your Sullivan Dewing client manager.