Federal Treasurer, Mr Josh Frydenberg, handed down the 2020/ 21 Federal Budget at 7:30 pm (AEDT) on Tuesday, 6 October 2020.
Australia’s economic response to the COVID-19 pandemic in the form of the original and extended JobKeeper scheme, the cash flow boosts, and the enhanced JobSeeker payment has come at a significant cost, Mr Frydenberg said, resulting in a budget deficit of $213.7b, falling to $66.9b by 2023/ 24.
The government has proposed to bring forward by two years individual tax cuts legislated to start in 2022/ 23, meaning as of the 2020/ 21 income year, the 19% threshold will be lifted from $37,000 to $45,000 and the 32.5% threshold lifted from $90,000 to $120,000. The low and middle income tax offset will also be retained for an additional year.
The Budget has been described as an economic recovery plan which is “all about jobs” — with the introduction of a new JobMaker Hiring Credit scheme designed to give businesses incentives to take on additional young people seeking jobs. In a major boost to business investment, immediate deductions for asset purchases of any value will be available to businesses with a turnover of up to $5b, until June 2022. Other measures include further refinement of proposed changes to the R&D incentive, FBT and CGT exemptions.
The full Budget papers are available at www.budget.gov.au and the Treasury ministers’ media releases are available at ministers.treasury.gov.au.
The tax highlights are set out below.
Individuals
Individual income tax rate and tax offset changes brought forward
The legislated changes to the individual income tax rates will be brought forward from 1 July 2022 to 1 July 2020. Individual tax offsets will be realigned from 1 July 2020, with the legislated increase to the low income tax offset (LITO) brought forward, and the low and middle income tax offset (LMITO) retained for one year.
Income tax rates
The 2019/ 20 Federal Budget announced a 3 phase personal income tax plan, commencing from the 2018/19 income year. The second phase of the plan included changes to the 19% and 32.5% tax brackets. The 2020/ 21 Federal Budget intends to bring these changes forward from 1 July 2022 to 1 July 2020.
The changes include:
- raising the 19% bracket from $37,000 to $45,000, and
- raising the 32.5% bracket from $90,000 to $120,000.
The proposed income tax brackets from 1 July 2020 are as follows.
The above will apply until 30 June 2024. The legislated changes as part of stage 3 of the personal income tax plan are unchanged and will commence on 1 July 2024.
Personal tax offsets
With the commencement of phase 2 of the personal income tax plan from 2020/21, changes to LITO will also be brought forward two years to 1 July 2020.
From 1 July 2020, LITO will increase from $445 to $700. Individuals who have a taxable income below $37,500 will be entitled to the full non-refundable tax offset. Above this amount, LITO is tapered off at two different levels. Individuals with taxable incomes between:
• $37,500 and $45,000 will be tapered off at 5 cents per dollar, and
• $45,000 and $66,667 will be tapered off at 1.5 cents per dollar.
Phase 2 of the plan previously marked the end of LMITO, introduced as a temporary measure in the 2019/20 Federal Budget. Despite phase 2 being brought forward, LMITO will remain in place for the 2020/21 income year. The LMITO rates are as follows:
The new effective tax-free threshold for individual Australian tax residents is $23,226 for the 2020/21 income year.
Source: Budget Paper No 2, pp 18–19; Glossy “Tax relief to back hard-working Australians and to create more jobs”.
CGT exemption for granny flat arrangements
A targeted capital gains tax exemption will apply for granny flat arrangements where there is a formal written agreement in place.
Capital gains tax will not apply to the creation, variation or termination of formal written granny flat arrangements providing accommodation for older Australians or people with disabilities. The exemption will only apply to arrangements entered into because of family relationships or other personal ties and does not apply to commercial rental arrangements.
This measure will commence as early as 1 July 2021, subject to the passing of legislation.
Source: Budget Paper No 2, pp 23–24; Treasurer and Minister for Housing and Assistant Treasurer’s media release “Removing Capital Gains Tax for Granny Flats”, 5 October 2020.
Income tax exemptions of International Monetary Fund and World Bank Group employees to be clarified
The Government has announced that it will clarify the income tax exemptions for Australian individuals engaged by the International Monetary Fund (IMF) and the three institutions of the World Bank Group (WBG).
This will mean that experts working for these organisations on a short-term basis will be exempt from income tax. This is consistent with Australia’s support for, and contributions to, the IMF and WBG.
Source: Budget Paper No 2, p 22.
Business incentives and companies
Full expensing of eligible assets to 30 June 2022
The full cost of an eligible capital asset that is acquired after 7:30pm AEDT on 6 October 2020 and first used or installed ready for use by 30 June 2022 may be fully deducted. This deduction is available for any business with an aggregated annual turnover of less than $5b.
The full expense will be available in the income year the eligible capital asset is first used or installed ready for use. The outright deduction may also be available for the cost of improvements to existing eligible depreciable assets during the full expensing period.
An eligible depreciable asset of any value is eligible for full expensing.
Small and medium sized businesses (those with an aggregated annual turnover of less than $50m) can fully deduct second-hand assets purchased and installed during the eligible period.
Source: Budget Paper No 2, p 20; Glossy “Lower taxes — Supporting households, driving investment and creating jobs”, pp 9–10.
JobMaker: Small business depreciation pools write-off extended
Small businesses using simplified depreciation pools can deduct the entire balance of the pool at the end of the income year while full expensing applies. This means that effectively, the small business depreciation pools may have up to 30 June 2022 to access this asset write-off concession.
Source: Budget Paper No 2, p 20.
JobMaker: Instant asset write-off for companies with turnover between $50m and $500m
Under the enhanced instant asset write-off, businesses with an aggregated annual turnover of between $50m and $500m can deduct the full cost of an asset costing less than $150,000, if purchased by 31 December 2020. These businesses will now be afforded an additional six months, until 30 June 2021, to first use or install these assets ready for use.
Source: Budget Paper No 2, p 20; Glossy “Lower Taxes – Supporting households, driving investment and creating jobs”, p 9.
Research and development tax incentive changes
The research and development (R&D) tax incentive will be adjusted from 1 July 2021. The 2020/21 Federal Budget amends changes to the incentive last announced in the 2019/20 MYEFO measure, which was tabled in parliament as a government Bill in December 2019.
The proposed changes to the current government Bill depend on whether the entity is a small or large R&D entity. An R&D entity is defined as small if their aggregated annual turnover is less than $20m during the claim year.
Small R&D entities:
• will be eligible for a refundable R&D tax offset of 18.5 percentage points above their company tax rate, up from 13.5 percentage points
• will no longer have an upper R&D tax offset limit of $4m.
Large R&D entities:
• will move from three intensity-based offset tiers to two
• will be eligible for a non-refundable R&D tax offset of 8.5 percentage points above the claimant’s company tax rate for notional deductions between 0% and 2% of total expenses
• will be eligible for a further non-refundable R&D tax offset of 16.5 percentage points above the claimant’s company tax rate for notional deductions over 2% of total expenses.
The proposed increase of the R&D expenditure threshold from $100m to $150m will not change.
Source: Budget Paper No 2, pp 19–20; Glossy “Economic Recovery Plan for Australia — JobMaker — Creating jobs and rebuilding our economy”, p 38.
JobMaker Hiring Credit for employers creating new jobs
Eligible employers can claim a JobMaker Hiring Credit for each additional new job they create for an eligible employee from 7 October 2020 to 6 October 2021.
The JobMaker Hiring Credit will be available from the date of employment for up to 12 months and capped at $10,400 for each additional new position created. 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.
There are specific “additionality criteria” to be met to be an eligible employer, including demonstrating that there is an increase in the total employee headcount and payroll of the business. Other employer eligibility criteria include being registered for PAYG withholding and reporting through Single Touch Payroll. Employers do not need to satisfy a fall in turnover test. The Jobmaker Hiring Credit will also not be available to employers who are claiming the JobKeeper payment.
The employee must have worked at least 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 before they were hired.
The credit will be available for each additional new job created for an eligible employee from 7 October 2020 until 6 October 2021. It will be claimed quarterly in arrears from the ATO starting from 1 February 2021.
Source: Budget Paper No 2, p 162; Glossy “JobMaker Hiring Credit”, pp 1–3.
JobMaker: Apprenticeship wage subsidy expanded
The apprenticeship wage subsidy program announced in the July 2020 Economic and Fiscal Update, will be expanded to allow businesses of any size to claim the subsidy.
Eligible businesses that employ apprentices or trainees will be eligible to receive up to a 50% wage subsidy, up to $7,000 per quarter, capped at 100,000 places. This new measure will run from 5 October 2020 to 30 September 2021.
Source: Budget Paper No 2, p 77; Glossy “JobMaker — Creating jobs and rebuilding our economy”, p 5.
Temporary loss carry-back for corporate tax entities
Eligible companies with turnover up to $5b will be able to offset tax losses against prior year taxed profits to generate a refund.
Under the measure, losses incurred in the 2019/20, 2020/21 or 2021/22 income years may be carried back against profits made in or after the 2018/19 income year. Eligible companies may elect to receive the tax refund when they lodge their 2020/21 and 2021/22 tax returns. The tax loss carried back cannot exceed the prior year taxed profits or generate a franking account deficit.
Currently, companies are required to carry losses forward to offset taxable profits in future years.
Companies that do not elect to carry back losses will continue to carry losses forward as normal.
Source: Budget Paper No 2, p 21; Glossy “Lower taxes — Supporting households, driving investment and creating jobs”, p 11.
Tax residency of foreign incorporated companies clarified
Companies that are incorporated offshore will be treated as Australian tax residents where there is a “significant economic connection to Australia”.
The test will be satisfied where both the company’s core commercial activities are undertaken in Australia, and its central management and control is in Australia.
The amendments clarifying the corporate residency test will be optional to apply from 15 March 2017 and will otherwise have effect from the first income year after the date of royal assent of the enabling legislation.
Source: Budget Paper No 2, pp 13–14.
Victorian COVID-19 business support grants made non-assessable, non-exempt income
The Victorian Government’s business support grants as announced on 13 September 2020 for small and medium businesses will be made non-assessable, non-exempt (NANE) income for tax purposes.
This concession will be extended to all states and territories on an application basis. To be eligible, grants will have to be announced on or after 13 September 2020, and payments made between 13 September 2020 and 30 June 2021. A new power will enable the government to make regulations to ensure that specified state and territory COVID-19 business support grant payments are NANE income.
Source: Budget Paper No 2, p 15.
Increased funding for Australia’s foreign investment framework
Funding will be provided to implement a new information and communication technology platform and a new consolidated Register of Foreign Ownership of Australian Assets. This is in addition to the funding announced in the July 2020 Economic and Fiscal Update.
The foreign investment fee framework will be simplified and adjusted from 1 January 2021, to ensure foreign investors bear the cost of administering the system.
Source: Budget Paper No 2, p 23.
Other tax measures
FBT exemption and deductions for retraining
Employer-provided retraining and reskilling for redundant, or soon to be redundant, employees will be exempt from fringe benefits tax.
Currently, employers providing training that is not sufficiently connected to an employee’s current employment may be subject to fringe benefits tax. The exemption will apply for retraining towards a position within or outside of the employer’s business. Retraining provided through a salary packaging arrangement or commonwealth supported places at universities will not be eligible for the exemption.
When enacted, the exemption will apply from 2 October 2020.
Changes to tax deduction rules for self-education expenses unrelated to current employment will also be considered by the government in consultations.
Source: Budget Paper No 2, p 15; Glossy “Lower taxes — Supporting households, driving investment and creating jobs”, p 15; Treasurer and Minister for Housing & Assistant Treasurer’s media release “Boost for skills training with fringe benefits tax exemption”, 2 October 2020.
Reduced FBT record keeping requirements
Employers will be allowed to use existing corporate records, rather than prescribed records, to comply with their fringe benefits tax obligations.
The fringe benefits tax legislation prescribes the form certain records must take, often requiring employers to create additional records and employee declarations. The Commissioner of Taxation will have the power to determine adequate alternative records, allowing employers to rely on existing corporate records and reduce compliance costs.
The measure will have effect from the start of the first fringe benefits tax year (starting on 1 April) after the date of royal assent of the enabling legislation.
Source: Budget Paper No 2, pp 15–16; Glossy “Lower taxes — supporting households, driving investment and creating jobs”, p 14.
Deductible gift recipients list updated
• Since the July 2020 Economic and Fiscal Update, the following organisations have been approved as specifically listed deductible gift recipients:
• Royal Agricultural Society Foundation Limited from 1 July 2020
• Judith Neilson Institute for Journalism and Ideas from 1 July 2020
• The Andy Thomas Space Foundation from 1 July 2020
• The Royal Humane Society of New South Wales from 1 July 2020
• Youthsafe from 1 July 2020
• Alliance for Journalists’ Freedom from 1 July 2020, and
• The Great Synagogue Foundation Trust Fund from 1 July 2020 to 30 June 2025.
The following organisations have also received approval for an extension of their deductible gift recipient status:
• Sydney Chevra Kadisha from 1 January 2021 to 30 June 2022 — deductible gift recipient status extended by 18 months, and
• Centre for Entrepreneurial Research and Innovation Limited — deductible gift recipient status retained from 31 December 2021 onwards.
The specific listing of China Matters Limited from 1 July 2019 to 30 June 2024 will not proceed.
Taxpayers may claim an income tax deduction for gifts of $2 or more to specifically listed deductible gift recipients.
Source: Budget Paper No 2, pp 21–22.
List of exchange of information jurisdictions to be updated
The list of jurisdictions that have an information sharing agreement with Australia will be updated.
The following countries will be added to the existing 122 jurisdictions: Dominican Republic, Ecuador, El Salvador, Hong Kong, Jamaica, Kuwait, Morocco, North Macedonia and Serbia.
Kenya will be removed from the list because it had not yet entered into an information sharing agreement with Australia as of January 2020.
Residents of listed jurisdictions will be eligible to access the reduced managed investment trust withholding rate of 15% on some distributions, instead of the default rate of 30%.
The updated list will be effective from 1 July 2021.
Source: Budget Paper No 2, p 17.
COVID-19: Waiver of import duties for certain medical and hygiene products extended
The waiver of import duties for certain hygiene or medical products used to treat, diagnose or prevent the spread of COVID-19 has been extended from 1 August 2020 to 31 December 2020. Products affected by the waiver extension include face masks, gloves, disinfectants, soaps, COVID-19 test kits, and viral transport media.
Source: Budget Paper No 2, p 8.
Disclaimer: This article contains general information only and is not intended to constitute financial product advice. Any information provided or conclusions made, whether express or implied, do not take into account the investment objectives, financial situation and particular needs of an investor. It should not be relied upon as a substitute for professional advice. Any tax information included in this article is not based on your unique circumstances and should not be relied on as tax advice.