2020-21 Federal Budget - Australia's recovery from the COVID-19 pandemic

By comparison to many countries, Australia has managed the COVID-19 pandemic well, but good management isn’t enough to protect us from the $213.7 billion deficit in 2020-21. The Government has taken to heart the old adage, “You have to spend money to make money” to trade our way out of a black hole.

Some of the measures are aimed at addressing the harsh lessons COVID-19 has taught us and seek to centralise production back in 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. Many of the initiatives aim to improve how Government interacts with the community and business in particular. This funding is focussed on streamlining interaction and compliance with Government requirements and investing in the IT infrastructure required to digitise the compliance process.

The final comments in the Treasurer’s Budget speech paint 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.

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
Access to generous tax concessions for a wider range of businesses

The Budget also contains two additional Economic Support payments to pensioners and other eligible recipients to drive money back into the economy.

We outline below the initiatives focussed towards individuals, superannuation and small-medium business.

Individuals

Personal income tax cuts

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 the passage of the legislation).

At a cost of $17.8 billion over the forward estimates, bringing forward the tax cuts is a controversial move. 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 (from $37,000)
Increase the top threshold of the 32.5% tax bracket to $120,000 (from $90,000)
Increase the low income tax offset 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.

Tax relief to back hard-working Australians and to create more jobs

$250 economic support payments

Two additional economic support payments of $250 each will be made during November 2020 and early 2021 to eligible recipients of the following payments and health care card holders:

Age Pension

Disability Support Pension
Carer Payment
Family Tax Benefit, including Double Orphan Pension (not in receipt of a primary income support payment)
Carer Allowance (not in receipt of a primary income support payment)
Pensioner Concession Card (PCC) holders (not in receipt of a primary income support payment)
Commonwealth Seniors Health Card holders
Eligible Veterans’ Affairs payment recipients and concession 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’

At present, if you enter into a formal granny flat arrangement with a relative, such as an elderly parent, there is a risk of capital gains tax (CGT) applying.

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.

The exemption only applies to family arrangements or other personal ties and will not apply to commercial rental arrangements and will be effective from 1 July 2021 (subject to the passage of legislation).

Removing Capital Gains Tax for Granny Flats

10,000 additional places in 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 mortgage insurance. There are currently 27 participating lenders across Australia offering places under the First Home Loan Deposit Scheme.

Helping an additional 10,000 first home buyers

Aged care support
$1.6bn to help elderly stay at home

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 have increased threefold from around 60,300 in 2013 to around 185,500 in 2021.

Aged care industry monitoring and support

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.

Superannuation

Superannuation accounts ‘stapled’ to an individual

This reform will ensure individuals continue to use their existing superannuation fund when they change jobs. The fund will be “stapled” to the individual to prevent the duplication of superannuation fund accounts when changing employers.

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.
The employer will do this 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.
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 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.

Accountability of underperforming funds

From July 2021, the Australian Prudential Regulation Authority will conduct benchmarking tests on the net investment performance of MySuper products, with products that have underperformed over two consecutive annual tests prohibited from receiving new members until a further annual test shows they are no longer underperforming.

If a fund is deemed to be underperforming in the first of these annual tests, it will need to inform its members of its underperformance by 1 October 2021. When funds inform their members about their underperformance they will also be required to provide them with information about the YourSuper comparison tool (see below). Underperforming funds will be listed as underperforming on the YourSuper comparison tool until their performance improves.

Non-MySuper accumulation products where the decisions of the trustee determine member outcomes will be added from 1 July 2022.

Performance transparency

A new interactive tool (YourSuper) will enable a comparison of simple super (MySuper) products ranked by fees and investment returns. The tool will also provide links to other MySuper products and show current super accounts if the individual has more than one.

The tool will be administered by the ATO.

Trustee accountability

The obligations on superannuation trustees will be strengthened to ensure their actions are consistent with members’ retirement savings being maximised. By 1 July 2021:

Superannuation trustees will be required to comply with a new duty to act in the best financial interests of members.
Trustees must demonstrate that there was a reasonable basis to support their actions being consistent with members’ best financial interests.
Trustees will provide members with key information regarding how they manage and spend their money in advance of Annual Members’ Meetings.

Resources:

Business & 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

The Government is really keen for business 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 acquired after 7:30pm AEDT on 6 October 2020 and first used or installed ready for use by 30 June 2022. This means that an asset’s cost will be fully deductible upfront rather than being claimed 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).

Second-hand assets

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.

ATO document ‘JobMaker Plan – temporary full expensing to support investment and jobs’

Ability for companies to carry-back losses

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.

Note that loss 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.

ATO document ‘Loss carry back’

R&D tax concessions injection and simplification

The Government has enhanced its proposed shake-up of the R&D system injecting an additional $2 billion through the Research and Development (R&D) Tax Incentive effective 1 July 2021.

Currently, the R&D Tax Incentive provides the following in respect of eligible R&D activities (for the first $100 million of eligible expenditure):

a 43.5% refundable offset for eligible companies with aggregated annual turnover less than $20m; and
a 38.5% non-refundable tax offset for all other eligible companies.

Note that the Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019, before Parliament at the time the Federal Budget was released, proposed various amendments to the R&D Tax Incentive to take effect from the 2019-20 income year. The Government is now delaying (by two years) and enhancing the proposed changes.

Companies under $20m turnover

For companies with an aggregated annual turnover less than $20 million:

The refundable R&D tax offset is being set at 18.5 percentage points above the claimant’s company tax rate (an increase from 13.5 percentage points above the claimant’s company tax rate as previously announced)
The previously announced annual $4 million cap on cash refunds for R&D claimants will not proceed.

Companies over $20m turnover

For companies with aggregated annual turnover of $20 million or more, the previously announced R&D intensity premium, originally intended to apply across three tiers, will now apply across two tiers.

Note the intensity premium will tie the rates of the non-refundable R&D tax offset to the incremental intensity of R&D expenditure as a proportion of total expenditure for the year. The marginal R&D premium will be the company’s tax rate plus:

8.5 percentage points above the claimant’s company tax rate for R&D expenditure between 0 per cent and 2 per cent R&D intensity for larger companies
16.5 percentage points above the claimant’s company tax rate for R&D expenditure above 2 per cent R&D intensity for larger companies (the previously announced intensity premiums varied from 4.5 to 12.5 percentage points).

The R&D expenditure threshold – the maximum amount of R&D expenditure eligible for concessional R&D
tax offsets – will be increased as intended from $100 million to $150 million per annum.

Access to tax concessions extended to businesses up to $50m

Announced pre Budget, a range of generous tax concessions normally only available to small and medium businesses, will be available to businesses with an aggregated turnover of up to $50 million.
The expanded concessions will be rolled out in three phases:

The eligibility turnover thresholds for other small business tax concessions will remain at their current levels.

FBT exemption for retraining and reskilling workers

Announced pre Budget, the Government will provide a Fringe Benefits Tax (FBT) exemption for employer-provided retraining and reskilling effective 2 October 2020, for employees who are redeployed to a different role in the business.
Currently, if an employer provides a benefit to an employee that is not directly related to their current job, FBT applies. This measure enables employers to help employees reskill for a new role or another role with a different employer, without incurring FBT.
The exemption does not apply to retraining acquired through salary packaging or training provided through Commonwealth supported places at universities. The exemption also does not extend to repayments towards Commonwealth student loans.
The Government will also consult on potential changes to the law to allow a worker to deduct expenses they personally incur to undertake training directed at future employment and skills (current rules that limit deductions to training related to current employment, may act as a disincentive for workers to retrain and reskill).

Boost for skills training with Fringe Benefits Tax exemption

FBT record keeping simplified

The Tax Commissioner will be given the power to simplify record keeping requirements for fringe benefits tax purposes by enabling employers to rely on existing corporate records, rather than employee declarations and other prescribed records to complete FBT returns effective for the first FBT year (commencing 1 April) after the date of Royal Assent of enabling legislation.

Victorian business support grants to be tax-free

As previously announced, the Government will make the Victorian Government’s business support grants for small and medium business tax-free (non-assessable, non-exempt (NANE) income) for tax purposes for grants announced on or after 13 September 2020 and for payments made between 13 September 2020 and 30 June 2021.

This program will be extended to all States and Territories on an application basis and is restricted to future grants programs.

State-based grants such as the Business Support Grants are generally considered taxable income unless legislation enables them to be treated as non-assessable, non-exempt income.

100,000 new apprenticeships

Announced pre Budget, from 5 October 2020 a business (or Group Training Organisation) that takes on a new Australian apprentice will be eligible for a 50% wage subsidy, regardless of geographic location, occupation, industry or business size. The scheme will be available until the 100,000 cap has been reached.

Under the subsidy, employers will be eligible for up to 50% of the wages of a new or recommencing apprentice or trainee for the period up to 30 September 2021. The maximum subsidy is $7,000 per quarter.

The subsidy is paid in arrears and is available for wages paid from 5 October 2020 to 30 September 2021.

Eligible businesses are those that:

Engage an Australian Apprentice between 5 October 2020 and 30 September 2021, and
The Australian Apprentice or trainee is undertaking a Certificate II or higher qualification, and has a training contract that is formally approved by the state training authority.