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On 6 October 2020 the Coalition Government presented its delayed Federal Budget for the 2020/21 financial year. In a year that has already seen unprecedented levels of governmental support for Australian individuals and businesses alike, the Federal Government proposes to continue to spend in an effort to jumpstart Australia’s economy.

Unsurprisingly for a Liberal led government, the taxation proposals in the budget seek to incentivise businesses, and small businesses in particular, via concessions for investment in plant and equipment, R&D and employees. Combined with the bringing forward of previously proposed personal tax cuts and short term cash-flow boosting tax changes, the government hopes that a shot of electricity to Australia’s economic heart will get the country back on its feet.

Pilot’s summary of the major tax related budget announcements follows:

Brought forward personal income tax cuts

This measure has now been legislated.

In an effort to deliver an immediate boost to aggregate demand, the Government has brought forward the second stage of personal income tax cuts originally proposed to be implemented from 1 July 2022. Once legislated, these changes will have been effective from 1 July 2020.

The Government has announced that it will retain the Low and Middle Income Tax Offset (LMITO) for the 2021 year as a sweetener for middle income Australians. Taxpayers earning between $48,000 and $90,000 will continue to be eligible for the maximum offset of $1,080. The offset continues to be available to taxpayers with taxable incomes up to $126,000.

In addition, the Low Income Tax Offset (LITO) will increase from $445 to a maximum of $700 per person. The LITO is reduced for taxable incomes exceeding $45,000 and is withdrawn for individuals with taxable incomes exceeding $66,667.
The aforementioned changes are summarised follows:

Thresholds
Rate 2019-20 2020-2021 to 2023-2024
Nil $0 – $18,200 $0 – $18,200
19% $18,201 – $37,000 $18,201 – $45,000
32.5% $37,001 – $90,000 $45,001$120,000
37% $90,001 – $180,000 $120,001 – $180,000
45% $180,001 + $180,001 +
Low and middle income tax offset (LMITO) Up to $1,080 Up to $1,080
Low income tax offset (LITO) Up to $445 Up to $700

 

As an illustration, these changes will result in the following reductions in annual income tax payable:

Taxable Income ($) Tax Payable
(2019-20) ($)
Tax Payable
(2020-21 to 2023-24) ($)
Net Tax Saving ($)
50,000 7,797 6,717 1,080
100,000 24,497 22,967 1,530
150,000 42,997 40,567 2,430
200,000 63,097 60,667 2,430

 

*This does not include the Medicare Levy (which remains unchanged at 2% of taxable income), as well as any applicable tax offsets.

The proposed Stage 3 tax cuts remain unchanged and are expected to commence from 2024-25. The proposed changes are as follows:

Rates from 2024-25 Proposed thresholds from 2024-25
Nil $0 – $18,200
19% $18,201 – $45,000
30% $45,001 – $200,000
45% $200,000 +
Low income tax offset (LITO) Up to $700

 

Immediate write-off and accelerated depreciation for business

This measure has now been legislated.

Whilst the Government only recently expanded the instant asset write-off to 31 December 2020, a brand new “immediate expensing” of the full cost of eligible capital assets will be available from 7.30pm on 6 October 2020 until 30 June 2022. This concession will apply to all businesses with aggregated turnover not exceeding $5 billion.

Under the existing instant-asset write off, businesses with aggregated turnovers not exceeding $500 million can immediately write off the value of assets acquired with costs below the threshold (i.e. $150,000). In addition, these businesses may claim a 50% immediate deduction for assets costing above the threshold (or pooled for small businesses entities).

If the new measure is legislated, eligible businesses will be able to claim a deduction for the costs of new assets (and improvements to existing assets) used or installed between 6 October 2020 and 30 June 2022.
As the depreciation rules have been altered several times in recent years, we have summarised the who, what, when and how for this concession as follows

* Businesses that hold assets eligible for the $150,000 instant asset write-off will have an additional six months (until 30 June 2021) to install or use those assets.

Small business entities with aggregated turnovers less than $10 million will be able to deduct the entire balance of their simplified depreciation pools for years ending while the immediate expensing is in effect.

We expect that passenger cars will continue to be subject to the depreciation limit.

Where an immediate deduction is not available under the new rules, the existing rules may still apply.

Expanded category of Small Business Entity and related concessions

This measure has now been legislated.

The Government is proposing to increase the small business entity turnover threshold from $10 million to $50 million. If enacted, this will provide access to a broad range of concessions currently only available to businesses with a turnover of less than $10 million. The concessions which would become available are:

  • Capital allowance concessions allowing the business to immediately deduct certain new and second hand assets provided they are installed or first used by 30 June 2022;
  • Exemptions from FBT from 1 April 2021 on certain car parking benefits and the provision multiple work related portable electronic devices;
  • Businesses without particularly complex affairs or significant international tax dealings would be subject to a two-year amendment period (instead of a four-year amendment period) for income tax assessments from 1 July 2021;
  • The ability to choose not to account for changes in the value of trading stock where less than $5,000 of stock is held at year end;
  • The ability to remit Pay As You Go Instalments based on the GDP adjusted notional tax (an Australian Taxation Office calculated amount based on the most recently lodged income tax return) as opposed to the rate method; and
  • The ability to immediately deduct certain start-up expenses and prepaid expenditure from 1 July 2020.

Losses Carried Back to the Future (again)

This measure has now been legislated.

For a three year period, corporate tax losses will be able to be carried backwards to offset historical profits, rather than the usual carry-forward only method. This mechanism was introduced by Julia Gillard’s Labor Government a number of years ago and removed after only one year. However, the reintroduction appears to be aimed at replacing cash flow for previously profitable businesses now in distress. Thus assisting them to fund their current losses from historic profits, rather than only providing relief when the business is once again profitable.

Under the proposal, companies with an aggregated turnover of less than AUD$5 billion that incur tax losses in the 2019-20, 2020-21 or 2021-22 financial years will be able to carry those losses backwards to offset taxable profits in the 2018-19 or future financial years. This means that income taxes paid in those prior years will be available on lodgement of 2020-21 and 2021-22 tax returns in the form of a refundable tax offset. The refunds will be limited to taxes paid in those prior years. Further, companies that have distributed taxes paid as franking credits will not be able to claim refunds for the credits passed on to their shareholders.

New Fringe Benefits Tax (FBT) concessions

The Budget Measures propose several changes to the Fringe Benefits Tax (“FBT”) regime to exempt certain benefits currently subject to FBT and reduce red tape.
An exemption from FBT is proposed for costs incurred from 6 October 2020 by employers on retraining and reskilling employees where the training does not relate to the employee’s current employment. The exemption is not available for Commonwealth supported places at universities or the repayment of Commonwealth student loans.
The Government is also proposing to increase the small business entity turnover threshold from $10 million to $50 million. If enacted, this change will also enable these businesses to access the following concessions available for eligible small businesses:

  • Exemption from FBT on car parking benefits provided the car parking is not provided in a commercial car park and the business is not a listed public company, subsidiary of a listed public company or a government body; and
  • Exemption from FBT when providing multiple work related portable electronic devices to employees, even if the devices have substantially identical functions (larger businesses can only provide one work related portable electronic device per FBT year, unless the item is a replacement).

In order to reduce red tape, the Government has proposed allowing employers to rely on existing corporate records, rather than additional, specific employee declarations and other prescribed records to finalise their FBT returns. This measure legislates what many businesses have been doing in any event and is proposed to commence on 1 April in the year after the legislation receives Royal Assent.

R&D changes (again)

This measure has now been legislated.

The Government has announced that the R&D tax incentive will be amended (again) from 1 July 2021 onwards. The previous proposed changes were drafted only, and without becoming legislated have now been updated again.

The current proposals include bringing in two intensity tiers to test how much of the company’s total expenditure relates to R&D, and updates to the applicable R&D offset rates thereon. Further, the previous proposal to limit the cash refunds generated by these offsets has now been abandoned. However the upper limit of claiming R&D remains unchanged (from the previous proposal) at $150 million.

As a result, the R&D offsets for the 2021/22 and future financial years will be as follows (assuming no further changes in corporate tax rates):

      R&D Offset at:
Aggregated  Turnover R&D Intensity  R&D Premium 25% Tax Rate 30% Tax Rate
< $20 million N/A 18.5% 43.5% 48.5%
> $20 million Between 0% and 2% 8.5% 33.5% 38.5%
> $20 million Above 2% 16.5% 41.5% 46.5%

 

Clarity for corporate tax residency rules

The Government has announced technical amendments to the legislation to clarify the income tax residency tests for corporate entities. Confusion has existed in this space since 2016 and 2017, following the Bywater Investments Ltd vs Federal Commissioner of Taxation court decision and the subsequent withdrawal by the ATO of Taxation Ruling 2004/15. Since that time foreign incorporated companies with Australian resident directors have operated with the risk the ATO would tax them as Australian residents. The myriad of international double tax treaties and OECD guidelines have muddied the waters further, and double taxation has become a much more real possibility for companies incorporated overseas, but which have no real business or operations in Australia.

In an effort to (hopefully) clarify the rules, the 2020-21 Federal Budget proposes to implement a two-prong corporate residency test which looks very similar to the rules as they were generally applied before 2017. The proposal is that foreign incorporated companies will become Australian tax residents if they have a “significant economic connection to Australia”, being where both:

  1. Core commercial activities are undertaken in Australia; and
  2. Central management and control is in Australia.

This is proposed to take effect from the first income year after the date of royal assent, but early adoption is available from 15 March 2017 (being the pivotal date the ATO withdrew their prior ruling on this matter).

Other 2020 measures

While JobKeeper and its extension dominated the headlines, several other taxation related policy decisions have been announced during 2020. The following items are included below due to their broader relevance:

  • The maximum number of members in a self-managed superannuation fund was proposed to increase from four to six from 1 July 2019. The Bill has been introduced to the Senate and is currently before the Senate Economics Legislation Committee with their report due in early November 2020. The measure is proposed to take effect following the date of Royal Assent of the enabling legislation;
  • The 2016-17 Federal Budget contained measures to change the operation of Division 7A of the Income Tax Assessment Act 1936. In particular, these measures were designed to convert all Division 7A loans from 7 or 25 year loans to 10 year loans. These measures were modified in the 2018-19 Federal Budget and again in the 2019-20 Federal Budget and were scheduled to commence on 1 July 2020. As a result of the reprioritisation of Government resources and the shortened parliamentary sitting period in 2020 due to COVID-19, the proposed commencement date of this proposal has been removed. If pursued, it is intended that the changes will take effect from 1 July following Royal Assent of the legislation.
  • The Government announced that the minimum superannuation drawdown requirements for account-based pensions would be halved for the 2019-20 and 2020-21 financial years.

Additionally the Government recently announced reforms to aid small business survival. The proposed reforms include changes to debt restructuring, simplified processes to increase returns for creditors, and measures to assist the insolvency sector to respond effectively to the needs of small businesses. Read our full commentary.

Contact Pilot

If you would like to discuss any of the tax changes announced in the budget, please contact your Pilot Advisor or Murray Howlett from our tax team on (07) 3023 1300.