Last night, the Government delivered a 2020-2021 Federal Budget focused on targeted tax incentives that aim to make businesses and individuals invest, grow, create more jobs and spend money to stimulate the Australian economy as much as possible in the shortest amount of time.
Recognising the precarious position of the Australian economy, which has been plunged into a recession by COVID-19 for the first time in nearly 30 years, this year’s Budget brings overall spending to $507 billion, including $257 billion in direct economic support. It included some big-ticket spending items, amongst them:
- An additional $17.8 billion in personal income tax relief.
- The JobMaker Hiring Credit which is estimated to support around 450,000 positions for young people and cost $4 billion.
- An additional $2 billion through the Research and Development Tax Incentive.
- A regional package of more than $550 million to support regional areas recover from the impacts of COVID-19.
- Cash payments for seniors, carers and disability support recipients, costing $2.6 billion.
- An extra 23,000 in-home aged care packages costing $1.6 billion.
These measures are forecast to see Australia’s net debt peak at $966 billion in 2024 and their success is largely contingent on a COVID-19 vaccine being made available. Arguably, the Government is taking a gamble by hoping individuals will spend the tax savings and thereby stimulate the economy throughout Australia instead of saving the excess money.
Let’s take a look in more detail at some of the measures from the Federal Budget 2020-21, which we believe will play an important part in Australia’s road to recovery from COVID-19.
Tax measures for businesses
1. A new “super-charged” instant asset write-off.
From 7 October 2020 to 30 June 2022, any business with aggregated turnover of less than $5 billion can deduct the full cost of new eligible depreciable assets of any value in the year the assets are first used or installed ready for use. The upfront deduction also applies to improvements made to eligible depreciable assets in this period.
Unlike the current instant asset write-off available for businesses with a turnover of less than $500 million on new or second-hand depreciable assets costing less than $150,000, the “super-charged” instant asset write-off is only available on new depreciable assets.
This “super-charged” instant asset write-off will reduce the after-tax cost of the investment and will undoubtedly play a big part in helping to get the Australian economy back on track.
2. Loss carry-back measure
The Budget proposes to allow companies with aggregated turnover less than $5 billion to offset tax losses incurred in 2020, 2021or 2022 against profits made in or after 2019 on which tax has been paid.
This measure will help improve the cashflow of companies that were profitable and tax-paying previously but are no longer profitable because of COVID-19.
3. Research and Development (R&D)
From 1 July 2021, the Research and Development (R&D) expenditure threshold will be increased from $100 million to $150 million to stimulate companies undertaking more innovative activities.
Companies with aggregate turnover of less than $20 million will be entitled to a refundable offset of the company tax rate (i.e. 30 percent or 25 percent for 2022) plus 18.5 per cent. Companies with aggregate turnover of $20 million or more will be entitled to a non-refundable tax offset of the company tax rate plus either 8.5 per cent or 16.5 per cent depending on how much the company has spent on R&D activities.
Although these changes may lead to bigger deductions for R&D expenditure, the complexity of determining the amount of the R&D tax incentive may lead to unnecessary compliance costs.
4. Small and medium business entity concessions
The Government is expanding access to a range of small business entity concessions for entities with aggregated turnover of less than $10 million and medium sized businesses with aggregated turnover of $10 million or more but less than $50 million.
Examples of concessions that will apply to the 2021 income tax year are an immediate deduction for eligible start-up expenses or eligible prepaid expenditure and exemption from 47 percent Fringe Benefits Tax (FBT) on car parking provided to employees or multiple phones or laptops provided to employees.
From 1 July 2021, the remaining small business concessions, which include simplified trading stock rules and a two-year ATO amendment period, will also apply to medium sized businesses.
Tax measures for individuals
For individuals and households, the Government is hoping to help free up cash for low and middle-income individuals, by applying the following tax relief measures retrospectively from 1 July 2020:
- Increase the low-income tax offset from $445 to $700, providing $225 in tax relief.
- Increase the top threshold of the 19 percent bracket from $37,000 to $45,000, providing up to $1,080 in tax relief.
- Increase the top threshold of the 32.5 percent bracket from $90,000 to $120,000, providing up to $1,350 in tax relief.
We anticipate the Government’s budget proposals should empower businesses and individuals to grow, invest and innovate, but only time will tell how wisely the money splashed around was spent.
For more Federal Budget coverage and news as it comes to hand, visit our Federal Budget Resource Centre.
Published 7 October 2020