Given this history, although commentators regularly describe 2020 as “unprecedented”, the fiscal reaction from the Government has been more predictable. This budget continues with that familiar response and the expected economic benefits can be reasonably assumed to be achievable, provided the economy appears to on an upward trajectory so households continue to spend rather than merely increasing their savings rates.
The business measures are more problematic. The two key measures – the temporary full expensing for the cost of certain depreciable assets and the limited loss carry back rules – are only available for a relatively short period. The scale of business that can use the temporary full expensing measures is particularly generous but the timeframe for making substantial investments may prevent businesses from taking full advantage of them. Thus it is not clear that the business measures will achieve the Treasurer’s ambitions for the business sector.
All in all, it is a solid but predictable budget that will provide important stimulus, but perhaps lacking in the creativity that would match these “unprecedented” times.
Personal income tax cuts
With a clear objective of putting money into the hands of individual taxpayers to help drive domestic consumption and investment, the Government is introducing two key personal tax-related measures:
First, the Government will be bringing forward its plan to implement Stage 2 of the Personal Income Tax Plan (PITP) from 1 July 2022 to 1 July 2020. The Stage 2 PITP measures increase:
- the top threshold of the 19 per cent tax bracket to $45,000 from $37,000;
- the low income tax offset (LITO) from $445 to $700, reducing at a rate of 5 cents per dollar between taxable incomes of $37,500 and $45,000 and 1.5 cents per dollar between taxable incomes of $45,000 and $66,667; and
- the top threshold of the 32.5 per cent tax bracket from $90,000 to $120,000.
Secondly, by preserving the low and middle income tax offset (LMITO) for the 2020-21 income year, the Government will provide a reduction in tax of up to $1,080 for eligible taxpayers. The LMITO provides a reduction in tax of up to $255 for taxpayers with a taxable income of $37,000 or less. Between taxable incomes of $37,000 and $48,000, the value of the offset increases at a rate of 7.5 cents per dollar to the maximum offset of $1,080. Taxpayers with taxable incomes between $48,000 and $90,000 are eligible for the maximum offset of $1,080. For taxable incomes of $90,000 to $126,000, the offset phases out at a rate of 3 cents per dollar.
Our view: the changes are predominantly targeted at putting money in the hands of low- to medium-income earners, as soon as possible. This segment of the taxpaying population will likely be spending a greater percentage of their incremental tax savings than higher income earners (who are more inclined to save the tax benefit). With immediate consumer spending being a key priority for the Government, it is understandable why this strategy has been pursued rather than pursuing immediate higher income bracket tax cuts (which are planned to be delivered as part of Stage 3 of the PITP, in 2024-25.
Temporary loss carry back to support cash flow
The ability to carry back tax losses from the current year to prior year taxable years has been a feature of tax regimes around the world (and in Australia) at various times. In its latest Australian guise, the measure will permit eligible companies (broadly, corporate tax entities with an aggregated turnover of less than $5 billion) to carry back tax losses from the 2019-20, 2020-21 or 2021-22 income years to offset previously taxed profits in 2018-19 or later income years. The measure has the effect of generating a refundable tax offset in the year in which the loss is made.
To obtain the tax refund, taxpaying entities will need to elect when they lodge their 2020-21 and 2021-22 tax returns. Otherwise, they will need to carry forward the relevant tax losses.
Our view: these rules represent a welcome potential cash flow boost for eligible business. When coupled with the changes permitting the temporary expensing of assets, the Government has adopted a clear and deliberate strategy of making these concessions accessible and wants business to take advantage of them.
It should be noted that the tax refund would be limited by requiring that the amount carried back is not more than the earlier taxed profits and that the carry back does not generate a franking account deficit. A key design principle of this rule appears to be that a company should not benefit from a tax refund to the extent that the tax being refunded has benefited shareholders through the imputation regime.
A potential ancillary impact of this approach is to encourage retention of cash (and franking credits) within corporates with the retained money being reinvested in the business.
The way in which these rules operate in a transactional context remains to be seen. Say, for example, a corporate, which would otherwise be eligible for a refund under these rules is sold during the 2020-21 income year:
- Will the rules permit the 2021-22 loss to be carried back to permit a refund of taxes for the 2019-20 year?
- Will there be a need to apply a modified version of the same business test to work out eligibility for the tax refund?
- How do the rules interact with the tax consolidation regime? Will the losses accruing on account of an acquired subsidiary permit a refund of the head company's prior year taxes?
- If a refund of taxes is permitted, how would the refund be dealt with under a share sale agreement? In many agreements, refunds of prior year taxes need to be paid back to the Seller. This may not be appropriate where the losses have accrued under the Buyer's stewardship.
It is hoped that the draft legislation will provide clarity on many of the technical issues. In the meantime, the commercial implications of these rules on M&A transactions should also start being considered.
Clarifying the corporate residency test
The Government has announced changes to clarify the corporate residency test for companies incorporated offshore.
Under the definition of corporate tax residency in Australian domestic law, a company incorporated offshore will be treated as an Australian tax resident if it carries on business in Australia and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia.
Following the High Court’s 2016 decision in Bywater Investments Ltd v Federal Commissioner of Taxation, the ATO interpreted the decision to mean that if a company carrying on business has its central management and control in Australia, it will necessarily carry on business in Australia.
The Government has recognised that the ATO's interpretation departed from the long-held position on the definition of a corporate resident.
To clarify the corporate tax residency test, the Government will amend the law to provide that a company that is incorporated offshore will be treated as an Australian tax resident if it has a "significant economic connection to Australia". This 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.
This measure is intended to make the treatment of foreign incorporated companies reflect the position prior to the ATO's interpretation of the 2016 High Court decision.
Taxpayers will have the option of applying the new law from 15 March 2017 (the date that the ATO withdrew its previous ruling on the subject).
Our view: this measure will likely provide companies which have been incorporated offshore with greater certainty as to their corporate tax residency. This may become increasingly relevant as businesses shift to using virtual board meetings in a post-pandemic world.
Instant asset write-off: more incentives, more possible refunds
The Federal Government has announced a number of instant write-off incentives for capital expenditure which has been well received by the business community and could be significant. Almost all businesses and assets will be eligible. Combined with the tax loss carry-back rules, there are potential for substantial refunds to be generated. These changes include:
1. Businesses with an aggregated annual turnover of less than $5 billion
Businesses can deduct the full cost of eligible capital assets acquired from Budget night and first used or installed by 30 June 2022. This will apply to both new depreciable assets and the cost of improvements to existing eligible assets.
Although further detail has not been provided as to what constitutes an eligible capital asset, under previous incentive measures it has been limited to assets that can be depreciated, excluding buildings and second-hand assets. Given the other measures listed below, we expect this incentive to apply in a consistent way.
There appears to be no expenditure limit in relation to the full deduction of a new depreciable asset. This could therefore be a significant benefit to businesses in Australia in combination with the loss carry back rule which will apply for 2020, 2021 and 2022 income years.
2. Businesses with aggregated annual turnover between $50 million and $500 million
Businesses can deduct the full cost of second-hand assets costing less than $150,000 that are purchased by 31 December 2020 under the enhanced instant write-off. These assets will need to be first used or installed by 30 June 2021.
3. Businesses with an aggregated turnover of less than $50 million
Businesses can deduct the full cost of second-hand assets.
4. Businesses with an aggregated turnover of less than $10 million
Businesses can deduct the balance of their simplified depreciation pool at the end of the income year while full expensing applies.
Managed Investment Trusts (MIT) – updated list of eligible jurisdictions
MITs are a preferred vehicle for certain foreign investment including in Australian real estate. The Government has announced that it will update the list of jurisdictions that have an effective information sharing agreement with Australia. Subject to certain requirements, residents of such listed jurisdictions are eligible to access the reduced MIT withholding tax rate of 15% on certain distributions (such as rent and capital gains) instead of the default rate of 30%. The updated list will now include Hong Kong (a significant source of foreign investment) and Kuwait (amongst others). The updated list will be effective from 1 July 2021.
Small business concessions
The Government announced the increase of the relevant turnover thresholds for determining eligible "small business entities" (SBE) from $10 million to $50 million. This will allow businesses which fall within this expanded threshold to access the following small business tax concessions over three phases, being (in broad terms):
From 1 July 2020
- immediate deductions for certain eligible start-up expenses and certain eligible prepaid expenditure;
From 1 April 2020
- FBT exemption for the provision of car parking and work-related portable electronic devices (eg. laptop, phone) to employees;
From 1 July 2021
- access to simplified trading stock rules;
- ability to remit PAYG instalments based on GDP adjusted tax;
- monthly settlement of excise duty and customs duty on eligible goods;
- two-year amendment period for reviewing income tax assessments (excluding entities that have significant international tax dealings or complex affairs);
- expansion of Commissioner of Taxation's power to create a simplified accounting method determination for GST purposes to eligible SBEs.
Fringe benefits tax measures
There are a number of different FBT measures that could have been adopted to stimulate the economy –the flagging restaurant industry would have appreciated some support from the Budget in this regard. Unfortunately, the scope of the FBT concessions was limited to a much needed measure which removes the FBT liability associated with the provision of retraining assistance to employees being “out placed”.
Under the current rules, the provision of retraining to an employee may give rise to an FBT liability for the employer where the skills provided by the retraining lack a sufficient connection to the employee’s current role. The Budget measure will remove the need for this connection, providing employers with a specific FBT exemption enabling employers to help those employees obtain the skills they need to move to a wholly different role with a new employer.
This measure was announced on 2 October 2020 and will apply from that date.
A further measure, to commence from 1 April after the passage of the relevant legislation, will allow employers who have “adequate alternative records” to avoid the hassle of obtaining employee declarations. Effectiveness of this measure will depend on what the Commissioner will accept as acceptable alternative records.
JobKeeper lifeline remains while ATO receives significant funding for compliance
No substantive changes to the JobKeeper Payment scheme were announced, however additional funding to the ATO will enhance its focus on compliance of the program in the months ahead.
More than $300 million in funding has been allocated towards JobKeeper program scheme compliance activity, signalling the ATO's focus on claw-backs where appropriate. The announcement ties in with the already announced compliance and enforcement activity for JobKeeper claims which includes thousands of ATO officers tasked with identifying and reviewing ineligible and fraudulent behaviour within the JobKeeper program. Compliance activities are expected to run through to Christmas and will include data matching, verification at the time claims are made and post-registration activities.
To date, JobKeeper payments have totalled around $60 billion and the program is currently supporting around 3.5 million workers. As a result of the program's extension until 28 March 2021, as well as the effect of restrictions imposed in Victoria, the overall cost of the JobKeeper program is now estimated to be $101.3 billion. This is an increase of $15.6 billion from the estimated cost reported in the July 2020 Economic and Fiscal Update. Given the demand-driven nature of JobKeeper program, we can expect estimates of its cost to continue to be updated over the life of the scheme.
Otherwise the Federal Budget confirmed previously announced changes to the JobKeeper program, which has been extended to 28 March 2021, requiring businesses to satisfy the actual decline-in-turnover test for the September 2020 quarter alone (rather than for both the June and September quarters as previously announced) to be eligible for the period 28 September 2020 to 3 January 2021 and a decline in turnover for the December 2020 quarter, rather than each of the June, September and December 2020 quarters (for the period to 28 March 2021, ie. for the March quarter).
Jobseekers under 35 to benefit from new JobMaker Hiring Credit
Young people aged 16 to 35 who are currently receiving welfare payments will soon become more attractive to employers thanks to the budget’s JobMaker Hiring Credit.
The newly announced JobMaker Hiring Credit provides $4 billion in incentives for business to take on additional employees aged between 16 and 35 years old. The Hiring Credit will be available to eligible employers over 12 months from 7 October 2020. For each eligible employee hired during that period, employers will receive:
- $200 per week during that period if they hire an eligible employee aged 16 to 29 years; or
- $100 per week for employees aged 30 to 35 years,
with the maximum amount receivable per employee capped at $10,400.
To be eligible, employees will need to have worked for a minimum of 20 hours per week (averaged over a quarter), and received the JobSeeker Payment, Youth Allowance or Parenting Payment for at least one month out of the three month prior to when they are hired. The Hiring Credit will be available to all businesses except major banks. Employers must demonstrate they have increased their overall employment to receive the Hiring Credit for a period up to 12 months for each position created, and must report their employees' payroll information to the ATO.
Deferred R&D Tax Incentive changes offer much-needed clarity and certainty
The Government is going ahead with scaled-back changes to the R&D Tax Incentive (RDTI) scheme, removing some of the most contentious elements, including the $4 million refunds cap and the potential for 2020 clawbacks. A new two-tiered approach will also provide more clarity around R&D spending while the 1 July 2021 start date provides much needed certainty.
The plans fall short of scrapping the RDTI changes altogether – something many start-up founders and tech leaders were hoping for – however it does change the state of play for the better, coming in stark contrast to last year’s budget measures, which effectively cut $1.8 billion from the scheme.
For small companies, those with aggregated annual turnover of 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, and the $4 million cap on annual cash refunds will not proceed. For larger companies, those with aggregated annual turnover of $20 million or more, the Government will reduce the number of intensity tiers from three to two. This will provide greater certainty for R&D investment while still rewarding those companies that commit a greater proportion of their business expenditure to R&D. R&D rebate eligibility will be judged as a proportion of the business’ total expenses for the year. Those who spend between 0% and 2% of their total expenditure on R&D will be able to claim 8.5 percentage points over their company tax rate and those who exceed the 2% R&D intensity will be able to claim 16.5% above their company tax rate.
The Government will also defer the start date so that all changes to the program apply to income years starting on or after 1 July 2021, to provide businesses with greater certainty as they navigate the economic impacts of the COVID-19 pandemic. Previously, it was thought changes would be implemented retrospectively to July 2020, meaning many businesses were facing the possibility of paying back their RDTI rebates and managing uncertainty when considering R&D investment decisions.
First Home Loan Deposit Scheme
Access to the First Home Loan Deposit Scheme will be expanded to an additional 10,000 first home buyers.
The conditions of eligibility and the substance of the government guarantee have remained the same: only new homes or newly built homes can benefit from the scheme, and a homeowner can buy a home with a deposit as little as 5%, and the Government may guarantee up to 15% of a loan.
The Government will also increase its guarantee of the National Housing Finance and Investment Corporation by $1 billion to encourage construction of affordable housing. While first home buyers may benefit from increased supply, these measures' effects will be shared with low-middle income earners.
The first home buyer support is clearly targeted at those who are already saving. A potential disappointment to the first home buyer and a win for the construction sector, the measures are focused on generating housing construction rather than providing a direct grant or subsidy.
CGT exemption extended to granny flats
Homeowners may soon benefit from a targeted CGT exemption where written and legally enforceable granny flat accommodation arrangements are put in place. Currently, a significant impediment deterring homeowners from entering into formal arrangements has been the imposition of significant CGT liabilities upon the disposal of their main residence where it has been used to derive income under such arrangements. This has led to the use of informal arrangements, which are inherently risky for the occupants of granny flats.
Set to apply from 1 July 2021, and subject to legislation being enacted, this measure is intended to help support older Australians and people with disabilities by minimising the risk of financial abuse and exploitation where there has been a breakdown in relationships and an informal arrangement is legally unenforceable. While the measure is expected to boost activity in the construction sector, its scope will be limited to arrangements with family members and people with other personal ties, with commercial rental arrangements to be excluded from exemption.