Federal Budget 2020-21: What does it mean for private business and their owners?
On 6 October 2020, Treasurer Josh Frydenberg handed down the 2020-21 Federal Budget. Delayed from May due to COVID-19, the key focus of this year’s Budget is to stimulate the Australian economy post COVID-19 lockdowns and the associated economic shocks to the global economy.
Unsurprisingly, last year’s pre-COVID goal of budget surplus is long gone. The budget contains a raft of significant tax announcements aimed at kickstarting the economy. For private businesses and their owners, some of the big-ticket items in the Budget are as follows:
- a temporary loss carry-back regime;
- greatly expanded ‘instant asset write-off’ rules;
- for employers, hiring credits of up to $200 per week for each eligible employee;
- immediate tax relief to individuals under the Personal Income Tax Plan;
- widening certain concessions for ‘small business’ to businesses with up to $50 million of turnover; and
- corporate tax residency reform.
Read on for our full breakdown of some of the major tax announcements in this year’s Budget for SMEs.
Temporary Loss Carry-Back Measure
The tax losses regime will be amended to temporarily allow a refund for tax paid in previous years. Under the current rules, tax losses incurred in an income year can only be carried forward and applied against future profits in a later income year. However, assuming the proposed changes are legislated, it will be possible for losses that are incurred in the income years 2019-20, 2020-21 or 2020-22 to instead be retrospectively applied against profits that have already been taxed in the 2018-19 year or later years.
If COVID-19 resulted in 2019-20 being a bad year for a business and it suffered $1 million in losses, but the business had a good year in 2018-19 with a taxable profit of $500,000, the taxpayer can apply $500,000 of its losses against its previous taxable income – which will generate a refundable tax offset for the 2019-20 year.
Importantly, the measure is only proposed to apply to corporate tax entities, so trusts, partnerships or sole traders are unlikely to see any benefit from these changes. There is also a turnover limit of $5 billion. The measure is expected to increase the benefit of the Government’s expanded instant asset write off measure, as the increased deductions generated by that measure may still provide an immediate benefit for eligible companies even if it increases their losses for a current year.
Greatly Expanded ‘Instant Asset Write-Off’ Rules
An immediate deduction will be available for ‘eligible capital assets’ acquired from 7.30pm AEDT on 6 October 2020 that are first used or installed by 30 June 2022. The measure applies to all businesses with an aggregated turnover of under $5 billion.
Eligible capital assets include new depreciable assets and certain improvements to existing assets. For businesses with an aggregated turnover of less than $50 million, the list also includes second-hand assets. The measure is expected to cost $26.7 billion over the forward estimate period and expands on the Government’s previously announced instant asset write-off scheme.
Jobmaker Hiring Credit
In the interests of promoting employment, a JobMaker hiring credit will be introduced. The key aspects to this measure are:
- eligible employers will be entitled to a cash payment for each new eligible employee they hire from 7 October 2020;
- a payment of $200 per week over 12 months (up to $10,400 per new job) for a new employee aged 16 to 29 years; and
- a payment of $100 per week over 12 months for a new employee aged 30 to 35 years.
For the employer to be eligible, the employee will need to have worked for a minimum of 20 hours per week, averaged over a quarter, and received either the JobSeeker Payment, Youth Allowance (other) or Parenting Payment for at least one month out of the three months prior to when they were hired.
Increase to the Small Business Entity Turnover Threshold
Previously only available to entities with less than $10 million annual turnover, it is proposed that entities with annual turnover of up to $50 million will be able to gain access to the following small business tax concessions:
- an immediate deduction for certain start-up expenses and certain prepaid expenditure (from 1 July 2020);
- a fringe benefits tax exemption on car parking and multiple work-related portable electronic devices (such as phones or laptops) provided to employees (from 1 April 2021);
- access to the simplified trading stock rules, remit pay as you go (PAYG) instalments based on GDP adjusted notional tax, and settle excise duty and excise-equivalent customs duty monthly on eligible goods under the small business entity concession (from 1 July 2021);
- a two year time limit for the Commissioner to amend tax assessments issued to eligible business from the 2022 financial year onwards, reduced from four years (except in circumstances where the entity has ‘significant international tax dealings’ or ‘particularly complex affairs’ – although no clear guidance has been given as to how this will be determined in practice) (from 1 July 2021); and
- access to a simplified accounting method for GST purposes (which was previously available to businesses with annual turnover up to $10 million) (from 1 July 2021).
Notably, these changes do not appear to be intended to open up access to the Small Business CGT Concessions (applicable to businesses with less than $2 million annual turnover) or the Small Business Restructure Rollover (applicable to businesses with less than $10 million annual turnover).
Changes to Personal Income Tax Rates
Stage 2 of the Government’s ‘Personal Income Tax Plan’ arrives early, and applies retrospectively from 1 July 2020. Under these changes:
- the income threshold for the 19 per cent personal income tax bracket will increase from $37,000 to $45,000; and
- the income threshold for the 32.5 per cent personal income tax bracket will increase from $90,000 to $120,000.
Stage 3 of the Personal Income Tax Plan remains unchanged and commences in 2024-25 as legislated.
FBT Exemption – Carparking and Electronic Devices
From 1 April 2021, eligible small business entities will be exempt from fringe benefits tax (FBT) on:
- car parking benefits provided to employees; and
- multiple work-related portable electronic devices (such as phones or laptops) provided to employees.
These announcements will enable eligible small business entities to incentivise their employees through carparking benefits or the provision of portable electronic devices without being stung with a large tax bill. FBT is currently levied at the top marginal tax rate of 47% and can become a major hurdle for businesses wishing to offer these benefits.
The announced changes will come into effect from 1 April 2021. In the meantime, employers can potentially rely on the FBT exemption available for certain fringe benefits provided to employees due to the COVID-19 pandemic, such as the provision of electronic devices for work, emergency accommodation, food and transport.
Deductibility of Education and Training Expenses for Individuals
The Government will introduce an exemption from FBT for employer provided retraining and reskilling benefits provided to redundant, or soon to be redundant employees where the benefits may not be related to their current employment.
Further, the Government will consult on potential changes to allow individuals to deduct education and training expenses they incur themselves, even where the expense is not related to their current employment.
Currently, individuals can only deduct education or training expenses where the expenses have the necessary connection with the individual’s employment and the production of their assessable income. The Budget acknowledges that the current system may act as a disincentive for Australians to retrain and reskill to support their future employment and career. The Government will consult on any potential changes to the current arrangements to determine whether deductions should also be targeted to future employment and skills needs, so for now, it is a ‘watch this space’.
Granny Flats – CGT Relief
Under the current CGT rules, the formal licence of a ‘granny flat’ can give rise to adverse tax consequences for the landowner.
To prevent these adverse tax consequences, landowners often opt to provide granny flats under informal arrangements. Unfortunately, those informal arrangements do not provide any legal protection of tenure for the residents, particularly those who are vulnerable like elderly parents or disabled individuals.
To address this, the Government has announced that it will provide a CGT exemption for granny flat arrangements created under a formal written agreement. This is designed to ensure there are no tax disincentives for landlords to enter into a formal arrangement to provide secure accommodation for the residents.
Importantly, the exemption will only apply to arrangements concerning older Australians or those with a disability. The devil will be in the detail, however the exemption does not appear to extend to CGT on the sale of the land on which the granny flat is located (such as the loss of the full main residence exemption).
Corporate Tax Residency
In a win for taxpayers and corporate groups with foreign incorporated entities, amendments will be made to clarify when a company is a resident of Australia for tax purposes. These amendments reverse the effect of 2016 High Court decision in Bywater Investments Ltd v Federal Commissioner of Taxation. In the Bywater decision, the High Court held that a company will carry on business where its central management and control is located – effectively amalgamating the two tests into one, potentially resulting in foreign incorporated companies (controlled by Australians) being Australian residents even if they have no other business activities in Australia.
The proposed changes are that a foreign incorporated company will only be an Australian tax resident if it has a ‘significant economic connection to Australia’. This will require the company to have both:
- core commercial activities in Australia; and
- central management and control in Australia.
If the company has only central management and control in Australia, the company will not be an Australian tax resident contrary to the decision in Bywater. Taxpayers will be able to choose between the new treatment or the existing treatment for determining Australian tax resident retrospectively from 14 March 2017.
Changes to Australia’s Foreign Investment Framework
The Foreign Investment Framework administered by the Foreign Investment Review Board (FIRB) will be changed by:
- introducing a new IT platform, which will be developed for more effective and efficient foreign investment application processing over the next four years;
- simplifying the application fees for foreign investment applications, so that foreign investors will bear the cost of administering the foreign investment application system; and
- consolidating the Register of Foreign Ownership of Australian Assets.
Budget estimates are that receipts for FIRB will increase from $19 million in 2020-21 to $40 million in 2021-22. It is very likely that the revised fees will be significantly higher as the foreign investment system is intended to be fully funded by prospective foreign investors. Budget estimates are that receipts for FIRB will increase from $19 million in 2020-21 to $40 million in 2021-22.
While the Government has attempted to encourage foreign investment in Australia, the cost of doing so is likely to increase because of this measure.
What’s Not in the Budget?
While the Budget included a raft of significant tax announcements aimed at kickstarting the economy, there are a number of tax issues affecting private business and their owners which are not part of the Budget. These include:
- Division 7A reform (first flagged in the 2016-17 Budget);
- a review of the CGT rollovers;
- tax concessions for small business (including the small business CGT concessions);
- modernising the individual tax residency rules;
- asset merger roll over relief; and
- reviewing the CGT look-through provisions for earnout arrangements.
With the Federal Budget for 2021-22 only seven months away, the next raft of tax announcements may be just around the corner.