2020 Federal Budget Insights

With an economy ravaged by the effects of COVID-19, the Treasurer, Josh Frydenberg, last night unveiled a big spending Federal Budget designed to get the Australian economy moving. There are big tax cuts for individuals and a number of significant boosts for businesses, all designed to increase spending and boost jobs.

H&R Block has analysed the impact of the measures on individuals and small businesses in detail below but the key headlines for individuals is:

• There’s a big tax cut coming. The Treasurer is bringing forward tax cuts originally intended to be introduced from 1 July 2022 and applying them from 1 July 2020 instead. Those with a taxable income between $45,000 and $90,000 will be $1,080 better off this year, with the size of the tax cut then increasing to a maximum of $2,430 this year for those with a taxable income of $120,000 or more. The tax cut will be passed on when Parliament passes the necessary legislation which could happen as soon as this week. The ATO will then be able to implement the cut immediately by updating their PAYG withholding schedules so that employers can deduct the new, lower amounts of tax that apply to your income.

For small businesses, there are two significant tax breaks included in the Budget:

• There is a dramatic extension of the instant asset write-off deduction (now called “full expensing”) for capital assets acquired by small businesses. From 7:30pm (AEDT) on 6 October 2020 until 30 June 2022, businesses with a turnover up to $5 billion will be able to deduct the full cost of eligible capital assets of any value in the year they are installed. The cost of improvements to existing eligible depreciable assets made during this period can also be fully deducted. Previously, assets up to $150,000 could be deducted. In a nutshell, this means that businesses can now immediately deduct the full cost of all purchases of items such as:
  • Plant and machinery
  • Fixtures and fittings
  • Technology, such as laptops and computers
  • Motor vehicles such as utes, vans and most cars
  • The Government will also allow companies with turnover up to $5 billion to offset losses against previous profits on which tax has been paid, to generate a refund. Losses incurred up to 2021‑22 can be carried back against profits made in or after 2018‑19. With many companies and expecting to make losses this year due to COVID-19, these companies may elect to receive a tax refund from the ATO for the tax they paid in earlier years back to 2018-19 when they lodge their 2020‑21 and 2021‑22 tax returns.

The Detail

Personal tax cuts

The government announced reductions in individual tax rate thresholds will apply for the 2020-21 income year. These changes were previously legislated to begin from 1 July 2022.

From 1 July 2020:

• The top threshold of the 19% personal income tax bracket will be increased from $37,000 to $45,000.
• The top threshold of the 32.5% personal income tax bracket will be increased from $90,000 to $120,000.

This brings forward changes previously legislated to commence from the 2022-23 income year.

Tax rates for the 2020/21 year (as well as 2021/22, 2022/23 and 2023/24) now look like this:

In addition, the Low and Middle Income Tax Offset (LMITO) will be retained for the 2020-21 income year. This was originally intended to be removed when the changes to tax thresholds were introduced but with the early introduction of the new tax thresholds, the government has decided to retain the offset for this year, meaning that taxpayers will benefit both from the change in thresholds and the LMITO.

The Low Income Tax Offset (LITO) will also increase from $445 to $700. The increased LITO will be withdrawn at a rate of 5 cents per dollar between taxable incomes of $37,500 and $45,000. The LITO will then be withdrawn at a rate of 1.5 cents per dollar between taxable incomes of $45,000 and $66,667.

The impact on your personal tax position is set out in the table below. Note that the savings from the increase in thresholds will be passed on through your wage or salary as soon as legislation passes. Savings from offsets will be passed on through lodgement of your 2020/21 tax return from 1 July 2021.

Small Business Taxes

Temporary “Full Expensing” Deduction For Businesses

Businesses with aggregated annual turnover of less than $5 billion will be able to deduct the full cost of eligible capital assets acquired from 7:30pm AEDT on 6 October 2020 (Budget night) and first used or installed by 30 June 2022.

“Full expensing” in the year of first use will apply to new depreciable assets and the cost of improvements to existing eligible assets. For small- and medium-sized businesses (with aggregated annual turnover of less than $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 instant asset write-off. Businesses that hold assets eligible for the existing $150,000 instant asset write-off will have an extra six months, until 30 June 2021, to first use or install those assets. 

Small businesses (with aggregated annual turnover of less than $10 million) 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.

Temporary Loss Carry-Back to Support Cash Flow

The Government will allow eligible companies 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.

Under these measures, corporate tax entities with an aggregated turnover of less than $5 billion can apply tax losses against taxed profits in a previous year, generating a refundable tax offset in the year in which the loss is made. 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. 

The tax refund will be available on an election basis 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. Companies that do not elect to carry back losses under this measure can still carry losses forward as normal. 

This measure will promote economic recovery by providing cash flow support to previously profitable companies that have fallen into a tax loss position as a result of the currently weaker economic conditions, themselves associated with the economic impact of COVID-19.

Increase to The Small Business Entity Turnover Threshold

The Government will expand access to a range of small business tax concessions by increasing the small business entity turnover threshold for these concessions from $10 million to $50 million.
Businesses with an aggregated annual turnover of $10 million or more but less than $50 million will, for the first time, have access to up to 10 further small business tax concessions in three phases:

• From 1 July 2020, eligible businesses will be able to immediately deduct certain start-up expenses and certain prepaid expenditure.
• From 1 April 2021, eligible businesses will be exempt from the 47% fringe benefits tax on car parking and multiple work-related portable electronic devices (such as phones or laptops) provided to employees. This concession already exists in the FBT law but now multiple work-related items can benefit from the concession.
• From 1 July 2021, eligible businesses will be able to access 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.
• Eligible businesses will also have a two-year amendment period apply to income tax assessments for income years starting from 1 July 2021, excluding entities that have significant international tax dealings or particularly complex affairs.
• From 1 July 2021, the Commissioner of Taxation’s power to create a simplified accounting method determination for GST purposes will be expanded to apply to businesses below the $50 million aggregated annual turnover threshold.

These changes will simplify eligibility, as more turnover thresholds will align to the aggregated annual turnover threshold for a base rate entity for company tax purposes.

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

Victoria’s Business Support Grants to Be NANE

The Commonwealth Government will make the Victorian Government’s business support grants for small- and medium-sized business – as announced on 13 September 2020 – non-assessable, non-exempt (NANE) income for tax purposes.

State-based grants such as the Business Support Grants are generally considered taxable income by the Commonwealth. Given COVID-19 and the exceptional circumstances Victorian businesses face, providing this additional concessional treatment will assist in their recovery.

The Commonwealth will extend this arrangement to all states and territories on an application basis. Eligibility would be restricted to future grants program announcements for small- and medium-sized businesses that are facing similar circumstances to Victorian businesses. 

Eligibility for this treatment will be limited to grants announced on or after 13 September 2020 and for payments made between 13 September 2020 and 30 June 2021.

FAQ

Q: Do I need to do anything to obtain the tax cut if I have already done my tax return this year?

A: No, you don’t need to do anything. As the tax cut came into effect from 1 July 2020, last year’s tax return is not affected. Your employer will amend the tax they deduct from your wage or salary based on the tax tables produced by the ATO. This will reduce your tax from the date your employer applies the new tax tables, which could be anytime from now. The tax you have, in effect, overpaid between 1 July and now cannot be adjusted through your pay so you’ll get this bit of the tax cut when you lodge your 2020/21 tax return from 1 July 2021.

Q: Does this mean I will get more money this year or next year?

A: Some of the tax cut will be passed on to you through your wages or salary. Your employer will calculate your new tax position based on the ATO’s tax tables and then deduct a lower amount of tax from your pay. This means you’ll pay less tax each time you are paid and will get more money in your pocket. Sadly, your employer won’t be able to pass on the backdated part of the tax cut, covering the period from 1 July to the date the new ATO tax tables are published. This bit will be paid to you through your tax return next year.

Q: I am a retiree - Am I entitled to the proposed tax cut?

A: If you earn taxable income and your taxable income exceeds approximately $37,000, you’ll get some of the tax cut, with the amount of your tax cut increasing as your taxable income increases. If you are not a tax payer or your taxable income is less than $37,000, you won’t benefit.