Federal Budget 2020-21 Report

Personal Tax

The Government’s Personal Income Plan was designed to lower personal taxation and was to be implemented in three stages. Stage 1 was implemented in June 2018, while Stage 2 was to commence in 2021. In this Budget, the Government's Personal Income Tax Plan brings forward the tax cuts in Stage 2 of the Plan, as well as a one-off additional benefit from the low and middle income tax offset in 2020–21.

In 2020–21, low- and middle-income earners will receive tax relief of up to $2,745 for singles, and up to $5,490 for dual income families, compared with 2017–18. The majority of the tax benefit for 2020–21 will go to those on incomes below $90,000.

Stage 3 of the Government's Personal Income Tax Plan was designed to simplify and flatten the various income tax thresholds and to lower the marginal tax rate for most Australians to 30 per cent or less. This Stage 3 was not changed and remains in place for roll-out in 2024-25.

Tax rates and thresholds in 2020 compared with 2024-25

Tax Rates in 2020-21	Thresholds 2020-21	Tax Rates in 2024-25	Thresholds 2024-25
Nil	Up to $18,200	Nil	Up to $18,200
19%	$18,201 - $37,000	19%	$18,201 - $45,000
32.5%	$37,001 - $90,000	30%	$45,001 - $200,000
37%	$90,001 - $180,000	-	-
45%	$180,000 +	45%	$200,000 +
Low income tax offset	Up to $445	Low income tax offset	Up to $700

Tax relief by taxable income 2020-21 compared with 2017-18

Taxable income	2017-18 Tax liability ($)	2020-21 Tax liability ($)	Change in tax ($)	Change in tax (%)
40,000	4,947	3,887	-1,060	-21.4
60,000	12,147	9,987	-2,160	-17.8
80,000	19,147	16,987	-2,160	-11.3
100,000	26,623	24,187	-2,445	-9.2
120,000	34,432	31,687	-2,745	-8.0
140,000	42,232	39,667	-2,565	-6.1
160,000	50,032	47,467	-2,565	-5.1
180,000	57,832	55,267	-2,565	-4.4
200,000	67,232	64,667	-2,565	-3.8

Business Tax

Generally a business asset is "depreciated", meaning that a portion of the cost is deductible each year over the life of the asset.  Under this measure, 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 will also apply to second-hand assets.

The budget papers do not specify details of which assets will be "eligible" assets for the purposes of this measure, but we expect that the definition will be broad.

Stage 3 of the Government's Personal Income Tax Plan was designed to simplify and flatten the various income tax thresholds and to lower the marginal tax rate for most Australians to 30 per cent or less. This Stage 3 was not changed and remains in place for roll-out in 2024-25. .

The "immediate expensing" applies to assets acquired after 6 October 2020.  However there is also an extension for businesses that acquired assets before budget night but had not yet used or installed them.

Businesses that hold assets eligible for the enhanced $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.

• Immediate deductions for capital investments in assets to reduce the taxable income of the business in the year the asset is purchased
• Deductions allowed on an asset by asset basis
• Deductions for depreciation pool balances (i.e. immediate tax deduction for costs that would previously have been claimed over several years)
• If increased deductions for capital investments contribute to a company's tax loss position, electing to apply the loss carry back provisions may allow the company to obtain a tax refund. 

The Government will allow eligible companies to carry back tax losses from the 2020, 2021 or 2022 income years to offset previously taxed profits in 2019 or earlier income years. 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 will be available on election by eligible businesses when they lodge their 2021 and 2022 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.

The tax refund will 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. In other words, the tax refund generated by the loss carry back provisions cannot exceed the company's franking account balance.

This measure is designed to 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.  The loss carry-back provisions will also support the incentive for companies to invest under the investment incentive measures which will temporarily allow full expensing of capital acquisitions.  If increased deductions for capital investments contribute to a company's tax loss position, electing to apply the loss carry back provisions may allow the company to obtain a tax refund. 

The Government is introducing an incentive to encourage organisations to take on additional employees. This new incentive, the JobMaker Hiring Credit, will be available to eligible employers over 12 months from 7 October 2020 to 6 October 2021 for each additional new job they create for an eligible employee.  

Eligible employers who can demonstrate that the new employee will increase overall employee headcount and payroll will receive $200 per week if they hire an eligible employee aged 16 to 29 years or $100 per week if they hire an eligible employee aged 30 to 35 years. The JobMaker Hiring Credit will be available for up to 12 months from the date of employment of the eligible employee with a maximum amount of $10,400 per additional new position created.

Most employers would be eligible. However employers must have an Australian Business Number (ABN), be up to date with their tax lodgement obligations, be registered for Pay As You Go (PAYG) withholding, report through Single Touch Payroll (STP) and cannot be claiming the JobKeeper Payment.

To attract the JobMaker Hiring Credit, the employee must be in an additional job created from 7 October 2020. To demonstrate that the job is additional, specific criteria must be met. The additionality criteria require that there is an increase in:

• the business’ total employee headcount (minimum of one additional employee) from the reference date of 30 September 2020; and
• the payroll of the business for the reporting period, as compared to the three months to 30 September 2020. 

The amount of the hiring credit claim cannot exceed the amount of the increase in payroll for the reporting period.

To be eligible, the employee will need to have worked for a minimum of 20 hours per week, averaged over a quarter, and received the JobSeeker Payment, Youth Allowance (other) or Parenting Payment for at least one month out of the three months prior to when they are hired.  

The JobMaker Hiring Credit will be claimed quarterly in arrears by the employer from the Australian Taxation Office (ATO) from 1 February 2021. Employers will need to report quarterly that they meet the eligibility criteria.

The measure will have effect from the first income year after the new tax law is passed by Parliament, but taxpayers will have the option of applying the new law from 15 March 2017 (the date on which the definition was changed following the Bywater case). 

• Any companies that became Australian residents because of the change of definition in 2017 should be able to reverse this position if they do not have core operations in Australia
• If those companies paid tax in Australia, they may be able to amend their tax returns and receive refunds of Australian tax paid

• it has its central management & control in Australia, and
• it carries on business in Australia.

"Central management & control" is generally where directors make decisions.

In 2016, the ATO released a new interpretation following the High Court’s decision in Bywater Investments Ltd v Federal Commissioner of Taxation that said that a foreign incorporated company would be taxed as an Australian resident if it:

• had its central management & control in Australia, and
 
• it carried on business, whether in Australia or overseas.

This meant that overseas subsidiaries of Australian companies were deemed to be Australian residents for tax purposes, even if they did not have any operations in Australia.

The tax law will be changed so that foreign incorporated companies will only be Australian residents if they have 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.

Under existing law, various fringe benefits such as E-tags, work related travel, home telephone and internet may not be exempt from FBT unless the employee provides a declaration confirming the business use percentage of the item.  This can be a significant compliance burden for employers and problematic if an employee ceased employment during the year.  

Under the proposed measure, the Government will provide the Commissioner of Taxation with the power to allow employers to rely on existing corporate records, rather than employee declarations and other prescribed records, to finalise their FBT returns.  The measure will allow employers, with what the Commissioner determines as adequate alternative records, to rely on existing corporate records. This will remove the need to complete additional records and reduce employer compliance costs.

A Fringe Benefits Tax (FBT) exemption will be introduced for employer provided retraining and reskilling benefits provided to redundant, or soon to be redundant employees where the training is not related to their current employment.  Under the current law, such training would ordinarily be subject to FBT at a rate of 47%.  

Whilst the government has suggested that this measure will incentivise employers to retrain redundant employees to prepare them for their next career, the proposed measure is unlikely to have significant adoption because:

• The exemption will not extend to retraining acquired by way of a salary packaging arrangement. In other words, the FBT exemption will not apply if employees forgo salary (salary package) in exchange for retraining;
• The FBT exemption will not reduce the cost of providing the training. Employers may be reluctant to incur retraining costs if the employees are going to be made redundant; and
• The exemption will not be available for Commonwealth supported places at universities, which already receive a benefit, or extend to repayments towards Commonwealth student loans.

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 ten 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 per cent fringe benefits tax on car parking and multiple work-related portable electronic devices (such as phones or laptops) provided to employees. 
• 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.

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

For companies 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 previously proposed $4 million cap on annual cash refunds will not proceed.

For companies with aggregated annual turnover of $20 million or more, the number of intensity tiers will reduce from three to two to provide greater certainty for R&D investment while still rewarding those companies that commit a greater proportion of their business expenditure to R&D.

The R&D premium ties the rates of the non-refundable R&D tax offset to a company’s incremental R&D intensity, which is R&D expenditure as a proportion of total expenses for the year. The marginal R&D premium will be the claimant’s company tax rate plus: 

• 8.5 percentage points above the claimant’s company tax rate for R&D expenditure between 0 per cent and 2 per cent R&D intensity for larger companies 
• 16.5 percentage points above the claimant’s company tax rate for R&D expenditure above 2 per cent R&D intensity for larger companies.

All changes to the program apply to income years starting on or after 1 July 2021. All other aspects of the R&D Program will remain unchanged, including the increase to the R&D expenditure threshold from $100 million to $150 million.

It was very pleasing to see the Government stand by its election promise of no adverse tax changes to superannuation in this Budget. However, in the words of Senator Jane Hume, there was “some necessary tinkering within the regulatory settings of super”.

The Government announced the ‘Your Future, Your Super’ package in the Budget to address APRA superannuation fees and poor performance. The four measures included in this package are outlined briefly below:

From 1 July 2021, an existing superannuation account will be ‘stapled’ to a member to avoid the creation of a new account when that person changes their employment. Employers will be required to pay super contributions to their employee’s existing superannuation fund if they have one, unless they select another fund. This measure is designed to reduce the number of unintended multiple super accounts. It was noted in the Budget Fact Sheet that there are currently 6 million multiple accounts held by 4.4 million people.

Generally when an employee commences a new job, if the employee doesn’t make a choice of super fund and provide the details to the new employer, then contributions are made to the employer’s default fund. This results in many employees having multiple super funds, paying unnecessary fees and insurance premiums which then results in reduced retirement savings when they reach retirement. Employers will be able to obtain information about a new employee’s existing superannuation fund from the ATO.

The ATO will develop systems so that new employees will be able to select a superannuation product from a table of MySuper products through the YourSuper portal. The YourSuper portal will be an online comparison tool that will provide a table of simple super products (MySuper) ranked by fees and investment returns which will help people decide which superannuation product would best suit their needs.

Benchmarking tests will be undertaken on the net investment performance of MySuper products, with products that have underperformed facing stringent requirements. Products that have underperformed over two consecutive annual tests will be prohibited from receiving new members until a further annual test that shows that they are no longer underperforming.

By 1 July 2021 super trustees of large APRA funds will be required to comply with a new duty to act in the best financial interests of members. Trustees must demonstrate that there was a reasonable basis to support their actions being consistent with members’ best financial interests. This will affect large APRA funds to ensure they are spending in the best interests of their members and are more accountable for their actions.

The Government will provide two separate $250 economic support payments, to be made from November 2020 and early 2021 to eligible welfare recipients and health care card holders.

This includes the following:

• Age Pension
• Disability Support Pension
• Carer Payment
• Family Tax Benefit, including Double Orphan Pension (not in receipt of a primary income support payment)
• Carer Allowance (not in receipt of a primary income support payment)
• Pensioner Concession Card (PCC) holders (not in receipt of a primary income support payment)
• Commonwealth Seniors Health Card holders
• Eligible Veterans’ Affairs payment recipients and concession card holders.

Noticeably there were no changes to the following in the 2020-21 Budget:

• SMSF tax rate of 15% remains unchanged and 10% on capital gains after applying 1/3 discount (if applicable). SMSF retirement phase pension tax rate still 0%.
• Contribution caps & contribution thresholds remain unchanged
• No changes to the taxation of benefits withdrawn from super
• No mention of the superannuation guarantee rate that is legislated to increase from 9.5% to 10% from 1 July 2021
• No further extension to the COVID-19 early release of super
• No further reduction mentioned to the required rate of minimum pension drawdowns after 2020-21
• No changes to the Transfer Balance Cap of $1.6 million & indexation
• Division 293 tax threshold of $250,000 remains unchanged