2020 Federal Budget
On 6 October 2020, Treasurer Frydenberg announced the 2020-2021 Budget. At the conclusion of the 2019 financial year, the Australian economy was in surplus for the first time in eleven years. Following the Australian summer of bushfires and the COVID-19 pandemic, the Australian economy is now expected to reach a peak debt in the 2024 financial year with a net debt of $966billion.
The 2020 Budget includes measures that finalise the bushfire assistance, extend the COVID-19 stimulus package, bring forward a number of planned tax changes, and reconcile several longstanding issues in taxation.
The phase two measures of the Personal Income Tax Plan (initially set to commence from 1 July 2022), will not just come into effect this year, but apply retrospectively to 1 July 2020:
19% tax bracket to increase from $37,000 to $45,000;
Low income tax offset to be increased from $445 to $700; and
32.5% tax bracket will increase from $90,000 to $120,000
Phase three of the Personal Income Tax Plan is still set to come in effect on 1 July 2023.
The low and middle income tax offset will remain for the 2020-21 income year and will be received on assessment after an individual lodges their 2020-21 tax return.
The 2020 Budget included two matters impacting international taxation:
1) Change to the corporate residence test; and
2) Addition to the list of exchange of information jurisdictions.
The corporate residence was introduced almost a century ago, and provided that a corporation was an Australian resident for taxation purposes if it was incorporated in Australia, or if it carried on a business in Australia and had its central management and control in Australia.
Following the completion of the Board of Taxation Review, it was announced in the 2020 Budget that the test detailed in section 6 of the Income Tax Amendment Act 1936 will be amended to provide that a corporation which is not incorporated in Australian will be an Australian tax resident if it has significant economic connection to Australia. That being, if both:
1) The company’s core commercial activities are undertaken in Australia; and
2) The company’s central management and control is in Australia.
The 2020 Budget announcement makes it clear that this amendment is a response to the Commissioner of Taxation’s misinterpretation of Bywater Investments Ltd v Federal Commissioner of Taxation. In Taxation Ruling 2018/5 and Practical Compliance Guide 2018/9 the Commissioner conflated the two separate concepts of whether a corporation carried on a business in Australia, and where the company’s central management and control was located.
It is clear now that central management and control alone is not enough to make a company an Australian tax resident, although the new concept of core commercial activities will undoubtedly attract much excitement amongst accountants, lawyers and the Commissioner (and ultimately the Courts).
Exchange of Information
Over the past 12 months, Australia has established an exchange of information agreement with an additional nine jurisdictions, including Jamaica, Kuwait and Hong Kong. Kenya has also been removed from the list of countries
As a result of this extension, the certain distributions from Managed Investment Trusts (MITs) to these countries will only be subject to 15% withholding, instead of 30% withholding.
The practical implications of exchange of information agreements with these countries means that the ATO has obligations to automatically exchange of information and exchange certain information on request. Where countries such as Hong Kong have been added to the list, with which Australia does not have a double taxation agreement, this can have significant implications for taxpayers.
SMALL AND MEDIUM ENTERPRISES
Small business tax concessions
The Government has expanded access to a range of small business tax concessions by increasing the small business entity turnover threshold from $10 million to $50 million. Some of the key concessions include:
From 1 July 2020, Immediate deduction available for start-up expenses and certain prepaid expenditure;
From 1 April 2021, car parking and multiple work-related portable electronic devices (such as phones and laptops) will be exempt from fringe benefits tax;
From 1 July 2021:
access to simplified trading stock rules, remission of pay as you go instalments based on GDP adjusted notional tax, and settlement of excise duty and excise-equivalent duty monthly on eligible goods;
income tax assessments will have a two-year amendment period (excluding entities that have significant international dealings); and
businesses below the $50 million aggregate turnover threshold can apply the simplified accounting method determination for GST purposes.
The Government introduced the JobMaker Plan to support investment and jobs. The key elements of the JobMaker Plan include:
- Businesses with an aggregate annual turnover of less than $5billion will be eligible to deduct the full cost of eligible capital assets acquired from 6:30pm AEST on 6 October 2020 and first used or installed by 30 June 2022.
- Full expensing in the year of first use will apply to:
- new depreciable assets;
- the cost of improvements to existing eligible assets; and
- second hand assets for SME businesses with an aggregate turnover of less than $50million.
- Small businesses (aggregate 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 new JobMaker also extends the COVID-19 stimulus measure which saw businesses with an aggregated annual turnover between $50million and $500million able to deduct the full cost of eligible second hand assets costing less than $150,000 which are purchased by 31 December 2020. Businesses will then have an additional six months, to 30 June 2021, to first use or install those assets.
Temporary loss carry-back
One of the most striking features was the introduction of a temporary measure to allow losses to be carried back and offset against previous profits.
This measure is intended to assist previously profitable companies that have fallen in to a tax loss position due to weaker economic conditions. In effect, the Government will allow 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 and apply those losses against previously taxed profits in the 2018-19 or later income years.
These rules will generate a refundable tax offset in the loss year. However, the tax refund would be limited by ensuring 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 election upon lodgment of the 2020-21 and 2021-22 tax returns.
Spend committed to ease burden on drought affected land
The Treasurer announced a number of measures to improve Australia’s ability to deal with drought, including committing:
- A further $50million to extend the On-farm Emergency Water Infrastructure Rebate Scheme, which assists primary producers in drought-affected areas to access rebates for on-farm water infrastructure expenses, improving their ability to maintain animal welfare during prolonged drought, increasing productivity and mitigating the degradation of natural watering points; and
- $296.6million over four years to improve conditions in the Murray-Darling Basin, including the provision of grants and projects to improve the health of the river and wetlands, recognition and engagement of First Nations peoples to improve access to water for economic and social purposes and forward planning for the Basin’s future.
Easing the strain of primary production export business
Farmers who export their products will also get a helping hand from the Government, with $328.4million set aside to improve the ease of doing export business. The funds will be directed at easing red tape and inefficiencies in the export process, as well as modernising the industry in boosting cyber security measures.
Ban on waste export
Consistent with his messaging that “Australia’s environment is Australia’s problem”, Treasurer Frydenberg also announced that $6.6million has been set aside to implement a ban on particular waste exports from 1 January 2021. Types of waste that will become subject to the ban include plastic, glass and tyres, with export licenses and permits only available where it has been shown that sufficient processing has occurred prior to export to prevent harm to the environment or human health in the waste’s destination country.
The construction industry was a winner in the budget with a number of measures being announced, including:
- $1.3 billion from 2020-21 for priority road and rail projects in Queensland and $2.7 billion for New South Wales. An additional $14.2 million will be brought forward to accelerate existing transport infrastructure projects;
- increasing the Government’s infrastructure investment pipeline by $10 billion to $110 billion;
- $1 billion of low cost finance to support the construction of affordable housing; and
- $1.2 billion over 4 years to increase the number of apprentices and trainees employed and build a pipeline of skilled workers. From 5 October 2020 to 30 September 2021 business of any size can claim the Boosting Apprentices Wage Subsidy for new apprentices or trainees who commence during this period. Eligible businesses will be reimbursed up to 50% of an apprentices or trainees wages up to $7,000 per quarter. This will be capped at 100,000 places.
In addition, virtually all construction companies will be able to access the broader measures for companies with turnover less than $5 bn, including the temporary carried back loss provisions and the expanded instant asset write off for eligible assets.
The following changes come into effect in the income year commencing 1 July 2021:
- for companies with annual turnover of less than $20 million the refundable R&D tax offset is set at 18.5% above the company’s tax rate. The previously announced $4million cap has not been implemented;
- for larger companies with an aggregated turnover of greater than $20 million the R&D intensity tiers will be reduced from three to two. The marginal R&D premium will be the company’s tax rate plus:
- 8.5% above the company’s corporate tax rate for eligible R&D expenditure between 0% to 2% R&D intensity; and
- 16.5% above the company’s tax rate for eligible R&D expenditure above 2% R&D intensity.
Fringe Benefits Tax
- An exemption from FBT will be introduced for employer provided retraining and reskilling benefits to redundant or soon to be redundant employees where the benefits may not be related to their current employment; and
- Reduced compliance burden by allowing employers to rely on corporate records rather than employee declarations.
Victorian grants announced on or after 13 September 2020 and payments made between 13 September 2020 and 30 June 2021 will be treated as non-assessable non-exempt (NANE) for income tax purposes.
The ATO has been given $15.1 million to target serious and organised crime in tax and superannuation.
If you would like assistance or any additional information, please contact a member of our tax team below.
This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.