The headlines focus on personal tax cuts, the deficit, and the increase in debt. However, this year’s Budget is a mixture of tax measures – business and personal - to boost spending, create jobs, and help the economy grow out of the COVID-19 induced recession.
We summarise the main Budget tax measures below. As with all announced tax changes the ‘devil is in the detail’ of the legislation and, quite often, the interaction of the changes with other areas of the Tax Acts.
Personal income tax measures
Stage 2 of the personal income tax cuts that were to apply from 1 July 2022 will now come into effect from 1 July 2020. The main measures brought forward are:
the 19% rate will apply up to $45,000 (from $37,000);
the 32.5% rate will apply up to $120,000 (from $90,000); and
the low-income tax offset will increase from $445 to $700.
The low-and middle-income tax offset, currently $1,080, will expire after the current 2021 income year (currently it expires after the 2022 income year).
There was no change to the quantum and timing of the Stage 3 tax cuts due from 1 July 2024.
The table below summarises the changes to personal income tax. (Source: Greenwoods & Herbert Smith Freehills).
Small business measures
Small business tax concessions
The aggregated turnover threshold will increase from $10 million to $50 million for up to 10 small business tax concessions with those concessions phased in from 1 July 2020 to 1 July 2021:
1 July 2020: eligible businesses will be able to immediately deduct certain start-up expenses and certain prepaid expenditure;
1 April 2021: eligible businesses will be exempt from fringe benefits tax (FBT) on car parking and multiple work related portable electronic devices (such as phones or laptops) provided to employees; and
1 July 2021: eligible businesses will be able to:
access the simplified trading stock rules;
remit pay as you go instalments based on GDP adjusted notional tax;
settle excise duty and excise-equivalent customs duty monthly on eligible goods; and
have a two-year amendment period for income tax assessments for years starting after 1 July 2021 (excluding entities that have significant international dealings or particularly complex tax affairs).
In addition, from 1 July 2021 the Commissioner of Taxation (Commissioner) will have expanded power to create a simplified accounting method determination for GST purposes for eligible small businesses.
The announced changes do not alter the thresholds for the small business capital gains tax concessions ($2 million of aggregated turnover or $6 million of net assets).
Victorian business support grants – non-assessable non-exempt
Victorian Government business support grants for small and medium business as announced on 13 September 2020 will be non-assessable, non-exempt for income for tax purposes.
Eligibility will be limited to grants announced on or after 13 September 2020 and for payments made between 13 September 2020 and 30 June 2021.
The Commonwealth will extend this arrangement to all States and Territories on an application basis.
Business tax measures
Temporary tax loss carry-back for companies
Companies with an aggregated turnover of less than $5 billion will be entitled to choose to carry-back tax losses incurred in the 2020, 2021 and 2022 income years to offset the company’s taxable income in the 2019 or later income years.
The loss carry back will generate a refundable tax offset in the year in which the loss is made but will not be available where the carry-back generates a franking account deficit. This may mean that where a company has paid earlier year profits as franked dividends, carry back refunds are not available. Companies that do not choose to carry back losses under this measure can still carry losses forward as normal.
Expensing the cost of capital assets
Businesses with aggregated annual turnover of less than $5 billion will be entitled to deduct the cost of capital assets acquired after Budget night and first used or installed by 30 June 2022.
The measure applies to new capital assets and enhancements to existing assets, and second-hand assets if a business with aggregated turnover of less than $50 million acquired the second-hand asset.
It is unclear whether the passive ownership of real property could be a business for purposes of this concession.
Fringe Benefits tax – FBT exemption for retraining
An exemption will be provided 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. This measure applies from announcement.
Under the current rules, retraining employees who have either been made redundant or who are about to be made redundant would ordinarily be subject to FBT as the expense would not be ‘otherwise deductible’ if met by the employee.
The exemption will not extend to retraining by way of a salary packaging arrangement. It will also 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 also consult on allowing an individual to deduct education and training expenses they incur themselves where the expense is not related to their current employment.
Fringe benefits tax - relying on existing business records for FBT
The FBT record keeping arrangements are extensive and burdensome.
From 1 April 2021, the Commissioner will be able to determine what constitutes ‘adequate alternative records’ so that businesses can use existing corporate records to prepare their FBT returns.
The measure will allow employers — with what the Commissioner determines as adequate alternative records — to rely on existing corporate records, removing the need to complete added records. For example, existing records rather than a separate travel diary.
Corporate residency
Based on Board of Taxation recommendations, amendments will be made to the corporate residency test. The amended law will provide that a foreign-incorporated company will be an Australian tax resident if the company’s core commercial activities are in Australia and its central management and control is in Australia.
Prior to the High Court’s 2016 decision in Bywater Investments Ltd v FCT, the Australian Taxation Office’s long-held view was that, for a foreign-incorporated company to be an Australian resident, it had to both carry on business in Australia and have its central management and control in Australia. Following Bywater, the ATO view has been that having central management and control in Australia is enough.
The changes will have effect from the first income year following the date of Royal Assent, but taxpayers will have the option to apply the new test from 15 March 2017, the date upon which the ATO withdrew its pre-Bywater public ruling.
Research and development incentive
Further changes will be made to the research and development (R&D) tax incentive, originally announced in the 2018 Budget and refined in 2019. The changes will apply for income years starting on or after 1 July 2021:
for companies with aggregated annual turnover of less than $20 million, the refundable R&D tax offset is being set at 18.5% above the claimant’s company tax rate, and the $4 million cap on annual cash refunds will not proceed;
for companies with aggregated annual turnover of $20 million or more, the number of R&D intensity tiers (which measures the company’s R&D expenditure as a proportion of total expenses for the year) will be reduced from three to two:
8.5% above the claimant’s company tax rate for R&D expenditure between 0% and 2% intensity;
16.5% above the claimant’s company tax rate for R&D expenditure above 2% intensity.
Information exchange countries
Nine new countries (the Dominican Republic, Ecuador, El Salvador, Hong Kong, Jamaica, Kuwait, Morocco, North Macedonia and Serbia) will be added to Australia’s list of exchange of information countries and Kenya will be removed from the list increasing the list to 130 countries in total. The updated list of countries will be effective from 1 July 2021.
Residents of exchange of information countries are eligible for the managed investment trust withholding tax concessional rate of 15% (or 10%) on certain distributions (rather than the default rate of 30%.
For more information please contact:
Neil Brydges
Principal Lawyer | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E nbrydges@sladen.com.au
Daniel Smedley
Principal | Accredited Specialist in Tax Law
M +61 411 319 327| T +61 3 9611 0105
E: dsmedley@sladen.com.au
Rob Warnock
Principal Lawyer
M +61 419 892 115 | T +61 3 9611 0155
E: rwarnock@sladen.com.au
