Federal Budget 2020-21

The Budget is usually presented in May and as accountants, we get a nerdy excitement at the prospect of the tax planning that results.  Of course, this year is different.  Tax planning went out the window in April and was replaced with Stimulus planning.  The delay of the Budget until October seemed a lifetime away yet here we are, seven months into a global pandemic, sifting through a document full of unprecedented spending to kickstart our economy.

We knew the headline figure would be large, and the $213.7 billion deficit was not a big surprise.  In fact, there were few surprises in this budget as most of the measures had been announced prior to the budget being presented.  It has been clear that the Government sees the construction industry as a key driver to recovery.  As a business owner (particularly if you are in a Trade business) there is a lot in this for you, so let’s explore how this budget can help you to kickstart the Australian economy.

Personal tax cuts

The tax cuts that were expected in 2022-23 have been bought forward to this financial year.  The 19 percent tax bracket will increase from $37,000 to $45,000 and the 32.5 percent bracket will increase from $90,000 to $120,000.  The Low Income Tax Offset will increase from $445 to $700 and the LMITO (low and middle-income offset) of $1,080 will remain for an additional year, ending after 2020-21.  Ultimately this means more money in the pay packets of 11.6 million workers.  This money will be available almost immediately once the tax cuts are legislated.

I find it a little amusing that the tax cuts have been backdated to 1 July 2020.  I have no idea how the ATO would administer a mid-financial year tax cut so this a logical move in my opinion.

As a nation with one of the highest personal tax rates in the world, this is welcome news.  Bring on the Stage 3 tax cuts from 1 July 2024 which will flatten the tax rates resulting in 95% of taxpayers having a maximum rate of 30%.

Temporary Full Depreciation

We have become accustomed to budget changes to tax-deductible depreciation since 2012.  The government has been moving the deductible amount and the eligibility thresholds which has increased business investment in capital items by bringing forward the resulting tax deduction.  The latest measure is going to benefit almost every business who can invest in depreciable assets.

The temporary full depreciation measure takes away all the thresholds and eligibility (with the exception of those with turnovers exceeding $5 billion).  This means you can fully expense any ‘eligible’ assets purchased between 7.30 pm on 6 October 2020 that are installed and ready to use prior to 1 July 2022.  You can also fully expense the costs to improve existing eligible assets.

The key facts here, the asset must be an eligible asset which means it is a business asset subject to Division 40 depreciation.  Buildings and structure improvements to buildings are subject to a different type of depreciation (Division 43) which means the full depreciation is not going to apply to a property purchase or structure renovations.  You cannot use it for personal assets such as a new boat or investment purchases such as your rental property renovations.  The depreciation limit on luxury vehicles of $59,136 will apply, however many utes are not subject to this limit.  There are many assets that this will apply to and if you are intending to invest in capital in the next few years, this is your opportunity to maximise the tax deduction.

Temporary tax loss carry back

Our accountant minds are ticking away at how we can use this budget measure in combinations with the Full Depreciation to get you some of your previously paid tax back.  This measure applies to businesses with a turnover of less than $5 billion (so most businesses).  Without too many details available I imagine this is limited to those trading out of a company structure.

Essentially, if you have a tax loss in a business it will normally carry forward to future years to be offset against future profits.  However, it is expected that many businesses will have losses in 2020-21 and may not be able to use these for a few years.  As such the budget allows you to offset that loss against past taxes paid rather than carry the loss forward.

If you have tax losses in 2019-20, 2020-21 or 2021-22 you can offset these with tax paid in 2018-19 or later.  You will not be able to do this until the 2020-21 or 2021-22 tax return, so you don’t need to amend your 2020 return if you have already lodged this and it is applicable.

There are many questions that come out of this but no doubt it will be an excellent tax planning tool.  There was a loss carry back provision around 2012 -2014 so presumably, the rules will be similar.  We will be keenly waiting to find out how this will work.

It’s all about jobs

The government inspired catchphrases including the word “Job” just keep coming and the latest instalment is the JobMaker.  The JobMaker Plan involves $74 billion of spending to skill up our workforce.   If we are going to be creating new jobs, we need someone to do those jobs.  With high rates of unemployment, we need to find a way to direct people to areas that will need workers, at the same time creating sustainable careers.

Much of this money is directed at young people with the following key initiatives:

Boosting Apprenticeship Wage Subsidy.  The first lot of stimulus support for retaining apprentices was retrospective.  The apprentices needed to be in your employment before the key dates for you to be eligible for the wage subsidy.  This new initiative will help you to hire a new apprentice after 5thOctober 2020.  There are no restrictions on business size or employee numbers like the first and second round of apprentice wage subsidy.  The subsidy will be a quarterly payment of 50% of the apprentice’s wage up to $7000 per quarter until 30 September 2021.  This is expected to support up to 100,000 new apprentices and trainees.

JobMaker Hiring Credit.  Aimed directly at youth unemployment, payment will be made to businesses who create a job for an eligible employee from 7 October 2020.  An eligible employee is aged between 16-35 and is on Jobseeker, Youth Allowance (other) or Parenting Payment for at least one month of the 3 months prior to their hire.  The subsidy will be $200 per week for those aged 16-29 and $100 per week for those aged 30-35.  The program will be available for 12 months and subsidy is intended to run for the employee’s first year of employment.

JobTrainer Fund.  A fund of $1 billion will be established to support free or low fee training places, expected to benefit up to 340,700 people.  This money is meant to be directed to courses with areas of genuine skills needs, and presumably, some trades would be classified in this area.

Infrastructure spend

An effective way to create jobs is to initiate big infrastructure spending.  The budget added an additional $10 billion to project funding increasing the spending to $110 billion over the next 10 years.  The additional $10 billion announced in the budget is expected to be spent in the next 4 years, indicating an urgency to get these projects underway.

Much of this spend involves road, rail and water projects.  Money has been directed to State and Local governments for road upgrades, and presumably, some of these projects can be rolled out reasonably quickly.  Tradies, the demand for your services will be high over the next few years.

Housing Construction

For those not geared up for a large infrastructure project, the government has extended the First Home Loan Deposit Scheme by adding an additional 10,000 places. This allows first home buyers to enter the housing market to build or buy a newly constructed property with only a 5% deposit.

In conjunction with this, the Government is providing an addition $1 billion to enable the National Housing Finance and Investment Corporation to guarantee low-cost finance for eligible applicate to build affordable housing.

These initiatives are expected to generate $1.5 billion in additional economic activity.

Cutting red tape

The Government has relaxed a few things to make it easier for us to do business.  Of note are the following changes.

Insolvency Changes. The rules around trading while insolvent relaxed during COVID-19 but more permanent changes will be introduced from 1 January 2021.  The changes are aimed at small businesses allowing a lower cost process to restructure debts while they stay in control of their company.  There will also be a quicker, lower cost liquidation process available for those businesses that cannot survive.  These measures will be available to those companies that have liabilities of less than $1 million.

Relaxed credit rules.  If you have tried to borrow money from a financial institution in recent times you will understand that the processes are extremely restrictive.  The Government is relaxing the tight constraints that have been applied, hopefully allowing more people to access the funds required to spark investment.

While there has been a lot of criticism over this change in the regulatory framework of our credit laws, it will not be relaxed for the small loans and leases that are targeted at the more vulnerable (such as pay-day loans).  I personally think the relaxation of the laws will be a good thing.  The red tape we have to go through to get our clients even a basic loan has been incredibly restrictive and I cannot see how increased investment spending would be able to occur without this change.

Other spending and changes

Of course, there are plenty of other items in this budget, including investment in the Women’s Economic Security Statement 2020, changes to R&D concessions, spending on our security, the environment and health, but I have tried to highlight the items that are of interest to business owners.

One item that may be of interest to those who have young adult children is the increase of the age of dependents under private health policies from 24 to 31.  It was not highlighted in the speech, but I found it buried in the budget papers.

What next

Like all budgets, the bill will be debated and passed through parliament and then the various departments will work on how to enact the new rules.  The budget gives us a taste of what is to come, but the details are what we need so we can start to take advantage of these new initiatives.  As a business owner, it is time to consider how you will use these initiatives to your advantage.  It is your responsibility to take advantage of this unprecedented spending to create jobs, invest in capital and build your business.  That, along with a vaccine and the opening of borders, is the key to our nation’s recovery.

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