In what has been described as a truly Keynesian effort, and a budget you might expect from a Labor government, the Morrison Government’s 2020-21 Federal Budget, delayed from its usual early May date due to the COVID-19 pandemic, was delivered on 6 October. With a truly unprecedented increase in spending, it lacks any real attempt at structural reform and is intended to chart a course for Australia out of the current economic turbulence. Here are some key takeaways for our clients and colleagues.
Before diving into the detail of specific initiatives, it is worthwhile given the sheer magnitude of spending to briefly summarise a few key numbers from the 2020-21 Federal Budget:
- Budgeted Receipts 2020-21 $463.8 billion
- Budgeted Payments 2020-21 $677.4 billion
- Underlying cash deficit $213.6 billion
- 2019-20 Net Debt $491.2 billion
- 2020-21 Net Debt $703.2 billion
This is comfortably the largest budget deficit in Australian history, though interestingly doesn’t seem to be driven by collapsing revenue which is forecast to remain reasonably healthy at $463.8 billion (against $469.4b in 2019-20 and $485.3b in 2018-19). Rather the deficit is largely driven by an explosion in spending, rising from $478.1b in 2018-19 to $549.6b in 2019-20 and a staggering $677.4b in 2020-21.
The spending increase is attributable to a number of key initiatives including JobKeeper, JobSeeker boosts, Cash Flow Boost, JobMaker credits and a jump in capital investment.
Payments, and underlying cash deficits, are forecast to remain elevated for some years, with the forecast underlying cash deficit to reduce to $66.9b by 2023-24.
Net debt is predicted to reach $966.2b at the end of 2023-24, or 43.8% of Australian’s forecast GDP. This compares to net debt of $159.6b at the end of 2012-13 (the final months of the Rudd Government).
Nevertheless, even at a forecast 43.8% of GDP in 2023-24, Australia’s net debt to GDP ratio would remain low by comparison to other advanced economies. In 2017 the ratio was 153% for Japan; 120% Italy; 82% USA; 78% UK and 45% Germany. Those countries’ numbers will certainly be significantly higher by 2023-24.
It is also interesting to note there has never been a cheaper time for governments to borrow, with interest rates at record lows (the lowest in 2,000 years of recorded interest rates per Chris Richardson of Deloitte Access Economics). The Federal Government’s interest payments in 2019-20 were $16.9b and are forecast to be $17.8b in 2023-24, despite a doubling of net debt over that period. The Federal Government would be unlikely to have any difficulties servicing interest at this level.
Nevertheless, if interest rates were to rise in future, the impact on this level of debt would be significant.
Key Budget Announcements
The Morrison Government moved quickly following budget night to introduce legislation in respect of a number of budget announcements. With a level of bipartisanship rarely seen, the Bill made swift passage through both the House of Representatives and the Senate and is currently awaiting Royal Assent.
We have commented below on a number of key budget announcements, though certainly not everything. We have also noted where measures have already been legislated compared with those which remain as announced proposals only.
1. Personal Income Tax Cuts - Legislated
Personal income tax cuts, previously legislated to commence 1 July 2022, have now been brought forward to 1 July 2020. These cuts are referred to as “Stage 2” of the Morrison Government’s plan for lower personal income tax.
The effect of these cuts is to increase the 19% top threshold from $37,000 to $45,000; and the 32.5% top threshold from $90,000 to $120,000.
The Low and Middle Income Earner Tax Offset, previously slated for removal from 2021, will be given one more year.
The impact on an individual with a taxable income of $120,000 and above is a reduction in their annual income tax of $2,430.
The ATO have today released revised PAYG withholding schedules this week to enable employers to pass on the tax cuts to employees, though these do not factor in any over-withholding from 1 July to today.
Stage 3 income tax cuts remain legislated to commence from 1 July 2024 and are far more significant in scale. A taxpayer with a taxable income of $200,000 will receive annual tax savings of a further $9,075 on top of those provided by the Stage 2 cuts.
2. 10 Small Business Tax Concessions Extended to Business < $50 million Turnover – Legislated
There are a number of concessions available in tax law for small businesses with turnover of up to $10 million. 10 of these concessions have now been extended to businesses with turnover of up to $50 million with varying commencement dates.
These are: simplified GST accounting (as determined by the ATO); customs duty reporting; excise duty reporting; FBT car parking exemption; FBT work-related portable electronic devices exemption; immediate deduction for certain prepaid expenses; two year income tax amendment period; immediately deduction for certain start-up expenses; simplified trading stock rules; and PAYG instalments payable on a GDP-adjusted notional tax basis.
Unfortunately, a number of the more generous tax concessions available to small business, such as the Small Business CGT Concessions and the Small Business Restructure Rollover remain unchanged.
3. Carry Back Tax Loss Rules – Legislated
This concession operates similarly to the short-lived carry back loss rules introduced by the Gillard Government in 2013 and repealed by the Abbott Government in 2014.
Under these temporary rules, a company will be able to carry back tax losses incurred in any of the 2020, 2021, or 2022 income years to taxable income from any of the 2019, 2020, or 2021 income years. It is first claimable on a company’s 2021 year income tax return in respect of both 2019 and 2020 claims.
The concession is repealed from the 2023 income year and is only available for tax revenue losses, not capital losses.
There is no equivalent concession for trusts, partnerships or individuals and taxpayers conducting businesses through those structures miss out on this concession.
4. Extension of the Instant Asset Write-Off Concession – Legislated
This concession is for businesses with an aggregated turnover of up to $5 billion and allows an immediate tax deduction to be claimed for eligible depreciable assets (such as most furniture, fittings, plant and equipment) purchased after 7:30pm on 6 October 2020 and first installed ready for use by 30 June 2022.
For businesses with an aggregated turnover in excess of $50 million the concession applies only to new assets. Business below that level of turnover can also claim the full cost of eligible second-hand depreciable assets.
Note that cars remain subject to the car-limit ($59,136 for 2020-21).
5. Victorian Government Business Support Grants Made Tax-Free – Proposal Only
The Victorian Government’s business support grants for small and medium businesses announced on 13 September 2020 will be made tax-free as non-assessable non-exempt income to recipients.
Such amounts would otherwise be taxable to the recipients under currently income tax law.
While this remains an announced proposal only, we have no reason to expect it would be opposed when introduced into Parliament.
As with the Federal Government’s Cash Flow Boost however, grants paid to company recipients will be taxable as unfranked dividends when ultimately withdrawn by shareholders, effectively negating the benefit of this tax exemption. Trust, partnership and individual recipients will be able to receive the eligible grants fully exempt from income tax.
6. FBT Exemption – Retraining Costs – Proposal Only
An exemption will be provided for employer-provided training and reskilling benefits provided to redundant former employees, or current employees soon to be made redundant. This concession is intended to support the mobility of the workforce during the COVID-19 pandemic.
7. JobMaker Hiring Credits – Proposal Only
Delivered through the tax system, JobMaker Hiring Credits will give businesses incentives to take on additional young job seekers.
From 7 October 2020, eligible employers will be able to claim $200 per week for each additional eligible employee they hire aged 16 to 29 years old; and $100 per week for each additional eligible employee aged 30 to 35 years old.
New jobs created until 6 October 2021 will be eligible to receive the credit for up to 12 months from the date the position is created.
To be eligible, the employee must have received JobSeeker, Youth Allowance or Parenting Payment for at least one of the previous three months at the time they are hired. The credit will be claimed quarterly in arrears from the ATO by employers, commencing 1 February 2021.
This concession is likely to be more relevant for business in certainty industries, such as hospitality, though does appear to involve a high level of administration for what may ultimately prove to be a small financial benefit for most eligible employers.
8. Granny Flat Payments to be CGT Exempt – Proposal Only
Under current law, negative capital gains tax consequences can arise in a number of ways involving granny flats. Where a person makes a contribution to a homeowner in exchange for the right to occupy a granny flat, this can be a taxable event. Furthermore, a granny flat arrangement can also result in an inability to claim a full CGT main residence exemption when selling a home.
We await more detail on this announcement and are currently unsure whether it will address one or both of these outcomes.
There are a number of other tax measures announced in the budget including corporate tax residency changes and modifications to the R&D tax incentive.
Please don’t hesitate to get in touch with your usual Baumgartners representative to discuss how any of these changes might affect you.
Aaron is the tax partner at Baumgartners. He is a Chartered Tax Adviser with 18 years’ experience advising private and corporate clients on a wide range of tax and commercial matters. Aaron also represents clients in disputes with the Australian Tax Office and state revenue authorities. Aaron holds a Master of Taxation from UNSW and is an active member of the Taxation Institute of Australia.