The 2020 Federal Budget. Big Budget Spending for a Post-Covid World.

 

 “We’re back in black, oh yeah we’re BACK in BLACK.

Its May, 2019. And Josh Frydenberg grins and tells us that he has ‘brought the budget back into surplus in the coming year”

Not in the year that he was reporting on (2018/19), but in the year ahead - 2019/20.

Looking back now, it now reminds me of watching The Western Bulldogs play Essendon just a few months after this statement was made – in August 2019.

Essendon started brilliantly, kicking the first goal after just 20 seconds*

The Cheer squad was singing - They are Back in Black Baby! Break out the limited-edition coffee mugs and toast their success! (Or Break out a cigar perhaps?)

Well, we all know that you don’t determine the result of an AFL game after one minute. Nor do you proclaim the success of your financial forecasts in the moments after you announce them. But the treasurer was certainly not backwards in announcing just how successful they were going to be in the future.

And by the end of the financial year?

A year filled with economic downturns (The Myefo update in December 2019 had already shown a reduction in the ‘expected surplus’) then catastrophic bushfires before we faced a Global Pandemic that shut the economy down, meant that All the forecasts were not worth the paper they were printed on.

And like Essendon – not firing a shot until the game was well and truly over, the economic results sunk further and further into the abyss.

Like Essendon, they were well behind even before the Quarter time siren had sounded. But now, they blame the result on the last quarter's performance, telling us they were 'in the game' right up until then.

So, the 19/20 financial year went from an estimated 10 billion surplus to a $150 billion plus deficit. Like Essendon losing by 104 points after being 6 points up!

As we all know, from far too many AFL disappointments, you never assume the result before the game even begins. Plan, and proceed optimistically, but never ever assume you know beforehand exactly how things are going to pan out. It’s why the bookmakers make far more than they pay out!

So, what do we have this year? In looking over the announced elements of this budget, I am looking at things from two viewpoints – what will the budget do to assist tax payers and businesses now or this year in improving their overall position, and what impact will it have on them later – beyond the next 12 months?

So much of the forecasting on this budget is predicated on a Vaccine-inspired, Post-Covid recovery. It is expecting that all state borders other than WA will open up by the end of the year (Xmas on the Gold Coast anyone?), and that Covid flareups like we have had in Victoria will be 'largely contained’.

The biggest assumption of all is that a Covid 19 vaccination program will be fully in place by the end of 2021. That means not just that a vaccination is approved, but produced and a full immunisation program agreed and put in place by the end of the year. I admire optimism, but there are so many moving parts, and vested interests in play that I have my doubts that this will be in place by then. The budget assumes Australia’s economy will look fairly v-shaped next year. The budget papers expect Australia’s real GDP to fall 3.75% this calendar year, but to grow at 4.25% in 2021 — double what it was before the pandemic.

It’s a big call which underpins a lot of the government’s fiscal thinking, including in assistance to the unemployed and other areas of social security and welfare, where spending will fall to below 2019 levels from next year, “reflecting the impact of and recovery from the COVID-19 pandemic”.

The government says recovery will be driven by easing virus containment measures, and improving business and consumer confidence.

 So really, it all depends on if Australians (especially the rich) will spend.

 

For the recovery to look as v-shaped as Frydenberg wants, middle- and high-income earners will have to spend their tax cuts. Businesses will respond to asset write-offs and tax offsets by investing in stuff. A wage subsidy of $200 a week lasting just 12 months will be enough to get them hiring young Australians, who in turn will spend and keep the economy humming along.

All in all, it’s a whole lot of ifs. 

 

Another assumption is that the population slowly rises again.

The budget papers assume a gradual return of international students and permanent migrants, and a gradual increase in international travel through to the end of next year.

At the same time, net overseas migration is expected to go into the negative (-72,000) next year for the first time since 1946, before finally returning to above 200,000 in 2023-24. 

That longer-term return to normal, assumes people keep coming to Australia. And even the short-term forecasts could be tinged with optimism — as the ABC reported this week, international student numbers have fallen right off a cliff. And cutting university funding while increasing the cost of various courses – some by up to 115% - won’t make it easier for students to come back to study from any location

1.  The Budget at a Glance:

Year Ending	Budget Deficit   Billion	Spend   Billion	% of GDP	Tax  Billion	% of GDP	Net Debt   Billion	% of GDP
2021	213.7	670.3	34.40	424.6	21.80	703.2	36.10
2022	112.0	567.5	28.20	413.8	20.60	812.1	40.40
2023	87.9	574.9	27.40	442.9	21.10	940.4	42.80
2024	66.9	596.6	27.10	487.6	22.10	966.2	43.80

 Note that the estimates for 2020-21 are all considerably higher than the July update from the Treasurer for the same period. This may reflect the additional items in the budget that had not been allowed for at the time, as well as a ‘look' at the scoreboard midway through the first quarter!)

Economic forecasts

GDP: -1.5% (up from -0.2% in July update); 4.75% in 2021-22
Unemployment: 7.25% (up from 7.0% in July update)
CPI: 1.75% in 2020-21
Nominal GDP: -1.75%
Terms of trade: -1.5%
Household consumption: -1.5%
Dwelling investment -11%
Wage price index: 1.25%
Business investment: -9.5%
Population: 1.58 fertility rate (down from 1.69 in July update)

2.   Personal income tax

2.1  Changes to personal income tax rates

The Government has announced that it will bring forward changes to the personal income tax rates that were due to apply from 1 July 2022, so that these changes now apply from 1 July 2020 (i.e., from the 2021 income year). These changes involve:

• increasing the upper threshold of the 19% personal income tax bracket from $37,000 to $45,000; and
• increasing the upper threshold of the 32.5% personal income tax bracket from $90,000 to $120,000.

These changes are illustrated in the following table (which excludes the Medicare Levy).

Rate                           Current (2019 to 2022)                     Proposed (2021 – 2024)
0%	0 – $18,200	0 – $18,200
19%	$18,201 – $37,000	$18,201 – $45,000
32.5%	$37,001 – $90,000	$45,001 – $120,000
37%	$90,001 – $180,000	$120,001 – $180,000
45%	$180,001+	$180,001+

The Government advised that the personal income tax rate changes that have already been legislated, effective from 1 July 2024 (i.e., from the 2025 income year), remain unchanged. These involve abolishing the 37% personal income tax bracket, reducing the 32.5% personal income tax bracket to 30%, and increasing the upper threshold of the reduced 30% tax bracket from $120,000 to $200,000.

2.2     Changes to the Low Income Tax Offset (‘LITO’)

The Government announced that it will also bring forward the changes that were proposed to the LITO from 1 July 2022, so that they will now apply from 1 July 2020 (i.e., from the 2021 income year), as follows:

• The maximum LITO will be increased from $445 to $700.
• The increased (maximum) LITO will be reduced at a rate of 5 cents per dollar, for taxable incomes between $37,500 and $45,000.
• The LITO will be reduced at a rate of 1.5 cents per dollar, for taxable incomes between $45,000 and $66,667.

 

Current LITO (2021 to 2022)                                Proposed LITO (2021 to 2022)
$0 – $37,000	Up to $445	$0 – $37,500	Up to $700
$37,001 – $66,666	$445 – 1.5% of excess over $37,000	$37,501 – $45,000	$700 – 5% of excess over $37,500
$66,667 +	Nil	$45,001 to $66,666	$325 – 1.5% of excess over $45,000
		$66,667 +	Nil

 

Note that, the Government also announced that the current Low and Middle Income Tax Offset (‘LAMITO’) would continue to apply for the 2021 income year (which is available in addition to the LITO for eligible taxpayers). For example, the maximum LAMITO of $1,080 will be available to taxpayers with taxable incomes of between $48,000 and $90,000 in the 2021 income year.

However – currently, this rebate is set to be removed on June 30, 2021. This will mean an effective INCREASE in the net tax payable on taxable incomes up to $100,000 in the 2021/22 year. 

The net effect of these changes on various income levels are shown here:

		Net tax payable
		Allowing for tax rates and offset changes						Effective tax rate %
Taxable income	2020	2021	2022	Diff 2020 - 2021  $	Diff 2020 - 2021  %	Diff 2021 - 2022  %	2020	2021	2022
30,000	$2,142	1,887	2,142	$255	12%	-12%	7.14	6.29	7.14
40,000	$4,467	3,800	4,279	$668	15%	-11%	11.17	9.50	10.70
50,000	$7,467	6,387	7,467	$1,080	14%	-14%	14.93	12.77	14.93
60,000	11,067	9,987	11,067	$1,080	10%	-10%	18.45	16.65	18.45
70,000	14,617	13,537	14,617	$1,080	7%	-7%	20.88	19.34	20.88
80,000	18,067	16,987	18,067	$1,080	6%	-6%	22.58	21.23	22.58
90,000	21,517	20,437	21,517	$1,080	5%	-5%	23.91	22.71	23.91
100,000	25,717	24,187	24,967	$1,530	6%	-3%	25.72	24.19	24.97
150,000	45,997	43,567	43,567	$2,430	5%	0%	30.66	29.04	29.04
180,000	57,697	55,267	55,267	$2,430	4%	0%	32.05	30.70	30.70
200,000	67,097	64,667	64,667	$2,430	4%	0%	33.55	32.33	32.33
250,000	90,597	88,167	88,167	$2,430	3%	0%	36.24	35.27	35.27
400,000	161,097	158,667	158,667	$2,430	2%	0%	40.27	39.67	39.67

I expect that there will be ‘new announcements’ on this over the coming year. Probably leading up to an early election in late 2021. It’s pointless claiming that the government is trying to stimulate the economy with tax cuts if they only last for 12 months for a significant proportion of the population that are struggling the most.
There has been press saying that the backdating of the tax cut will occur by adjusting the tax to be deducted in the rest of the year – resulting in 12 months of tax cuts being provided over a 9 (or fewer months) period. I cannot see this myself, as it will require the legislation to be rushed through, made official and then the ATO needs to inform employers and payroll software providers on how this is to be implemented. Instead, I see the likelihood that there will be a ‘set date’ for payroll changes, after which a reduced tax amount is deducted from pays, with the balance of the tax benefit provided when tax returns for 2021 are lodged after July 1, 2021. (EDIT) As I prepare this, it as confirmed that the tax saving from July 1 until the tax cuts are processed will only be received once people lodge their 2021 tax returns after June 30 next year.

3    Changes affecting business taxpayers

3.1   Expanding access to Small Business Tax Concessions

The Government has announced that it will expand the concessions available to Medium Sized Entities to provide access to up to ten Small Business Concessions.
For this purpose, a Medium Sized Entity is an entity with an aggregated annual turnover of at least $10 million and (less than) $50 million

The expanded concessions will apply in three phases, as follows:

1.     From 1 July 2020, eligible businesses will be able to immediately deduct certain start-up expenses and certain prepaid expenditure.

2.     From 1 April 2021, eligible businesses will be exempt from FBT on car parking and multiple work-related portable electronic devices, such as phones or laptops, provided to employees.

            3.     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.
• Eligible businesses will generally have a two-year amendment period apply income tax assessments for income years starting from 1 July 2021.
• The Commissioner of Taxation’s power to create a simplified accounting method determination for GST purposes will be expanded to apply to businesses below the $50 million aggregated annual turnover threshold.

3.2   JobMaker Hiring Credit

The Government will introduce a JobMaker Hiring Credit to incentivise businesses to take on additional young job seekers.

From 7 October 2020, eligible employers will be able to claim $200 a week for each additional eligible employee they hire aged 16 to 29 years old and $100 a week for each additional eligible employee aged 30 to 35 years old. New jobs created until 6 October 2021 will attract the credit for up to 12 months from the date the new position is created.

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

The amount of the credit is capped at $10,400 for each additional new position created. Furthermore, the total credit claimed by an employer cannot exceed the amount of the increase in payroll for the reporting period in question (see employer eligibility requirements below). So,, a business cannot qualify for this support by simply replacing an existing employee with a new ‘qualifying employee’. Nor can they sack and re-hire their existing employees.

Who is an eligible employee?

Employees may be employed on a permanent, casual or fixed term basis.

To be an ‘eligible employee’, the employee must:

·       be aged (i.e., at the time their employment started) either:

–       16 to 29 years old, to attract the payment of $200 per week; or

–       30 to 35 years old to attract the payment of $100 per week;

·       have worked at least 20 paid hours per week on average for the full weeks they were employed over the reporting period;

·       have commenced their employment during the period from 7 October 2020 to 6 October 2021;

·       have received the JobSeeker Payment, Youth Allowance (Other), or Parenting Payment for at least one month within the past three months before they were hired; and

·       be in their first year of employment with this employer and must be employed for the period that the employer is claiming for them.

Certain exclusions apply, including employees for whom the employer is also receiving a wage subsidy under another Commonwealth program.

Who is an eligible employer?

An employer is able to access the JobMaker Hiring Credit if the employer:

·       has an ABN;

·       is up to date with tax lodgement obligations;

·       is registered for Pay As You Go withholding;

·       is reporting through Single Touch Payroll;

·       is claiming in respect of an ‘eligible employee’;

·       has kept adequate records of the paid hours worked by the employee they are claiming the hiring credit in respect of; and

·       is able to demonstrate that the credit is claimed in respect of an additional job that has been created.

 

Employers do not need to satisfy a fall in turnover test to access the JobMaker Hiring Credit. Certain employers are excluded, including those who are claiming the JobKeeper payment.
So if your business is receiving JobKeeper for the October to December 2020 or January to March 2021 period you are NOT eligible for the JobMaker support payment.

New employers created after 30 September 2020 are not eligible for the first employee hired but are (potentially) eligible for the second and subsequent eligible hires. 

·      Apprentice wage subsidy scheme – businesses that hire new apprentices will be eligible for a 50% wage subsidy. The $1.2 billion scheme will support 100,000 apprentices and be available to businesses of all sizes. Given that over 140,000 apprenticeship positions have ben lost in the recent past, this is a much needed, but still lacking, initiative.

 

3.3  Tax-free business support grants

The Government has announced that the Victorian Government’s Business Support Grants for small and medium businesses, as announced on 13 September 2020, are non-assessable, non- exempt income for tax purposes. The Government may extend this arrangement to similar future grants from all States and Territories on an application basis. Eligibility for this treatment will be limited to grants announced on or after 13 September 2020 and for payments made between 13 September 2020 and 30 June 2021.

Essentially, this means that with the Three rounds of support grants announced so far by the Victorian Government, Rounds 1 and 2 are ASSESSABLE for income tax, but round 3 is NOT assessable. At least we have some certainty (In Victoria, not sure what they will do about other states yet) for grants announced after September 13, including the Third round of grants, the Sole trader support and the hospitality support packaged. But the difference in the treatment of the various rounds of grants is difficult to understand.

 

 

3.4  Uncapped immediate write-off for depreciable assets

The Government has announced it will introduce the following changes to the Capital Allowance provisions:

(a)      Businesses with an aggregated annual turnover of less than $5 billion will be able to claim an immediate deduction (what the Budget terms as ‘full expensing’) for the full (uncapped) cost of an eligible depreciable asset, in the year the asset is first used or is installed ready for use, where the following requirements are satisfied:

• The asset was acquired from 7:30pm AEDT on 6 October 2020 (i.e., Budget night).
• The asset was first used or installed ready for use by 30 June 2022.
•  The asset is a new depreciable asset or is the cost of an improvement to an existing eligible asset, unless the taxpayer qualifies as a small or medium sized business (i.e., for these purposes, a business with an aggregated annual turnover of less than $50 million), in which case the asset can be second-hand.

(b)      As is currently legislated, businesses with aggregated annual turnover between $50 million and $500 million can still deduct the cost of eligible second-hand assets costing less than

$150,000 that are purchased from 2 April 2019 and first used or installed ready for use between 12 March 2020 and 31 December 2020 under the enhanced instant asset write-off.

The Government has announced that it will extend the period in which such assets must first be used or installed ready for use by 6 months, until 30 June 2021.

(c)       Small businesses (i.e., 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 (i.e., up to 30 June 2022).

Furthermore, 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.

So, as of October 7 effectively, all businesses with a turnover of less than $5 BILLION (i.e. most businesses in Australia) can claim a 100% tax deduction on ALL eligible equipment items purchased and installed for use by June 30, 2022.

Sorry, that does not mean you can claim your new Porsche (or plane or yacht!)  as a full tax deduction this year! (the key word is eligible) As there was already – for small business (less than $10 million turnover) a $150,000 threshold for equipment purchases. For vehicles, the luxury car limit would still apply (Unless specifically removed by the ATO) So for most business, this change actually provides no additional benefit – it extends the existing accelerated depreciation rules, but it does not add significantly to the tax or cashflow benefits. For larger businesses (i.e. turnover above $50 million to $5 Billion) yes, it provides some short-term tax benefit, but you have to wonder who this will benefit the most. And if a listed corporate pays less tax, and does not fully ‘frank’ their dividends as a result – it is the small investor and the superannuation funds that will end up paying more tax! (But it certainly favors the offshore investor for the same reason) 

The ‘instant write off’ of small business asset pools is again already in place for asset pools worth less then $150,000. But this additional benefit won’t be seen until the 2021 tax returns are lodged, so there is no immediate benefit to businesses, or to cashflow from this change. 

Businesses would still need to find funds from cashflow, cash reserves, or bank funding to pay for new equipment. All of these have been hard to find, and bank and lease finance has become as rare as an Adelaide Crows win.  It is hoped that the banks will start working with businesses as we go forward but they have been very ‘Covid wary’ and probably will be until there is a clear path out of lockdown and an improved economic outlook. Catch 22. No cash, no loans, no equipment, no tax benefit, no economic boost.

 

4.     Changes affecting companies

Temporary loss carry back for eligible companies

The Government has announced that it will introduce measures to allow companies with a turnover of less than $5 billion to carry back losses from the 2020, 2021 or 2022 income years to offset previously taxed profits made in or after the 2019 income year.

This will allow such companies to generate a refundable tax offset in the year in which the loss is made. The tax refund is 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. (So if Franked Dividends have already been paid to shareholders, the loss claim will be limited)

The tax refund will be available on election by eligible companies when they lodge their tax returns for the 2021 and 2022 income years. Note that, companies that do not elect to carry back losses under this measure can still carry losses forward as normal.

 

So, in looking at the 2019/20 tax returns - for the year just passed, we have the possibility of offsetting loses in that year against profits in the 2019 year. That ‘could’ mean getting some tax back that had been paid by business entities in the 2019 year.

But! At this stage, it appears that we will have to wait till after the end of the  2021 tax year - so the first ‘refunds’ would not happen before July or August 2021. So this provides NO additional cashflow in the remainder of this financial year.

 

5.    FBT exemption and deductions for retraining

Employer-provided retraining and reskilling for redundant, or soon to be redundant, employees will be exempt from fringe benefits tax.
Currently, employers providing training that is not sufficiently connected to an employee’s current employment may be subject to fringe benefits tax. The exemption will apply for retraining towards a position within or outside of the employer’s business. Retraining provided through a salary packaging arrangement or commonwealth supported places at universities will not be eligible for the exemption.
When enacted, the exemption will apply from 2 October 2020.
Changes to tax deduction rules for self-education expenses unrelated to current employment will also be considered by the government in consultations.

6.  Superannuation

Super will be paid to a new employee’s existing account

An existing superannuation account will be “stapled” to a member to avoid the creation of a new account when that person changes their employment.

By July 2021 if an employee does not nominate an account at the time they start a new job, employers will pay their superannuation contributions to their existing fund. Employers will obtain information about the employee’s existing superannuation fund from the ATO.

This is a significant and long overdue change – as previously the ATO were not making this information readily available to employers, leaving it to employees to identify their superannuation funds to their new employers. But this will also put the obligation onto employers to ‘know their employee’.

If an employee does not have an existing superannuation account and does not elect a fund, the employer will pay the employee’s superannuation into the employers nominated default superannuation fund.

7. Social security

COVID-19 response package — further economic support and pandemic leave payments

Further economic support payments

Two separate $250 economic support payments will be provided to eligible recipients. The first payment will be made from November 2020 and the second from early 2021.

Payments will be made to eligible recipients of the following benefits and health care card holders:

• 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 holders (not in receipt of a primary income support payment)
• Commonwealth Seniors Health Card holders
• ·eligible Veterans’ Affairs payment recipients and concession card holders.

The payments will be exempt from tax and will not count as income support for the purposes of any income support payment.

Looks similar to the Rudd /Swan Cash payments in the time of GFC. Derided then as the “Harvey Norman / Plasma grants", but rehashed, reduce, and reused in 2020/21. This time limited to benefit holders , as ‘you don’t need support if you have a job’ appears to be the mantra.

JobSeeker payments have been reduced from the peak ‘doubling’ that occurred in March 2020., and there is no announcement on a ‘permanent’ change to the base rate, so at this stage, JobSeeker will revert back to a $40 per day payment at the end of December. JobSeekers can only hope that Josh and Scomo have some goodies lined up for Christmas.

8. R&D tax incentive changes

For small companies (annual turnover of less than $20 million) the refundable R&D tax offset will be set at 18.5 percentage points above the claimant’s company tax rate and there will be no cap on annual cash refunds.
With a current income tax rate of 26% in 2020/21(Reducing to 25% in  2021/22) this means that the R&D tax rebate will be 44.5% for the 2021 year, and 43.5% in 21/22


There is a lot more to breakdown and review in the budget – like the comparison in the subsidy given to Gas investments ($50 million) compared to Electric Vehicle development ($5 million) or Carbon Capture & Storage (Also $50 million) and $70 million for a regional hydrogen export hub. And more money for School Chaplains than there is for Mental Health support for teenagers - sounds like a big "Hail Mary' to me.
But these are the key items currently in play, and I am sure there will be a need to refine and review much of what has bene suggested. The tax changes won’t be stopped in Parliament, but there will be a big push to increase the Social Security support and provide further support for targeted sectors of the economy. Everyone loves a winner, and we all choose different sides, but right now we need all of the ‘little guys’ to be winning, not just the big boys.

Feel free to contact us and discuss your situation and look at how we set up your business, investment or financial strategy in the best way possible. Or to just talk and lament another year of football games gone wrong!

Happy to see your comments on the blog as well.

Cheers

Stuart

 

 

*https://www.afl.com.au/news/39741/match-report-essendon-v-western-bulldogs

ESSENDON                     1.1         1.3       1.7         4.9 (33)
WESTERN BULLDOGS  6.3       10.3     16.6     21.11 (137)

By midway through the first quarter, Essendon was 3 goals down. They scored their second goal with less than ten minutes remaining in the game after the Bulldogs scored 21 straight.

It would be like going without income for 50 weeks after receiving a payment on the first day of the year - and not realizing that was going to be almost a fifth of your entire salary for the year. And claiming how much money you had made for the year on July 1. 

Never assume the result of your actions from the first few minutes, days or weeks of activity. The game is not over till it ends. Whatever your game is.

 

Information in this blog sourced from:

NTAA Federal Budget handout

Wolters Kluwer Overview

Crikey

The Guardian

The Age

Xero