Federal Budget 2020 – overview of taxation measures announced

The Treasurer handed down the Federal Budget 2020-21 on 6 October 2020. Detailed below is an overview of the significant tax measures announced, followed by further information regarding each of these measures.

Summary of tax measures

Personal Income Tax Measures

The following tax cuts will take effect from 1 July 2020:

• the top threshold of the 19% personal income tax bracket will increase from $37,000 to $45,000.
• the low-income tax offset (LITO) will increase from $445 to $700.
• the top threshold of the 32.5% personal income tax bracket will increase from $90,000 to $120,000.

The Government will also provide a one-off additional benefit from the low to middle-income tax offset in 2020-21.

Business Tax Incentives

• Temporary full expensing – From 7:30 pm (AEDT) on 6 October 2020 until 30 June 2022, businesses with an aggregated annual turnover of up to $5 billion will be able to deduct the full cost of eligible depreciable assets of any value in the year they are first used or installed ready for use. The cost of improvements made during this period to existing eligible depreciable assets can also be fully deducted.
• Temporary loss carry-back to support cash flow – The Government will allow companies with an aggregated turnover of less than $5 billion to offset tax losses against previous profits on which tax has been paid, to generate a refund. Eligible companies can carry back tax losses from the 2019-20, 2020-21 and/or 2021-22 income years to offset previously taxed profits in 2018-19 or later income years.
• Increase the small business entity turnover threshold – The Government will expand access to a range of small business tax concessions for small to medium businesses by lifting the aggregated annual turnover threshold from $10 million to $50 million.
• JobMaker Hiring Credit – The Government will provide financial support to employers to take on additional employees through a hiring credit. Eligible employers who can demonstrate that the new employee will increase overall employee headcount and payroll will receive $200 per week if they hire an eligible employee aged 16 to 29 years, or $100 per week if they hire an eligible employee aged 30 to 35 years.
• Fringe benefits tax – The Government will introduce an exemption 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.
• Research and Development Tax Incentive – The Government will enhance previously announced reforms to support business investment in Australia.

Further Budget Measures

• Superannuation Reform – The Government has announced several reforms to the compulsory superannuation system which will reduce the number of duplicate accounts held by employees as a result of changes in employment. The reforms will also hold funds to account for underperformance and will improve the transparency and accountability of trustees of superannuation funds.
• Tax residency of foreign companies – The Government will amend the law to provide that a company that is incorporated offshore will be treated as an Australian tax resident if it has a ‘significant economic connection to Australia.’
• Victorian Government business support grants – the Government will legislate to ensure these grants, as announced on 13 September 2020, are non-assessable, non-exempt income for tax purposes.
• The Government will provide a targeted capital gains tax (CGT) exemption for granny flat arrangements where there is a formal written agreement.

Tax measure in detail

Personal income tax measures

The Government is delivering an additional $17.8 billion in personal income tax relief to support Australia’s economic recovery from COVID-19, including an additional $12.5 billion over the next 12 months.

Lower Personal Income Taxes

The Government will provide additional support to Australian taxpayers by bringing forward the following tax cuts to 1 July 2020:

• the top threshold of the 19% personal income tax bracket will increase from $37,000 to $45,000. This will provide up to $1,080 in tax relief.
• the low-income tax offset (LITO) will increase from $445 to $700, which will provide up to an additional $255 in tax relief. The increased LITO will be withdrawn at a rate of 5 cents per dollar between taxable incomes of $37,500 and $45,000. The LITO will then be withdrawn at a rate of 1.5 cents per dollar between taxable incomes of $45,000 and $66,667.
• the top threshold of the 32.5% personal income tax bracket will increase from $90,000 to $120,000. This will provide tax relief of up to $1,350.

The above tax cuts were initially intended to take effect from 1 July 2022 in accordance with Stage 2 of the Government’s already legislated Personal Income Tax Plan. The Government is bringing forward the tax cuts from Stage 2 of its Plan to commence immediately.

Retaining the low to middle-income tax offset (LMITO)

The Government will provide further targeted tax relief for low and middle-income earners with a one-off additional benefit from the LMITO in 2020-21.

The LMITO provides a reduction in tax of up to $1,080 for individuals or $2,160 for dual-income couples. The LMITO was due to be removed with the commencement of Stage 2 of the Government’s Personal Income Tax Plan, however, the one-off additional benefit in 2020-21 will provide support to households and stimulus to the economy during the recovery.

Business tax incentives

The Government has announced initiatives to support Australian businesses to invest, grow and create more jobs through targeted tax incentives.

Temporary full expensing

The Government is providing a temporary tax incentive to support new investment and deliver cash flow benefits to businesses. From 7:30 pm (AEDT) on 6 October 2020 until 30 June 2022, businesses with an aggregated annual turnover of up to $5 billion will be able to deduct the full cost of eligible depreciable assets of any value in the year they are first used or installed ready for use. The cost of improvements made during this period to existing eligible depreciable assets can also be fully deducted.

This measure will improve cash flow for qualifying businesses that purchase eligible assets and bring forward new investment to support economic recovery.

For small and medium-sized businesses (with aggregated annual turnover of less than $50 million), full expensing also applies to second-hand assets.

Full expensing builds on the enhanced instant asset write-off and the accelerated depreciation previously announced to support businesses during the COVID-19 pandemic.

Businesses with aggregated annual turnover between $50 million and $500 million can still deduct the full cost of eligible second-hand assets costing less than $150,000 that are purchased by 31 December 2020 under the enhanced instant asset write-off. Businesses that hold assets eligible for the instant asset write-off will have an extra six months (i.e. until 30 June 2021) to first use or install those assets.

Temporary loss carry-back to support cash flow

The Government will allow companies with an aggregated turnover of less than $5 billion to offset tax losses against previous profits on which tax has been paid, to generate a refund.

Under this measure, eligible companies can carry back tax losses from the 2019-20, 2020-21 and/or 2021-22 income years to offset previously taxed profits in 2018-19 or later income years. This measure is intended to promote economic recovery by providing cash flow support to previously profitable companies that have fallen into a tax loss position as a result of the current economic conditions.

The tax refund would be 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.

Eligible businesses may elect to receive a tax refund when they lodge their 2020-21 and 2021 22 tax returns.

Increase the small business entity turnover threshold

The Government will expand access to a range of small business tax concessions for small to medium businesses by lifting the aggregated annual turnover threshold from $10 million to $50 million.

Businesses with an aggregated annual turnover of $10 million or more but less than $50 million will for the first time have access to up to ten further small business tax concessions in three phases:

• Phase 1: From 1 July 2020, eligible businesses will be able to immediately deduct certain eligible start-up expenses and prepaid expenditure.
• Phase 2: From 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.
• Phase 3: From 1 July 2021, eligible businesses will be able to access further concessions including the simplified trading stock rules and the ability to remit pay as you go (PAYG) instalments based on GDP adjusted notional tax. Eligible businesses will also have a two-year amendment period for income tax assessments for income years starting from 1 July 2021 (excluding entities that have significant international tax dealings or complex affairs).

From 1 July 2021, the Commissioner of Taxation (Commissioner) will have the power to create a simplified accounting method determination for goods and services tax (GST) purposes for these eligible businesses.

The eligibility turnover thresholds for other small business tax concessions will remain at their current levels.

JobMaker Hiring Credit

The Government will provide financial support to employers to take on additional employees through a hiring credit. The JobMaker Hiring Credit will be available to eligible employers over 12 months from 7 October 2020 for each additional new job they create for an eligible employee.

Eligible employers who can demonstrate that the new employee will increase overall employee headcount and payroll will receive $200 per week if they hire an eligible employee aged 16 to 29 years, or $100 per week if they hire an eligible employee aged 30 to 35 years.

The JobMaker Hiring Credit will be available for up to 12 months from the date of employment of the eligible employee with a maximum amount of $10,400 per additional new position created. In order to be eligible, the employee will need to have worked for a minimum of 20 hours per week, averaged over a quarter, and received the JobSeeker Payment, Youth Allowance (other) or Parenting Payment for at least one month out of the three months prior to when they are hired.

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

The JobMaker Hiring Credit is designed to support new employment. Employers do not need to satisfy a fall in turnover test.

The additionality criteria

In order to attract the JobMaker Hiring Credit, the employee must be in an additional job created from 7 October 2020. In order to demonstrate the job is additional, there must be an increase in:

• the business’ total employee headcount from the reference date of 30 September 2020; and
• the payroll of the business for the reporting period, as compared to the three months to 30 September 2020.

The amount of the hiring credit claim cannot exceed the amount of the increase in payroll for the reporting period.

Ineligible employers

Certain employers are not eligible for the JobMaker Hiring Credit, including Commonwealth, state and local government agencies, entities in liquidation or who have entered bankruptcy, and employers who are claiming the JobKeeper Payment.

Ineligible employees

The following are not eligible employees for the JobMaker Hiring Credit:

• employees aged under 16 years or over 35 years at the time their employment started;
• employees for whom the employer is also receiving a wage subsidy under another Commonwealth program such as the Boosting Apprenticeship Commencements wage subsidy, Supporting Apprentices and Trainees subsidy and the Australian Apprentice Wage Subsidy Trial;
• employees for whom another employer is claiming the JobMaker Hiring Credit in respect of; and
• employees who worked on average less than 20 hours per week, for the weeks that they were employed during a reporting period, will be ineligible for that period.

Fringe Benefits Tax

Exemption to support retraining and reskilling

The Government will introduce an exemption from fringe benefits tax 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 the announcement.

Currently, FBT is payable if an employer provides training to redundant, or soon to be redundant, employees and that training do not have sufficient connection to their current employment. The measure will provide an FBT exemption for a broader range of retraining and reskilling benefits, incentivising employers to retrain redundant employees to prepare them for their next career.

The exemption will not extend to retraining acquired by way of salary packaging arrangement.

The Government will also consult on allowing individuals to deduct education and training expenses they incur themselves where the expense is not related to their current employment.

Reducing the compliance burden of record-keeping

The Government will provide the Commissioner with the power to allow employers to rely on existing corporate records, rather than prescribed records, to finalise their FBT returns. The measure will have effect from the start of the first FBT year (1 April) after the date of Royal Assent of the enabling legislation.

Research and development tax incentive

The Government will enhance previously announced reforms to the Research and Development (R&D) tax incentive to support business investment in Australia.

For small claimants with an aggregated annual turnover of less than $20 million, the Government will increase the refundable R&D tax offset to 18.5 percentage points above the claimant’s company tax rate, and there will be no $4 million cap on annual cash refunds.

For larger claimants, the Government will streamline the ‘intensity test’ from three to two tiers and increase the non-refundable R&D tax offset rates. The new rates will be the claimant’s company tax rate plus 8.5 percentage points for initial R&D expenditure up to 2% R&D intensity, and 16.5 percentage points for R&D expenditure above 2% R&D intensity.

The Government will also proceed with the increase in the cap on eligible R&D expenditure from $100 million to $150 million per annum.

These measures will apply from 1 July 2021.

Superannuation reform

The Government has announced reforms to the compulsory superannuation system which are intended to reduce structural flaws of the system, including unnecessary fees and insurance premiums being paid on unintended multiple accounts and a lack of accountability of funds to members.

The reforms will reduce the number of duplicate accounts held by employees as a result of changes in employment and will prevent new members from joining underperforming funds.

Unintended multiple accounts

Under the reforms, an employee will keep their superannuation fund when they change employers, stopping the creation of unintended multiple superannuation accounts and the erosion of superannuation balances.

A member’s existing superannuation account will be ‘stapled’ to the member to avoid the creation of a new account when that person changes their employment. Further, a new online YourSuper comparison tool will assist members to decide which superannuation product best meets their needs.

Holding funds to account for underperformance

From July 2021, the Australian Prudential Regulation Authority will conduct benchmarking tests on the net investment performance of MySuper products, with products that have underperformed over two consecutive annual tests prohibited from receiving new members until a further annual test that shows they are no longer underperforming.

If a fund is deemed to be underperforming, it will need to inform its members of its underperformance by 1 October 2021 and provide them with information about the YourSuper comparison tool.

Increased accountability and transparency

The Government reforms will improve the transparency and accountability of trustees of superannuation funds, by strengthening obligations on superannuation trustees to ensure their actions are consistent with members’ retirement savings being maximised. Trustees will be required to comply with a new duty to act in the best financial interests of members and must provide members with key information regarding how they manage and spend members’ funds in advance of Annual Members’ Meetings.

International measures

Clarifying the corporate tax residency test

The corporate tax residency rules are fundamental in determining the Australian income tax liability, if any, of a foreign incorporated company.

The Government will make technical amendments to clarify the corporate residency test. The Government will amend the law to provide that a company that is incorporated offshore will be treated as an Australian tax resident if it has a ‘significant economic connection to Australia.’ This test will be satisfied where both the company’s core commercial activities are undertaken in Australia, and its central management and control is in Australia.

The ATO’s interpretation of corporate tax residency, following the High Court’s 2016 decision in Bywater Investments Ltd v Commissioner of Taxation¹, departed from the long-held position of a corporate tax resident. The current ATO interpretation is that a foreign incorporated company may constitute an Australian tax resident if only its central management and control is located in Australia. This Budget measure will clarify the corporate residency test to reflect the position prior to the 2016 court decision.

This measure will have effect from the first income year after the date of Royal Assent of the enabling legislation, however, taxpayers will have the option of applying the new law from 15 March 2017 (the date on which the ATO withdrew its ruling TR 2004/15: Income tax: residence of companies not incorporated in Australia – carrying on a business in Australia and central management and control).

Modernising and expanding Australia’s tax treaty network

The Government will support the recovery from COVID-19 by modernising and expanding Australia’s tax treaty network to eliminate double taxation, settle taxing rights between Australia and other countries, and attract foreign investment and skilled workers.

Other significant tax announcements

Making Victoria’s business support grants non-assessable, non-exempt income

The Government will make the Victorian Government’s business support grants for small and medium business as announced on 13 September 2020 non-assessable, non-exempt (NANE) income for tax purposes.

State-based grants such as the Business Support Grants are generally considered taxable income by the Commonwealth. Given COVID-19 and the exceptional circumstances, Victorian businesses face, providing this additional concessional treatment will assist in their recovery.

The Commonwealth will extend this arrangement to all States and Territories on an application basis. Eligibility would be restricted to future grants program announcements for small and medium businesses facing similar circumstances to Victorian businesses.

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.

Exempting granny flat arrangements from capital gains tax

The Government will provide a targeted CGT exemption for granny flat arrangements where there is a formal written agreement. The exemption will apply to arrangements with older Australians or those with a disability. The measure will have effect from the first income year after the date of Royal Assent of the enabling legislation.

CGT consequences are currently an impediment to the creation of formal and legally enforceable granny flat arrangements. When faced with a potentially significant CGT liability, families often opt for informal arrangements, which can lead to financial abuse upon the breakdown of family relationships. This measure will remove these CGT impediments, which is intended to reduce the risk of abuse to vulnerable Australians.

Australian Charities and Not-for-profits Commission Review Program

The Government will provide $2.9 million over three years from 2020-21 to implement a program of field-based compliance reviews of charities. The program will facilitate early intervention where charities are at high risk of failing to meet the obligations under the governance standards of the Australian Charities and Not-for-profits Commission (ACNC).

The review function will strengthen the ACNC’s ability to provide greater assurance to the Government and the public that charities have appropriate governance structures in place and are using their income for charitable purposes.

Funding to address serious and organised crime in the tax and superannuation system

The Government will provide $15.1 million to the ATO to target serious and organised crime in the tax and superannuation systems. This extends the 2017-18 Budget measure Additional funding for addressing serious and organised crime in the tax system by a further two years to 30 June 2023.

How can Rigby Cooke help?

If you would like to discuss your eligibility in respect of the above Budget measures, please contact the Tax team.

1. Bywater Investments Limited and Ors v Commissioner of Taxation [2016] HCA 45.

Federal Budget 2020-21 materials:
– Budget Paper No.2 2020-21
– Budget 2020-21 Fact Sheets: Economic Recovery Plan for Australia; JobMaker Hiring Credit; Lower Taxes; Your Future, Your Super.