A highly anticipated Federal Budget announced late in a turbulent and unpredictable year, the 2020-21 Budget sets out significant taxation relief for individuals and businesses in response to the COVID-19 recession. MinterEllison explores the impact and implications across the key focus areas raised in the government’s Budget announcement.
The announcements include almost $50 billion in tax relief for businesses and individuals with a hope to return the economy to financial health as Australia experiences its first recession in almost 30 years. Whilst the announced measures are expected to have significant fiscal stimulus impacts, there were no major substantive tax reform measures introduced. It would appear such reforms may be left to be implemented in better times.
The COVID-19 delayed budget announced by Treasurer Josh Frydenberg presented the Government's strategy to an Australia facing its biggest economic challenge since the Great Depression, with the underlying cash deficit estimated to be $213.7 billion in 2020-21 (11.0% of GDP).
As anticipated, the Government confirmed in the 2020-21 Budget that the Australian economy is currently in a recession – its first in 30 years.
Tax receipts are forecast to be $55.2 billion lower in 2020-21 than was estimated in the 2019-20 Mid-Year Economic and Fiscal Outlook (MYEFO), and $283.5 billion lower over the forward estimates. Further, total nominal payments are expected to increase by $166.9 billion in 2020-21 and by $237 billion over the forward estimates.
The decrease in tax receipts and the increase in nominal payments is partially driven by the harsh economic impact of COVID-19: with unemployment expected to peak at 8% in the December quarter 2020, fewer Australians are working and more are in receipt of Government benefits.
However, a significant contributor are the Government's initiatives to curb the impact of COVID-19, including JobKeeper and the JobMaker program announced in the 2020-21 Budget. The Government's support response to the COVID-19 pandemic is expected to cost around $507 billion, including balance sheet measures. This figure also includes tax cuts of $50 billion over the forward estimates.
The Government expects the worst economic impacts of the COVID-19 pandemic to have struck by the end of the 2020 calendar year, and the Australian economy to start recovering in 2021:
The Government’s strategy includes two phases:
COVID-19 Response Package — making Victoria’s business support grants non-assessable, non-exempt income for tax purposes
A welcomed change to assist in the recovery of small and medium Victorian businesses affected by COVID-19 restrictions, the Victorian Government's business support cash grants to these businesses, which were previously announced on 13 September 2020, will be non-assessable, non-exempt (NANE) income for tax purposes, meaning they will be effectively tax-free. Under the existing law, such cash grants are generally assessable income.
The Government will extend this treatment, on an application basis, to future State and Territory grants programs for small and medium businesses facing similar COVID-19 impacts as Victorian businesses. Eligibility for this treatment will be limited to grants announced on or after 13 September 2020 and for payments made between 12 September 2020 and 30 June 2021.
It remains to be seen to what extent new measures will be announced by various state cuts in response.
JobMaker Plan – temporary loss carry-back to support cash flow
The Government will introduce a measure to allow eligible businesses to carry-back losses to previous income years, in the hope that it will provide cash flow support to previously profitable Australian businesses which are now incurring tax losses as a result of the economic impact of COVID-19.
Businesses which do not elect to carry-back losses under this measure can continue to carry-forward losses to offset profits in future years (subject to satisfying the loss utilisation tests).
The measure is consistent with recommendations from the OECD regarding tax initiatives designed to assist companies seeking to navigate the economic damage caused by COVID-19. Similar measures have been introduced by several of Australian’s major trading partners, including New Zealand, the US, the UK, Germany, Austria and Japan.
The measure will be available to corporate tax entities (which include corporate limited partnerships and public trading trusts) with an aggregated turnover of less than $5 billion can apply tax losses against taxed profits in a previous income year.
It is stated to be temporary (for now) and will only permit tax losses from the 2019-2020 to 2021-2022 income years to be offset previously taxed profits made no earlier than the 2018-2019 income year.
The rules will operate by generating a refundable tax offset when an eligible business makes an election when lodging its 2021 and 2022 income tax returns. That is, eligible businesses looking to take advantage of the carry-back will not be required to amend previously submitted tax returns. Presumably, the same election will be available for eligible businesses wanting to make the election in their 2020 income tax return and entities who have already lodged that return will be able to amend.
There are limits on the offset amount to which eligible businesses will be entitled:
This is somewhat of a ‘Back to the Future’ measure, as a loss-carry back regime along very similar lines was implemented, albeit briefly, by the Rudd Government in 2012 and then repealed by the Abbott Government.
Clarifying the corporate residency test
A significant technical amendment to the corporate tax residency test was announced that will provide that a company incorporated offshore will be treated as an Australian tax resident if it has a ‘significant economic connection to Australia’. This will require the company’s core commercial activities to be undertaken in Australia and its central management and control to also be in Australia. Accordingly, a foreign incorporated company that has its central management and control in Australia should not be an Australian tax resident if it does not also undertake core commercial activities here.
The proposed amendment to the central management and control test will ensure that the determination of the corporate tax residency of foreign incorporated companies will be consistent with the position prior to the Bywater Case and subsequent ATO ruling in TR 2018/5. Taxpayers will have the option of applying the new law from 15 March 2017 (the date from which TR 2018/5 applied), or from the first income year after Royal Assent.
International Tax — updating the list of exchange of information jurisdictions
Broadly, Tax Information Exchange agreements facilitate the cooperation between the ATO and the participating revenue authority in the administration and enforcement of their respective domestic tax laws by exchanging relevant information that has been requested. These agreements play an important role in safeguarding against offshore tax avoidance and evasion.
The Government has announced that the list of exchange of information jurisdictions will be updated effective from 1 July 2021 to:
The inclusion of Hong Kong in the updated list of exchange of information jurisdictions is significant given the current political climate.
Another important implication of being included in the list of exchange of information jurisdictions is that a foreign investor that resides in a country that is included in this list would be able to benefit from the concessional managed investment trust withholding tax rate when fund payments are made by a managed investment trust to this foreign investor.
The addition to the list of exchange of information jurisdictions is likely to encourage foreign investments from these newly added countries into Australian managed investment trusts.
JobMaker Plan — temporary full expensing to support investment and jobs
Businesses with aggregated annual turnover of less than $5 billion will be able to deduct the full cost of eligible capital assets (i.e. depreciating assets) acquired from 7:30pm AEDT on 6 October 2020 and first used or installed by 30 June 2022.
The proposed full cost expensing deduction will be available in the income year in which the eligible asset starts to be used or has been installed ready for use (consistent with the current instant asset write off provisions).
The proposed full expensing will apply to new eligible depreciable assets and the cost of improvements to existing eligible depreciable assets.
Small and medium businesses
JobMaker Plan — Research and Development Tax Incentive — supporting Australia’s economic recovery
The Government has announced further refinements to the 2018-19 Budget measure 'Better targeting the research and development tax incentive', which build on the changes announced as part of the 2019-20 MYEFO.
For small companies (those with aggregated annual turnover of less than $20 million), the refundable R&D tax offset is being increased to 18.5 percentage points above the claimant's company tax rate. The previously announced $4 million cap on annual cash refunds has now been scrapped.
For large companies (those with aggregated annual turnover of $20 million or more), the Government will reduce the number of intensity tiers from three to two and increase the non-refundable R&D tax offset rates.
Although the categorisation of a taxpayer as a small company under the R&D tax incentive is nothing new, it is worth noting that this test remains inconsistent with the tests for determining whether a taxpayer is a small business under other tax concessions. Under the R&D tax incentive, a small taxpayer is one with an aggregated annual turnover of less than $20 million. This threshold is much higher than the aggregated annual turnover threshold of currently $10 million for most other concessions.
The R&D premium ties the rates of the non-refundable R&D tax offset to the incremental intensity of R&D expenditure as a proportion of total expenses for the year.
Previously, as part of the 2019-20 MYEFO, the Government announced that the number of intensity tiers would reduce from four to three, so that the marginal R&D premium was the claimant's company tax rate plus:
The Government has now streamlined these intensity tiers from three to two, to provide greater certainty for R&D investment while still rewarding those companies that commit a greater proportion of their business expenditure to R&D. The marginal R&D premium will now be the claimant's company tax rate plus:
The start date for these changes has been further deferred to income years starting on or after 1 July 2021 (previously on or after 1 July 2019) on the basis that it will provide businesses with greater certainty as they navigate the economic impacts of the COVID-19 pandemic.
All other aspects of the 2019-20 MYEFO measure will remain unchanged, including the increase to the R&D expenditure threshold for all claimants from $100 million to $150 million per annum.
This measure is estimated to have a cost to the budget of $2.0 billion in fiscal balance terms over the forward estimates period.
Strengthening Australia’s Foreign Investment Framework
The Government announced it will implement a new ICT platform to support more effective and efficient foreign investment application processing and compliance activities. The Government will also establish a new consolidated Register of Foreign Ownership of Australian Assets that will merge and expand the existing agricultural land, water and residential registers in order to increase the Government's visibility of foreign investments made in Australia. The Government will also simplify the foreign investment fee framework and adjust fees from 1 January 2021 to shift the cost of administering the foreign investment system from Australian taxpayers to foreign investors.
Additional funding to address serious and organised crime in the tax and superannuation system
The ATO will be provided with $15.1 million to target serious and organised crime in the tax and superannuation systems, extending an existing measure for a further 2 years until 2023. This measure is expected to increase the underlying cash balance by $18.9 and result in a gain to the budget of $136.8 million over the forward estimates.
JobMaker Plan — Digital Business Plan
The JobMaker Plan – Digital Business Plan provides $796.5 million over 4 years from 2020-21 to drive Australia's progress towards becoming a leading digital economy by 2030. This measure aims to improve productivity, income growth and jobs through the adoption of digital technologies.
Included in this measure is increased funding to the ATO of $44.7 million in 2020-21 and $52.6 million in 2021-22.
Funding is provided across various government departments and agencies in order to modernise the digital infrastructure, reduce regulatory barriers, support small and medium enterprises and improve government digital capabilities.
No digital services tax announced
One notable absence in the Budget is any measure associated with digital taxation, and accordingly, the existing Australian policy position to engage in the multilateral process through the G20 and the OECD is maintained.
It may have been opportunistic for the Budget to include a unilateral DST as a means of raising revenue, particularly as other jurisdictions that have implemented a unilateral DST have experienced negative political responses from their trading partners, most notably the United States.
Hybrid mismatch rules still not enacted
Australia's hybrid mismatch rules will be amended to provide greater certainty and to ensure that the rules operate as intended. The amendments are designed to negate the effect of a foreign tax deduction on franked additional Tier 1 Capital distribution by including an amount equivalent to the deduction in the assessable income.
These rules will apply from 1 January 2019 (aside from the change relating to the comparison of foreign hybrid mismatch laws which will commence on 1 July 2020) assuming the amendments are passed.
Bringing forward personal tax relief – altered tax brackets
The Government will amend parts of its Personal Income Tax Plan (PITP) which were originally announced as part of the 2019-20 Budget, to bring forward the announced tax cuts for lower income brackets. These changes will be backdated to 1 July 2020.
Two key changes are proposed:
These changes will be backdated to 1 July 2020 and are expected to be passed in the next two weeks. The benefits of the decreased rates for the first four months of the 2020-21 financial year are expected to be passed on to taxpayers at the time of assessment.
Withholding tax rates in payroll systems will have to be adjusted to account for the rate changes when they come into force.
These income tax cuts will not affect the top marginal rate of tax. The Government still plans to increase the application of the 30% personal income tax bracket so that it applies to taxable income between $45,001 and $200,000 from 1 July 2024.
Bringing forward personal tax relief – Low and Middle-Income Tax Offset
The Government has said it will retain the Low and Middle-Income Tax Offset (LMITO) which it introduced in the 2019-20 Budget. The LMITO will be worth $255 for a taxpayer with $37,000 of taxable income, and increase at a rate of 7.5 cents in the dollar to a maximum of $1,080 for someone whose taxable income is between $48,001 and $90,000. It will phase out at a rate of 3 cents in the dollar for individuals with taxable incomes above $90,000.
Bringing forward personal tax relief – Low Income Tax Offset
The Government will increase the low income tax offset (LITO) from $445 to $700. The increased LITO will be withdrawn at a rate of 5 cents in the dollar for individual taxable incomes from $37,500 to $45,000, and 1.5 cents in the dollar for taxable incomes from $45,000 to $66,667.
Supporting Older Australians — exempting granny flat arrangements from capital gains tax
The Government will exempt granny flat arrangements from CGT where there is a formal written agreement in place and the arrangement is with an older Australian or a person with a disability.
A further notable absence in the Budget was the widely speculated delay or scrapping of the proposed increases in the mandatory superannuation guarantee (SG). The SG is currently 9.5% of ordinary time earnings and is scheduled to progressively increase to 12% in 2027-28.
Personal income tax deductions for education and training expenses
The Government will consult on whether to allow individuals to claim income tax deductions for education and training expenses notwithstanding that those expenses may not relate to their current employment.
Additional payments for welfare recipients
Two cash payments of $250 each will be paid in December 2020 and March 2021 to eligible recipients of the following forms of welfare:
Increase the small business entity turnover threshold
The Government will increase the small business entity turnover threshold from $10 million to $50 million. This will allow businesses with aggregated turnover of between $10 million and $50 million access to small business concessions in three key phases. It is anticipated that these measures will support an additional 20,000 businesses and their employees.
While the detail on these announced measures are limited, it is not clear whether a sunset date will apply to the expanded concessions.
Research & Development Tax Incentive
The further refinements to the 2018-19 Budget measure 'Better targeting the research and development tax incentive', which we discuss under the large business tax measures, are also relevant to small business, particularly the scrapping of the $4 million cap on annual cash refunds.
Fringe Benefits Tax — exemption to support retraining and reskilling
The Government will introduce a FBT exemption for retraining and reskilling benefits provided by employers to redundant, or soon to be redundant, employees notwithstanding that those benefits may not relate to the employee's current employment.
The exemption will not extend to:
Fringe Benefits Tax — reducing the compliance burden of record keeping
The Government will provide the ATO with the power to allow employers to rely on existing corporate records, rather than employee declarations, to finalise their FBT returns, It is not yet clear what corporate records employers will be able to rely on although the Budget Papers implicitly suggest that employers may have to seek ATO approval before obviating the need to obtain declaration from employees in order to rely on exemptions and concessions in the FBT laws. No doubt the amending legislation will make this clear.
The measure will have effect from the start of the first FBT year, i.e. 1 April, from the date of Royal Assent of the enabling legislation.
Prior to the Budget it was speculated that a ‘COVID-19 levy’ could be introduced as one method of repairing the budget (as occurred for high income earners in the ‘Temporary Budget Repair levy’ in the 2014-15 Federal Budget).
It is presumed that the Government opted to pursue stimulus measures rather than impose higher taxes in order to pay down debt.
Prior to the Budget it was not anticipated that the Government would pursue radical changes to the tax system (perhaps in part due to the outcome of the last federal election in which the tax reforms proposed by the Labor party were rejected).
Such changes could have included a cash flow corporate tax, an allowance for corporate equity, a comprehensive business income tax, or perhaps by removing the fringe benefits tax in an effort to stimulate the hospitality sector.