An unprecedented social and economic response to an unprecedented health disaster.
As many have said, we find ourselves in “unprecedented” times. Unprecedented from a health perspective, a socio-economic perspective, some may even say a political perspective and unprecedented because of the intergenerational issues that have been created.
Tonight, we find those words having, as many expected, equal application to the delayed 2020 Federal Budget. The Government has embarked upon a campaign of an expenditure-driven recovery, with the spending announcements taking us to the dizzy heights of debt levels not seen in Australia since the Second World War.
So, is all this expenditure or stimulus necessary and is it going in the right places? There is no doubt the economy needs a serious shot in the arm which the Government has sought to do tonight. Central to the placement of this fiscal stimulus is job creation.
This becomes self-evident when one considers the following areas in which this spending is being deployed, including:
- New incentive schemes to encourage employers to employ new employees;
- New incentives for business to boost investment;
- Retrospective tax cuts to encourage taxpayers to boost consumption; and
- Government spending:
- focused on increasing and accelerating infrastructure spending;
- to address environmental, regional and social welfare sectors;
- to promote manufacturing and cheaper energy; and
- a general boost to funding of all Government portfolios.
Compared with other years, one could argue that the Government had an economic mandate to stimulate and resuscitate the economy. Even pre-eminent economists seemed supportive. This in itself is an extraordinary event, which the Government has seemingly exploited fully.
While our debt levels are “unprecedented”, one needs to contextualise this in the knowledge that Australia is not alone in taking this course of action and, in fact compared to most other comparable countries, we are still relatively well placed.
Key spending measures
The following chart summarises the key spending measures of the 2020 Federal Budget, including $12 billion to be pumped into the economy this year through personal income tax cuts brought forward and $10 billion in additional infrastructure spending.
The pursuit of surpluses is over for the time being, with debt and deficits set to rise over the forecast period:
- $214 billion deficit, forecast to improve to $67 billion deficit in 2023-2024.
- $703 billion net debt this year, peaking at $966 billion in June 2024.
Income tax cuts brought forward
The Government’s previously announced cuts to personal income tax rates and changes to the tax brackets will be brought forward from 1 July 2022 and back dated to 1 July 2020.
In a bid to deliver lower taxes and build on the 2019-20 Budget measure Lower taxes for hard-working Australians: Building on the Personal Income Tax Plan and the 2018-19 Budget measure Personal Income Tax Plan, the tax cuts will result in the following changes to the taxable income thresholds:
Prior to the Budget
With effect from 1 July 2020 after the Budget
Up to $18,200
Up to $18,200
$18,201 to $37,000
$18,201 to $45,000
Up to $1,080 tax saving per year ($20 per week)
$37,001 to $90,000
$45,001 to $120,000
$90,001 to $180,000
$120,001 to $180,000
Unfortunately, this measure results in those likely to spend the money (people earning in the lower tax brackets) receiving less than those likely to save the money (people earning in the higher tax brackets). For example, an individual on a taxable income of $45,000 would obtain a tax saving of $1,080 per annum. However, the tax relief for an individual with a taxable income of $180,000 would equate to $2,430 per annum.
Although the cuts will be welcomed, they may not be as effective as the Government hopes in driving economic growth as the assumption is that any tax savings will be spent, not saved.
Low and middle income tax offset
The Government will be providing further targeted tax relief to low and middle-income earners by retaining the low and middle income tax offset for the 2020-21 income year. Along with the personal income tax cuts, the intention of this measure is to reduce the tax burden on individuals, thereby providing them with extra cash that is expected to boost consumption.
This tax offset will reduce tax payable by up to $1,080 for individuals or $2,160 for dual income couples. For an individual, the full offset of $1,080 is available where taxable income is between $48,001 and $90,000. The offset starts to phase out thereafter until it reduces to nil at a taxable income of $126,000.
The Government expects that approximately 10.1 million individuals will be eligible for the offset in 2020–21.
The Government has announced various superannuation reforms that are directed at improving outcomes for members of superannuation funds and holding superannuation fund trustees accountable for fund performance. These reforms include:
- The ATO developing systems so that new employees will be able to select a superannuation product from a table of My Super products through their own Your Super portal;
- Any existing superannuation account being “stapled” to a member to avoid the creation of a new account when that person changes their employment;
- The Australian Prudential Regulation Authority conducting benchmarking tests from July 2021 on the net investment performance of My Super products, with products that underperform over two consecutive annual tests prohibited from receiving new members until a further annual test that shows that they are no longer underperforming. Other non-My Super accumulation products, where the decisions of the Trustee determine member outcomes, will be added to the testing from 1 July 2022; and
- Improved transparency and accountability of superannuation funds by strengthening obligations on superannuation trustees to ensure their actions are consistent with members’ retirement savings being maximised.
The Government clearly expects that these improvements will result in an increase in a member’s superannuation benefits come retirement.
Modern manufacturing strategy
Recognising the importance of the contribution made by many Australian manufacturing companies (such as sleep-apnoea ventilator manufacturer ResMed) by pivoting and retooling during the COVID crisis, the Government has allocated $1.5 billion to be spent on the “Modern Manufacturing Strategy”.
This measure is designed to secure the country’s future by building a competitive and resilient manufacturing sector and thereby create more high value jobs in six key industries:
by enabling manufacturers to build scale, commercialise ideas, connect to global supply chains, address supply chain vulnerabilities for key products and obtain capital investments.
Infrastructure and transport
The Budget proposes to increase the Government’s 10-year infrastructure pipeline by a further $10 billion to $110 billion. Major projects to be funded include the following:
In what may be seen as increasing competition between the States, funding for these projects will be provided on a use it or lose it basis – if a State drags its feet, another State will get the money.
Over the next two years, the Budget also includes a $2 billion investment in road safety upgrades across the country and an additional $1 billion expansion of the Local Roads and Community Infrastructure program to support local councils to immediately upgrade local roads, footpaths and street lighting.
The Government has announced two new schemes relevant to young people – the JobMaker and the JobTrainer.
The JobMaker hiring credit targets the employment of additional employees aged 16 to 35 years. The credits of:
- $200 a week for 16 to 29 year old employees; and
- $100 a week for 30 to 35 year old employees,
will be available to employers from 7 October 2020 for each new job they create over the next 12 months. Eligible employees will have received certain Government payments, including JobSeeker.
With matched funding from State and Territory Governments, the Federal Government will establish the JobTrainer Fund to support free or low-fee training places.
The Government will also invest $1.2 billion to support Australian businesses to employ new apprentices or trainees as part of its COVID‐19 economic recovery plan. From 5 October 2020 to 30 September 2021, businesses who take on a new Australian apprentice or trainee will be eligible for a 50% wage subsidy (of the apprentice or trainee’s wages worth up to $7,000 per quarter), regardless of geographic location, occupation, industry or business size. This wage subsidy is capped at 100,000 places.
Building and construction
First home buyers
A further 10,000 first home buyers will be able to obtain a loan to build or buy a newly built home in the 2020-2021 income year with a deposit of as little as 5% with the Government’s first home loan deposit scheme.
The Government will also increase the caps on the price of such homes that can qualify under the scheme from $750,000 to as high as $950,000, to reflect the higher prices for new properties.
The Government will increase the National Housing Finance and Investment Corporation’s cap on total guaranteed liabilities by $1 billion (to $3 billion) to provide further support to institutional investment to provide lower cost loans to community housing sector providers.
Removing capital gains tax for granny flats
The Government is supporting older Australians and people with disabilities and their families by providing a targeted capital gains tax (CGT) exemption for the implementation of granny flat arrangements where there is a formal written agreement.
Under this measure, CGT will not apply to the creation of a formal and legally enforceable granny flat arrangement, which provides accommodation for older Australians or people with disabilities. The measure will only apply to arrangements entered into because of family relationships or other personal ties, and will not apply to commercial rental arrangements.
In the absence of this measure, the creation of rights under the granny flat arrangement could potentially trigger a capital gain, which would be a disincentive to formalising such arrangements (thereby increasing the risk of financial abuse or exploitation of vulnerable Australians).
The Government’s hope is that this measure will boost the construction industry, stimulate demand for new housing and support tradesperson jobs.
The measure will have effect from the first income year after the date of Royal Assent of the enabling legislation, which could be as early as 1 July 2021.
Response Package – Victoria
The business support grants announced by the Victorian Government on 13 September 2020 will be non-assessable, non-exempt income for tax purposes. These included over $1.1 billion in cash grants to support small and medium sized businesses that are most affected by the coronavirus restrictions.
State-based support grant payments
The Commonwealth will extend the arrangement with the Victorian Government to other States and Territories on an application basis. However, eligibility will be restricted to future grants program announcements for small and medium businesses facing similar circumstances to Victorian businesses.
A new regulation-making power will be introduced in the income tax laws which will allow regulations to be created that ensure specified State and Territory COVID-19 business support grant payments are non-assessable, non-exempt income for tax purposes.
Grants announced on or after 13 September 2020 and payments made between 13 September 2020 and 30 June 2021 will be eligible non-assessable, non-exempt income for tax purposes.
Small business start-up tax breaks
Small businesses with “aggregated turnover” between $10 million and $50 million will be able to access 10 tax concessions that were previously not available to them. These new concessions will be rolled out in three phases:
Phase 1 (starting 1 July 2020)
Phase 2 (starting 1 April 2021)
Phase 3 (starting 1 July 2021)
Accessing these concessions requires an entity to fall below an aggregated turnover threshold of $50 million. Aggregated turnover is the sum of an entity’s “annual turnover”, the annual turnover of other entities “connected with” the entity and the annual turnover of all “affiliates” for the relevant year of income, disregarding turnover from transactions amongst themselves. Annual turnover is the total ordinary income derived in the ordinary course of carrying on a business.
Generally speaking, two entities are connected if one controls the other, or both are controlled by a third entity, based on a 40% control threshold. An individual or company is affiliated with an entity if it acts, or could reasonably be expected to act, in accordance with the entity’s directions or wishes, or in concert with the entity, in relation to the affairs or the business of the individual or company.
For example, an Australian subsidiary of a foreign resident parent company may be required to take into account the turnover of the parent company and any sister subsidiaries when determining if it falls below the $50 million threshold.
It can be seen that care should be taken with the concept of aggregated turnover when determining the eligibility of an entity for these concessions. Nevertheless, it is encouraging to see the Government backing small businesses, many of which have been hit hard by the economic fallout from COVID-19.
As at 1 July 2021, the Commissioner of Taxation will have a power to create a simplified accounting method (SAM) for GST purposes for businesses with an aggregated turnover below $50 million. Currently, SAMs are available to food retailers who buy and sell a mixture of products where some are taxable and some are GST-free. To reduce the compliance burden on such businesses, the SAMs allow them to use estimates of their GST-free sales and/or purchases rather than actual figures.
JobMaker Plan — temporary full expensing to support investment and jobs
Instant tax write-offs for certain capital assets acquired from 7:30pm AEDT on 6 October 2020 and first used or installed by 30 June 2022 will be available for small, medium and large taxpayers. These include:
Tax write-offs available
For taxpayers with aggregated turnover of less than $5 billion
The full cost of new depreciable assets and the costs of improvements to existing eligible assets.
For medium and large taxpayers with aggregated turnover between $50 million and $500 million
The full cost of eligible new assets (with no cost limitation) and the cost of second-hand assets costing less than $150,000 that are purchased by 31 December 2020 (and first used or installed by 30 June 2021).
For small and medium taxpayers with aggregated turnover of less than $50 million
The full cost of eligible new and second-hand assets.
For small taxpayers with aggregated turnover of less than $10 million
The full cost of eligible new and second-hand assets and a full write-off for the balance of any simplified depreciation pool at the end of the income year while such provisions apply. Additionally, such taxpayers will continue to be eligible to re-enter the simplified depreciation regime if they have previously opted-out.
These write-offs are clearly designed to encourage business investment and the cut off date of 30 June 2022 should incentivise businesses to bring forward such investment before the write-offs cease to be available.
JobMaker Plan — temporary loss carry-back to support cash flow
Corporate tax entities with aggregated turnover of less than $5 billion will be allowed to carry back tax losses from the 2019-20, 2020-21 or 2021-22 income years to offset previously taxed profits in 2018-19 or later income years. This offset will generate a refundable tax offset in the income year in which the loss is made.
This new refundable tax offset will 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. In practical terms, this means that loss making taxpayers will be able to apply current year tax losses against their franking account balance to generate a cash refund.
The loss carry-back will only be available to companies and certain entities that are taxed as companies, not to individuals, trusts or partnerships.
Businesses should consider the interaction of this measure with other proposed measures such as the immediate write-off available to businesses for the cost of new depreciable assets. For example, if a company made a tax loss for the 2020-21 income year as a result of investment in new depreciating assets, it would appear possible for the company to carry back that loss to offset against taxable income in the 2018-19 or 2019-20 income years (subject to the drafting of the law, when it is introduced).
Fringe Benefits Tax — exemption to support retraining and reskilling
An FBT exemption will be introduced for employers providing retraining and reskilling benefits to redundant, or soon to be redundant, employees where the benefits may not be related to their current employment. The exemption would not be required where the training has a sufficient connection to an employee’s current employment as an “otherwise deductible” rule would have the effect of reducing the value of the benefit that is subject to FBT.
This measure will apply from 6 October 2020.
The exemption will not be applicable where the retraining has been acquired by way of a salary packaging arrangement. Further, it will not be available for Commonwealth supported places at universities, which already receive a benefit, or extend to repayments towards Commonwealth student loans.
Where an employer does not provide retraining and an individual instead incurs education or training expenses themselves, the Government will consult on potentially allowing such individuals a deduction for those expenses where the expenses are not sufficiently related to their current employment. Currently, education and training expenses incurred by an individual are only deductible where they are sufficiently related to their current employment.
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 and other prescribed records, to finalise their FBT returns. The measure will have effect from the start of the FBT year (1 April) after the date of Royal Assent of the enabling legislation.
Corporate residency test
The Government is seeking to amend the law and clarify the tax residency test for companies. Under proposed legislative changes, a foreign-incorporated company will be treated as an Australian tax resident if it has a “significant economic connection to Australia”. This requirement 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 intention of this change will be to reflect the position on the tax residency of foreign-incorporated companies as it was prior to the Bywater decision handed down by the High Court in 2016. Accordingly, the change should be welcomed by multinational groups with foreign-incorporated companies as it will hopefully resolve the uncertainty that arose as a result of that decision.
The measure will have effect from the first income year after the date of Royal Assent of the enabling legislation, but taxpayers will have the option of applying the new law from 15 March 2017.
JobMaker Plan — Research and Development Tax Incentive — supporting Australia’s economic recovery
From 1 July 2021, an estimated $2 billion in refunds and tax offsets will be available under Australia’s research and development (R&D) tax concessions. The changes include:
- For small companies with aggregated annual turnover of less than $20 million:
- an increase in the refundable R&D tax offset to 18.5% (up from a previously proposed 13.5%) above the taxpayer’s company tax. This is an offset of 44.5% for base rate entities with a corporate tax rate of 26% in the 2020-21 income year; and
- removal of the proposed $4 million cap on annual cash refunds.
- For large companies with turnover of more than $20 million, the Government’s existing proposal to link non-refundable R&D tax offsets to a taxpayer’s eligible R&D expenditure as a percentage of total expenses (referred to an its “incremental R&D intensity”) will remain. However, the number of incremental R&D intensity tiers will be reduced from three to two and the available tax offset premiums will be increased. The rate of the non-refundable R&D tax offset for large company taxpayers will be:
- 8.5% above the taxpayer’s company tax rate where their incremental R&D intensity is between 0% to 2%; and
- 16.5% above the taxpayer’s company tax rate where their incremental R&D intensity is above 2%.
- Importantly, the proposed cap on concessional R&D tax offsets for eligible R&D expenditure above $150 million is not being reversed.
International Tax — updating the list of exchange of information jurisdictions
Effective from 1 July 2021, the Dominican Republic, Ecuador, El Salvador, Hong Kong, Jamaica, Kuwait, Morocco, North Macedonia and Serbia will be added to the list of jurisdictions that have an effective information sharing agreement with Australia (with Kenya being removed from the list as of January 2020).
This will enable investors resident in these countries to access a concessional withholding tax rate of 15% (instead of 30%) in relation to distributions of certain income (such as rent from Australian real estate and capital gains from disposals of Australian real property interests) by Australian managed investment trusts.
Initiatives to create a strategic partnership with India
Given the rise in recent tensions with China, Australia may be looking to expand and diversify its trading partners. Part of this strategy seems focused on building a strategic partnership with India. In this context, the Government has announced the following initiatives:
- $19.5 million to support the science, technology and innovation partnership with India;
- $15.7 million to strengthen Australia’s security and maritime partnership with India in the Indo-Pacific;
- $14.2 million to enhance the business and educational relationship with India; and
- $12.7 million to establish Australia/India cyber and critical technology partnership.
Not surprisingly, the Budget has a range of additional measures targeted at generating jobs through particular industries. Some of the key measures are described below.
Cyber security and improving the digital economy
To implement the 2020 Cyber Security Strategy and identify and disrupt cyber threats, the Government will provide $1.5 billion to defence, intelligence and law enforcement agencies to identify and disrupt cyber-related threats. A further $73.4 million will be provided to industry and academia to develop innovative approaches to cyber security, provide support services to victims of identity theft and cybercrime and strengthen the protection of Australia’s critical infrastructure assets.
Additionally, to further drive progress towards Australia becoming a leading digital economy by 2030, $762.3 million will be provided for a variety of measures, including transferring existing business registers to modernised platforms to allow the creation of a single, accessible and trusted source of business data and to continue the development and expansion of biometric verification to improve access to government services and online payments.
The Government will be providing additional funding to further support older Australians accessing aged care as well as instituting measures to improve transparency and regulatory standards. Broadly, these initiatives include the following:
- The release of an additional 23,000 home care packages across all package levels;
- The expansion of the existing disability support under a new program to support previously ineligible older Australians; and
- Various oversight, administrative and workplace enhancement measures to assist aged care providers to improve their services, as well as providing funding assistance to compensate them for the additional costs associated with operating during COVID-19.
Agriculture, water and the environment
The Government is investing $328.4 million to improve agricultural exports regulation and improve the ease of doing business for agricultural exporters. The Government is also providing $155.6 million over four years to support farmers and communities in drought.
Supporting Regional Australia
The Government will provide $552.9 million over four years for a package of measures to support regional Australia (including regional tourism operators) to recover from the impacts of COVID-19 and recent natural disasters. The Government’s measures are aimed at building resilience to future economic shocks and supporting long term economic growth.
A vast range of COVID-19 related essential services measures are included in the Budget, including funding for hospitals, vaccines, mental health, and crisis support, support for aged care providers.
Mental health and family law
In recognition of the rise of people with, or at risk of, mental illness in Australia, the Government has announced that it will provide $62.1 million to improve access to mental health services.
The Government will also provide $132.1 million over four years from 2020-21 to expedite the handling of family law matters and other matters in the Federal Circuit Court.
Education and training
In support for students, education providers and demand for higher education, the Government will provide $903.5 million to provide more places in, and to establish new quality protections for, the higher education system, and for the Job-ready Graduates reforms. Funding includes $251.8 million for an additional 50,000 subsidised higher education short course places across a range of discipline areas and $298.5 million for an additional 12,000 Commonwealth supported places in 2021 in national priority areas.
In support of universities managing the economic instabilities created by COVID-19, the Government will also guarantee Commonwealth Grant Scheme payments for higher education providers from 2021 to 2023 as they transition to new funding arrangements as part of the Job-ready Graduates reforms. This is estimated to cost $238.9 million over four years from 2020-21.
Skills reform package
$263 million will be provided over four years to continue to improve the quality of the Vocational Education and Training (VETS) system which is designed to assist people to join or re-join the workforce, move into a new career or gain additional skills. This spending is targeted at improving the delivery of fundamental training and streamlining support networks, information access and general program administration.
The Government will provide $1 billion in 2020-21 to safeguard Australia’s research sector against the impacts of the COVID-19 pandemic. The majority of this funding will support universities’ costs of research.
The Government will also deliver the 2020 Research Infrastructure Investment Plan. This will maintain the Government’s $1.9 billion, 12-year funding for national research infrastructure.
The Government is committed to improving education outcomes of young Australians, particularly disadvantaged students and those most impacted by the COVID-19 pandemic.
In support of this, the Government will provide $146.3 million for a package of students support initiatives.
Support for Victorian early childhood centres
The Government will provide $314.2 million in 2020-21 to support Victorian early childhood education and care services to remain viable as COVID-19 restrictions ease in the State.
The Government will provide $1.9 billion over twelve years from the income year ending 30 June 2021 to continue funding the Australian Renewable Energy Agency, expand the investment mandate of the Clean Energy Finance Corporation and invest in low emissions technologies, network infrastructure, dispatchable generation and reliable supplies in the National Electricity Market.
As commendable as the spending program may be and as targeted as it is on employment growth, there was a significant, once-in-a-lifetime opportunity for real reform to the tax law and system. Instead, apart from some minor tinkering and reversals, not much has changed. There remains a raft of announced measures which are not yet law and a number of commendable reform recommendations from several reviews that have not been touched. Such reform may have addressed some of the intergenerational concerns with such expensive, though necessary, measures.