Federal Budget 2020-21 insights: Tax measures to stimulate the economy

Eighteen months ago, the Treasurer was able to announce the first Budget surplus in more than a decade. The 2020-21 Federal Budget could not be more different – it is an unprecedented budget for unprecedented times.

The economic impact of COVID-19 and the steps taken to support businesses and individuals through the pandemic have resulted in ballooning government expenditure and shrinking government revenue. The measures in this Budget focus on rebuilding our economy - it’s the JobMaker Budget!

From a tax perspective, the bringing forward of already legislated personal tax cuts are a key feature of this Budget, along with a range of measures to stimulate business investment and jobs growth. This includes a temporary loss carry-back for companies with aggregated turnover of less than $5 billion, a new and improved instant asset write-off for businesses with aggregated turnover of less than $5 billion and the JobMaker Hiring Credit.

The Government has announced a number of measures to support businesses during the COVID-19 recovery in the form of new or extended incentives to promote investment and encourage opportunities to retain and create jobs.

New JobMaker Hiring Credit

The Government will support jobs growth for those aged 35 years and under by introducing a new credit for businesses that take on additional employees. The “JobMaker Hiring Credit” will be available to eligible employers from 7 October 2020 for each additional new job that is created for an eligible employee.  

To be eligible, employers must firstly demonstrate that the new employee will increase the overall employee headcount and payroll, using total headcount on 30 September 2020, and total payroll in the three months to 30 September 2020 as the base line. Special rules apply to newly established businesses and businesses with no employees at the reference date.

The credit will be available to most eligible employers regardless of size (with some exceptions, most notably any employer who is claiming the JobKeeper Payment), and there is no fall in turnover requirement to be satisfied. Employers 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 new jobs created from 7 October 2020 until 6 October 2021, and will be paid for 12 months from the date of employment of the eligible employee up to a maximum amount of $10,400 per additional new position created.

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. Some other eligibility conditions apply. For further details, refer to this Budget Factsheet.  

Employers will claim the credit quarterly in arrears from the Australian Taxation Office (ATO) commencing from 1 February 2021 (for new jobs created in the first reporting period of 7 October 2020 to 6 January 2021), and will be required to report quarterly that they meet the eligibility requirements. The ATO will be provided with $305.9 million in additional funding for effective delivery of this program and the extended JobKeeper Payment.

Supercharged instant asset write-off

The Government will extend the tax incentives that currently apply to business capital investment announced early this year as part of the COVID-19 stimulus package, in the hope that this will continue to drive business investment and jobs growth.

Specifically, the Government has announced an instant asset write-off to support businesses with aggregated annual turnover of less than $5 billion (refer to this Tax Alert which considers the issues relevant to working out aggregated turnover). This will enable eligible businesses to claim a tax deduction for the full cost of eligible capital assets (subsequently confirmed in amending legislation to consist of depreciating assets located in Australia or principally used in Australia for the principal purpose of carrying on a business), acquired from 7:30pm AEDT on 6 October 2020 (Budget night) and first used or installed by 30 June 2022.

The measures are summarised in the table below: 

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 existing instant asset write-off. Under the Budget measure, those eligible businesses that hold assets eligible for the $150,000 instant asset write-off will have an extra six months until 30 June 2021, to first use or install those assets. 

Small businesses (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 until 30 June 2022. 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.

Loss carry back to support businesses suffering temporary shock

The Government will introduce a temporary loss carry-back measure to support companies with an aggregated turnover of less than $5 billion suffering a temporary shock as a result of the COVID-19 pandemic. The loss carry-back regime, which is a feature of the tax system in some countries overseas, will allow companies to choose to "carry back" tax losses to be offset against tax paid in a previous income year to generate a tax refund.

Specifically, a company with aggregated turnover of less than $5 billion (refer to this Tax Alert which considers the issues relevant to working out aggregated turnover) will be able to obtain a refundable tax offset (i.e. cash-back) in a loss year against previously taxed profits, subject to satisfying certain conditions. The offset is uncapped, however the amount carried back cannot be more than the earlier taxed profits and the carry back cannot generate a franking account deficit.

Losses incurred in the 2019-20, 2020-21 and 2021-22 income years will be able to be carried back and offset against taxed profits from the 2018-19 or later income years only. These losses may be created by other measures announced in the Budget including, for example, the new and improved instant asset write-off. There is, however, a one year delay in accessing the cash refunds, with eligible companies only able to receive a tax refund when they lodge their 2020-21 and 2021-22 tax returns. For further details, refer to this Budget Factsheet.

This is not the first time we have had a loss carry-back measure in Australia. The Rudd/Gillard Government’s loss carry-back measure was short-lived and repealed by the Abbott Government and as such only applied to the 2012-13 income year.

For more details about the new loss carry-back measures, refer to this Tax Alert. 

R&D tax incentives to stimulate business growth

The 2020-21 Federal Budget announcement marks a welcome significant step in the Government’s efforts to encourage investment in Research and Development (R&D) activities by companies in Australia, create jobs and help businesses manage the economic impacts of the COVID-19 pandemic. Importantly, the Government has taken the move to use this Budget to rethink its most recent attempts first announced in the 2018-19 Federal Budget to “better target” the R&D Tax Incentive.

Following a complete overhaul of the scheme in 2011, the rate of offset under the R&D tax incentive has since steadily reduced due to a number of subsequent amendments including the introduction of a $100 million R&D expenditure cap. More recent reviews have led to measures that are currently before Parliament which seek to amend the rates of the R&D tax offset so they are tiered, tied to the corporate tax rate and largely reduced. In addition, a $4 million cap on annual cash refunds was proposed.

The changes announced in the 2020-21 Federal Budget seek to reverse these more recent proposed cuts and instead enhance the benefits available under the program. Effectively, there will be very few companies that will be worse off under the new announcement compared to the current program and many claimants will be better off.

Specifically, the Government has announced that it will defer the start of previously announced changes to the R&D tax incentive to income years starting on or after 1 July 2021 with the following now proposed:

• For companies with aggregated 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 the $4 million cap on annual cash refunds will not proceed.
• For larger companies with aggregated annual turnover of $20 million or more, the Government will reduce the number of intensity tiers from three to two. The intensity tiers tie the rates of the non-refundable R&D offset to the companies R&D expenditure as a proportion of total expenses for the year. The non-refundable R&D tax offset will be the claimant’s company’s tax rate plus:
  • 8.5 percentage points for R&D expenditure between 0 and 2 per cent R&D intensity; and 
  • 16.5 percentage points for R&D expenditure above 2 per cent R&D intensity.

All other aspects of the previously proposed measures will remain unchanged, including the increase to the R&D expenditure cap from $100 million to $150 million per annum.

Cutting red tape for small business by extending tax concessions

In the lead up to the Federal Budget, the Government announced that it will expand the application of certain existing small business tax concessions to businesses with aggregated annual turnover between $10 million and $50 million (eligible businesses). These concessions are intended to support businesses to attract and retain workers, and reduce red tape as part of the Government’s larger economic recovery plan.

Although higher thresholds will apply, entities will still need to determine their ‘aggregated annual turnover’ in order to qualify for the available concessions. As this requires an entity to take into account not only their turnover, but also the turnover of connected entities and their affiliates, care needs to be taken before concluding that the concessions are available (refer to this Tax Alert which considers the issues relevant to working out aggregated turnover).

The expanded concessions, which will apply in three phases, are summarised in the table below.

These concessions will no doubt be welcomed by many medium-sized businesses and go some way to removing the various differential tax treatments that have applied over many years. There does remain, however, a number of other tax concessions which continue to be only accessible to smaller businesses such as the rollover relief for genuine business restructures (applicable to those with aggregated turnover of up to $10 million) and the small business capital gains tax (CGT) concessions which are still based on a $2 million aggregated turnover threshold.

Clarifying corporate tax residency rules

The Government will make technical amendments to clarify the corporate tax residency test which is fundamental to determining the Australian income tax liability of any company not incorporated in Australia. This is in accordance with the Board of Taxation’s key recommendation in its 2020 report “Review of Corporate Tax Residency”.

Following the 2016 High Court decision (Bywater Investments Limited & Ors v Commissioner of Taxation and the related matter in Hua Wang Bank Berhad v Commissioner of Taxation [2016] HCA 45; 2016 ATC 20-589) which concerned the residency of a foreign incorporated company, the ATO’s withdrew Taxation Ruling TR 2004/15 (dealing with the residency of foreign incorporated companies) and released TR 2018/5 reflecting its interpretation of the principles established in the Bywater case. There has been an increase in the red tape and costs of doing business for many Australian corporate groups with offshore operations and aspirations. The ATO issued a practical compliance guideline in an endeavour to assist foreign companies and their advisers to apply the new ATO approach (see our Insight of 14 January 2019 for more details).

The Government has proposed technical amendments to the existing legislation to clarify the corporate residency test. The amendments will provide that a foreign incorporated company 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. This amendment effectively reinstates the corporate tax residency position prior to the 2016 court decision in Bywater and will overturn TR 2018/5.

The 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 (being the date on which the ATO withdrew TR 2004/15).

The changes announced in the 2020-21 Federal Budget will be welcomed by many multinational businesses, particularly in light of the rapidly changing operating practices for many Boards and travel restrictions imposed due to the COVID-19 pandemic.

New Fringe Benefits Tax exemptions and concessions

In the days before the Federal Budget, the Government has announced a number of new or enhanced Fringe Benefits Tax (FBT) exemptions that aim to reduce red-tape and/or attract, retrain or retain workers.

With effect from 2 October 2020, there will be a new FBT exemption for employers who provide retraining or re-skilling benefits for their employees whose roles are being made redundant. This is a welcome move as the associated FBT often discourages employers from providing departing employees with re-skilling or retraining opportunities to set them up for their next career.  It may also assist with potential redeployment elsewhere in the existing employer’s business.  There will be limitations however on the scope of the exemption as it will not extend to retraining acquired by way of a salary packaging arrangement or training provided through Commonwealth supported places at universities.

In addition, the Government will consult on potential changes to the current arrangements that apply to deny deductions for new skills development training costs directly incurred by an individual where the training does not relate to their current employment.

From 1 April 2021, the following FBT exemptions that currently apply to small business employers with aggregated turnover of less than $10 million will be extended to those with aggregated turnover of up to $50 million:

• Car parking: This exemption will typically apply to parking provided on an employer’s premises, i.e. the exemption does not apply in the case of parking provided at a commercial parking station, and it will also not apply to employers that are public companies (including their subsidiaries) or government bodies.
  
• Work-related portable electronic devices: Multiple work-related portable electronic devices, such as laptops, tablets and mobile phones, that are provided to employees in the same FBT year (and having substantially identical functions) will all be exempt from FBT. This will be a useful concession for employers to provide their employees with additional portable technology to support a flexible working environment.
  

Also in the Federal Budget it was announced that from 1 April 2021, the Commissioner of Taxation will be provided with powers to accept existing corporate records instead of requiring employers to obtain declarations from employees.  This should go some way to easing the FBT compliance burden, but many of the compliance frustrations will remain.

Digital reforms to support business recovery and cut red tape

As part of the Government’s Digital Business Plan announced in the lead up to the Federal Budget, an additional $420 million has been allocated to complete the consolidation of government business registers, originally announced in the 2018-19 Federal Budget. This will see the consolidation of the Australian Business Register and the 31 registers administered by the Australian Securities and Investments Commission "allowing businesses to quickly view, update and maintain their business registry data in one location''. The new register will be administered by the ATO.

The Government has also announced that it will mandate electronic invoicing for all Commonwealth agencies by 1 July 2022.  State and Local Governments are aiming for implementation by June 2022. The Federal Government has committed to paying its suppliers who issue e-invoices via the Peppol framework within 5 days. We also expect Peppol e-invoicing to become mandatory for all business to business transactions in the future with the Government to shortly commence consultation on options for how to best implement the measure. We expect there will be a transition period and phased rollout, similar to how the Government introduced Single Touch Payroll.

More support for apprentices or trainees

From 5 October 2020 to 30 September 2021, businesses who take on a new Australian apprentice or trainee will be eligible for a 50 per cent wage subsidy of up to $7,000 per quarter, regardless of geographic location, occupation, industry or business size. This assistance will support 100,000 new apprentices across Australia, and is in addition to the Supporting Apprentices and Trainees wage subsidy (announced as part of the COVID-19 stimulus package) which is helping small and medium businesses to keep their apprentices and trainees in work and training.

Updating the list of information exchange countries

The Government has announced in this year’s Budget that it will include Dominican Republic, Ecuador, El Salvador, Hong Kong, Jamaica, Kuwait, Morocco, North Macedonia and Serbia into the list of countries whose residents are eligible to access a reduced withholding tax rate of 15 per cent on certain distributions from managed investment trusts (MITs), instead of the default rate of 30 per cent. To be listed, jurisdictions must have established the legal relationship enabling them to share taxpayer information with Australia. The new listed jurisdictions have entered into information sharing agreements since the previous update to the list of eligible countries in 2019. The updated list of countries will be effective from 1 July 2021. These countries are in addition to the 122 jurisdictions on the list of information exchange countries. Kenya will be removed from the list because as of January 2020, it had not yet entered into an information sharing agreement with Australia.

Modernising and expanding Australia’s tax treaty network 

In the Budget Factsheet, there is an indication that the Government will support the recovery from COVID-19 by modernising and expanding our tax treaty network. The Government expects this will help to eliminate double taxation, settle taxing rights between Australia and other countries, attract foreign investment and skilled workers, raise productivity, creating better jobs and supporting higher incomes. This initiative will also prioritise refurbishing Australia’s treaties with key strategic partners where necessary to maximise the benefits for Australia’s economy.

No rate cuts for companies

Although there are tax cuts for individuals in this Federal Budget, there is no such direct tax relief for companies. This means that the current dual rate corporate tax system seems to be here to stay with only those companies that have aggregated turnover of up to $50 million potentially eligible for a tax rate other than 30 per cent.

By way of reminder, the current legislated tax rates that apply to companies that qualify as a "base rate entity" are as shown in this table.

Other measures

Business support grants exempt from income tax

The Government will ensure that Victorian Government business support grants for small and medium businesses will be non-assessable-non-exempt income for income tax purposes. This will extend to all States and Territories on an application basis. Eligibility will be limited to grants announced on or after 13 September 2020 and for payments made between 13 September 2020 and 30 June 2021.

Strengthening Australia’s Foreign Investment Review Framework

The Government will provide an additional $86.3 million funding to the ATO, Treasury and Department of Finance over four years to implement a new platform to support more effective and efficient foreign investment application processing and compliance activities across Government and a new consolidated Register of Foreign Ownership of Australian Assets. The foreign investment fee framework will be simplified and fees will be adjusted from 1 January 2021 to ensure that foreign investors bear the costs of administering the foreign investment system.

Global trade and excise

The Government has announced a range of funding initiatives and measures to support Australia’s trade and export system, including, among other things, measures to:

• support initiatives to modernise Australia's trade system and streamline border services to reduce administrative complexity and improve efficiency of international trade;
• assist the recovery of Australian businesses from the impacts of COVID-19 by increasing the share of two-way trade covered by free trade agreements and by expanding regional digital trade;
• provide for a number of new free trade agreements, including the Comprehensive Strategic Partnership with India;
• simplify and reorient the Export Market Development Grants Scheme to more effectively support export-ready small and medium enterprises; and
• reduce the cost impost of fuel excise by lowering excise rates to account for a weaker outlook for the excise indexation factors and freezing the Heavy Vehicle Road User Charge.