October 7, 2020
Australia issues 2020-21 Federal Budget
The Australian Federal Budget 2020 was delivered on 6 October 2020 by the Federal Treasurer Josh Frydenberg.
Economic and overall policy issues in the 2020 budget are outlined on the EY Australia website.
This Tax Alert focuses on the key tax measures announced, to assist entities with tax business planning and compliance processes.
The key challenge for Australia in the COVID-19 recovery phase is to support investment and consumption by providing support to business and households. Businesses with aggregate turnover greater than AU$5 billion (b)1 may benefit from the retention of the research & development tax incentives (R&DTI), removal of the Fringe Benefits Tax (FBT) on re-training or re-skilling, clarification of the central management and control test, the ambition to expand Australia's treaty network and to make improvements to treaties with strategic partners, as well as flow on impacts.
The clear winners from the Budget tax measures are middle income earners and businesses with aggregate turnover under $5b. These measures include:
Other notable measures include:
It is a positive development to see the adoption of a number of measures supported by EY over a number of years, including wage subsidies for unemployed workers, tax loss carrybacks, and simplification of FBT and R&D measures.
While the Budget tax measures are welcomed, it is unfortunate that the mooted Investment Allowance of at least 20% did not eventuate. Given the current low cost of funding, tax incentives that simply bring forward tax deductions may not be enough to make marginal projects viable.
Looking beyond the Budget, international competition for investment is expected to be fierce, with many countries facing the same challenges expected to adopt expansionary fiscal policy during the COVID-19 recovery phase. The case for comprehensive, structural tax reform in Australia is compelling. However, this will be a challenge to deliver. Bolder tax policy settings that increase Australia's international competitiveness, by reducing the effective tax rates applicable to new investments are what's needed.
Tax changes announced in the Budget
This Tax Alert outlines the key tax changes affecting:
Business tax measures
Temporary full expensing of depreciating assets
The availability of instant asset write offs (IAWO) has been extended to businesses with aggregated turnover of less than $5b.3 These measures apply to new, eligible capital assets acquired after 7:30pm AEDT on 6 October 2020 which are either first used or installed by 30 June 2022. No threshold applies to the value of each eligible asset.
The measures also allow for an instant write off for the cost of improvements to existing eligible assets made before 30 June 2022.
Assets of entities with aggregated turnover of $50m or more where a commitment to incur the cost in relation to the asset was entered into before 7:30pm AEDT on 6 October 2020 are excluded.
The instant tax write off measures available for small- and medium-sized businesses (with an aggregated turnover of less than $50m) have been extended to allow for the full expensing of the cost of second-hand assets.
If a depreciating asset of a business with turnover between $50m and $500m is not eligible for temporary full expensing, they are still able to deduct the full cost of second-hand assets costing less than $150,000 which are purchased by 31 December 2020. These businesses now have until 30 June 2021 to first use or install the assets.
Small businesses (with aggregated turnover of less than $10m) will also be able to deduct the balance of their simplified depreciation pool at the end of the income year while the measures are in operation.
The measures can be used in conjunction with the loss carryback measures.
The new measures may represent a significant opportunity for many businesses and confirmation of eligibility and consideration of requirements in planning will be important. Application is not optional and if this results in little or no taxable income some tax attributes may be lost (e.g., FITOs).
Access to small business tax concessions extended
Access to current small business tax concessions will be extended to businesses with an aggregated turnover3 between $10m and $50m, including:
The Commissioner of Taxation's power to specify simplified accounting methods for Goods and Services Tax (GST) purposes will also be expanded to businesses with aggregated annual turnover below $50m – from 1 July 2021.
Carryback of tax losses
Tax losses of corporate tax entities incurred in the fiscal year (FY)20 to FY22 years can be carried back to offset taxable income in FY19 or later years, generating a refundable tax offset for taxes paid in those earlier years. Eligible entities may elect to receive a tax refund when they file their 2020-21 and 2021-22 income tax returns (including carryback tax losses for the 2019-20 income year).
In combination with the enhanced instant asset write off deduction, some companies will be able to subsidize capital asset purchases in FY21 and FY22 via refunds of tax paid in FY19 and FY20.
To qualify, a company's aggregated turnover3 must be less than $5b in the year of the loss, therefore excluding companies within very large global organizations. The quantum of tax losses that can be carried back is limited to the taxable income derived in the earlier years converted into a tax equivalent amount at the entity's corporate tax rate for the loss year and must not produce a franking account deficit for the company.
The loss carryback provisions include integrity rules consistent with those that applied under the previous 2013 year loss carryback rules.
R&DTI - A new intensity test and significant improvements
There are significant changes proposed to the R&DTI from 1 July 2021, with a new intensity test, improved benefit rates, uncapped or higher caps on R&D expenditure, simplicity and greater certainty.
All claimants accessing the non-refundable R&D tax offset will receive a benefit of between 8.5% and up to 16.5% (above the corporate tax rate), and all claimants under the refundable R&D tax offset will receive a benefit of 18.5% (above the corporate tax rate).
In total this represents an additional $2b in business R&D support over the forward estimates, encouraging business to accelerate innovation and R&D across the economy. Combined with improved funding for the Commonwealth Scientific and Industrial Research Organisation (CSIRO) and University research this sends a very positive signal about the role innovation is expected to play in the economic recovery.
While the decrease in the corporate tax rate for companies with turnover of less than $50m to 25% from 1 July 2021 will erode some of the benefits for companies with turnover above $20m and with R&D intensity of 2% or less (measured against total expenses of the R&D entity), the new system should deliver increased incentives over the previously proposed R&D intensity test, and will mean most companies accessing the R&DTI keep the same, or get higher levels of benefit, than the current system.
Above all bipartisan support for the measures should translate into fast passage of the law and improved certainty about the future longevity of the system.
In summary, the changes are as follows:
Businesses - turnover below $20m (refundable tax offset)
Businesses - turnover above $20m (non-refundable tax offset)
* Only applies to R&D expenditure increment above 2% R&D intensity
There will be no cap on the amount of refundable R&D tax offsets and the cap for eligible R&D expenditure for non-refundable offsets will increase from $100m to $150m per annum. Additional changes to the administration of the program and increased transparency as previously proposed will also be applied.
Companies with existing eligible R&D can work on the basis previously legislated changes before Parliament will not go ahead. Those considering expenditure on future R&D projects, should incorporate these favorable proposed changes in the financial models.
Export Market Development Grants (EMDG) overhaul
Significant changes are proposed to the EMDG from 1 July 2021 which will create an eligibility-based grant program, with entities able to access funding for multiple years through a pre-application system. Eligible entities will be restricted to annual turnovers of less than $20m (currently $50m).
Modern Manufacturing Initiative – Support for manufacturers
Provides $1.5b over five years focusing on building competitiveness, scale and resilience in the Australian manufacturing sector. This includes $1.3b for projects centered around collaboration, translation and integration activities for manufacturers, as well as adoption of new technologies, focused in the following six national manufacturing priority areas:
Investment in new energy technologies
An additional $1.4b over 12 years to continue funding the Australian Renewable Energy Agency (ARENA) to provide R&D investment for emerging low emission technologies to increase their commercial readiness, as well as $500m of other funding for investment in other low emissions technologies and network infrastructure.
Key focus areas include:
Making Victoria's business support grants non-assessable, non-exempt (NANE) income
Victorian Government business support grants for small and medium businesses will be made NANE income for income tax purposes.
Grants announced on or after 13 September 2020 and payments made between 13 September 2020 and 30 June 2021 will be eligible for this treatment. This arrangement can be extended to similar grants in all States and Territories on an application basis.
Employment tax measures
Fringe benefits tax changes
As actively supported by EY, an FBT exemption will be introduced for certain employer-provided retraining and reskilling costs, for employees who are redundant or soon to be made redundant - from 2 October 2020. FBT is currently payable on employer training that is not sufficiently connected to an employee's current employment. It is hoped this change will encourage employers to help workers transition to new employment opportunities.
The Government will also consult on potential changes to allow tax deductions to employees for such training undertaken at their own expense.
Other FBT changes include:
JobMaker – further initiatives
New "JobMaker" initiatives will provide wage subsidies to encourage hiring of young unemployed individuals and the creation of new apprenticeships and traineeships.
International business measures
Clarifying the corporate residency test
As expected, the Government has announced it will clarify the circumstances in which a foreign incorporated company will be classified as Australian tax resident for domestic income tax purposes. The announcement follows a period of significant uncertainty since the Bywater Investments & Ors v Commissioner of Taxation (Bywater) decision in 2016 and the Australian Taxation Office's (ATO) subsequent withdrawal and replacement of TR 2004/15 with TR 2018/5 and practical compliance guide PCG 2018/9.
The announcement is also in response to the consultation process and reports issued by the Board of Taxation (BoT) on the matter. The Government did not respond to all the recommendations in the final BoT report released on 7 October 2020. But foreign incorporated companies will only be considered Australian tax resident if they have a "significant economic connection with Australia" as well as their central management and control from date of Royal Assent to amending legislation.
Taxpayers will have the option of applying the new rule retrospectively from 15 March 2017, the date when TR 2004/15 was withdrawn. However, it is unknown whether this will be via administrative practice or legislative instrument.
It remains to be seen how the legislation will be amended with concepts around "significant economic connection with Australia" defined "around core commercial activities" or whether the existing alternative test of voting power being controlled by Australian residents is retained. The interaction of domestic tax law with tax treaties, especially in the context of the new multilateral instrument model, will also need to be considered.
In essence, the position following the announcement returns the focus to those foreign incorporated companies who were the focus pre-Bywater and the withdrawal of TR 2004/15, i.e., passive investment of holding companies and mere decision making not being enough for a significant economic connection.
The proposed changes will warrant careful analysis by relevant corporations when details are issued.
Modernizing and expanding Australia's tax treaty network
The Government will support the recovery from COVID-19 by modernizing and expanding the country's tax treaty network to eliminate double taxation, settle taxing rights between Australia and other countries and to attract foreign investment and skilled workers. Refurbishing Australia's treaties with key strategic partners where necessary to maximize the benefits for Australia's economy will be a priority.
Tax treaties benefit both businesses and individuals. They provide greater certainty for international transactions, lowering the cost of doing business overseas. They also provide relief from double taxation to attract skilled foreign workers to Australia. Reducing tax barriers will promote trade and investment. By attracting foreign investment and skilled workers, treaties raise productivity, creating better jobs and supporting higher incomes.
Personal income tax changes
As anticipated, the already legislated second stage of the personal income tax relief plan announced in the 2019-20 Budget (which built on the Government's 2018/19 plan), to provide tax relief to low- and middle-income earners, that was scheduled to commence from 1 July 2022, will now commence retrospectively from 1 July 2020.
The ATO will publish updated tax withholding schedules once the amendments pass Parliament, or when there is public bipartisan support for the Bill to bring forward the tax cuts, to allow the tax cuts to be reflected in employee's take home pay.
*Rates do not include Medicare levy of 2%
Non-refundable low and middle income tax offset (LMITO) retained
The lLMITO, which was due to be removed with commencement of Stage 2, has been retained for the 2020/21 income year. Taxpayers with taxable income:
Low income tax offset (LITO) increase
Medicare levy threshold increases
The Medicare levy thresholds will also be adjusted from the 2019-20 income year.
Individuals and employers should ensure that personal income tax rate changes are factored into tax planning, payroll and compliance processes.
Capital gains tax (CGT) exemption for granny flat arrangements
A CGT exemption will be introduced for the creation, variation or termination of a formal written granny flat arrangement, entered into because of family relationships or other personal ties, providing accommodation for older Australians or people with disabilities. The measure will have effect from the first income year after Royal Assent.
Financial services and tax administration
Updated list of Information Exchange Countries
As Hong Kong is a major international financial center, it is positive that, in response to an EY submission, from 1 July 2021, Hong Kong resident investors will be eligible for the concessional 15% withholding tax on certain Managed Investment Trust (MIT) distributions. Other countries included in the list are Dominican Republic, Ecuador, El Salvador, Jamaica, Kuwait, Morocco, North Macedonia and Serbia.
However, Kenya will be removed from the list.
Foreign investors should factor in this favorable change when making investment decisions. MITs and their custodians and administrators will need to update systems.
Additional funding for the ATO
The Government will provide additional funding to the ATO:
1 Currency references in this Alert are to the AU$.
2 A Bill was introduced into the House of Representatives on 7 October 2020 to implement this measure.
3 Aggregated turnover is broadly the annual turnover of the entity plus the annual turnover of the entity's connected entities and affiliates (including overseas entities).
For additional information with respect to this Alert, please contact the following:
Ernst & Young (Australia), Sydney
Ernst & Young (Australia), Perth
Ernst & Young (Australia), Melbourne
Ernst & Young (Australia), Brisbane
Ernst & Young (Australia), Canberra
Ernst & Young (New Zealand), Auckland
Ernst & Young LLP (United States), Australian Tax Desk, New York
Ernst & Young LLP (United Kingdom), Australian Tax Desk, London
PDF version of this Tax Alert