2021 2020 Federal Budget

Federal Budget 2020–21: summary, resources and tools

By Robyn Jacobson, CTA, Senior Advocate at The Tax Institute

   

Dr Julianne Jacques accepts the Tax Adviser of the Year Award, 2020

Now that the whirlwind of Budget week has passed, there is an opportunity to reflect on the implications of the measures announced in the Federal Budget 2020–21.

Some of the tax measures announced in the Federal Budget 2020—21 have proven to be complex and challenging for busy practitioners. Given that the Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Act 2020 has been enacted (on 14 October 2020 as Act No. 92 of 2020) it’s important for tax practitioners to understand the new measures affecting depreciating assets and their practical application.

To assist our members, I have analysed the recent legislative amendments and collated the most important information into the summary and infographics below, which contain a series of practical reference tables to assist in applying the new Budget measures.

Key measures

Personal income tax cuts

Tax rates tables

The enacted rates and thresholds are summarised in the tables below. 

Residents

TABLE 1: Summary of individual income tax rates

To 30 June 2018

STAGE 1
From 1 July 2018

STAGE 2
From 1 July 2020

STAGE 3
From 1 July 2024

Income threshold

Tax rate above threshold

Income threshold

Tax rate above threshold

Income threshold

Tax rate above threshold

Income threshold

Tax rate above threshold

$18,200

19% 

$18,200

19%  

$18,200

19%

$18,200

19%

$37,000

32.5% 

$37,000

32.5% 

$45,000

32.5%

$45,000

30%

$87,000

37%

$90,000

37%

$120,000

37%

$200,000

45%

$180,000

45%

$180,000

45%

$180,000

45%

   
TABLE 2: Individual income tax rates: 2019–20

Taxable income

Marginal rate

Tax on this income

$0–$18,200

Nil

Nil

$18,201–$37,000

19%

19 cents for each $1 over $18,200

$37,001–$90,000

32.5%

$3,572 plus 32.5 cents for each $1 over $37,000

$90,001–$180,000

37%

$20,797 plus 37 cents for each $1 over $90,000

$180,001 and over

45%

$54,097 plus 45 cents for each $1 over $180,000

TABLE 3: Individual income tax rates: 2020–21

Taxable income

Marginal rate

Tax on this income

$0–$18,200

Nil

Nil

$18,201–$45,000

19%

19 cents for each $1 over $18,200

$45,001–$120,000

32.5%

$5,092 plus 32.5 cents for each $1 over $45,000

$120,001–$180,000

37%

$29,467 plus 37 cents for each $1 over $120,000

$180,001 and over

45%

$51,667 plus 45 cents for each $1 over $180,000

TABLE 4: Income tax offsets

Offset

STAGE 1 — From 1 July 2018

STAGE 2 — From 1 July 2020

 

Taxable income 

Rate

Taxable income 

Rate

LITO

$0–$37,000

$445 

$0–$37,500

$700

$37,000–$66,667

$445 less 1.5 cents for every $1 by which the taxable income exceeds $37,000

$37,501–$45,000

$700 less 5 cents for every $1 by which the taxable income exceeds $37,500

$45,001–$66,667

$325 less 1.5 cents for every $1 by which the taxable income exceeds $45,000

Over $66,667  

Nil 

Over $66,667

Nil

LMITO

$0–$37,000

$255

LMITO available only until 1 July 2021

$37,001–$48,000 

$255 plus 7.5% of the amount of the income that exceeds $37,000

$48,001–$90,000 

$1,080

$90,001–$126,000 

$1,080 less 3% of the amount of the income that exceeds $90,000

$126,001 and over

Nil

Non-residents

TABLE 5: Individual income tax rates: 2019–20

Taxable income 

Marginal rate 

Tax on this income

$0–$90,000

32.5%

32.5 cents for each $1

$90,001–$180,000 

37% 

$29,250 plus 37 cents for each $1 over $90,000

$180,001 and over 

45% 

$62,550 plus 45 cents for each $1 over $180,000

TABLE 6: Individual income tax rates: 2020–21

Taxable income 

Marginal rate 

Tax on this income

$0–$120,000

32.5%

32.5 cents for each $1

$120,001–$180,000

37%

$39,000 plus 37 cents for each $1 over $120,000

$180,001 and over

45%

$61,200 plus 45 cents for each $1 over $180,000

Working holiday makers

TABLE 7: Individual income tax rates: 2019–20

Taxable income

Marginal rate

Tax on this income

$0–$37,000 

15% 

15 cents for each $1

$37,001–$90,000

32.5% 

$5,550 plus 32.5 cents for each $1 over $37,000

$90,001–$180,000  

37%

$22,775 plus 37 cents for each $1 over $90,000

$180,001 and over 

45% 

$56,075 plus 45 cents for each $1 over $180,000

TABLE 8: Individual income tax rates: 2020–21

Taxable income 

Marginal rate

Tax on this income

$0–$45,000

15%

15 cents for each $1

$45,001–$120,000

32.5%

$6,750 plus 32.5 cents for each $1 over $45,000

$120,001–$180,000

37%

$31,225 plus 37 cents for each $1 over $120,000

$180,001 and over

45%

$53,325 plus 45 cents for each $1 over $180,000

Effect of tax cuts

Bringing forward Stage 2 of the already legislated Personal Income Tax Plan from 1 July 2022 to 1 July 2020 will result in an increase in post-tax income for 2020–21 (compared to the tax payable for 2017–18) for most individual taxpayers.

This is summarised in the following table.

TABLE 9: Increase in post-tax income in 2020–21

Taxable income 

Tax payable at 2017–18 rates* 

Tax payable at 2020–21 rates* 

Reduction in tax

$30,000

$1,797 

$1,542 

$255

$50,000 

$7,547 

$5,387 

$2,160

$100,000 

$24,632

$22,187

 $2,445

$120,000 

$32,032  

$29,287

$2,745

$150,000 

$43,132 

$40,567 

$2,565

$200,000 

$63,232

$60,667 

$2,565

*Excludes Medicare levy but includes benefit of Low income tax offset and Low and middle income tax offset

Delivery of tax cuts

The Taxation Administration Act Withholding Schedules No. 2 2020 were registered on 12 October 2020. The withholding schedules specify the updated formulas and procedures to be used for working out the amount of PAYG withholding following the changes in the marginal tax rates.

The ATO has released new PAYG withholding tax tables which take effect from 13 October 2020. These adjust the withholding schedules and tax tables to incorporate the changes to personal income tax thresholds for 2020–21 announced by the Government during the Federal Budget. They apply to payments made on and from 13 October 2020.

As the changes to PAYG withholding for 2020–21 have been made part way through the income year, employers and other payers who are unable to immediately implement these changes into their payroll will have until 16 November 2020 to do so.

The ATO does not consider it would be appropriate to adjust the tables for any over-payments of tax in the first four months of the income year and further reduce the PAYG withholding in the remaining eight months of the year. There is a risk of under-withholding when trying to squeeze 12 months of tax cuts into eight months for people with variable employment patterns. 

Unquestionably, over-payments of tax will result from the mid-stream change in the income thresholds, but employees and other payees will receive their entitlement to the reduced tax payable for the entire 2020–21 income year when they lodge their 2021 income tax return.

This has created the perception for some that the tax cuts will not have an immediate benefit for taxpayers. However, this overlooks the reduction in PAYG withholding amounts that will affect payroll amounts from 13 October 2020.

Expanded access to small business tax concessions

Access to 10 small business tax concessions previously available only to small business entities1 has been expanded to include businesses with an aggregated annual turnover of $10 million to less than $50 million.

TABLE 10: Expanded small business tax concessions

Concession 

Legislative reference 

Start date

Immediate deduction for certain start-up expenses

s 40-880(2A) of the ITAA 1997 

1 July 2020

Immediate deduction for certain prepaid expenditure 

s 82KZM of the ITAA 1936 

1 July 2020

FBT exemption for car parking benefits 

s 59GA of the FBTA 1986

1 April 2021

FBT exemption for multiple work-related portable electronic devices

s 58X(2)(a) and s 58X(4) of the FBTA 1986 

1 April 2021

Simplified trading stock rules 

Subdiv 328-E of the ITAA 1997 

1 July 2021

Remit PAYG instalments based on GDP-adjusted notional tax 

s 45-130(1)(d) of Schedule 1 to the TAA 1953 

1 July 2021

Settle excise duty monthly on eligible goods 

s 61C of the Excise Act 1901 

1 July 2021

Settle excise-equivalent customs duty monthly on eligible goods2

s 69 of the Excise Act 1901 

1 July 2021

Two-year amendment period

Item 2 of the table in s 170(1) of the ITAA 1936

1 July 2021

Simplified accounting method determination for GST purposes 

s 123-5 of the GSTA 1999 

1 July 2021

Full expensing of depreciable assets

The date by which an entity must first use or install ready for use an asset acquired by 31 December 2020 in order to claim the existing instant asset write off (IAWO)3  has been extended by six months to 30 June 2021. This extension does not change the requirement that the asset must be acquired by 31 December 2020.

A new measure allows businesses with an aggregated turnover of less than $5 billion to fully expense a depreciating asset (FEDA)4  the entity starts to hold from 7:30pm on 6 October 2020, provided it is first used or installed ready for use by 30 June 2022.

Thumbnail for infographics - new site

    

 

Temporary loss carry back

The new loss carry back measure will allow corporate tax entities (CTE) to carry back tax losses from the 2019–20 to 2021–22 income years against taxed profits from the 2018–19 to 2020–21 income years. The tax is claimed by way of a refundable tax offset — a loss carry back tax offset — which is claimed in the 2020–21 and 2021–22 tax returns only.

The temporary rules will cease to apply after the 2021–22 income year.

Calculating the loss carry back tax offset

TABLE 13: Calculating the loss carry back tax offset

Step 1 

Identify loss from 2019–20 to 2021–22 that can be carried back against taxed profits from 2018–19 to 2020–21

Step 2 

Reduce loss to be carried back by exempt income (if any)

Step 3

Loss carry back tax offset component — convert loss to tax equivalent amount (× corporate tax rate for loss year):

If the CTE is a base rate entity, use:

  • for a loss made in 2019–20: 27.5%
  • for a loss made in 2020–21: 26%
  • for a loss made in 2021–22: 25%

Otherwise use 30%

Step 4 

Determine balance in franking account at the end of the year in which the offset is claimed

Step 5 

(Refundable) loss carry back tax offset is the lesser of Step 3 and Step 4

Step 6 

Claim the loss carry back by the time the 2020–21 or 2021–22 income tax return is lodged (it is expected the choice to carry back a loss will be made in the tax return)

Key points

Applies to corporate tax entities only i.e. a company, corporate limited partnership or public trading trust (not sole traders, partnerships or trusts).

Entity must carry on a business.

Many businesses with a domestic turnover of less than $5 billion may nevertheless be ineligible for this measure due to foreign ownership interests. The entity’s annual turnover is grouped with that of its affiliates and entities connected with it, which may cause the entity’s aggregated turnover to be $5 billion or more.

Revenue losses only (capital losses cannot be carried back as the CGT regime operates on a realisation basis).

The entity must have lodged a tax return for the year of claim and each of the 5 years immediately preceding it. In certain cases where the CTE might not have been required to lodge a return for a year, this will not prevent an entity from being entitled to a loss carry back tax offset.

A CTE can choose:

  • the amount of the loss to carry back; or
  • to carry the loss forward to offset again future taxable profits (subject to continuity of ownership test or same/similar business test)

An integrity rule applies to deny the loss carry back tax offset where a scheme has been entered into for a purpose of obtaining the offset.

Download our handy infographic below to help you understand and apply these rules and core principles.

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Changes to the R&D tax offset

The changes to the R&D tax offset apply from 1 July 2021.

TABLE 14: R&D tax offset

Aggregated turnover of R&D entity

R&D tax offset rate to 2020–21

R&D spend as % of total expenditure 

Premium

R&D tax offset rate from 2021–22

       

Corporate tax rate: 25%

Corporate tax rate: 30%

Less than $20m 

Refundable 43.5% tax offset 

Not applicable 

18.5% 

43.5% 

48.5%

$20m or more, or controlled by exempt entities

Non-refundable 38.5% tax offset

0–2%

More than 2%

 8.5%

16.5% 

33.5%

41.5% 

38.5%

46.5%

Note
  • Proposed $4 million cap on the refundable tax offset for small R&D entities is not proceeding.
  • The R&D expenditure threshold will increase from $100 million to $150 million.

CGT exemption for eligible granny flat arrangements

An exemption will apply to disregard the CGT implications of creating, varying or terminating a formal written granny flat arrangement. This will remove the adverse tax consequences for the homeowner.

This is not a blanket CGT exemption for all granny flats. The exemption will apply only in respect of a granny flat interest6 for a property that is the principal home7 of the taxpayer. The exemption will not be available for a rental property that happens to contain a granny flat.

The exemption will apply from the first 1 July following the date of Royal Assent of enabling legislation.

Enabling legislation is yet to be introduced into Parliament, but it is expected that the exemption will apply to disregard capital gains from arising under:

  • CGT event D1 (creation of contractual rights) where a lump sum is paid to the homeowner; and
  • CGT event C2 (cancellation or ending of rights).

It is not expected that a CGT exemption will apply to prevent the partial loss of the main residence exemption where the homeowner receives rent under the granny flat arrangement.

Disclaimer

The material and opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries in making any decisions concerning their own interests

Footnotes

1 Defined in s 328-110 of the ITAA 1997 as an entity that, broadly, carries on a business and has an aggregated annual turnover of less than $10 million.

2 Eligible small businesses can currently apply to defer settlement of excise duty and excise-equivalent customs duty from a weekly to a monthly reporting cycle. See ATO web guidance.

3 Rules are contained in s 40-82 and Subdiv 328-D of the ITAA 1997, and s 328-180 of the Income Tax (Transitional Provisions) Act 1997.

4  Rules are contained in Subdiv 40-BB of the Income Tax (Transitional Provisions) Act 1997.

5 Applies to entities with an aggregated turnover of less than $500 million where the entity starts to start to hold the asset, and starts to use it or has it installed ready for use for a taxable purpose, between 12 March 2020 to 30 June 2021. The rules are contained in Subdiv 40-BA of the Income Tax (Transitional Provisions) Act 1997.

6 Within the meaning of s 12A of the Social Security Act 1991.

7 As defined in s 11A of the Social Security Act 1991.