15 Oct 2020 This week in tax
Budget obscurities and opacities
Now that the whirlwind of Budget week has passed, Robyn Jacobson, CTA, reflects on some of the obscure and complex issues within the key tax measures announced in last week’s Federal Budget 2020–21.
A number of the key tax measures are contained in the Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Act 2020 (the Budget Act) which was passed by the Parliament on 9 October 2020, just two days after the Bill’s introduction into the House of Representatives. The Bill was enacted on 14 October 2020 as Act No. 92 of 2020.
This summary contains a series of practical reference tables to assist in applying the new Budget measures. We will soon be publishing an accompanying infographic summarising the interaction of the existing instant asset write-off, and the new full expensing of depreciating assets measure for business entities.
Personal tax cuts
Who fares best?
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.
Some commentary in the media and on social media has questioned, even objected to, the Government’s decision to bring forward Stage 2 of the Personal Income Tax Plan. The concern is that middle- and high-income earners receive greater tax cuts than lower income earners.
However, as highly respected economist, Chris Richardson from Deloitte Access Economics, pointed out in last week’s The Summit: Project Reform keynote session, in 2017–18, the top 1% of taxpayers were paying 17.1% of all personal tax. Because of wage growth pushing people up through the tax brackets, if the Government had done nothing, this would have dropped to 15.9%. After the Stage 3 cuts, this increases to 17.9%. The top 5% of taxpayers were paying 33.3% of all personal tax in 2017–18; after the tax cuts, this increases to 33.8%.
It is important that you compare ‘apples with apples’ and not ‘apples with camels’ as Chris amusingly put it. He pointed out, if you’re talking absolute dollars, that if there are any tax cuts, the people who pay lots of tax are going to get more dollars than the people who don’t pay lots of tax. It is also important to discuss the entire package, comprising of all three stages, and not overlook Stage 1, which took effect from 1 July 2018 and predominantly benefitted lower income earners. There can also be a tendency by some commentators to use the wrong years, for example, the end of the 2020s when there has been time for more wage growth. Chris said the best comparison is between 2017–18 (before the personal tax cuts started) and 2024–25 (when they are currently scheduled to finish).
He continued to say:
If Phase 3 does ever come in, we will have knocked a rate out of the personal tax system, and that is tax reform. Typically, a tax cut is not tax reform. If you can take out an extra rate, without doing particular damage to the progressivity of the system, then it’s achieving [tax reform].
New PAYG withholding tables released
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 as part of the Federal Budget.
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.
CGT exemption for formal written granny flat arrangements
This is a very complex area, and one which has caused concerns to the ATO and taxpayers for many years. The announcement to provide a CGT exemption for homeowners with formal written granny flat arrangements is welcome and will go some way to addressing wider concerns about elder and financial abuse.
The Budget papers indicate that a capital gain will not result from the creation, variation or termination of a formal written granny flat arrangement, so it is likely that an exemption will be provided in respect to:
- CGT event D1 (creation of a contractual right) and,
- CGT event C2 (the cancellation or ending of a right).
However, this would seem to address only one of the two CGT issues. We await the new law to ascertain whether it will also prevent the partial loss of the main residence exemption when the property is rented under such an arrangement.
And no, a CGT exemption won’t be available for a property that is not the principal home (as defined in s 11A of the Social Security Act 1991) of the taxpayer, such as a rental property that happens to contain a granny flat.
New full expensing of depreciable assets (FEDA)
Andrew Mills and I noted in last week’s TaxVine preamble that the very generous new immediate deduction for the purchase of eligible depreciating assets for businesses with an aggregated annual turnover of less than $5 billion will be welcome. According to the Government’s media release on 6 October 2020, it will ‘allow 99% of businesses to write off the full value of assets they purchase’.
While at first glance, this seems to be a simple extension of the instant asset write-off (IAWO) until 30 June 2022, it is only with a monocle that the finer points of the new measure are apparent.
- Date first held: Unlike previous iterations of the IAWO, and contrary to the Government’s clear statements in the Treasurer’s media release and the Budget papers, the measure doesn’t require that the asset be ‘acquired’ from 7:30pm on 6 October 2020. Section 40-160 of the Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Act 2020 requires that the entity start to ‘hold’ the asset at or after 7:30pm on 6 October 2020. Holding an asset within the meaning in s 40-40 of the ITAA 1997 can be quite different from the date on which the asset is acquired or purchased, or the contract entered into.
- 30 June 2022 deadline: While the asset must be first used or installed ready for use by 30 June 2022, nothing seems to prevent an entity meeting this requirement even if they don’t start to ‘hold’ the asset until after 30 June 2022.
- Small business entities: Small business entities (SBEs) are required to write off the balance in their general small business pools if the low pool value is less than $150,000 as at 30 June 2020. The IAWO for SBEs reverts to $1,000 from 1 January 2021, however this will have no practical effect until after 30 June 2022. This is because SBEs (along with larger entities with an aggregated turnover of less than $5 billion) will be required to fully deduct all eligible depreciating assets first held from 7:30pm on 6 October 2020 and first used or installed ready for use by 30 June 2022. Further, all SBEs with a balance in their general small business pools will be required to deduct the pool balance on 30 June 2021. New s 328-181 of the Income Tax (Transitional Provisions) Act 1997 modifies s 328-210 of the ITAA 1997 to require SBEs to deduct the balance in their general small business pools if the low pool value is more than zero for the 2020–21 and 2021–22 income years. This is not a choice.
- Car limit still applies: The treatment of a car under FEDA is still subject to the car limit of $59,136 (for 2020–21).
- Certain assets are excluded: FEDA excludes assets that are buildings, Div 43 capital works, allocated to low-value pools and software development pools under Subdiv 40-E, covered by Subdiv 40-F (certain primary production assets), and used or located outside Australia.
- Two exclusions don’t apply where aggregated turnover is under $50 million: The inability to claim FEDA for second-hand assets and the exclusion for pre-existing commitments (before 7:30pm on 6 October 2020) applies only to businesses with an aggregated turnover of $50 million to less than $5 billion.
- May create a loss: The requirement to fully expense the asset may cause some entities to make a loss as a result. This may not be desirable in a trust or where the taxpayer would prefer to spread the deduction for the decline in value over multiple income years. However, the taxpayer does not have a choice for eligible depreciating assets.
- Interaction with business investment incentive: Assets that are eligible for accelerated depreciation deductions under the COVID-19 stimulus measure, Backing business investment, will instead be fully expensed where the asset is first held at or after 7:30pm on 6 October 2020 by an entity that has an aggregated turnover of less than $5 billion.
- Under $5 billion turnover but still not eligible: Despite the Government’s claim that 99% of businesses will be able to write off the full value of assets they purchase, many businesses with a domestic turnover of less than $5 billion may be ineligible for FEDA due to substantial foreign ownership interests. This is discussed further below.
Loss carry back
This measure will provide tangible benefits to eligible corporate tax entities who choose to carry back a tax loss in any of the 2019–20 to the 2021–22 income years against tax paid for any of the 2018–19 to the 2020–21 income years.
A deeper dive reveals some important features:
- Available only to corporate tax entities: Loss carry back will be of no benefit to the majority of small businesses that are conducted outside a corporate structure (i.e. sole traders, partnerships and trusts).
- No immediate benefit: Eligible entities will need to wait until the refundable loss carry back tax offset is claimed in either or both the 2020–21 and 2021–22 tax returns, that is, no earlier than 1 July 2021.
- Under $5 billion turnover but still not eligible: Many companies with a domestic turnover of less than $5 billion may be ineligible for loss carry back due to substantial foreign ownership interests. This is discussed further below.
- Calculating the loss carry back tax offset component: A loss that is carried back must be converted to a tax equivalent amount, called the ‘loss carry back tax offset component’. This is worked out by multiplying the loss by the entity’s corporate tax rate for the loss year) as follows:
- If the entity is a base rate entity:
- Loss in 2019–20: use 27.5%
- Loss in 2020–21: use 26%
- Loss in 2021–22: use 25%
- If the entity is not a base rate entity — use 30%.
- Franking account balance: The loss carry back tax offset component is then capped at the balance in the franking account at the end of the income year in which the offset is claimed.
Issues with aggregated turnover test
Access to FEDA (all business entities) and loss carry back (corporate tax entities only) is limited to entities with an aggregated turnover of less than $5 billion. This groups the entity’s annual turnover with that of its affiliates and entities connected with it, under s 328-115 of the ITAA 1997. This may cause the entity’s aggregated turnover to be $5 billion or more.
According to the Corporate Tax Association, 79 out of its 130 corporate members are ineligible for these measures. While 35 of their 130 members are ineligible due to their Australian aggregated turnover exceeding $5 billion, a further 44 members are ineligible due to the operation of the aggregated turnover test.
Corporate Tax Association Executive Director, Michelle de Niese, explained that:
A sensible read of the $5 billion aggregated turnover test set the expectation on Budget night that the larger mining, oil and gas and banking entities with Australian turnover over that amount would be excluded from the measure. Upon seeing the Bill, it became clear that there would be a much larger number of companies that are ineligible. We suspect there will be more, and no doubt others with smaller Australian based operations, who happen to be affiliates with larger foreign based and local groups.
As a reminder, the concept of ‘aggregated turnover’ originated in the Simplified tax system in 2001, the predecessor to the current small business entity regime. It was designed as an integrity measure, to prevent larger businesses forming smaller separate entities to become eligible for the concessions.
While the threshold was initially, and remains at, $2 million (now solely for the purposes of the small business CGT concessions), the construct of the threshold has been more widely applied for many other tax purposes. Thresholds of $5 million, $10 million, $20 million, $50 million, $100 million, $500 million and now $5 billion, apply for a range of tax concessions and measures not contemplated when the original concept was conceived.
This issue highlights how a test designed for a small business measure may not be fit for purpose when applied without modification to much larger businesses, decades after its original design. These concerns are being raised by business groups with the Treasury, but they illustrate the importance of consultation on significant measures, which in this case was not undertaken with the profession.
A note on JobKeeper
The recent case of Qantas Airways Limited v Flight Attendants' Association of Australia (The JobKeeper Case)  FCA 1365 raises serious questions about the design of JobKeeper and its interaction with the Fair Work Act 2009 (FWA).
Under the JobKeeper rules, an employer meets the wage condition in respect of an employee for a fortnight if the amounts paid by the employer to the individual in the fortnight by way of salary, wages, commission, bonus or allowances (and other amounts covered by s 10(2)(b) to (d) of the JobKeeper rules) equal or exceed the fortnightly JobKeeper amount — $1,500 in the case of Qantas as the dispute arose under JobKeeper 1.
This was by deliberate design so that employers need not be concerned with when the hours were worked or whether the payment was in advance or arrears. It is based on whether the minimum JobKeeper amount (of $1,500) was paid in the fortnight.
Under s 789GDA(2) of the FWA:
If a JobKeeper payment is payable to an employer for an employee of the employer for a fortnight, the employer must ensure that the total amount payable to the employee in respect of the fortnight is not less than the greater of the following:
- the amount of JobKeeper payment payable to the employer for the employee for the fortnight;
- the amounts payable to the employee in relation to the performance of work during the fortnight.
As you can see, the phrasing between the FWA and the JobKeeper rules unfortunately differs. An employer could meet the wage condition under the JobKeeper rules by paying an employee $1,500 or more in the fortnight, even if the amount relates to other periods. However, under the FWA, making a payment in the fortnight only for the work performed in another period and not also paying the minimum $1,500 would breach the FWA, with significant penalties.
The Qantas dispute focused on overtime paid to employees in pay cycles following the period of actual work, and annual leave taken.
By paying only the overtime in the later period and not an additional $1,500, the airline met the wage condition under the JobKeeper rules, but was found to have breached s 789GDA of the FWA. Similarly, paying annual leave of $1,500 in a fortnight met the wage condition, but the Federal Court found that leave paid during a fortnight is not earned during that fortnight, and therefore does not relate to the performance of work during the fortnight. Accordingly, paying leave without also paying an additional $1,500 was found to have breached s 789GDA.
This has significant implications for employers who unintentionally, and informed by ATO guidance based on how the JobKeeper scheme was understood to operate, may have not met the requirements of the FWA. The JobKeeper rules were designed to overcome the very problem caused by the wording in the FWA; that is, it was not supposed to have regard to the work performed in the fortnight or require the payment made to relate to work performed in the fortnight.
As Flick J concluded at paragraph 68 of the judgment:
If the consequence of the interpretation now given to s 789GDA(2)(b) is that idiosyncrasies arise in respect to the quantification of amounts that an employee is to receive – including the prospect that employees may benefit from a ‘windfall’ – so be it. It remains a matter for the Legislature to ‘tweak’ or adjust the [JobKeeper] Scheme if it sees fit.
The Government has delivered a sensible and gentle Federal Budget for the times, but the need for genuine tax reform remains, and should not be forsaken due to the ubiquitous, difficult economic conditions. Let us hope that the 2020–21 Budget measures are an appetiser for the main course, which ultimately must be holistic tax reform, perhaps as soon as the release of the 2021–22 Budget expected on 11 May 2021.
As always, we welcome your views and thoughts, which you can provide here.
Robyn Jacobson CTA