The 2021 Federal Budget is designed to help Australia recover from economic crisis and highlights the need particularly, for small businesses to plan for prospective future opportunities. As we have seen with all legislation this year, the devil is in the detail. Working with advisors has become crucial during this time, especially when it comes to navigating the waters of an uncertain and everchanging economy. In this article, we briefly highlight each of the key benefits of the budget. We will provide more details as the legislation is released.
The focus of the Budget is the personal income tax cuts, designed to support spending. These tax cuts include the continuation of the Low-Medium Income Tax Offset, which will benefit more than 11 million taxpayers. Additionally, sole traders will access a standalone tax discount of $1,000.
Will I get a one-off tax break?
|$37,000 or less||Up to $510|
|$37,001 – $48,000||$510-$2,160|
|$48,001 – $90,000||$2,160-$2,295|
|$90,001 – $126,000||$2,295 – $2,745|
Personal Income Tax Cuts
The budget holds a continued focus on the Personal Income Tax Plan, with the announcement of further tax bracket cuts. These cuts aim to reduce the marginal tax rate by 2.5%, from 1 July 2024. Stage two, originally expected to take effect from 1 July 2022, now applies from 1 July 2020. This will see the increase of the top thresholds of both the 19% and 32.5% personal income tax brackets.
Impact of the tax bracket cuts
|2020-21 Onwards||2020-21 Onwards|
|Nil – $18,200||0%|
|$18,201 – $45,000||19%|
|$45,001 – $120,000||32.5%|
|$120,001 – $180,000||37%|
Low Income Tax Offset (LITO)
The proposed increase of $445 to $700 will be brought forward. This will be recovered at a rate of 5 cents per dollar between taxable incomes of $37,500 and $45,000 and an additional 1.5 cents per dollar from taxable incomes between $45,001 and $66,667.
Low and Middle Income Tax Offset
As a one-off benefit in the 2021 year, you will receive the Low and middle income tax offset as well as the stage two tax cuts.
Why is this important?
Backdating the tax cuts means that additional capital will be deposited into employee’s bank accounts and hence providing households with an increased income (once legislation is passed and software can be updated). The overall benefit to the economy will depend if the money is saved or spent. If spent, this is when we see an increase in jobs and economic growth – which in turn leads to an increase in economic confidence.
Changes to Private Health Cover
The maximum age of dependants allowed under Private Health insurance policies will increase from 24 years to 31 years and the age limit of dependants with disabilities will be removed.
Economic support payments
The Government proposes to provide two $250 economic support payments to be made from early December 2020 and early March 2021. This will be available to eligible recipients of the following payments and concession cards:
- Age Pension
- Disability Support Pension
- Carer Payment
- Carer Allowance
- Pensioner Concession Card (PCC)
- Eligible DVA payments
- DVA Gold card
- DVA Seniors card
- Family Tax Benefit, including Double Orphan Pension (Only for those not already receiving a primary income support payment)
Note: Clients eligible for one of the above payments/concession cards on 27 November 2020 will be eligible for the December 2020 payment, and clients eligible for one of the above payments/concession cards on 26 February 2021 will be eligible for the March 2021 payment.
Youth employment and Job Maker
Eligible employers who can demonstrate that the new employee will increase overall employee headcount and payroll, 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. From 7 October 2020, eligible employers will be able to claim the JobMaker Hiring Credit for each eligible employee for up to 12 months from the date of employment of the eligible employee.
Job Maker Plan
The Boosting Apprentices Wage Subsidy has been introduced to replace the SAT subsidy. This new subsidy is accessible by businesses of all sizes and will be available from 5 October 2020 to 30 September 2021, for those apprentices and trainees commencing employment during this period. Eligible businesses will be reimbursed with up to 50% of the apprentice or trainee’s wages worth up to $7,000 per quarter. This subsidy is capped at 100,000 places. To minimise disruptions to these new apprentice arrangements, the commencement of the Incentives for Australian Apprenticeships Program will be delayed until 1 July 2021.
Points to consider:
- You need to increase the head count of your business
- Ensure you are avoiding discrimination in the hiring process if the candidate is on benefits
- Factor in the time to train the new employees correctly into the positions
- As with Job Keeper, you need to pay the employee first and then you will put in a claim at a later date
- Youth unemployment is such a significant issue. This is a great way to motivate businesses to hire young people
- We will provide more details on how this will work with the apprenticeship announcement once we know more
Instant Asset Write Off
The Government is eager for businesses to invest. From 7:30pm AEDT on 6 October 2020, the acquisition of eligible capital assets will become available to eligible businesses. This measure enables businesses with an aggregated turnover of less than $5 billion, to fully write-off the cost of new depreciable assets and the cost of improvements to existing eligible assets in the first year of use.
For businesses with a combined turnover under $50 million, full expensing also applies to second-hand assets. 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 enhanced instant asset write-off. Businesses that hold assets eligible for the enhanced $150,000 instant asset write-off will have an extra six months, until 30 June 2021, to first use or install those assets.
Small business entities (with an annual turnover of less than $10 million) using the simplified depreciation rules, can deduct the balance of their simplified depreciation pool at the end of the income year, while full expensing applies. The provisions preventing small businesses from re-entering the simplified depreciation regime for five years if they opt-out, will continue to be suspended.
Points to consider:
Whilst the instant asset write-off will provide some instant tax relief, we still face the following issues:
- Future tax issues if the asset is sold. When the asset is sold in the future, 100% of the proceeds are considered business income. If you are trading as a Trust, Sole Trader or a Partnership, this can mean that the amount of tax you pay on the sale of the asset is more than the benefit you received when you purchased the asset.
- You are still need required to pay for the asset. If you purchase an asset for $100,000 and you trade as a Company, you initially need $100,000 in profit to offset. The tax saving would be $26,000. However, you still need to fund the $74,000 in repayments.
- Motor vehicles are limited as to what you are entitled to claim.
- Fringe Benefits Tax in Companies and Trusts can entail that the long-term tax payable on the car is greater than the initial benefit of the purchase of the car. Especially in cases where the vehicle is costing more than the $59,136 (deduction limit for 2020/21 year).
- The ability to access personal and business lending with the instant asset write off may be problematic, as it can affect clients’ serviceability. Banks will interpret the write off as a loss for the financial year, and so the lending is not assessed favourably. We can assist you in navigating this by running accounting and tax depreciation schedules.
- It is important to remember that the repayments of Chattel mortgages will affect your serviceability for other lending – such as home loans and business lending. It is imperative when considering an asset purchase, that we consider your whole personal situation and timing of the purchases to ensure that you are not adversely affected.
Loss Carry Back
Companies with turnover of up to $5 billion will now be able 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. The temporary loss carry-back provision will be available by eligible businesses when they lodge their 2020-21 and 2021-22 tax returns. The tax refund will be limited by requiring that the amount carried back is no more than the earlier taxed profits and that the carry back does not generate a franking account deficit*.
The loss carry back is for those businesses that are trading as Companies. It will be of great benefit for those who have seen the effect of the pandemic in the later stages. The key benefit will be assisting with the levelling out of tax payables. Many businesses with tax payable in May 2020 who are making a loss in the 2021 year, will be able to access the tax refund in early July and August. Therefore, it is not out of their cashflow for a long period of time.
*In relation to the Franking Deficit, businesses will need to watch if:
- They have been claiming Research and Development tax offsets
- Paid dividends on prior year profits
- Have not paid their tax
It is vital that you are maximising the benefits of the Budget and utilising all the incentives available to you. This is something that requires planning, and as Accountants we are best equipped to help you navigate this.
If you have any questions about the Federal Budget or what it means for you, please do not hesitate to get in touch with us by calling 07 5451 1118 or email firstname.lastname@example.org