Treasurer Josh Frydenberg delivered the Federal Budget for the 2020 – 2021 financial year on 6 October 2020. In light of the current economic conditions due to COVID-19, the budget contains various tax cuts and expanded concessions. Let’s take a look at some of the main tax related measures in the budget.
Individuals
A. Tax Cut
The treasurer proposed to bring forward individual tax cuts that were originally planned to be implemented from 2023 financial year to now commence from 1 July 2020. The tables below compare the current individual tax rates for residents and the proposed ones:
Current 2021 individual income tax rates for residents:
Proposed tax rates for 2021 – 2024 individual income tax rates for residents
The tax rates for non-residents are also adjusted according.
As the time of writing, these changes have passed the parliament and become laws.
B. Self-Education Deduction
The current law only allows an individual to claim deduction on self-education expenses that are incurred related to current employment. The government will review this and potentially allow deduction for education and training expenses not specifically related to the current employment.
C. CGT Exemption on Granny Flats
A granny flat is a self-contained living area built in a property’s backyard and traditionally provided to elderly relatives for accommodation. Depending on the arrangement, the sale of the flat (as part of the property) may or may not be subject to capital gains tax.
In the budget, the government proposed to provide CGT exemption for granny flat arrangements where there is a formal written agreement and the flats are provided to older Australians or those with disabilities who have family or other personal relationships with the owner.
Businesses
A. Temporary Full Deduction on Assets Purchased
If passed as legislation, business with aggregated annual turnover of less than $5 billion will be able to claim deduction in full for eligible capital assets purchased after 6 October 2020 and first used by 30 June 2022.
For small and medium businesses (aggregated annual turnover of less than $50 million), both brand new and second hand depreciable assets and improvements to existing eligible assets are eligible. For all other eligible businesses, only new depreciable assets and improvements to existing assets are eligible.
Small businesses (aggregated annual turnover of less than $10 million) can also write off the balance of their small business general pool at the end of the income year.
B. Temporary Loss Carry Back
The government proposed to allow eligible businesses to use tax losses incurred during 2020 to 2022 financial years to offset taxed profits in 2019 and later years. It will apply to businesses with aggregated annual turnover of less than $5 billion, and generate refundable tax offset in the year the loss incurred.
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Example:
Company ABC Pty Ltd has aggregated annual turnover of $5 million. It reported taxable income of $100,000 in 2019 financial year and paid $27,500 income tax. During 2021 financial year, the company made a tax loss of $30,000.
Under the current legislation, the company would have to carry forward the $30,000 loss to offset future taxable income.
Under the loss carry-back scheme, ABC Pty Ltd has the option to offset the loss against 2019 profit and receive a tax refund of $8,250.
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Note that the carried back tax loss cannot exceed the taxed profit and cannot generate deficit in franking account.
A business still has the option to carry forward the tax loss into future years.
C. Small Business Entity Turnover Threshold Increase
The government proposed to increase the small business entity turnover threshold for some of the small business concessions. Below are some of the concessions that are only available to businesses with aggregated turnover of less than $10 million under the current law, but will be available to businesses with aggregated annual turnover between $10 million and $50 million according to the federal budget:
Immediate deduction of certain start-up expenses (otherwise amortised over 5 years)
FBT exemption on car parking and multiple portable electronic devices provided to employees
Simplified trading stock rules
2 year amendment period for income tax returns
D. Victoria’s Business Support Grants to be Non-Assessable
The government will make the business support grant announced by the Victorian Government on 13 September 2020 income tax free. This concession will also extend to any subsequently announced grants by the Victorian Government.
Other tax related matters mentioned in the federal budget include changes to the R & D tax offset, clarification to the corporate residency tests, a better superannuation system and etc.
It is worth noting that not all of the above changes proposed in the budget have become legislations at the time of writing. Care should be taken when exercising any business decisions based on the budget.
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