With an economy ravaged by the effects of COVID-19, the Treasurer, Josh Frydenberg, last night unveiled a big spending Federal Budget designed to get the Australian economy moving.
There are big tax cuts for individuals and a number of significant boosts for businesses, all designed to increase spending and boost jobs. Here’s what the Budget will mean for small businesses and individuals:
Tax cuts for individuals
There’s a big tax cut coming.
The Treasurer is bringing forward tax cuts originally intended to be introduced from 1 July 2022 and applying them from 1 July 2020 instead.
Those with a taxable income between $45,000 and $90,000 will be $1,080 better off this year, with the size of the tax cut then increasing to a maximum of $2,430 this year for those with a taxable income of $120,000 or more.
The tax cut will be passed on when Parliament passes the necessary legislation which could happen as soon as this week.
The ATO will then be able to implement the cut immediately by updating their PAYG withholding schedules so that employers can deduct the new, lower amounts of tax that apply to income.
From 1 July 2020:
- The top threshold of the 19% personal income tax bracket will be increased from $37,000 to $45,000.
- The top threshold of the 32.5% personal income tax bracket will be increased from $90,000 to $120,000.
In addition, the Low and Middle Income Tax Offset (LMITO) will be retained for the 2020-21 income year.
This was originally intended to be removed when the changes to tax thresholds were introduced but with the early introduction of the new tax thresholds, the government has decided to retain the offset for this year, meaning that taxpayers will benefit both from the change in thresholds and the LMITO.
The Low Income Tax Offset (LITO) will also increase from $445 to $700.
The increased LITO will be withdrawn at a rate of 5 cents per dollar between taxable incomes of $37,500 and $45,000. The LITO will then be withdrawn at a rate of 1.5 cents per dollar between taxable incomes of $45,000 and $66,667.
The full impact on your tax position is set out in the table below.
Note that the savings from the increase in thresholds will be passed on through your wage or salary as soon as legislation passes. Savings from offsets will be passed on through lodgement of the 2020/21 tax return from 1 July 2021.
New tax breaks for small business
For small businesses, there are two significant tax breaks included in the Budget:
Temporary “Full Expensing” deduction for businesses
Businesses with aggregated annual turnover of less than $5 billion will be able to deduct the full cost of eligible capital assets acquired from 7:30pm AEDT on 6 October 2020 (Budget night) and first used or installed by 30 June 2022.
“Full expensing” in the year of first use will apply to new depreciable assets and the cost of improvements to existing eligible assets.
For small- and medium-sized businesses (with aggregated annual turnover of less than $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 instant asset write-off.
Businesses that hold assets eligible for the existing $150,000 instant asset write-off will have an extra six months, until 30 June 2021, to first use or install those assets.
Small businesses (with aggregated annual turnover of less than $10 million) can deduct the balance of their simplified depreciation pool at the end of the income year while full expensing applies.
The provisions which prevent small businesses from re-entering the simplified depreciation regime for five years if they opt out will continue to be suspended.
In a nutshell, this means that businesses can now immediately deduct the full cost of all purchases of items such as:
- Plant and machinery
- Fixtures and fittings
- Technology, such as laptops and computers
- Motor vehicles such as utes, vans and most cars
Whilst this measure is undeniably generous (and potentially expensive for the Government), it does suffer from the same problem as the existing instant asset write-off;
To benefit, businesses need either the cash or borrowing capacity to invest in new capital assets in order to benefit from the tax break.
With many businesses currently cash strapped and unable or unwilling to borrow, initial take-up may be limited, at least until some semblance of business confidence is restored.
Temporary Loss Carry-Back to support cash flow
Losses incurred up to 2021‑22 can be carried back against profits made in or after 2018‑19.
With many companies and expecting to make losses this year due to COVID-19, these companies may elect to receive a tax refund from the ATO for the tax they paid in earlier years back to 2018-19 when they lodge their 2020‑21 and 2021‑22 tax returns.
Currently, companies are required to carry losses forward to offset profits in future years. Companies that do not elect to carry back losses under this measure can still carry losses forward as normal.
Mark Chapman is the Director of Tax Communications at H&R Block.