Federal Budget 2020-21: Initial observations on some of the major tax measures affecting business

This year’s highly anticipated Budget sets in motion key aspects of the economic recovery plan through a mixture of tax cuts, business concessions and bold measures to stimulate spending and investment.

The Budget is built on key assumptions, including a vaccine for COVID-19 next year and no future lockdowns. It is critical that domestic borders are open sooner than later.

Businesses will welcome the substantial new expensing of capital expenditure regime and loss carry-back measures. Cash availability for households will be boosted by the accelerated personal income tax cuts.

Australia’s economic recovery will rely upon businesses and households spending, rather than saving, the additional cash available.

In this article, we examine some of the key announcements affecting business.

Temporary full expensing – a “game changer”

The temporary full expensing announcement for investment in capital assets by business is a ‘game changer’.

Businesses with an aggregated annual turnover of up to $5 billion will be able to deduct the full cost of eligible capital assets acquired after 7.30 pm on 6 October 2020 (Budget night) and, importantly, used or installed ready for use by 30 June 2022. Eligible capital expenditure will apply to new depreciable assets and the cost of improvements to existing eligible assets. For businesses with an aggregated annual turnover of less than $50 million, full expensing also applies to second-hand assets.

Businesses with an aggregated annual turnover between $50 million and $500 million can deduct the full cost of eligible second-hand assets under $150,000 purchased by 31 December 2020. Businesses that hold assets eligible for the enhanced $150,000 instant asset write-off will have an extra 6 months, until 30 June 2021, to first use or install those assets.

Small businesses (aggregated turnover of under $10 million) can deduct the balance of their simplified depreciation pool at the end of the income year while full expensing applies. Provisions preventing small business from re-entering the simplified depreciation regime for five years will continue to be suspended.

Observation

This is a massive announcement for businesses that are trading and have the ability to finance capital expenditure.

Importantly, the eligibility for businesses will be key – the assets must be acquired from 7.30 pm on 6 October 2020 (Budget night), and must be first used or installed ready for use by 30 June 2022.

This is a pragmatic decision, recognising that COVID-19 has caused international supply and distribution chains to be disrupted and that significant capital assets can have a significant ‘lead time’ to be used and be available for use by business.

The question of when a capital asset is used, or installed ready for use, is a factual question and we expect that, as we get closer to the key date of 30 June 2022, substantiation will be key. A business could get caught if, for example, the capital asset has been received and stored by the business, but is not yet fitted for its intended use. The ability to put the capital asset to use, or have it installed ready for use, may be affected by extraneous and unanticipated factors. Proper planning will be necessary to ensure that this requirement is satisfied.

Further, the full expensing will apply in the first year of use, and not the year of purchase. This means that expenditure on the capital asset may be deductible in either the 2021 or 2022 financial years.

While the Budget announcement gave little guidance as to what is an ‘eligible capital asset’ for the purpose of the announcement, the now-introduced Bill to implement the changes – the Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Bill 2020 – refers to “eligible depreciating assets”. Very briefly, under the proposed amendments, to be eligible for the temporary full expensing incentive, a depreciating asset must be:

  • first held, and first used or installed ready for use for a taxable purpose, between the 2020 budget time and 30 June 2022;
  • located in Australia and principally used in Australia for the principal purpose of carrying on a business;
  • in addition, the depreciating asset must not be:
    • excluded from the uniform capital allowance rules in Division 40 of the ITAA 1997 (such as a building or other capital works); or
    • subject to the capital allowance rules in Subdivision 40-E (about low value and software development pools) or 40-F (about primary production depreciating assets) of the ITAA 1997.

It is surprising that the small business threshold in this announcement has an aggregated annual turnover of less than $10 million, which is inconsistent with other Budget announcements that increase the small business entity threshold from $10 million to $50 million.

For small business, the ability to deduct the balance of their simplified depreciation pool will be a welcome announcement.

Temporary loss carry-back

The Budget announced that companies will be able to carry-back tax losses incurred in the income years ending 30 June 2020, 30 June 2021 and 30 June 2022 to offset income from the income year ended 30 June 2019 onwards. Currently, companies can only carry tax losses forward to offset income from a future income year.

The temporary measure will be available to corporate tax entities with an aggregated turnover of less than $5 billion. A refundable tax offset will be generated in the year the loss is made. However, the refund will be limited so that the amount carried back is not more than the taxed profits of the earlier year and does not generate a franking account deficit.

Companies will make the election to use the loss carry-back provisions when lodging their tax return for the income years ending 30 June 2021 and 30 June 2022.

The current tax loss rules allowing taxpayers to carry forward tax losses will remain unchanged.

Observation

Australia is following the recent lead of overseas economies, such as the US, UK and New Zealand, in introducing loss carry-back rules. However, for Australia, it’s a case of back to the future. The previous Labor government introduced loss carry-back rules in mid-2013, before they were repealed in mid-2014 by the incoming Coalition government when the minerals resource rent tax was repealed.

The temporary loss carry-back rules are a welcome relief for eligible companies that have been impacted by COVID-19. The measures effectively represent a cash flow benefit to these businesses by allowing them to reclaim some of the tax paid in limited previous years when they were profitable. The Government is also banking on these businesses using that cash flow benefit to invest under the super-charged instant depreciable asset write-off also announced in this Budget.

Taxpayers should also note that eligibility for the carry-back loss provisions is based on an aggregated turnover of less than $5 billion – including not only the turnover of the company claiming the tax loss, but all of its connected entities and affiliated entities (local and overseas). This means that a small company that is part of a larger group may be excluded from the rules if the turnover of the group exceeds the $5 billion threshold. The measures only apply to corporate tax entities and do not apply to trusts or partnerships – and so excluding many small businesses from benefiting under the measures.

Increase in small business entity turnover threshold

The Government announced in the Budget an increase to the small business entity turnover threshold from $10 million to $50 million for the following specific tax concessions:

  • From 1 July 2020, eligible entities below the threshold will be able to immediately deduct certain start-up expenses and certain prepaid expenditure.
  • From 1 April 2021, eligible entities below the threshold will be exempt from the 47% FBT on car parking and multiple work-related portable electronic devices (such as phones or laptops) provided to employees.
  • From 1 July 2021, eligible entities below the threshold will be able to access the simplified trading stock rules, remit PAYG instalments based on GDP adjusted notional tax, and settle excise duty and excise-equivalent customs duty monthly on eligible goods under the small business entity concession.

Observation

The increase to the small business entity turnover threshold from $10 million to $50 million is welcome, and it’s expected that more business will be able to now benefit from the specific concessions and simplified rules. The Government has predicted that this change will simplify eligibility and reduce red tape for around 20,000 businesses.

However, the increase to the threshold is only relevant for the specific concessions that are noted above. That is, the eligibility turnover thresholds for other small business tax concessions (such as the small business CGT concessions and the small business restructure rollover) will remain at their current levels.

This will create further confusion and uncertainty for practitioners as even more turnover thresholds will apply for different concessions; $2 million, $10 million and $50 million, depending on the relevant concession. This flies in the face of the original concept of having a simplified taxation system consisting of a range of concessions available to a small business entity; as measured by reference to a single turnover threshold.

By Hall and Wilcox

This article was originally published in Thomson Reuters’ Weekly Tax Bulletin.

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