Tax cuts pass Parliament

Tax cuts pass Parliament The Government announced various tax measures in the 2020 Budget on 6 October 2020, and it was able to secure passage of legislation containing some of the important measures very shortly afterwards, as summarised below. 

Tax relief for individuals 

The Government brought forward 'Stage two' of their Personal Income Tax Plan by two years, so that, from 1 July 2020:
the low income tax offset increased from $445 to $700;
the top threshold of the 19% tax bracket increased from $37,000 to $45,000; and
the top threshold of the 32.5% tax bracket increased from $90,000 to $120,000. In addition, in 2020/21, low and middle-income earners will receive a one-off additional benefit of up to $1,080 from the low and middle income tax offset. Tax relief for business Businesses with a turnover of up to $5 billion are now able to immediately deduct the full cost of eligible depreciable assets as long as they are first used or installed by 30 June 2022. 

To complement this, the Government will also temporarily allow companies with a turnover of up to $5 billion to offset tax losses against previous profits on which tax has been paid. Also, businesses with an aggregated annual turnover between $10 million and $50 million will, for the first time, be able to access up to ten small business tax concessions. Under the changes passed by the Parliament, the Government will also enhance previously announced reforms to invest an additional $2 billion through the Research and Development Tax Incentive.

Employers need to apply recent tax cuts as soon as possible

The ATO has now updated the tax withholding schedules to reflect the 2020/21 income year personal tax cuts — the updated schedules are available at ato.gov.au/taxtables. The ATO has said that employers now need to make adjustments in their payroll processes and systems in order for the tax cuts to be reflected in employees’ take-home pay. Employers must make sure they are withholding the correct amount from salary or wages paid to employees for any pay runs processed in their system from no later than 16 November onwards. Employees should be aware that any withholding on the old scales will be taken into
account in their tax return.

Deferrals of interest due to COVID-19
​
Many lenders have recently allowed borrowers with investment property loans to defer repayments for a period of time. While repayments are being deferred, interest (and fees) will usually be added to the loan
balance (i.e., the deferred interest will be 'capitalised'). However, it is important to recognise in such situations that, while repayments are not being made during the relevant period, borrowers continue to ‘incur’ the interest during that time. Further, interest will continue to be calculated
and will accrue on both the unpaid principal sum of the loan and the unpaid (i.e., capitalised) interest. The interest that accrues on the unpaid or capitalised interest is referred to as ‘compound interest’. Importantly, the ATO has previously acknowledged that, if the underlying, or ordinary, interest is deductible, then the compound interest will also be deductible. Accordingly, interest expenses (including any compound interest) will generally be deductible to the extent the borrowed monies are used for income producing purposes (such as where the borrowed funds are used to purchase a rental property). However, interest on a loan will not be deductible to the extent to which the borrowed 
funds are used for private purposes (e.g., to purchase a home, a private boat, or to pay for a holiday). Note that, despite the name, "penalty interest" is not always "in the nature of interest" and, in some cases, may not be deductible (e.g., due to the expense being capital in nature).

Simplified home office expense
​
deduction claims due to COVID-19 Given that many Australians continue to work from home due to COVID-19, the ATO has updated its Practical Compliance Guideline which allows taxpayers working from home to claim a rate of 80 cents per hour, by keeping a record of the number of hours they have worked
from home, rather than needing to calculate specific running expenses. The application of the Guideline has been extended so that it now applies from 1 March 2020 until 31 December 2020. This determination is intended to be in effect until (and will be repealed from) 22 March 2021, unless the Government determines otherwise. Note that the Government has also released exposure draft legislation to make these reforms (in respect of virtual meetings and electronic document execution) permanent.

COVID-19 and loss utilisation
​
The ATO understands the way some businesses operate has been impacted as a result of COVID-19. Some of these impacts may have resulted in changes that affect whether they are able to utilise their carried-forward losses in the current or a future income year. For companies to utilise their carried-forward losses in a particular year, they need to satisfy the continuity of ownership test or, if they fail that test, they need to satisfy the business continuity test ('BCT'). Whether a company can utilise carried-forward losses requires a consideration of its facts and circumstances. Generally, a company that has completely closed its business with no intention to resume will fail the BCT. However, a company that has temporarily closed its business may still be able to satisfy the BCT. Importantly, the mere receipt of JobKeeper payments will not cause a company to fail the BCT.

Employees on JobKeeper can satisfy the ‘work test’

The Australian Prudential Regulation Authority ('APRA') has confirmed that, where an employer is receiving the JobKeeper wage subsidy for an individual, superannuation funds should consider the individual to be ‘gainfully employed’ for the purpose of the ‘work test', even if that individual has been fully stood down and is not actually performing work. As such, superannuation funds can assume that all members in receipt of the JobKeeper subsidy satisfy the ‘work test’ when determining whether they can make voluntary superannuation contributions.

We summarise the below key changes announced in the Federal Budget that was delivered on 6 October 2020.  This is for informational purposes and does not take the place of advice suited to your circumstances.   Should you require any further information or explanation please contact your accountant at SH Tait & Co.
INDIVIDUAL TAXPAYERS:

Changes to personal income tax rates

The Government has legislated to bring forward changes to the personal income tax rates that were due to apply from 1 July 2022, so that these changes now apply from 1 July 2020 (i.e., from the 2021 income year). These changes include: 

• increasing the upper threshold of the 19% personal income tax bracket from $37,000 to $45,000; and 
• increasing the upper threshold of the 32.5% personal income tax bracket from $90,000 to $120,000.

 The current and proposed tax brackets are summarised below (excludes the Medicare Levy). 

​Employers are to reduce the tax withheld from 13 October 2020.

Changes to the Low Income Tax Offset ('LITO')

The Government announced that it will also bring forward the changes that were proposed to the LITO from 1 July 2022, so that they will now apply from 1 July 2020 (i.e., from the 2021 income year), as follows:

• The maximum LITO will be increased from $445 to $700.
• The increased (maximum) LITO will be reduced at a rate of 5 cents per dollar, for taxable incomes between $37,500 and $45,000.
• The LITO will be reduced at a rate of 1.5 cents per dollar, for taxable incomes between $45,000 and $66,667.

The current and proposed LITO are summarised below:  

Note that, the Government also announced that the current Low and Middle Income Tax Offset (‘LAMITO’) would continue to apply for the 2021 income year (which is available in addition to the LITO for eligible taxpayers). For example, the maximum LAMITO of $1,080 will be available to taxpayers with taxable incomes of between $48,000 and $90,000 in the 2021 income year.  

BUSINESS TAXPAYERS:
Expanding access to Small Business Tax Concessions
The Government has announced that it will expand the concessions available to Medium Sized Entities to provide access to up to ten Small Business Concessions.   

For this purpose, a Medium Sized Entity is an entity with an aggregated annual turnover of at least $10 million and (less than) $50 million.   

The expanded concessions will apply in three phases, as follows:

1. From 1 July 2020, eligible businesses will be able to immediately deduct certain start-up expenses and certain prepaid expenditure.
2. From 1 April 2021, eligible businesses will be exempt from FBT on car parking and multiple work-related portable electronic devices, such as phones or laptops, provided to employees.
3. From 1 July 2021:
   • Eligible businesses will be able to access the simplified trading stock rules, remit pay as you go (PAYG) instalments based on GDP adjusted notional tax and settle excise duty and excise-equivalent customs duty monthly on eligible goods.
   • Eligible businesses will generally have a two-year amendment period apply to income tax assessments for income years starting from 1 July 2021.
   • The Commissioner of Taxation’s power to create a simplified accounting method determination for GST purposes will be expanded to apply to businesses below the $50 million aggregated annual turnover threshold. 

JobMaker Hiring Credit
The Government will introduce a JobMaker Hiring Credit to incentivise businesses to take on additional young job seekers.   

From 7 October 2020, eligible employers will be able to claim $200 a week for each additional eligible employee they hire aged 16 to 29 years old and $100 a week for each additional eligible employee aged 30 to 35 years old. New jobs created until 6 October 2021 will attract the credit for up to 12 months from the date the new position is created. 

The JobMaker Hiring Credit will be claimed quarterly in arrears by the employer from the ATO from 1 February 2021. Employers will need to report quarterly that they meet the eligibility criteria. 

The amount of the credit is capped at $10,400 for each additional new position created.  Furthermore, the total credit claimed by an employer cannot exceed the amount of the increase in payroll for the reporting period in question (see employer eligibility requirements below). 
Who is an eligible employee?
Employees may be employed on a permanent, casual or fixed term basis.  To be an ‘eligible employee’, the employee must:

• be aged (i.e., at the time their employment started) either:
  • 16 to 29 years old, to attract the payment of $200 per week; or
  • 30 to 35 years old to attract the payment of $100 per week;
• have worked at least 20 paid hours per week on average for the full weeks they were employed over the reporting period;
• have commenced their employment during the period from 7 October 2020 to 6 October 2021;
• have received the JobSeeker Payment, Youth Allowance (Other), or Parenting Payment for at least one month within the past three months before they were hired; and
• be in their first year of employment with this employer and must be employed for the period that the employer is claiming for them. 

Certain exclusions apply, including employees for whom the employer is also receiving a wage subsidy under another Commonwealth program.  
Who is an eligible employer?
An employer is able to access the JobMaker Hiring Credit if the employer: 

• has an ABN
• is up to date with tax lodgment obligations;
• is registered for Pay As You Go withholding;
• is reporting through Single Touch Payroll;
• is claiming in respect of an 'eligible employee'
• has kept adequate records of the paid hours worked by the employee they are claiming the hiring credit in respect of; and
• is able to demonstrate that the credit is claimed in respect of an additional job that has been created. Broadly, there must be an increase in the business’ total employee headcount and also in the payroll of the business for the reporting period (based on a comparison over a specified reference period). 

Employers do not need to satisfy a fall in turnover test to access the JobMaker Hiring Credit. Certain employers are excluded, including those who are claiming the JobKeeper payment.   New employers created after 30 September 2020 are not eligible for the first employee hired but are (potentially) eligible for the second and subsequent eligible hires. 
Uncapped immediate write-off for depreciable assets

The Government has announced it will introduce the following changes to the Capital Allowance provisions:

1. Businesses with an aggregated annual turnover of less than $5 billion will be able to claim an immediate deduction (what the Budget terms as ‘full expensing’) for the full (uncapped) cost of an eligible depreciable asset, in the year the asset is first used or is installed ready for use, where the following requirements are satisfied:
   • The asset was acquired from 7:30pm AEDT on 6 October 2020 (i.e., Budget night).
   • The asset was first used or installed ready for use by 30 June 2022.
   • The asset is a new depreciable asset or is the cost of an improvement to an existing eligible asset, unless the taxpayer qualifies as a small or medium sized business (i.e., for these purposes, a business with an aggregated annual turnover of less than $50 million), in which case the asset can be second-hand.

·  As is currently legislated, businesses with aggregated annual turnover between $50 million and $500 million can still deduct the cost of eligible second-hand assets costing less than $150,000 that are purchased from 2 April 2019 and first used or installed ready for use between 12 March 2020 and 31 December 2020 under the enhanced instant asset write-off. The Government has announced that it will extend the period in which such assets must first be used or installed ready for use by 6 months, until 30 June 2021.

1. Small businesses (i.e., 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 (i.e., up to 30 June 2022). Furthermore, 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.  

 
CORPORATE TAX PAYERS INCLUDING PTY LTD COMPANIES:

Temporary loss carry back for eligible companies

The Government has announced that it will introduce measures to allow companies with a turnover of less than $5 billion to carry back losses from the 2020, 2021 or 2022 income years to offset previously taxed profits made in or after the 2019 income year.
   
This will allow such companies to generate a refundable tax offset in the year in which the loss is made. The tax refund is limited by requiring that the amount carried back is not more than the 
earlier taxed profits and that the carry back does not generate a franking account deficit.

The tax refund will be available on election by eligible companies when they lodge their tax returns for the 2021 and 2022 income years. Note that, companies that do not elect to carry back losses under this measure can still carry losses forward as normal. 
The application of these new measures to our corporate business clients will be considered during tax planning work performed in April / May 2021.

OTHER BUDGET ANNOUNCEMENTS:
Supporting apprentices and trainees
The Australian Government is extending and expanding the Supporting Apprentices and Trainees wage subsidy, to include medium-sized business who had an apprentice in place on 1 July 2020.  Eligible employers can apply for a wage subsidy of 50% of an eligible apprentice or trainee’s wages paid until 31 March 2021.
·        Your small business may be eligible if:
·        you employ fewer than 20 people; or
·        you are a small business with fewer than 20 people, using a Group Training Organisation; and
·        the apprentice or trainee was undertaking an Australian Apprenticeship with you on 1 July 2020 for claims after this date. Claims prior to 1 July 2020, will continue to be based on the 1 March 2020 eligibility date.
·        Your medium-sized business may be eligible if:
·        you employ fewer than 200 people; or
·        you are a medium business with fewer than 200 people, using a Group Training Organisation; and
·        the apprentice or trainee was undertaking an Australian Apprenticeship with you on 1 July 2020.
Any employer (including all small, medium or large businesses and Group Training Organisations) who re-engages an apprentice or trainee displaced from an eligible small or medium business may also be eligible for the subsidy. Further information is available at https://www.australianapprenticeships.gov.au/search-aasn
  
Small business COVID-19 Adaption Grant Program
The objective of this program is to support small businesses subject to closure or highly impacted by the coronavirus (COVID-19) shutdown restrictions announced by the Queensland Government, to adapt and sustain their operations, and build resilience.  The first round of funding for this program is 100% subscribed, however round two is currently open specifically to regional businesses, noting that subscription is nearing capacity.  To be a 'regional business', your principal place of business must be in a local government area within Queensland that is not identified as a South East Queensland (SEQ) location.
To be eligible, your business must:

• have been subject to closure or otherwise highly impacted by current shutdown restrictions announced by Queensland's Chief Health Officer on 23 March 2020
• have experienced a minimum 30% decline since 23 March 2020, over a minimum 1-month period due to the onset and management of COVID-19
• employ staff and have fewer than 20 employees at the time of applying for the grant (employees must be on your payroll and does not include the business owner(s))
• have a valid Australian Business Number (ABN) active as at 23 March 2020
• be registered for GST
• have a Queensland headquarters
• have an annual turnover over $75,000 for the 2018–19 or 2019–20 financial year, or you can provide financial records that show this will be met for recently started small businesses
• have a payroll of less than $1.3 million
• not be insolvent or have owners or directors that are an undischarged bankrupt.

The available grant amount is a minimum of $2,000 and up to a maximum of $10,000 per eligible small or micro business.
In recognition of the significant impacts of COVID-19 on small businesses, the funding can be used towards meeting a variety of ongoing costs, including the following:

• financial, legal or other professional advice to support business sustainability and diversification
• continuing to meet business operational costs including utilities, council rates, rent, telecommunication charges, insurance fees, licensing or franchise fees
• strategic planning, financial counselling or business coaching aligned to business development and diversification
• building the business through marketing and communications activities (e.g. content development – web pages, mobile apps, visual and audio media etc.)
• digital/technological strategy development

 
Modern Manufacturing Initiative
This Modern Manufacturing Strategy (the Strategy) is led by industry, for industry, to help our manufacturers to scale-up, become more competitive and build more resilient supply chains. The Australian Government will be a strategic investor in this, in order to drive productivity and create jobs for Australians, both now and for generations to come.  Key initiatives will deliver immediate and long-term economic benefits.

• $1.3 billion Modern Manufacturing Initiative – The MMI will transform manufacturing businesses and help them to scale-up, translate ideas into commercial successes and integrate into local and international value chains.
• $107.2 million Supply Chain Resilience Initiative – The Supply Chain Resilience Initiative will help Australia address identified gaps in critical supply chains.
• $52.8 million Manufacturing Modernisation Fund round two – The Manufacturing Modernisation Fund round two will deliver quick action to unlock business investment on shovel ready projects.

 
The program is targeted at growth opportunities in the following areas:
 

• Resources Technology & Critical Minerals Processing
• Food & Beverage
• Medical Products
• Recycling & Clean Energy
• Defence
• Space  

This funding is targeted at substantially large businesses who are looking to further ‘scale up’ their operations.  More information on the funding available is at https://www.industry.gov.au/news-media/modern-manufacturing-initiative-and-national-manufacturing-priorities-announced
Insolvency reforms to support small business

The Government will implement certain insolvency reforms, effective from 1 January 2021 (subject to the passing of legislation) to support small business, including the following:   

• The introduction of a new streamlined process to enable eligible incorporated small businesses (broadly, those with liabilities of less than $1 million) in financial distress to restructure their debt.
• Simplifying the liquidation process for eligible incorporated small businesses (to allow faster and lower-cost liquidations, increasing returns for creditors and employees).
• Support for the insolvency sector (to ensure it can respond effectively to increased demand and to the needs of small business).  

Currently, the insolvency system faces a number of challenges. These include an increase in the number of businesses in financial distress due to COVID-19, a ‘one-size-fits-all’ system, and high costs and lengthy processes that can prevent distressed small businesses from engaging with the insolvency system early thereby reducing their opportunity to restructure and survive. Temporary insolvency and bankruptcy protections that were introduced in March 2020 to provide relief for businesses impacted by COVID-19 are due to expire on 31 December 2020 (e.g., under these measures, directors are temporarily relieved from personal liability for trading while insolvent). However, the number of companies being put into external administration is expected to increase significantly, putting additional stress on the system. Therefore, the above proposed reforms will help more businesses to successfully get to the other side of the crisis.  If your business is in significant financial distress, please contact our office before 31 December 2020 so that we can discuss these provisions in further detail.

Special COVID-19 Superannuation Condition of Release Extended

Regulations  that  extend  the  time  frame  of  the special  condition  of  release  to  access  
$10,000 from superannuation for individuals experiencing financial difficulties due to COVID-19 
have been formally registered.
The   ability   to   withdraw   up   to   $10,000   from superannuation (if certain conditions are 
met) was initially set to expire on 24 September 2020.
The newly registered Regulations to the SIS Act will now enable an eligible individual to withdraw 
up to $10,000 from superannuation (which is not assessable to the individual) until 31 December 
2020.
To be eligible, a citizen or permanent resident of Australia  (and  New  Zealand)  must  require  
the COVID-19 early release of super to assist them to deal with the adverse economic effects of 
COVID- 19.
In  addition,  one  of  the  following  circumstances must apply:
θ    The individual is unemployed;
θ    The individual is eligible to receive one of the following;
–      JobSeeker payment;
–      Youth Allowance for job seekers (unless they are undertaking full-time study or are a new 
apprentice);
–      Parenting payment (which includes the single and partnered payments);
–      Special Benefit; or
–      Farm Household Allowance;
θ    On or after 1 January 2020 either;
–     they were made redundant;
–     their working hours were reduced by 20% or more (including to zero); or
–     they were a sole trader and their business was suspended or there was a reduction in turnover 
of 20% or more (partners in a partnership are not eligible unless the partner satisfies any other 
eligibility criteria).


Tax treatment of JobKeeper Payments

Broadly,  JobKeeper  Payments  received  by  an employer are assessable income to the employer.
Likewise,      the      payments      an      employer subsequently  makes  to  an  employee  that  
are funded  (in  whole  or  in  part  by  the  JobKeeper Payment)  are  generally  allowable  
deductions  to the employer.
The ATO has recently issued some guidance for employers in receipt of JobKeeper Payments.
For  sole  traders,  they  will  need  to  include  the payments as business income in their 
individual tax return.
For  partnerships or  trusts, JobKeeper  payments should  be  reported  as  business  income  in  
the relevant partnership or trust tax return.
For  a  company,  report  JobKeeper  payments  as income in the company tax return.
For a taxpayer that has repaid (or is in the process of repaying) any of their JobKeeper payments 
to the  ATO,  these  amounts  do  not  need  to  be included in their tax return.

Note  a business would be  refunding JobKeeper payments to the ATO if it had been discovered that 
the business had incorrectly claimed JobKeeper payments,  and  had  either  voluntarily  disclosed 
this   to   the   ATO,   or   the   ATO   made   this determination as a result of audit activity.

The normal rules for deductibility apply in respect of   the   amounts   a   taxpayer   pays   to   
their employees,   even   where   those   amounts   are subsidised by the JobKeeper payment.
That is, if the underlying salary is deductible, then it is still deductible to the employer where 
it has been subsidised by a JobKeeper payment.
For  employees  who  have  received  JobKeeper payments,  these  will  be  included  as  salary and 
wages (or an allowance) in their income statement (or   payment   summary)   as   provided   by   
their employer.
If  you  have  any  queries  about  the  JobKeeper Payment scheme, please contact our office.


Deduction for work-related vehicle expenses disallowed

In   a   decision   of   the   Administrative   Appeals Tribunal,  a  taxpayer,  Mr  Bell,  was  a  
denied  a deduction for $21,565.73 of work-related vehicle expenses for the 2016 income year.
Mr    Bell,    was    a    construction    worker    who predominantly worked on a construction 
site in an eastern    suburb    of    Melbourne    and    lived approximately  100  kilometres  
away  from   that worksite.
Mr  Bell  owned  a  ute  that  had  a  load  carrying capacity of more than one tonne – so it fell 
outside the definition of a 'car' for the purposes of the ITAA 1997.
Mr Bell claimed a total deduction for $24,865.73 for  motor  vehicle  expenses   and  received  an 
allowance    under    his    Enterprise    Bargaining Agreement.
This  allowance  did  not  vary with  the  amount  of travel  undertaken  and  totalled  $15,221  
for  the year.
Mr Bell contended that he was required to use his vehicle  to  transport  heavy/bulky  goods  
(tools) between  his  home  and  his  workplace  and  to collect  supplies  and  equipment  from  
hardware stores while travelling between his workplace and his home.
Ordinarily,  travel  from  home-to-work  (and  back again) is considered non-deductible.  However, 
if an employee is required to carry heavy/bulky
equipment   for   which   there   are   no   secure storage  facilities  at  work,  the  travel  
between home and work  with the heavy/bulky equipment can be considered deductible.
Unfortunately  for  Mr  Bell,  evidence  before  the Tribunal indicated that there were safe and 
secure storage  facilities  for  his  tools  (the  bulky/heavy equipment) at the worksite.
Accordingly, Mr Bell was unable to rely upon the ‘bulky goods’ exception to recharacterise home- 
to-work   travel   as   being   a   deductible   work expense.
Instead, it  retained its ordinary private and non- deductible status.
Mr   Bell   was   unsuccessful   in   advancing   the argument that he was entitled  to a deduction 
in relation to the motor vehicle expenses because he was in receipt of an allowance.
However, Mr Bell was able to convince the ATO that he had undertaken at least some work-related 
travel using his vehicle.  The ATO allowed Mr Bell a   deduction   under   the   'cents   per   
kilometre method'  up  to  the  maximum  dollar  amount  for 5,000  kilometres  for  the  2016  
income  year  of
$3,300.

Editor:   This decision provides a timely reminder that  simply  carrying  bulky  equipment  
between home   and   work   will   not   make   these   trips deductible, where there is a secure 
place for the equipment   to   be   stored   at   the   employee’s worksite.  The decision also 
highlights the fallacy of assuming that being in receipt of an allowance somehow  entitles  the  
taxpayer  to  an  offsetting deduction.
The taxpayer was technically 'lucky' that he was allowed    the    'cents    per    kilometre    
method' deduction  for  work-related  travel,  given  that  his motor vehicle fell outside the 
definition of a 'car'.
This is because the cents per kilometre method only applies to 'cars', so it could be said that the 
ATO  was  generous  to  the  taxpayer  in  these circumstances.

Please contact our office if you have any queries as to the deductibility of work-related travel.

Please Note: Many of the comments in this publication are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstances.