What it means for Small and Medium Business

The 2020-21 Federal Budget is a road to recovery paved with cash, business measures in this year focused on jobs recovery, tax breaks and the expansion of the instant asset write-off. Below are some of the significant tax reform for small to medium business owners.

JobMaker Hiring Credit

Date of effect: From 7 October 2020 for 12 months

The JobMaker Hiring Credit will be available to eligible employers over 12 months from 7 October 2020 for each additional new job they create for an eligible employee.

Eligible employers 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.

The JobMaker Hiring Credit will be paid quarterly in arrears. It will be available for up to 12 months from the date of employment of the eligible employee with a maximum amount of $10,400 per additional new position created.

Employers will need to demonstrate that the new employee will increase overall employee headcount and payroll.

To be eligible, the employee will need to have worked for a minimum of 20 hours per week, averaged over a quarter, and received the JobSeeker Payment, Youth Allowance (other) or Parenting Payment for at least one month out of the three months prior to when they are hired.

Immediate deductions for investment in capital assets

Date of effect: Acquisition of eligible capital assets from 7:30pm AEDT on 6 October 2020 and first used or installed by 30 June 2022

The Government is really keen for business to invest. This measure enables businesses with an aggregated turnover of less than $5 billion to fully expense the cost of new depreciable assets and the cost of improvements to existing eligible assets in the first year of use. This means that an asset’s cost will be fully deductible upfront rather than being claimed over the asset’s life.

While many businesses were already eligible for an instant asset write-off for asset purchases of up to $150,000, this measure does not cap the asset’s cost, and eligibility for the higher instant asset write-off has been significantly broadened and extended (the existing $150,000 instant asset write-off applies to businesses with turnover less than $500 million and will not apply to purchases after 31 December 2020).

Second-hand assets

For businesses with an aggregated 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 pooling

Small business entities (with aggregated 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 which prevent small businesses from re-entering the simplified depreciation regime for five years if they opt-out will continue to be suspended.

Ability for companies to carry-back losses

Date of effect: Losses from the 2019-20, 2020-21 or 2021-22 income years

Companies with an aggregated turnover of less than $5 billion will be able to carry back losses from the 2019-20, 2020-21 and 2021-22 income years to offset previously taxed profits in the 2018-19, 2019-20 and 2020-21 income years.

Under this measure tax losses can be applied against taxed profits in a previous year, generating a refundable tax offset in the year in which the loss is made. The amount carried back can be no more than the earlier taxed profits, limiting the refund by the company’s tax liabilities in the profit years. Further, the carry back cannot generate a franking account deficit meaning that the refund is further limited by the company’s franking account balance.

The tax refund will be available on election by eligible businesses 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. Under the proposed amendments, companies that do not elect to carry back losses can still carry losses forward as normal.

This measure will interact with the Government’s announcement to allow full expensing of investments in capital assets. The new investment will generate significant tax losses in some cases which can then be carried back to generate cash refunds for eligible companies.

Note that loss carry-back rules were introduced some years ago by the Gillard government.  The rules were repealed and were only operational in the 2012-13 year.

R&D tax concessions injection and simplification

Date of effect: 1 July 2021

The Government has enhanced its proposed shake-up of the R&D system injecting an additional $2 billion through the Research and Development (R&D) Tax Incentive.

Currently, the R&D Tax Incentive provides the following in respect of eligible R&D activities (for the first $100 million of eligible expenditure):

• a 43.5% refundable offset for eligible companies with aggregated annual turnover less than $20m; and
• a 38.5% non-refundable tax offset for all other eligible companies.

Note that the Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019, before Parliament at the time the Federal Budget was released, proposed various amendments to the R&D Tax Incentive to take effect from the 2019-20 income year. The Government is now delaying (by two years) and enhancing the proposed changes. 

Companies under $20m turnover

For companies with an aggregated annual turnover less than $20 million:

• The refundable R&D tax offset is being set at 18.5 percentage points above the claimant’s company tax rate (an increase from 13.5 percentage points above the claimant’s company tax rate as previously announced)
• The previously announced annual $4 million cap on cash refunds for R&D claimants will not proceed.

Companies over $20m turnover

For companies with aggregated annual turnover of $20 million or more, the previously announced R&D intensity premium, originally intended to apply across three tiers, will now apply across two tiers.

Note the intensity premium will tie the rates of the non-refundable R&D tax offset to the incremental intensity of R&D expenditure as a proportion of total expenditure for the year.  The marginal R&D premium will be the company’s tax rate plus:

• 8.5 percentage points above the claimant’s company tax rate for R&D expenditure between 0 per cent and 2 per cent R&D intensity for larger companies
• 16.5 percentage points above the claimant’s company tax rate for R&D expenditure above 2 per cent R&D intensity for larger companies (the previously announced intensity premiums varied from 4.5 to 12.5 percentage points).

The R&D expenditure threshold - the maximum amount of R&D expenditure eligible for concessional R&D

tax offsets - will be increased as intended from $100 million to $150 million per annum.

Access to tax concessions extended to businesses up to $50m

Date of effect: Three phases: 1 July 2020, 1 April 2021, 1 July 2021

Announced pre Budget, a range of generous tax concessions normally only available to small and medium businesses, will be available to businesses with an aggregated turnover of up to $50 million.

The expanded concessions will be rolled out in three phases:

From 1 July 2020

Immediate deduction for certain start-up expenses

Eligible new businesses can immediately deduct a range of professional expenses required to start up a business – such as professional, legal and accounting advice as well as amounts paid to Government agencies to set up the business entity.  

Immediate deduction for prepaid expenditure

Eligible businesses can choose to claim an immediate deduction for prepaid expenses where the payment is for a period of service which is 12 months or less and ends in the next income year.

From 1 April 2021

FBT cark parking exemption

Eligible employers will be exempt from FBT on certain car parking benefits provided to employees.  

FBT exemption on portable electronic devices

Eligible employers will be able to provide more than one portable electronic device that is mainly for work use to an employee in a single FBT year and apply an FBT exemption (e.g., phones and laptops).

From 1 July 2021

Simplified trading stock

Eligible businesses can choose not to conduct a stocktake if there is a difference of less than $5,000 between the opening value of trading stock and a reasonable estimate of the closing value of trading stock at the end of the income year.

PAYG instalments based on GDP adjustment amount

Eligible businesses can pay an ATO calculated PAYG instalment amount based on the last reported income (i.e., as reported in the most recent tax return) adjusted by a GDP adjustment factor. This removes the need to calculate the PAYG instalment each period based on a percentage of instalment income.

Settle excise duty and excise-equivalent customs duty monthly

On eligible goods, this concession enables eligible businesses to apply to defer settlement of their excise duty and excise equivalent customs duty from a weekly to a monthly reporting cycle.  

Two-year amendment period

Eligible businesses will have a two-year amendment period apply to income tax assessments, excluding entities that have significant international tax dealings or particularly complex affairs.  

Simplified accounting methods

The Commissioner of Taxation’s power to create a simplified accounting method determination for GST purposes will be expanded to apply to eligible businesses below the $50 million aggregated annual turnover threshold.

The eligibility turnover thresholds for other small business tax concessions will remain at their current levels.