2020 Federal Budget — Lorica Partners

The 2020 Federal Budget is all about jobs and spending to make more jobs. We already have JobSeeker and JobKeeper, and now we have JobMaker and a JobTrainer fund. The Treasurer tried to explain how each announcement would translate into jobs, e.g. tax cuts for 11 million taxpayers equals 50,000 new jobs.

The Budget sets the scene for a slow climb back to surplus and out of the first recession for Australia in almost 30 years. A projected FY2021 budget deficit of $241 billion will see debt levels increase significantly to $703 billion and peak at $966 billion in FY2024, but this appears unavoidable and necessary given the size of the economic hit and the ongoing headwinds this has created.

History suggests the employment recovery following recessions can be long and arduous. It took eight years in the 1980’s to drag unemployment back to pre-recession levels of ~6% while the 1990’s took even longer. The recent experience has not been any better with unemployment in the last decade averaging well above pre-GFC levels.

The list of Budget announcements is long and we have endeavoured to detail matters most likely to impact clients of Stewart Partners and their families below.

Personal Income Tax Cuts

Tax cuts would typically be available from the beginning of the next financial year, but these are not typical times. Injecting cash into the economy is the top priority with tax cuts to ‘go live’ as soon as December, just in time for the holiday season, and backdated to 1 July 2020. Will people spend the tax cuts?

The following changes have been announced:

The 19% personal income tax bracket will increase from $37,000 to $45,000.
The 32.5% personal income tax bracket will increase from $90,000 to $120,000.

The proposed tax schedule, including planned changes from 1 July 2024, is listed below:

The proposed tax savings for 2020-21 are detailed below:

Superannuation Guarantee

No changes have been announced to the current timetable for mandated increases to the Superannuation Guarantee. It is currently legislated to increase to 10% from 1 July 2021 and a further 0.5% each financial year until it reaches 12%.

$250 economic support payments

Two tax-free economic support payments of $250 each will be paid to individuals in receipt of certain government income support (including the aged pension) and Commonwealth health care card holders. Payments will be made from November 2020 and early 2021.

Private health cover

The Government proposes to increase the maximum age of dependants allowed under Private Health insurance policies from 24 to 31 years and remove the age limit of dependants with disabilities.

Superannuation

New duties and responsibilities for super fund trustees effective 1 July 2021 will help ensure trustees are more accountable and transparent in how they manage the retirement savings of members. Trustees will be required to comply with a new duty to act in the best financial interests of members and be able to demonstrate there was a reasonable basis for their actions.

The Government will provide $159.6 million over four years from 2020-21 to implement reforms to superannuation to improve outcomes for superannuation fund members. There will be increased regulation for the super sector with a greater focus on transparency, fees and underperforming funds. Expect this to lead to ongoing industry consolidation.

Some of the measures include:

an existing superannuation account will be ‘stapled’ to a member to avoid the creation of a new account when that person changes their employment. Future enhancements will enable payroll software developers to build systems to simplify the process of selecting a superannuation product for both employees and employers through automated provision of information to employers. Any measures that make it less likely that superannuation members lose touch with their account is to be welcomed.
the Australian Taxation Office will develop systems to enable new employees to select a superannuation product from a table of MySuper products through the YourSuper portal
providing an obligation on funds to align performance with members’ best interests
from July 2021 the Australian Prudential Regulation Authority will conduct benchmarking tests on the net investment performance of MySuper products. Products that have underperformed over two consecutive annual tests will be prohibited from receiving new members until a further annual test that shows they are no longer underperforming.

It will be interesting to see how APRA approaches this benchmarking, for several reasons:

what timeframe do they deem as relevant?

how do they ensure apples with apples comparisons? For example, many super fund portfolios have between 20% and 60% allocated to “alternatives” which generally comprise private equity, hedge funds, infrastructure, distressed debt and unlisted real estate. We already know many trustees are selective (in their favour) when they choose to revalue these assets.
in addition, the names applied to super fund investment options to help people select an appropriate asset allocation are frequently misleading. Some super funds market “balanced” portfolios which have as much as 90% invested in riskier growth assets like equities, property and alternatives. Most investors would reasonably expect a “balanced” fund to have much lower risk exposure.

JobMaker Hiring Credit

To promote employment growth, the Government has committed $4 billion over the next three years in the form of JobMaker Hiring Credits to eligible employees aged 16-35 years. The program is designed to encourage employers to hire young workers and move people from JobSeeker, Youth Allowance or Parenting Payment programs into stable employment.

The subsidy will be split into two, age-based tiers and will be available to employers excluding the major banks and those businesses that are currently claiming JobKeeper. Eligible employers will receive a credit of $200 per week for certain employees aged 16-29 that increase the total headcount and payroll of the business and $100 per week for those aged 30-35.

The payments will be available for the first 12 months of a worker’s employment and will be capped at $10,400 for each additional position created. Whilst new jobs created from 7 October 2020 will be eligible for the program, employers will be required to make claims in arrears beginning 1 February 2021.

For an employee to be eligible for either of the tiers of payment, they will be required to have worked, on average, at least 20 hours per week each quarter. Further to this, they must also have received the JobSeeker Payment, Youth Allowance or Parenting Payment in at least one of the three months prior to their new employment.

Apprenticeship wage subsidy

The Government will provide $1.2 billion from 2020-2021 to increase the number of apprentices and trainees employed. This investment will be made over four years and is accessible to businesses of any size.

Eligible businesses will be reimbursed with up to 50% of the apprentice or trainee’s wages worth up to $7,000 per quarter. This subsidy is capped at 100,000 places.

Temporary full expensing of capital assets

The Government has announced a temporary measure to allow incorporated businesses to claim an immediate deduction for the full cost of eligible capital assets up to $150,000.

Under the new measure, 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 and first used or installed by 30 June 2022. Importantly, this does not apply to sole traders, partnerships or trusts.

The announcement also extends the current instant asset write-off by giving businesses an extra six months, until 30 June 2021, to first use and install those assets.

Temporary Loss Carry Back

In a move to support businesses and their cashflow, the Government is allowing companies with turnover of up to $5 billion to elect to carry back tax losses from FY2020, FY2021 and FY2022 income years to offset previously taxed profits in FY2019 or later income years. This refund will become available once FY2021 and FY2022 tax returned are lodged. Any businesses that do not elect to take part in this scheme can continue to carry forward losses as normal.

No more car parking fringe benefits for SMEs

This proposed measure will expand the current FBT exemption for small business car parking fringe benefits to include businesses with an aggregated annual turnover between $10 million and $50 million. However, the exemption only applies to vehicles parked in the employee’s building and is not applicable to outside public carparks.

Multiple work-related electronic devices to be Fringe Benefit Tax (FBT) exempt for SMEs

Small and medium sized employers will be able to provide multiple work-related portable electronic devices without incurring FBT liabilities under this proposed measure.

Under the current FBT law, eligible work-related items such as phones, tablets and laptops provided primarily for use in the employee’s employment are treated as exempt from FBT. However, additional items acquired in the same FBT year for that employee, would not be exempt, where there are substantially identical functions to an earlier item acquired (unless it was a replacement item e.g. where the item was lost or destroyed).

This exemption helps reduce uncertainty in the application of the FBT law and prevents eligible employers from having to track previously provided equipment and determine whether those portable electronic devices have substantially identical functions.

JobMaker Plan Infrastructure Investment

The Federal Government has committed more than $12.5 billion in additional infrastructure funding across the country as part of its JobMaker Plan.

The Federal Government has committed an additional $2.7 billion to road and rail projects in New South Wales, bringing the total transport infrastructure commitment to more than $39 billion. Key funding measures include:

$603 million for the New England Highway – Singleton Bypass and Bolivia Hill Upgrade
$591.7 million for the Newell Highway Upgrade
$490.6 million for the Coffs Harbour Bypass (don’t forget to visit the Big Banana when travelling north!)

Queensland will benefit from a further $1.3 billion in funding for priority road and rail projects across the state. Significant funding includes:

$750 million for the Coomera Connector Stage 1 (Coomera to Nerang)

$201.2 million for the Bruce Highway
$112 million for the Centenary Bridge Upgrade.

First Home Loan Deposit Scheme

Extending the First Home Loan Deposit Scheme to provide an additional 10,000 guarantees in 2020-21 to enable eligible first home buyers to build a new home or purchase a newly constructed home with a deposit of 5%.

Granny flats

The Government will provide a targeted capital gains tax (CGT) exemption for granny flat arrangements where there is a formal written agreement. The exemption will apply to arrangements with older Australians or those with a disability.

CGT consequences are currently an impediment to the creation of formal and legally enforceable granny flat arrangements. When faced with a potentially significant CGT liability, families often opt for informal arrangements, which can lead to financial abuse and exploitation if the family relationship breaks down. This measure will remove the CGT impediments, reducing the risk of abuse to vulnerable Australians.

Summary

The strong recovery in equity markets since late March has surprised many investors, reflecting both the extrapolation of current conditions by economists (too pessimistic) and the massive stimulus working its way through the global economy. Unlike economic surprise indices in the US and Europe, which are showing clear signs of softening, Australia’s has just hit a post-GFC high.

The economy is not the equity market, which is only around 10% off its YTD highs, while the economy has fallen substantially. On first impressions, this budget should help restore both consumer and business confidence in respect of the backstopping from government. Clearly the projected increase in the deficit this financial year to $213 billion, being 11% of GDP, or $507 billion since the pandemic commenced, is a cost younger generations will bear in the years ahead.

Please contact your adviser if you wish to discuss any particular aspect of the budget and how it may impact your own position.

Author: Rick Walker, with thanks to budget summaries from Macquarie Bank, IOOF, BDO and Colonial First State