Small to medium sized business
JobMaker – a substantial incentive to encourage employment
The Federal Government has announced a new program, the JobMaker Hiring Credit, to encourage the creation of new employment opportunities. The program will commence 7 October 2020 and will apply to newly created positions for eligible employees until 6 October 2021. The credit will be available for 12 months from the date the position is created.
Eligible employers who can demonstrate an increase in both headcount and payroll (the additionality criteria) will have access to two tiers of credit depending on the age of an eligible employee.
The credit available for each newly created position is as follows:
- Tier 1 – age 16 to 29, $200 per week, maximum credit $10,400
- Tier 2 – age 30 to 35, $100 per week, maximum credit $5,200
An eligible employer is one who:
- has an Australian Business Number (ABN)
- is up to date with tax lodgement obligations
- is registered for Pay As You Go (PAYG) withholding
- is reporting through Single Touch Payroll (STP)
- meets the additionality criteria
- is claiming in respect of an eligible employee, and
- has kept adequate records of the paid hours worked by the employee, for whom they are claiming the hiring credit.
An eligible employee is one who:
- has worked for a minimum of 20 hours per week, averaged over a quarter, and
- has 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
- is NOT receiving a wage subsidy under another program (e.g. JobKeeper and Boosting Apprenticeship Commencement wage subsidies)
- does not have more than one employer entitled to the credit (e.g. only one employer can claim).
Newly created businesses can be eligible for the JobMaker Hiring Credit for each new position that increases the business headcount beyond one (the first employee will not be eligible).
Registrations will open through ATO online services from 7 December 2020. Employers do not need to be registered at the time that they hire an employee in order to be eligible.
The JobMaker Hiring Credit will be paid quarterly in arrears. Employers can claim the first payment when claims open on 1 February 2021 (for new jobs created between 7 October 2020 and 6 January 2021).
This significant new incentive is expected to beneficially impact most businesses and accelerate employment growth. Businesses should review the potential employment cost savings from hiring workers meeting these requirements, and consider the impact on future hiring programs.
JobMaker – concessions to strengthen business cashflow, support investment and create jobs
Businesses with aggregated annual turnover of less than $5 billion will be able to deduct the full cost of new depreciating assets acquired from 7.30pm 6 October 2020 and first used and installed by 30 June 2022.
Full expensing in the year of first use will also be available for the cost of improvements to existing eligible assets, and second-hand assets if aggregated annual turnover is less than $50 million.
Businesses with turnover between $50 million and $500 million, which hold second-hand assets eligible for the enhanced $150,000 instant asset write-off, will now have until 30 June 2021 to first use or install those assets (where purchased by 31 December 2020).
In summary, an instant asset write-off will now apply for businesses from 7:30pm AEDT on 6 October 2020 as follows:
|DATE USED AND INSTALLED BY||TYPE OF ASSET||AGGEGATED TURNOVER THRESHOLD
|30 June 2022||New depreciating assets and improvements to eligible assets – unlimited cost||Less than $5 billion
|30 June 2022||Second-hand depreciating assets – unlimited cost||Less than $50 million
|30 June 2021||Second-hand depreciating assets – cost up to $150,000 and purchased by 31 December 2020 ||Between $50 million and $500 million
As an additional measure, small businesses (with aggregated 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.
JobMaker – temporary loss carry back
Businesses with aggregated annual turnover of less than $5 billion will be able to carry back tax losses incurred in the income years ending 30 June 2020, 2021 and 2022 to offset previously taxed profits in the year ended 30 June 2019 or later income years.
This action will have the effect of generating a refundable tax offset in the year in which the loss is made. The amount carried back will not be allowed to exceed the earlier taxed profits and the carry back will not be able to generate a franking account deficit. The tax refund will be available on election when a business lodges its income tax return for the years ending 30 June 2021 and 2022.
Small business entity turnover threshold
Access to a range of existing small business tax concessions will become available to about 20,000 additional businesses by increasing the small business turnover threshold (aggregated annual turnover) for certain concessions from $10 million to $50 million.
These changes are being introduced to eligible businesses in three phases:
- From 1 July 2020, immediate deductions available for certain start-up and prepaid expenses
- From 1 April 2021, exemptions available from fringe benefits tax on car parking and multiple work-related portable electronic devices provided to employees
- From 1 July 2021, there will be access to the simplified trading stock rules, ability to 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 under the small business entity concession.
These businesses will also have a two-year amendment period apply to income tax assessments for income years starting from 1 July 2021, excluding entities that have significant international tax dealings or particularly complex affairs.
COVID-19 response package in Victoria
The Australian Government will make the Victorian Government business support grants for small and medium businesses, which were announced on 13 September 2020, non-assessable and non-exempt income.
The Federal Government’s Cash Flow Boosts have previously been made non-assessable and non-exempt income.
Eligibility for this treatment will be limited to grants announced on or after 13 September 2020 and for payments made between 13 September 2020 and 30 June 2021.
A decision to provide this in Victoria is due to the exceptional circumstances that Victorian businesses have been operating under.
This arrangement may be extended to other states and territories on an application basis.
Where applicable, these concessions all have the effect of reducing taxable income and taxation liabilities for the periods described.
Small to medium taxpayers need to identify:
- what investment in capital assets is needed in the years ending 30 June 2021 and 2022 to aid recovery
- whether investments planned for the 2021 and 2022 years will result in tax losses that can be offset against income in the 2019 or 2020 years
- whether any of the additional tax concessions for businesses with aggregated annual turnover under $50 million are applicable to their business, and
- whether they should separately record business support grants and other concessions received to enable identification of non-assessable non-exempt income.
While recent budgets have only seen anti-avoidance measures and red tape for big business, this year sees two key economic recovery measures that can benefit the bigger end of town.
Unlimited instant asset write off
As described in detail in the small to medium sized businesses section above, depreciable assets acquired from the time of Budget announcement and first installed and ready for use by 30 June 2022 can be fully written off where the relevant turnover thresholds are met.
Loss carry back for the next three years
As for small and medium sized businesses, large companies with an aggregated turnover of less than $5 billion will now be able to carry back losses incurred for FY20, FY21 and FY22 to offset any previously taxed profits incurred in the FY19 or later income years. The carry back will allow eligible companies a refundable tax offset in the year of loss. The amount of the carry back will be limited to the earlier tax profits and must not generate a franking account deficit.
It is expected that many businesses will take advantage of these two key measures and it will be important to undertake projections and consider eligibility.
Subject to any integrity measures it appears that the unlimited asset write off may also actually help to assist with generating tax losses that can be carried back to obtain refunds of tax paid in earlier years. This position will become clearer once legislation is released.
Corporate tax residency clarified for foreign companies
The Federal Government will introduce new testing rules to clarify the current uncertainty surrounding companies incorporated offshore and their tax residency.
The corporate tax residency rules have currently caused much uncertainty for Australian owned offshore companies. This area was thrown into confusion following the Commissioner’s interpretation of corporate residency as a result the High Court’s 2016 decision in Bywater Investments Ltd v Federal Commissioner of Taxation.
The Commissioner’s interpretation of corporate tax residency as a result of the 2016 Bywater case potentially meant that many offshore incorporated companies would be deemed tax resident in Australia because they were centrally managed and controlled in Australia – this was referred to as the ‘CMC test’.
The Budget announcement now proposes an additional ‘significant economic connection’ (SEC) test to be met in order for an offshore company to be deemed tax resident in Australia. The SEC test will be passed if the foreign company’s core commercial activities are carried out in Australia.
In other words, an offshore company will only be deemed tax resident in Australia if its CMC and SEC are both in Australia. It is expected that this technical amendment should mean that most foreign incorporated businesses with legitimate offshore operations should remain foreign resident for Australian tax purposes.
The Federal Government has indicated the proposed change is intended to restore the status quo of the residency test for foreign incorporated companies prior to the Bywater decision. This will be a welcome relief to many Australian businesses that have offshore operations.
It will however be important for Australian businesses with offshore companies to review the details of the SEC test once legislation is introduced.
Innovation and incentives
$2 billion boost to the R&D Incentive
Australian innovators are big winners in the budget with contentious changes to the R&D Tax Incentives that would have wiped $1.8 billion from the program being reversed. Instead, there will be a new $2 billion boost, including a lifting of the offset rate and rewarding those business that invest more in R&D.
Proposed changes to the R&D Tax Incentive included reductions in the refundable tax offset, a cap on refunds and a new tiered benefit system in the form of an R&D intensity test for larger businesses have been taken off the table.
For companies with a turnover of less that $20 million, it was previously proposed that the 43.5% refundable tax offset would reduce to 39.5% for the 2020-21 year and 38.5% for the 2021-22 and future years. As a result of increasing the R&D premium from 13.5% to 18.5% this will now result in the refundable tax offset of 43.5% being maintained for 2020-21 and future years. A proposed $4 million cap on refundable claims will also now not proceed.
For larger businesses with a turnover of more than $20 million per year, a proposed intensity test will be substantially watered down. The new R&D intensity tiers will be based on the claimant’s corporate tax rate plus 8.5 percentage points where R&D expenditure is between 0% and 2% of total expenditure, and 16.5% where R&D expenditure is above 2% of total expenditure.
The R&D Tax Incentive is a critical stimulus for technology-oriented businesses, and especially for the technology start-up sector.
Encouraging business R&D is vital in a post-COVID world. The measures presented by the Treasurer in the budget are significant and of considerable benefit to innovative Australian businesses.
COVID has seen many historically profitable businesses dip into losses who could now benefit from cash refunds from the R&D Tax program. Additionally, businesses that have historically exceeded the $20 million refundable offset cap might now, as a result of COVID-19 downturns, potentially fall under the $20 million turnover cap and have tax losses that could be the subject of potential R&D refunds.
Where eligible R&D activities and expenditure have taken place, a considerable benefit exists, and we would encourage any company to contact us to investigate their prospective eligibility and potential benefit.
$1.5 billion new in grants for the manufacturing sector
A new modern manufacturing strategy has been announced, which is designed to improve the global competitiveness, resilience and scalability of Australian manufacturers.
The new Modern Manufacturing Strategy will focus on building post COVID ‘supply chain resilience’, targeting six national manufacturing priorities:
- resources technology and critical minerals processing
- food and beverage
- medical products
- recycling and clean energy
- defence, and
The $1.5 billion program consists of three main elements.
- A $1.3 billion Modern Manufacturing Initiative
- $107.2 million Supply Chain Resilience Initiative
- $52.8 million Manufacturing Modernisation Fund round two.
Modern Manufacturing Initiative (MMI)
The $1.3 billion MMI has a primary focus on building scale and sustainability in Australian manufacturing.
The plan is for Government to create a partnership with businesses, providing co-investment based grants that seek to stimulate private investment.
Commencing in the first-half of 2021, the program will be offered in three streams:
- A Manufacturing Collaboration Stream will provide funding for large projects that support business-to-business and business-to-research collaboration
- A Manufacturing Translation Stream will help manufacturers turn ideas into commercial outcomes and invest in non-R&D innovation
- A Manufacturing Integration Stream to assist manufacturers integrate into local and international supply chains and markets.
All three will be targeted at projects within the six identified sectors.
Supply Chain Resilience Initiative
This will be a $107.2 million program targeted at building an understanding of Australia’s critical goods and services, supply chain vulnerabilities and strategy formulation to resolve weaknesses and build upon strengths.
Early focus of the Initiative will be on medicines and medical equipment, followed by food, chemicals and plastics.
Manufacturing Modernisation Fund (MMF) round two
MMF round 2 will be a new $52.8 million grants program providing assistance to businesses in the six identified sectors in shovel-ready projects.
Applications for grants of between $100,000 and $1 million matched three-to-one by industry partners will be open before the end of the 2020.
Significant changes to the Export Market Development Grants scheme
The longstanding Export Market Development Grants (EMDG) scheme is set to see the most significant change in its history.
The EMDG has historically operated as a rules-based entitlement program where grants are paid retrospectively based on an eligible SME’s eligible export market development expenditure after the end of a financial year.
The EMDG, subject to legislative changes being approved, will enable eligible SMEs to apply to receive upfront funding over multiple years for eligible export marketing and promotional activities.
Grants will target eligible SMEs with an annual turnover of less than $20 million at three stages:
- Eligible SMEs who are new to export – grants up to $80,000 over two years
- Eligible exporters who plan to expand their presence in export markets – grants up to $240,000 over three years
- Eligible exporters who continue to expand into new markets – grants up to $450,000 over three years.
The new EMDG is proposed to commence from 1 July 2021, with current EMDG arrangements remaining in place for the 2019-20 and 2020-21 financial years.
Increased investment in innovation, supply chain security and sovereign capability is crucial if Australia is to build sustainable employment, economic growth, competitiveness and productivity in a post COVID world.
Bentleys is strongly supportive of direct intervention that supports sectors that have the capability to drive sustainable growth, security and sovereign capability. COVID has, in part, exposed the frailties of globalisation and the loss of skills and capabilities through offshoring. Any initiative that assists Australia to rebuild capability and sustainability is welcomed.
Business grants are an excellent means of direct intervention and stimulus, however any new programs must be underpinned by a transparent and robust approval process.
Government programs, such as the Manufacturing Modernisation Fund, are always massively over-subscribed where the number of ‘losers’ outweighs the number of Government picked ‘winners’ by a large multiple. Note that the cost of developing an application is considerable and a failed bid has virtually no residual value.
Indirect tax and GST
The Government is providing an FBT exemption to support retraining and reskilling and cutting FBT record keeping requirements.
Fringe benefits tax (FBT) exemption
As announced on 2 October 2020, the Federal Government will exempt from FBT, retraining and reskilling activities provided by employers to redundant, or soon to be redundant employees. Currently FBT is payable if an employer provides training to these employees where the training does not have a sufficient connection to their current employment.
The exemption is intended to encourage businesses to retain and redeploy workers to new roles within their business. The exemption will not apply to salary sacrifice arrangements or for Commonwealth supported places at universities.
The Government will also consult on allowing an individual to deduct education and training expenses relating to future employment that would not be deductible under current rules.
FBT record keeping
The FBT rules impose a significant record keeping burden on employers. The Government will provide the Commissioner of Taxation with the power to allow employers to rely on existing corporate records, rather than prescriptive records (e.g. employee declarations), to finalise their FBT returns. The measure will only apply from the start of the first FBT year (1 April) after the date of Royal Assent of the enabling legislation (i.e. expected from 1 April 2021).
FBT impacts of increase to small business entity turnover threshold
As noted above, the Government will expand access to a range of small business tax concessions by increasing the small business entity turnover threshold for certain concession from $10 million to $50 million.
This includes allowing small business entities with aggregated annual turnover of up to $50 million (previously $10 million) to now be eligible for the FBT exemption on car parking (subject to certain restrictions) and multiple work-related portable electronic devices (such as phones or laptops) provided to employees. These changes to FBT will apply from 1 April 2021.
While limited, employers will welcome the reduced FBT record keeping requirements and other FBT announcements.
Employers considering redundancies will be able to provide retraining and reskilling activities to eligible staff to move to new roles or outside the organisation without an FBT cost.
Employers with an aggregated turnover of up to $50 million should also consider the FBT concessions for car parking and multiple work-related portable electronic devices although noting these changes only apply from 1 April 2021.
Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.