Technical Update:

2020-21 Federal Budget Measures Now Law

23 October 2020

On 14 October 2020, the Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Bill 2020 (‘the Act’) which contains many of the key measures announced in the 2020-21 Federal Budget, received Royal Assent. This legislation which is now law gives effect to many of the important Budget changes including the temporary full expensing of depreciating assets, temporary loss carry back rules, the bringing forward of personal income tax cuts, providing businesses with incentives to undertake additional research and development (R&D) and various other incentives for business investment.

Temporary Full Expensing of Capital Assets

New rules introduced will allow businesses with an aggregated turnover less than $5 billion to deduct the full cost of eligible depreciable assets of any value in the year they are first held, and first used or installed ready for use for a taxable purpose from 6 October 2020 to 30 June 2022. Businesses will also be able to deduct the full cost of improvements to these assets and to existing eligible depreciating assets made during this period.

Eligibility

Generally, to be eligible for the full expensing of eligible assets, a depreciating asset must be:

  • first held, and first used or installed ready for use for a taxable purpose, after 6 October 2020 and on or before 30 June 2022; and
  • 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 ITAA 1997.

Additional exclusions apply if the entity has an aggregated turnover of $50 million or more. For these entities, a depreciating asset that starts to be held after 6 October 2020 will be excluded from an immediate deduction if:

  • the entity had already entered into a commitment to hold, construct or use the asset on or before 6 October 2020. Note however, an option to enter into such a contract is not considered to be a commitment; or
  • the asset is a second-hand asset.

Second hand assets

Consistent with the Federal Budget announcement, the amendment provides that businesses with aggregated turnover of less than $50 million will be entitled to an immediate tax deduction for the full cost of second-hand assets.

An asset held by an entity will be a second hand asset if:

  1. another entity held the asset when it was first used, or first installed ready for use (other than as trading stock or merely for the purposes of reasonable testing and trialling). However, if the asset is an intangible asset, this exclusion will not apply unless the asset was used by the other entity for the purpose of producing ordinary income before the holding entity first used it, or had it installed ready for use, for any purpose. (For these purposes, any ordinary income derived by the other entity as a result of the disposal of the asset to the holding entity is disregarded);
  2. the entity started to hold the depreciating asset because the asset was split or merged;
  3. the asset is a licence or a sub licence in relation to an intangible asset; and the intangible asset is a second-hand asset;
  4. the depreciating asset was held by an entity that was previously a member of a consolidated group or multiple entry consolidated (MEC) group and if the entity started to hold the asset after 6 October 2020.

If the above conditions for a second hand asset are satisfied, temporary full expensing will apply to allow a full deduction for the second element of cost of the asset (i.e. cost of improvements to an asset) that is incurred between 6 October 2020 and 30 June 2022.

Small to medium-large business entities  

Business entities with turnover of less than $500 million that do not qualify for temporary full expensing of depreciating assets may still be entitled to the previously announced “enhanced instant asset write‑off” that allows a write off of the full value of assets with value of less than $150,000. However, the time by which such assets must be first used or installed ready for use to qualify for the enhanced instant asset write‑off is extended until 30 June 2021 (previously 31 December 2020).

Small business entities

Small businesses (with aggregated annual turnover of less than $10 million) will be able to deduct the balance of their simplified depreciation pool at the end of the income year while full expensing applies.

Also, the provisions which prevent small businesses from re-entering the simplified depreciation regime for 5 years if they opt-out will continue to be suspended for the 2021 and 2022 income years.

Company loss carry back offset rules

The new rules for the temporary loss carry back refundable tax offset are detailed and complex. Under these rules, a corporate tax entity with an aggregated turnover of less than $5 billion can choose to carry back a tax loss for the 2019‑20, 2020‑21 or 2021‑22 income year and apply them against tax paid in a previous income year as far back as the 2018‑19 income year. To receive a tax refund, eligible companies will need to make a choice when they lodge their 2020-21 and/or 2021-22 income tax returns. If the loss carry back is being claimed for the 2019-20 income year the claim must be made when lodging the 2020/21 or 2021/22 tax return i.e. for 2019/20 losses the company must wait at least a year before getting the refund.

The choice to claim a loss carry back tax offset is an alternative to carrying tax losses forward as a deduction for future income years. Note that, only tax losses can be carried back. Capital losses cannot be carried back.

Note: The loss carry back rules are temporary and will cease to apply after the 2021‑22 income year.

Entitlement to loss carry back tax offset

The loss carry back rules only apply to corporate tax entities defined as companies, corporate limited partnerships and public trading trusts. A corporate tax entity will be eligible for loss carry back in a particular income year only if the entity:

  • was a corporate tax entity throughout that income year;
  • carried on a business and had an aggregated turnover of less than $5 billion in the income year that the entity incurred the loss; and
  • was a corporate tax entity throughout the income year the loss is carried back to (disregarding any part of the year before the entity came into existence) and throughout any intervening income years.

In addition, to be entitled to a loss carry back tax offset, a corporate tax entity must have lodged an income tax return for the current year and each of the five years immediately preceding it (if it was required to do so in those years). For a year where an entity is not required to lodge a return for the loss year, the entity will still be entitled to the loss carry back tax offset.

Amount of loss carry back

The amount of the refundable tax offset available to a corporate tax entity is based on the entity’s tax rate in the loss year. However, the amount cannot exceed:

  • the amount of earlier tax paid by the entity; and
  • the entity's franking account balance at the end of the income year for which the refundable tax offset is claimed.

For an entity that is not a base rate entity for the loss year (i.e. entities with aggregated turnover of $50 million or more), the corporate tax rate in the loss year will be 30%. However, for base rate entities the tax rate in the loss year will vary depending on the loss year:

  • if the loss year is the 2019‑20 income year – tax rate is 27.5 per cent;
  • if the loss year is the 2020‑21 income year – tax rate is 26 per cent; or
  • if the loss year is the 2021‑22 income year – tax rate is 25 per cent.

The maximum amount of a corporate tax entity’s loss carry back tax offset for an income year will be limited by the surplus balance of its franking account at the end of that income year. When the entity receives a refund of tax as a result of the loss carry back tax offset, there will be a debit in the corporate tax entity’s franking account on the day the refund is received. Note that the franking credit in relation to the tax previously paid is not affected but care must be taken to ensure the debit arising from the refund does not put the franking account into deficit e.g. where there has been other debits to the franking account between the end of the loss year and the time of receiving the refund.

Choice and timing of loss carry back

The choice to carry back losses is optional and mirrors the existing choice companies have about whether to deduct their tax losses (i.e. how much of its loss for the current year to carry back to an earlier year). The choice must be made by the time the entity lodges its income tax return for the current income year, or within such further time as the Commissioner allows.

Tax losses not used for loss carry back in the current income year are available to reduce any taxable income in that income year or in a future income year, according to the usual rules for deducting prior-year losses in Division 36.

Integrity and other rules 

The loss carry back provisions include integrity rules that are consistent with the integrity rules which applied under the previous loss carry back rules that applied in Australia in 2013.

Note that, tax consolidated groups and MEC groups are not eligible to apply the loss carry back rules in respect of losses that have been brought into the group by an entity joining the group.   

Bringing forward personal tax cuts to 1 July 2020

The Act bringing forward Stage 2 of the Personal Income Tax Plan, originally proposed to take effect from 1 July 2022, will now apply from 1 July 2020 i.e. in this year. From 1 July 2020, the top threshold of the 19% personal income tax bracket has been increased from $37,000 to $45,000. The top threshold of the 32.5% tax bracket has also been increased from $90,000 to $120,000. The Act also brings forward to 2020-21 the increase in the low income tax offset (up to $700). The low and middle income tax offset (up to $1,080) are retained for 2020-21.

Note that the Stage 3 tax cuts are still legislated to apply from 1 July 2024 and will see only 3 personal tax rates - 19%, 30% (from $45,000) and 45% (above $200,000)). The start date of 1 July 2024 is unchanged.

Expanding access to small business tax concessions

New measures have been introduced which increase the aggregated turnover threshold for certain small businesses entity (SBE) concessions from $10 million to $50 million. This measure will allow more entities including medium business entities to gain access to more SBE concessions.

From 1 July 2020

Eligible entities will be able to access the following concessions:

  • an immediate deduction for certain prepaid expenses; and
  • an immediate deduction for certain start-up expenses.

From 1 April 2021

Eligible entities will be able to access the following concessions:

  • a fringe benefits tax exemption in relation to small business car parking; and
  • a fringe benefits tax exemption in relation to the provision of multiple work-related portable electronic devices.

From 1 July 2021

Eligible entities will be able to access the following concessions:

  • a simplified accounting method for the purposes of GST, if determined by the Commissioner;
  • the ability to defer excise-equivalent customs duty to a monthly reporting cycle;
  • the ability to defer excise duty to a monthly reporting cycle;
  • a two year amendment period in respect of amendments to income tax assessments;
  • the simplified trading stock rules; and
  • the ability to pay PAYG instalments based on GDP-adjusted notional tax.

Note that these changes, unlike the carry back loss rules, do not have an end date.

R&D tax incentives

The legislative changes will provide certainty to businesses as to the level of support they can receive from the Federal Government in investing in R&D.

New R&D measures

The key R&D changes, which take effect from income years commencing on or after 1 July 2021, include:

  • for an R&D entity with aggregated turnover of less than $20 million for an income year  - providing a refundable tax offset equal to the entity's corporate tax rate plus 18.5%. This compares with the currently legislated rate of 43.5% (17.5% above the corporate tax rate for the 2021 financial year) and the 2019 Bill rate of the corporate tax rate plus 13.5%. The corporate tax rate for R&D entities in this category will be 25% from 1 July 2021.  This means the effective offset rate of 43.5% will be retained; and
  • for an R&D entity with aggregated turnover of $20 million or more – provide a premium tax offset equal to the entity's corporate tax rate plus a percentage determined by reference to the entity's R&D intensity (see below).  This compares with the current legislated rate of 38.5% for the non-refundable R&D tax offset.

R&D intensity premiums

R&D entities with aggregated turnover of $20 million or more for an income year are entitled to an R&D tax offset equal to their corporate tax rate plus marginal intensity premiums determined with reference to the R&D intensity of their R&D expenditure on an incremental basis. Incremental intensity is calculated as eligible R&D expenditure as a percentage of total expenses, ie R&D intensity = notional deductions /total expenses as per the table below.

Tier

R&D intensity range

 

Intensity premium

1

Notional R&D deductions representing up to and

including 2 per cent of total expenses

 

8.5%

2

Notional R&D deductions representing greater than 2 per cent of total expenses

 

16.5%

Other measures include:

  • increasing the $100 million annual R&D expenditure threshold to $150 million (R&D offset for expenditure above this threshold is limited to the company’s tax rate); 
  • making the $150 million threshold a permanent feature of the law by removing the sunsetting of the threshold, which was previously legislated to cease from 1 July 2024;
  • removing the ability for companies under $20 million annual turnover to receive an R&D tax benefit where they have received Government grants or on feedstock adjustments or balancing adjustments.