Last week we discussed changes to superannuation that were announced in this month’s Federal Budget. This week, we look at changes that have been announced regarding tax, especially for individuals and small business.
Personal Income Tax
The major announcement here was the extension for another year of the ‘low and middle income tax offset’ (LMITO – often referred to colloquially as the ‘Lamington.’) As we wrote last year, under this offset, people with incomes below $126,000 will receive some level of offset. The exact amount varies greatly according to the amount of income being earnt, as shown in this graphic we sourced last year from the Australian Tax Office.
As you can see, the ‘sweetspot’ for this offset is having annual earnings of around $50,000. But some offset applies to people earning up to $126,000 per year.
The lamington was originally scheduled to end in the current financial year (that is, 2020/21). But the Commonwealth have extended it for the coming financial year.
The major announcement for small business was also an extension of an existing concession – in this case, the ability to instantly ‘write-off’ the value of capital purchases and thus claim a tax deduction for the full purchase price of eligible assets. As the Government itself expressed the extension:
Temporary full expensing will now be available until 30 June 2023. Temporary full expensing allows eligible businesses with aggregated annual turnover or total income of up to $5 billion to deduct the full cost of eligible depreciable assets. Assets must be acquired from 7:30pm AEDT on 6 October 2020 and first used or installed ready for use by 30 June 2023.
As the name suggests, full expensing allows the business to claim a deduction for the full cost of purchasing eligible assets. This is distinct from the traditional way of expensing large purchases, which is to claim a portion of the cost each year for a set period of years. This method is known as depreciating the asset.
Once again, we can look back at what we wrote last year to explain how full expensing works:
Once the Budget has been passed, any business with turnover of less than $5 billion can instantly write-off the full purchase value of any new (that is, not second-hand) eligible asset that they purchase.
Businesses with turnover of less than $50 million can also apply this write-off to all assets new to the business (which includes second-hand purchases).
Businesses with turnover between $50 million and $500 million can claim an instant write off for second-hand assets purchased up to a value of $150,000.
So, businesses with turnover of up to $500 million can instantly write-off at least some second hand assets. Larger businesses can only instantly write off new assets.
The ability to claim for second-hand assets is especially important for small business – in more ways than you might think. Firstly, and rather obviously, by allowing a full tax deduction the Commonwealth is encouraging the purchase of capital equipment by businesses. Secondly, and perhaps less obviously, the Commonwealth is encouraging the sale of second-hand equipment by creating a better market for businesses that wish to sell second-hand gear. This is because businesses that previously were encouraged by the tax rules to only purchase brand new equipment can now enjoy the same tax benefits for second-hand purchases.
The other major business announcement was the extension of the ability to match recent tax losses against tax paid on profits in previous years. This is known as the ‘temporary loss carry-back’ and basically means that if your business paid tax on profits in any year dating back to 2018/19, and it makes a loss in a subsequent year (including the current financial year), a proportionate part of the tax previously paid can be returned to you. As always when it comes to tax, consult your tax adviser as the calculations here can be quite fiddly.
As ever, if there is anything about the way this year’s Budget may have impacted you or someone you know, please do not hesitate to get in touch.