Since the release of the Federal Government’s rather optimistic Economic and Fiscal Outlook in December, the world has changed dramatically. Who could have foreseen the onslaught of 2020 and the fiscal stimulus announced last night in Josh Frydenberg’s 2020 budget delivery?
Every new budget results in winners and losers but, with the right advice and planning, there are opportunities for many Australians to grow their wealth and business opportunities off the back of this budget. And while we’ll be keeping a very close eye on the medium and longer-term impacts of such significant stimulus (on the markets and our sovereign credit rating), we’re confident that with the appropriate reform and implementation to back-up the numbers, Aussie businesses can continue to thrive.
So, let’s take a look at what this all means for your businesses, yourselves and the Australian economy as a whole.
What does the budget mean for Aussie businesses?
As expected, Australian businesses have received fast and furious stimulus in a number of ways to offset the financial impact of the COVID-19 pandemic and to continue strategic employment, market and economic growth over the coming year.
Tax concessions are always a hot topic when it comes to the budget and this year was no different. Expanded small business tax concessions are available for businesses with an aggregated turnover of less than $50 million.
For guidance on your tax strategy or compliance, feel free to get in touch with our BlueRock Accounting advisors.
Instant Asset Write-off
Businesses looking to purchase new vehicles, machinery, computers or other business equipment are getting an extra tax break as part of this year’s budget. The instant asset write-off threshold has been increased from $30,000 to $150,000 for businesses with an aggregated annual turnover of less than $500 million. Whether you’re purchasing new equipment for your warehouse or a second-hand tractor, your business may now benefit from the increased and expanded instant asset write-off until 31 December 2020. With the second stage of tax cuts brought forward, business owners may find more disposable income in their pockets to spend on assets.
For more information about how to take advantage of the instant asset-write off scheme, get in touch with our BlueRock Finance advisors. And if you're looking at purchasing new assets, don't forget to contact our BlueRock General Insurance team who can do a free review of your insurance policies to make sure it's all covered.
Accelerated Depreciation Deductions
From 6 October 2020 until 30 June 2022, businesses with a turnover up to $5 billion will be able to deduct the full cost of eligible depreciable assets (and installation costs) of any value in the year they are installed. The cost of improvements to existing eligible depreciable assets made during this period can also be fully deducted.
For businesses with a turnover under $50 million, new and secondhand assets can be deducted (so long as they were purchased after 6 October 2020 and before 30 June 2022).
SME Guarantee Scheme
The Coronavirus Small and Medium Enterprises (SME) Guarantee Scheme is supporting up to $40 billion of lending to SMEs (including sole traders and not-for-profits) by guaranteeing 50% of new loans issued by participating lenders to SMEs. The scheme is enhancing the ability of lenders to provide credit, allowing many otherwise unviable SMEs to access vital additional funding to get through the impact of the pandemic, and to recover and invest for the future.
Phase 1 of the scheme provided SMEs with access to unsecured working capital loans to help them manage disrupted cash flows and get through the impact of coronavirus. It commenced on 23 March 2020 and closed for new loans on 30 September 2020.
The scheme has now been extended and enhanced to meet the evolving needs of SMEs. Phase 2 of the scheme commenced on 1 October 2020 and will be available for loans made by participating lenders until 30 June 2021. It will continue to support the ability of lenders to provide credit and ensure that SMEs benefit through low interest rates.
Research and Development Tax Incentive
Not only is the government backing down on plans to cut the Research and Development Tax Incentive by $1.8 billion but it is instead investing an additional $2 billion to ensure companies are investing in new products and ideas to provide jobs now and into the future.
Companies with less than $20 million in turnover will benefit from an increase in the refundable R&D offset rate from up to 43.5% to the company tax rate plus 18.5%. While the maximum amount available is up to 48.5%, most small businesses will continue to access a rate of 43.5%, given the upcoming reductions in company tax rates. The budget will also see the $4 million cap on cash refunds abandoned.
Companies with an annual turnover of $20 million or more will be streamlined into a two-tiered intensity test, judged as a proportion of the business’s total expenses for the year, with a non-refundable tax offset available at the company tax rate plus:
- 8.5% for R&D expenditure between 0% and 2% of total expenditure; or
- 16.5% for R&D expenditure above 2% total expenditure.
And it doesn’t end there! The cap on R&D expenditure that can be claimed under the incentive will be lifted from its current level of $100 million to $150 million per annum.
Still to be announced are improvements to the administration, integrity, and transparency of the currently over-complicated system, as well as details on how the R&D Tax Incentive will interact with the proposed increases to the Instant Asset Write-Off.
It doesn’t appear that R&D Tax Incentive losses will be available to use with the proposed carry-back measures.
These changes will apply from 1 July 2021, so keep them front of mind while you plan your future innovation projects. The current rates will continue to apply until 30 June 2021.
Book in a chat with our R&D Tax Incentive advisors to discuss how the proposed budget will impact your business and R&D claims.
Fringe Benefits Tax Exemptions for Retraining Staff
In a bid to keep people in jobs, employers with a turnover of less than $50 million who provide retraining activities to employees will have these amounts exempt from Fringe Benefits Tax from April 2021.
The costs towards training for a completely new role are not normally deductible.
JobMaker Plan for Young Workers
We know it’s hard for young people right now, and the $74 billion JobMaker Plan will provide employers with an incentive to take on young job seekers aged 16 to 35 years old. It will be available to employers from 7 October 2020 for each new job they create over the next 12 months for which they hire an eligible young person. Note that there must be a net increase in employees.
An eligible young job seeker must have received the JobSeeker Payment, Youth Allowance (Other) or a Parenting Payment for at least one month of the previous three months at the time of hiring.
For each eligible employee, employers will receive (through Single Touch Payroll) for up to 12 months:
- $200 a week if they hire an eligible young person aged 16 to 29 years
- $100 a week if they hire an eligible young person aged 30 to 35 years
Apprentice Wage Subsidy
We welcome the support of up to 100,000 new apprentices and trainees through the proposed $1.2 billion wage subsidy program. The subsidy will provide employers with 50% of an apprentice’s wage, up to a cap of $7,000 per quarter, for commencing apprentices and trainees at businesses of all sizes, in all industries, and in all locations, until 30 September 30 2021.
Temporary Loss Carry-Back
Businesses with a turnover of less than $5 billion can offset losses against previous profits on which tax has been paid, to generate a refund. This means that losses incurred up to 2021-2022 can be carried back against profits made in or after 2018-2019.
Eligible companies may elect to receive a tax refund when they lodge their 2020-2021 and 2021-2022 tax returns, with the first lodgement part of the 2021 tax return. There will be no cash refunds until then.
What does the budget mean for individuals?
The announcement that personal income tax cuts will be brought forward two years, and backdated to 1 July 2020 was a large focus of the budget announcement. This package includes raised tax brackets and support for workers on lower incomes. Home ownership, superannuation and aged care also received strategic investment, as detailed below.
First Home Loan Deposit Scheme
It’s an exciting time for first home buyers, with an extra 10,000 buyers now able to purchase homes with deposits as low as 5% under the extension to the Federal Government’s First Home Loan Deposit Scheme.
As with the original phase of the scheme, eligible first home buyers will be able to purchase a home with a deposit as low as 5% of the purchase price, with the Federal Government set to guarantee up to 15% of the loan. The scheme will be extended from October 6 to June 30 2021.
Unlike the original scheme, the extension only applies to newly built homes and comes under higher price caps. But this time around, successful applications will be able to buy homes worth up to $950K in Sydney, $850K in Melbourne, $650K in Brisbane and $550K in Perth.
Of course, the scheme aims to stimulate the economy and keep more tradies in jobs, which is great news for businesses in the construction industry. Unfortunately, there was no extension to the $688m Home Builder Scheme.
Please get in touch with our BlueRock Finance team to discuss how you can take advantage of the First Home Loan Deposit Scheme.
It’s great to see the government is allocating resources towards improving the superannuation system for everyday Australians. We commonly see clients with multiple superannuation funds and a mixed bag in regards to performance and inappropriate administration fees.
Superannuation is one of the most effective tools for retirement, and if invested correctly and structured appropriately, it can result in hundreds of thousands in retirement.
The budget introduced a number of reforms to be rolled out from 1 July 2021 to improve outcomes for superannuation account holders, including the launch of a new superannuation comparison tool, YourSuper, and an annual performance test for MySuper products.
Another update was the shift towards “stapled” superannuation accounts, so that individuals keep their existing superannuation account when they change jobs. An important aspect, which seems to have been overlooked, is the automatic acceptance of default life insurance. Australians have already been identified with an issue of underinsurance and it has become harder and harder to get life insurance under tighter medical underwriting policies. It’s concerning that the automatic acceptance of life cover when starting a new default superfund will now be lost and the underinsurance issue in Australia will be exacerbated.
If you’re looking for advice on your superannuation strategy, please get in touch with our BlueRock Private Wealth advisors, who would be happy to talk through your options.
The government has been under considerable pressure during the COVID-19 pandemic to address inadequately equipped aged care facilities and resources. As a result, the announcement of 23,000 new packages for older Australians waiting to receive at-home care, at a cost of $1.6 billion, was well received. For the past two years, more than 100,000 Australians have been on waitlists for approved home care packages, with tens of thousands entering residential care prematurely as a result.
To further prevent Australia’s aging population from prematurely entering aged care and to reduce the burden on aged care facilities, the capital gains tax on granny flats is set to be scrapped from 1 July 2021.
With a potentially weaker property market expected in the near future, this may provide an economic and tax incentive for retirees to retain property and not sell in a depressed market. It may also allow for more utilisation of the superannuation ‘downsizer contribution’, which allows eligible people over 65 to contribute up to $300,000 each into super to help self-fund retirement effectively.
What does the budget mean for the economy?
Broadly speaking, economists around the nation have welcomed last night’s big spending budget, which offers substantial stimulus for the Australian economy. (Interestingly, while the Aussie dollar shrugged off the release of the federal budget, it plummeted after President Trump tweeted a temporary pause on stimulus hopes for the US!).
Industry Growth - Manufacturing
The $1.5 billion baby is officially on its way, with the government’s Modern Manufacturing Strategy aiming to deliver high-value jobs, improving Australia’s competitiveness, and ensuring Aussies have access to the essential products needed to keep us secure and resilient - without needing to take our business offshore.
The strategy focuses on building our capability in 6 key industries where we are seen to be competitive with the rest of the world:
- Food and beverages
- Recycling and clean energy
- Medical products
- Resources technology and critical minerals processing industries.
The specific details behind how to access the funding and eligibility criteria are yet to be released, though what we will see is:
- Modern Manufacturing Initiative: $1.3 billion to invest in manufacturers to help them collaborate and build scale, commercialise their ideas and connect to global supply chains;
- Supply Chain Resilience Initiative: $107 million to address supply chain vulnerabilities for key products;
- Manufacturing Modernisation Fund Grants - Round 2: $52.8 million to co-fund capital investments that help manufacturers scale-up, invest in new technologies, create, and maintain jobs and upskill their workers; and
- Industry Growth Centres: $50 million to provide immediate support to manufacturing priority industries.
Our dedicated Grants & Incentives team can assist you with the above initiatives.
Industry Growth - Digitisation
Given the huge challenges posed by COVID-19, many Australian businesses have had to adapt to a digital economy and remote working. With this transition, digitisation has become more important (and exciting) than ever and the government is keen to support this digitisation, allocating $796.5 million to a new four-year Digital Business Plan that will lead to Australia becoming “a leading digital economy by 2030”.
The Digital Business Plan has the following four pillars:
- Modern digital infrastructure
- Reduced regulatory barriers
- Small and medium enterprise support and capability
- A digital government that is easier to work with.
$1.67 billion has also been set aside to emphasis and implement cybersecurity programs that will keep Australian businesses and individuals safe online. The strategy’s key elements include proposed laws and an enhanced regulatory framework to secure critical infrastructure, deemed the best way to protect Australians at scale. These powers will ensure the Australian Government can actively defend networks and help the private sector recover in the event of a cyber attack. The nature of this assistance will depend on the circumstances, but could include expert advice, direct assistance or the use of classified tools.
If you’re keen to digitise your business or better understand your cybersecurity risk, our BlueRock Digital team can help!
While the coronavirus black swan has hampered the 2020/21 estimate for economic growth to -1.5%, the Federal Government is seeking to shift the focus of households and businesses from the immediate to the medium-term and, laying a robust foundation for recovery.
This reflects the strong recovery forecast for 2021/22, seeing growth return to 4.75% and the unemployment rate at ‘just’ 7.5% as at June 2021. These forecasts are overstated relative to the RBA (Reserve Bank of Australia) and ANZ estimates, so the risk is that the deficits are potentially greater if their estimates are too optimistic.
The fiscal measures being implemented are the largest ever by a considerable margin, and Australia’s triple-A sovereign rating remains at risk. This will be something to watch going forward, to ensure Australia remains an attractive player in the global credit space. Significant stimulus is purposefully meant to be inflationary for an economy; however, when it comes to debt-induced inflation, Goldilocks is our intended friend - Not too hot, nor too cold.
Iron ore exports, which play a huge part in our economy, are expected to remain high until the end of the June quarter next year, which will lead to the budget being a combined $6.1 billion better off than originally forecast. On the flipside, the banks and miners will miss out on the investment write-offs and loss carry-backs proposed, and the banks have also been tipped to miss out on wage subsidies.
With the economy in its COVID-induced coma, the government and future taxpayers are bearing the major brunt of the downturn that has occurred. The capital account (government debt) is expected to soar to nearly $1 trillion by 2024. The servicing on this debt will be lower than the cost of debt utilised to kick-start the economy post-GFC, given historically low interest rates. The rate of our government debt will remain on average, nearly 4 times lower than the rest of the developed world. In saying this, over the next 4 years, government underlying cash balances (deficits) will equate to an enormous 23.8% of GDP (Gross Domestic Product) to end fiscal year 2024.
The huge economic question relates to inflation and the capacity for our government to make good on their promise of jump starting the economy using their debt laden cheque book, and to repair the budget via economic recovery and looser fiscal policy rather than increasing tax revenues. Importantly our cash rich superannuation sector was left alone last night. Perhaps the government has learnt from raiding the lolly jar in previous budgets? Inflation presents as a significant threat on multiple fronts over the coming years.
Very loose monetary policy (low interest rates) means that if the government ‘over stimulates’ the economy, we run the risk of needing to increase interest rates in order to ‘cool inflation’. With highly debt-ladened consumers and an inflated, debt-reliant property market, our economic growth is almost addicted to debt to the point where the implications of a reversal in interest rates are dire. Let’s hope that the Treasurer is right in his claims that this government is more responsible than his predecessors with their effective use of debt.
The very supportive forecast for GDP over the next 4 years should lead to Bond yields rising with the ASX and AUD to perform well. The fiscal package looks very big compared to other countries still struggling to pass similar packages (like the USA), which is a positive for the AUD/USD. These higher bond yields should also produce equity rotation out of Growth/Tech assets into Value/Financials. This has not changed out previous Asset Allocation positioning in which we were pro the AUD and Australian Equities.
Expectedly, the Australian Sharemarket has responded positively to the announcements, up over 1% in trading. The big 4 Aussie banks are all up over 2%.
The forecast synchronised global growth in CY21 is highly reliant on the development of a COVID-19 vaccine, as is the government's stimulus package, but there seems little alternative than to push on with the hopes of reopening an economy and reassessing as we go.
Please see below for the key economic forecasts and chat to our BlueRock Private Wealth team if you're keen to learn more.
If you would like to discuss any of the above topics or to talk through your plans for the upcoming year, please get in touch with the BlueRock team. Continuing to stay proactive and focused on new opportunities will help you to reduce risk and reach your goals. Let’s do it!