The 2021 Federal Budget has been delivered, with the budget designed to keep the country out of recession through prolonged spending, with the goal to drive down unemployment.
From a pure tax perspective, it was a fairly uneventful budget.
There are a few key changes, however, and these are summarised below.
Extension of the Instant Asset Write-Off: An extension of this program out to June 2023 to allow businesses to immediately depreciate eligible assets, with no cap on the value of these assets. This not only directly benefits small businesses that invest but some of these assets will be purchased from or serviced by other small businesses.
Low & Middle Income Earner Tax Offsets Extended Another 12 Months: The low and middle-income tax offset, which was due to end on June 30, will be extended for another 12 months. The offset is worth up to $1080 as a refund for about 10 million workers earning between $48,000 and $90,000 when they file their tax returns.
Loss Carry Back: Extended to 30 June 2023. Losses incurred during the 2020 to 2023 years can be carried back to offset profits as far back as the 2019 year as a refundable tax offset.
Changes To Minimum Super Payments: From 1 July 2022, the minimum threshold of $450 ordinary earnings before superannuation is payable will be removed. This ensures casual and part time workers are not penalised with less superannuation savings.
Super Contributions Limit for over 60’s: The access age to the “super downsizing scheme” will be reduced from 65 to 60 from 1 July 2022, allowing more people to boost their superannuation with the proceeds of the sale of their home. Contributions of up to $300,000 are allowed, but the home must have been owned for at least 10 years and the money must be paid into super within 90 days of receiving cash from the sale.
Superannuation – Removal of The Work Test: Work test rules for older Australians – which restrict contributions to super unless you are working a certain number of hours – will be scrapped. This change means people who are between 67 and 74 who may have already retired, are doing volunteer work or who have more flexible work arrangements can continue to make voluntary contributions or salary sacrifice.
Self-Education Deductions – Removal Of $250 Adjustment: From 1 July 2022 the exclusion for the first $250 of deductions for self-education expenses will be removed from the first income year after Royal Assent.
Changes to Residency Rules: From 1 July 2022 they will replace the individual tax residency rules with new primary and secondary tests to determine residency.
– a primary ‘bright line’ test — under which a person who is physically present in Australia for 183 days or more in an income year will be an Australian resident for tax purposes;
– secondary tests depending on a combination of physical presence and measurable, objective criteria — for individuals who do not meet the primary test.
Tax Breaks for Aussie Patents: From 1 July 2022, companies that develop patents in Australia will receive tax reductions under an initiative to promote the manufacturing sector and innovations in the medical and biotech sectors.
Dubbed the “patent box”, the initiative will see corporate profits taxed at a concessional rate of 17 percent if the patents are developed in Australia. The scheme is expected to take effect on July 1.
One of the key pillars of this year’s federal budget was the future and backdated tax cuts. The “stage two” tax cuts originally set down for the 2022-23 year have been brought forward and backdated to July 2020.
The measures are expected to see lower and middle-income earners receive tax relief of up to $2745 for singles, and up to $5490 for dual-income families – compared to 2017/18. The new tax scales have been released by the ATO now so all employees should be seeing an increase in their take-home pay. You will get the kicker for the backdated portion when you lodge your 2021 tax returns.
The government wants us to spend these tax cuts to drive economic activity. This argument that increased consumer spending will stimulate the economy is debatable as all spending isn’t equal. Spending money on electronics made in China doesn’t benefit our economy as much as eating out at local restaurants.
On top of this Covid-19 has changed the rules of the game. We have seen a fall in private consumption and people are still anxious about outbreaks and shutdowns. In this environment, people will be more likely to save, not spend.
Here are my thoughts on what you should do with your tax cut.
Pay off your debt
If you’ve got debt, pay it off. We have very high household debt-to-income ratios in Australia. Each person will have different priorities at times like these, but if financial security is at the front of your mind then you should be reducing non-discretionary spending and non-deductible debt.
Paying off high interest finance like credit cards and car loans as quickly as you can is about the most effective investment you can make.
Invest
If you don’t have non-deductible debt, then think about your goals and look to invest the tax cuts. Think about your goals and choose investments that are appropriate for the length of time to invest.
Younger people are particularly well served by investing early and often with compound interest on your side.
Now might be the time to sit down with a financial planner to start mapping out the years ahead. We work with a few planners in this space so let us know if you’d like some contact details.
Don’t spend it before you get it
Don’t second guess how much your tax refund is going to be and don’t spend it before you’ve got it. A lot gets taken into account in calculating the tax at year end and you might get caught out.
Also, avoid the Buy Now Pay Later offers such as AfterPay. These lenders are essentially unregulated and borrowers are getting caught out. The ASIC report this week about the schemes highlights that as many as 20% of borrowers are getting into trouble with these credit products. Past financial results have shown that the lenders make between 10% & 20% of their income from late fees. So beware, don’t overcommit and don’t spend more than you earn.
Over the past 9 months, there have been numerous Covid-19 government support payments for business and individuals. A question we are often asked is how these are treated for tax purposes.
JobKeeper payments
JobKeeper payments received by individuals are considered taxable income. Your employer will report them to the ATO along with the tax they withheld. These payments will be part of your Payment Summary which will be available through MyGov. They may appear separately or as part of your salary and wage income. If you are a sole trader you declare the JobKeeper payments as income.
Businesses that received JobKeeper payments to help make up for a fall in turnover, will need to disclose these payments as part of the assessable income of the business for the financial year. It will be offset by the JobKeeper payments made to staff.
JobSeeker payments and the $550 Coronavirus supplement
Your JobSeeker payment and the $550 Coronavirus supplement are both taxable income and are included in your tax return. The ATO should automatically populate this information for you under the ‘government payments and allowances’ section in your tax return.
The $750 Economic Support Payment
This payment was made to Australians on lower incomes who were receiving some kind of assistance from Centrelink. It is exempt from tax and does not count as income.
Business Cash Flow Boost payments
The federal government cash flow boosts were delivered as credits in the activity statement system to small and medium businesses who employed staff. They are tax-free payments. You do not need to report or include them in your tax return.
State Government Grants
A government payment to assist a business to continue operating is included in assessable income. This will include assistance provided as a one-off lump sum or a series of payments. These include:
Queensland COVID-19 adaption grant
New South Wales Government Small Business COVID-19 Support Grant
South Australian Government $10,000 Emergency Cash Grants for Small Businesses
South Australian Government Job Accelerator Grant Scheme
Victorian Government Business Support Fund
Payments under the Northern Territory Government Small Business Survival Fund
Northern Territory Government Business Improvement Grant
Western Australian Government Small Business grant scheme
Electricity rebates
Some states and territories are offering households and some businesses automatic electricity rebates. These rebates are not included in assessable income. For a business, the rebate will reduce the deduction the business can claim for electricity.
Early release of superannuation
If you accessed part of your super under the COVID-19 early release of super payment, you won’t be required to pay any tax on the payment so you don’t need to disclose it in your tax return.
Still have questions? Feel free to reach out to the team at Activ8 Accountants & Advisors who will be happy to talk further.
“There is a monumental task ahead,” the Treasurer admitted in his budget speech on Tuesday night. For once this does not seem like an overstatement. The coronavirus pandemic has fundamentally changed the way we do business in this country.
The challenge for the Government in this Budget was to outline a plan to kickstart the economy by encouraging jobs, investment, and household spending. To this end they have delivered one of the most stimulatory budgets we have ever seen, featuring tax breaks for individuals and businesses.
The Government’s road to recovery hinges on middle- and high-income earners and businesses spending big. The Government’s task now is to encourage businesses and households to take advantage of the new programs to deliver stronger economic growth and more jobs.
The three pillars of the Budget, that will underpin jobs, investment and household spending are:
Significant personal income tax cuts
JobMaker Hiring Credit for businesses employing new staff under 35
Immediate write off for any business assets purchased from 7:30pm last night
Lower taxes for households
Tax relief for over 11 million individuals.
Low- and middle-income earners to receive tax relief of up to $2,745 for singles or up to $5,490 for dual income families in 2020–21 compared with 2017–18 settings
Empowering businesses to grow, invest and innovate
12 month wage subsidies to hire new apprentices and people under 35 who are on JobSeeker.
Temporary full expensing available to around 3.5 million businesses on purchases of eligible depreciable assets. No asset limits.
Temporary loss carry‑back available to around 1 million companies. Companies can offset tax losses against previously taxed profits to generate a refund.
Investing an additional $2 billion through the R&D Tax Incentive.
Cutting red tape for businesses
Reducing record keeping requirements for fringe benefits tax.
Exempting employer‑provided retraining activities from fringe benefits tax to encourage reskilling.
Lower personal income taxes
The centerpiece of the Budget were the personal income tax cuts, including the continuation of the Low and Medium Income Tax Offset, which will flow to more than 11 million taxpayers. They have also backdated these tax cuts to start on 1 July 2020. This should mean the extra money will be in bank accounts as soon as the legislation is passed and payroll software is updated.
Workers earning between $50,000 and $90,000 will receive an extra $1,080 in 2020-21 as an extension of the low and middle income tax offset that was introduced last year.
People earning more than $120,000, on the other hand, will receive the biggest benefit with a permanent tax cut of $2,565 in 2020-21 and beyond.
The government is also looking at removing the 37% tax rate, so anyone earning between $45,000 and $200,000 only pays 30% tax.
In addition, sole traders will also benefit from the unincorporated tax discount of $1000.
For those people who receive a range of government payments, including aged pension, carer payment and family tax benefit, they will receive two $250 cash payments paid in December and March 2021.
Business-related policies
Business measures in this year’s Federal Budget focused on jobs recovery, tax breaks and the expansion of the instant asset write-off.
Job creation announcements:
JobMaker Hiring Credit – a 12-month wage subsidy for businesses that hire 16 to 35-year-olds for at least 20 hours per week, who were on JobSeeker. It will be a $200/week subsidy for those under 30 and $100/week for those aged 30-35. It’s expected that employers will report JobMaker Hiring Credits using Single Touch Payroll.
Apprentice wage subsidy scheme – businesses that hire new apprentices will be eligible for a 50% wage subsidy. The $1.2 billion scheme will support 100,000 apprentices and be available to businesses of all sizes.
Business investment announcements:
Extension of the Instant Asset Write-Off – An extension of this program out to June 2022 to allow businesses to immediately depreciate eligible assets, with no cap on the value of these assets. This not only directly benefits small businesses that invest but some of these assets will be purchased from or serviced by other small businesses.
R&D tax incentive changes – For small companies (annual turnover of less than $20 million) the refundable R&D tax offset will be set at 18.5 percentage points above the claimant’s company tax rate and there will be no cap on annual cash refunds.
Loss carry-back provisions – Companies will be able to offset losses incurred to June 2022 against prior profits made in or after the 2018/19 financial year.
Digital adoption announcements:
JobMaker Digital Business Plan – $800m for a series of measures to help Australia become a leading digital economy by 2030 and to improve productivity, income growth and jobs by supporting the adoption of digital technologies by Australian businesses.
Cyber security program – $1.7B to improve cyber security within government agencies and increase the confidence of small businesses to engage in the digital economy.
As with the tax cuts, the key to the success of these business-based programs is that they are used. Businesses will need to have the confidence to take on new staff and buy new equipment if the economy is to feel the full benefit of these programs.
Infrastructure projects
The Budget is not leaving all the responsibility of economic recovery to businesses and households, there was also an additional $7.5 billion spending for new national-level infrastructure projects. This funding is in addition to the $100 billion infrastructure fund (over ten years) announced in previous Budgets. In addition, $3.5 billion has been allocated for upgrades to the NBN roll-out to deliver more Fibre to the Premises connections.
Small businesses are also likely to benefit from the additional $1 billion for the Local Roads and Community Infrastructure program. This is for smaller, local projects to help councils to deliver immediate upgrades of local roads, footpaths and street lighting.
Budget success depends on confidence to spend and invest
The success of this Budget in rebooting the economy largely depends on the public response. Households will need to be confident enough to spend the tax cuts and businesses will need to be willing to invest in their future and hire new staff. If the tax cuts sit in bank accounts, business hiring and investment programs go unused and infrastructure projects are delayed then the economic recovery is less likely to eventuate.
A surprise coming out of this Budget was not bringing forward the timing of “Stage 3” tax cuts (which the Opposition opposes) or permanently increasing the JobSeeker payment. The government has stayed silent on where it expects the level of unemployment benefits will eventually land permanently when the JobSeeker supplement ends. However, we note that there is an allowance for spending decisions not yet announced worth more than $6 billion over four years.
The politics of this Budget lies in the hope for the Government that the strategy works, and that all the huge uncertainties in the domestic and global outlook fall its way, so that by the middle of next year it can contemplate going to an election with voters feeling it has protected them from the worst a pandemic has thrown at them.
Restrictions imposed due to Covid-19 has seen more employees working from home. On the back of this retailers are seeing increased expenditure on such things as desks, computer screens and cleaning products, as people try to bring makeshift office spaces up to scratch.
Employees who have worked from home during the COVID-19 pandemic are entitled to claim a deduction this tax time for the extra expenses they have incurred – provided they are not reimbursed by their employer.
There are three potential methods to calculate the value of their claim.
The first – and by far the simplest – is a new “shortcut method” which applies for the period between March 1 and June 30 in the 2019-20 income year. It will continue on from July 1 to September 30 for the 2020-21 income year. All you need is a timesheet, or other proof of your working hours, to claim a flat deduction of 80 cents for every hour worked from home. For an employee who worked 40 hours from home each week during the period, it amounts to a deduction of just over $500. This shortcut method covers all additional running costs including electricity, internet and depreciation.
However, workers who have incurred particularly high costs in working from home may be better off calculating their claim via one of two older methods.
The “52 cents” method is where you claim 52 cents for every hour worked at home to cover the costs of electricity, gas and home office furniture, and then add in separately the costs you have incurred for phone calls, internet, stationery and the decline in value of equipment such as laptops and phones. Purchases under $300 can be claimed in full in the first year, while purchases over $300 must be spread over multiple years.
The “actual expenses” method is the most intricate, requiring you to individually calculate the work-related portion of all costs you have incurred working from home.
Home expenses you can’t claim
Snacks
Toilet paper
Coffee, tea and milk
Luxury stationery
Childcare or home schooling costs
Items your employer has already reimbursed you for
Do you need a dedicated work area to make a working from home claim?
For the short-cut method, you don’t need a dedicated work area. For the fixed-rate method – so 52 cents per hour plus some other things – you do need a dedicated work area. For the actual costs method, if you’re not claiming for household running costs such as cleaning, heating, cooling, electricity then you don’t need a dedicated work area. But if you’re going to try to claim for those sorts of things, then you do need a dedicated work area.
Can you claim expenses like your mortgage, rent and council rates?
These costs are really limited to where your home is a formal place of business. So, it’s more likely to apply to a small business person who is actually running their business from home, and they might have business signage and a place where clients visit and those types of things. Most employees are not going to meet those requirements. And what is important also is that if they do, then there will be capital gains tax consequences. You will not get the full main residence exemption when you sell your home.
In summary
The ATO is expecting a large increase in people claiming working-from-home expenses and that’s part of why they developed the “80 cents per hour” shortcut method, because they also know that it’s an area where people do make a lot of mistakes.
Still, it will be an area that the ATO will be paying attention to and I would say to people who have unusual things that they’re wanting to claim: only claim what you’re entitled to. Don’t try and push the boundaries too far because it can result in a) slowing your return down or b) it can result in a bill later on.
If you own a rental property or are thinking of buying one, it’s a great idea for you to understand the tax consequences. Here is a summary of how rental properties’ income and expenses can affect your tax return, including what deductions you can claim and the records you need to maintain.
Rental Income
The income received during a Financial Year must be included on your tax return. Rental income and expenses are attributed to each co-owner according to their legal interest in the property.
If your property is rented to family members or friends at below market rate, you can only claim deductions up to the amount of rent charged. The property cannot be negatively geared.
If you use a Property Manager, they usually provide you with an Annual Summary showing the amount of rent earned during the year and any expenses they have paid on your behalf such as any repairs and maintenance, letting fees, advertising and property management fees.
Rental Expenses
There are three categories of rental expenses:
Expenses that are not deductible
Expenses that you can claim an immediate deduction in the income year you incur the expense
Expenses that can be claimed over several income years.
Non-Deductible Expenses
These include:
acquisition and disposal costs of the property. These are added to the cost base of the property
expenses not actually incurred by you, such as water or electricity usage charges paid by your tenants
expenses associated with periods where your property (including your holiday home) was not genuinely available for rent
expenses that are not related to the rental of a property
travel expenses
Deductible Expenses
To claim deductions against your rental income, your property must be genuinely available for rent. This means that the property is advertised giving it broad exposure to potential tenants and those tenants are reasonably likely to rent it. Word of mouth, limiting the time the property can be rented or you place unreasonable restrictions on the property would indicate the property is not genuinely available for rent.
You will need to apportion your expenses if any of the following apply to you:
your property is genuinely available for rent for only part of the year
your property is used for private purposes for part of the year
only part of your property is used to earn rent
you rent your property at non-commercial rates
Interest
Interest is the biggest deduction. Interest paid on the loan used to purchase the property is deductible, provided that all the money borrowed was used to purchase the property.
For line of credit accounts that are used privately as well, the interest claim must be apportioned for the private portion.
Repairs and Maintenance
Repairs made to the property during the period it is rented are deductible.
Repairs must relate directly to wear and tear or other damage that occurred as a result of your renting out the property. Repairs generally involve a replacement or renewal of a worn out or broken part, for example, replacing worn or damaged curtains, blinds or carpets between tenants.
Maintenance generally involves keeping the property in a tenantable condition, for example repainting faded or damaged interior walls.
Initial repairs are not deductible. Initial repairs include repairing defects, damage or deterioration that existed at the date you acquired the property. These can be used to reduce a capital gain on disposal.
Improvements
Improvements you make to the property are not deductible in full. They need to be depreciated and claimed over their effective life. Examples of improvements include:
Landscaping
Insulation
Adding on another room
Extensions
Replacement of an entire structure such as a complete fence, stove, kitchen cupboards or fridge
Other deductible expenses can include:
advertising for tenants
bank charges
body corporate fees
cleaning
council rates
electricity and gas
gardening and lawn mowing
insurance
land tax
legal expenses re leases agreements.
lease costs
pest control
property agent’s fees
letting fees
quantity surveyor’s fees
security
stationery
postage
telephone
internet
water rates
Expenses deductible over several years:
Borrowing expenses – these are written off over the term of the loan or 5 years whichever is less
Depreciation for capital assets
Capital works deductions
Capital Works Deductions
If the building is under 25 years old you will be entitled to claim a deduction of 2.5% per year of the original cost of construction of the building for up to 40 years from the original date of construction.
If you do not know the building cost you can contract a quantity surveyor to determine the building costs and prepare the depreciation schedules for the property and determine what can be claimed. The fee is tax deductible.
If the previous owner was allowed capital works deductions, earned assessable income from the property and the capital works started after 26 February 1992, they are required to give you, as the new owner, information that will enable you to calculate those deductions going forward.
Records you need to maintain
You should keep records of your rental income and expenses for five years from 31 October or, if you lodge later, for five years from the date you lodge your tax return. If at the end of this period you are in a dispute with the ATO that relates to your rental property, you should keep the relevant records until the dispute is resolved.
Records of expenses must include the name of the supplier, amount, nature of the expense, and the date.
There are still opportunities for tax-effective salary packaging – especially if you are in the not-for-profit sector.
Salary sacrificing is where your employer pays you the same salary, but you pay for selected expenses before the tax is taken out, rather than after. This could reduce your taxable income and give you more money to spend on the things you want.
The key to a tax-effective salary sacrifice is for the employee to take some of their salary in the form of concessionally taxed benefits or even exempt benefits instead of taking it all as taxable salary.
For the employer, salary packaging has some advantages such as the ability to attract employees. The administration costs of salary packages also need to be considered. Some employers may only offer limited forms of packaging to reduce their costs.
Even If You’re Financially Secure, It’s Time To Live On A Budget!
As we start to see the loosening of the restrictions imposed due to the COVID-19 pandemic, there is still another big unknown in our lives right now: What is going to happen with the economy? Some would argue that the sharp economic recession brought on by this crisis is near the bottom of the trough and we are close to a recovery stage. I believe we are virtually guaranteed of an ongoing recession over the next 12 to 24 months. Particularly after the governments subsidies and stimulus packages come to an end. What will that mean for our jobs and livelihoods—and what should we be doing financially to prepare?
Some of us are already having to rethink our spending habits to make ends meet. Others may feel more financially secure thanks to high salaries, six-month emergency funds or the ability to work remotely. But when recessions come, they tend to come for everybody—so it is time for all of us to re-evaluate our budgets and, potentially, start saving as much as we can.
Here are three pieces of advice to get you started:
Treat your income like it’s temporary
This is a good mindset to have at any time but particularly now: whatever income you are earning right now is temporary. If you are happy with your current income, don’t take it for granted—and don’t assume there will always be more money coming in.
This mindset becomes even more important during a recession. When jobs are harder to come by it’s important to treat your current income as if it might need to stretch for as long as possible. This doesn’t mean you need to cut back on all discretionary spending, but you might want to consider trimming some of your expenses so that you can put more money into savings or an emergency fund.
Saving money now is worth more than spending money later
In the face of so many unknowns, it is important to err on the side of cash. In recessions, cash is king. A lot of retailers have started offering significant sales and discounts to entice shoppers to start spending again—but buying something at a bargain may not be the smartest financial move.
Unfortunately, this advice will not help get the economy ticking over again, but in times of uncertainty, money in your pocket now is worth more than any saving you might make.
In other words: If you spot a great deal, remind yourself that having cash on hand is often more valuable than getting a price cut on a purchase that isn’t absolutely necessary. Saving $50 might still mean spending $100 after all—and you might really need that $100 in the not too distant future.
Make a plan and act
If you’re worried about how long your money might last during a potential recession—or if you’re simply unsure about what you should be doing with your money right now— try budgeting for 30 days, then re-evaluate.
No matter the current condition of your financial safety net. Create a budget, cut your expenses and save every dollar you can for the next 30 days, then evaluate: Did you actually trim as much as you could’ve? Did you make any purchases you regret? Were there any purchases you should have made but didn’t? How did your budget affect your overall quality of life?
Once you know the answers to these questions, you can reconsider and refresh your budget for the next 30 days. Continue to budget, reflect and repeat while saving as much money as possible—because whether you feel financially secure or financially anxious, right now it’s essential to start preparing for an uncertain future.
Don’t cut out all the things that make life bearable in these stressful times. If you can keep something that just makes you happy, keep it. For me, it’s chocolate and red wine. So, if you can afford that nice bottle of red you ordered, go ahead and drink up!
Don’t hesitate to contact us if you’d like some assistance with your personal budgeting. ASIC’s Moneysmart website also has an excellent budget planner (under Tools & Resources) as well as other useful advice. Check out: https://moneysmart.gov.au/
