Budget tax breaks represent important boost for business
Overall this is a Budget with plenty of useful and targeted measures for business. The tax loss carry-back rules are a great initiative and will benefit many companies which are still operating well during this crisis and deserve support. This is a smart policy decision that can unlock cash quickly for businesses which have shown they can be profitable.
Governments have resisted introducing this over many years as it has a significant cost. It would be ideal if the carry-back went back further than 2019 but it is still a very substantial act of assistance to companies that have made profits in previous years but now battling through the COVID-19 era. It means companies which suffer tax losses in the 2020, 21 and 22 tax years –very many given the COVID-19 impact – can carry those losses back and reclaim the tax on the profits they made in 2019, or carry it forward to later income years.
The temporary tax incentive allows expensing of capital assets acquired and installed before June 2022 – an extension of the instant asset write-off scheme – could also have a significant impact on business decisions. Companies with turnover up to $5 billion can deduct the full cost of eligible depreciable assets of any value in the year they are first used or installed, and the cost of improvements made during this period to existing eligible depreciable assets can also be fully deducted.
This will certainly help with the cost of purchasing capital equipment although, given it is temporary, it is mostly a timing advantage, bringing forward business investment, rather than representing the bigger costs to the public purse which an investment allowance would have required. It also requires companies to have sufficient confidence in the economy to invest in depreciable assets in the next two years, but nevertheless it should generate economic activity.
There are also other tax measures of note. For groups with international operations there is an important, and much-needed change to the company tax residency rules. Going forward, foreign subsidiaries will only be an Australian tax resident where they have a significant economic connection with Australia. This will prevent international subsidiaries from being tax resident on technical grounds and will simplify international tax.
The government will introduce a specific Fringe Benefits Tax (FBT) exemption for retraining benefits provided to redundant or soon to be redundant employees. Without this measure, FBT would apply at a rate of 47 percent effectively doubling the cost of providing retraining benefits. In addition, there is a potentially significant win for the reduction of FBT administration costs. The Government will provide the ATO with increased powers to allow employers to rely on existing corporate records rather than the current prescribed declarations and other records employers and sometimes employees must maintain. This measure will apply from the FBT year commencing 1 April after the enabling legislation is enacted.
At the smaller end of the market, there is also an extension of several small business tax concessions to entities with a turnover up to $50m, which should benefit an additional 20,000 businesses.
From a business perspective, the bringing forward of the personal tax cuts will also be welcome as they will stimulate economic growth. Overall, it is a budget focused on stimulus measures for mid-market growth and job creation, supported by welcome tax changes.
Research and development changes
The Budget has some very good news for Australian businesses, worth over $5bn from an R&D and wider innovation perspective.
The government has changed its approach to previously announced reforms and will now invest an additional $2 billion over the forward estimates period through the R&D Tax Incentive (RDTI). The bill currently before the Senate Economic Legislation Committee, which would have led to reductions in the RDTI, will now not proceed in its current form. However, much of its content still stays relevant.
The R&D benefit will be increased for income years on or after 1 July 2021 and will support more than 11,400 companies:
For larger companies (annual aggregated turnover of $20 million or more), elements of the Bill will be kept, but instead of decreasing the benefit, the ‘R&D intensity measure’ (which measures the relative expenditure by a company on R&D compared to its total expenditure) will now increase the R&D tax benefit as follows:
For smaller companies (annual aggregated turnover less than $20 million), the refundable R&D tax offset rate will be pegged at 18.5 percentage points above the corporate tax rate (instead of 13.5 percentage points) and there will be no cap on the annual cash refund.
Further, the current $100 million cap will be increased to $150 million and other integrity and administrative measures in the bill will be retained. Overall, this is an excellent result and will give a welcome boost to R&D in Australia.