Well that is definitely a big spending budget!
Watching the budget live, you could have been forgiven for being a little confused watching our supposedly ‘fiscally responsible’ Liberal National Party coalition throwing out buckets of money.
The question, that can only be answered in the future, is whether all this expenditure is absolutely necessary? What is definite is we will all have a very big debt to repay.
Extraordinary times – yes, but we are using a lot of our economic weapons and the cupboard may be a little bare after this.
So the numbers:
In July, the treasurer forecast a budget deficit of $185 billion for 20_21. This was after a deficit of $85.8 billion for the 19_20 financial year. This has already blown out to $213.7 billion. Yes, Victoria has set the government’s plans back, but $185 billion was already a big fiscal stimulus. Remember that this is forecasting that we will spend $213 billion more than the $472.4 billion we will collect at the federal level.
This link gives you a snapshot of some of the spending initiatives but I will focus on the major changes that may impact you and your families.
One point to note that this is only proposed and needs to get through the legislative process before we see any of this implemented.
Firstly, Tax cuts.
A big boost for all tax paying Australian’s. The government has brought forward its tax cuts planned for 1 July 2022.
As you would be aware, Australia has a progressive tax system where higher incomes pay an incrementally higher tax rate on that portion of their income.
- If passed, these new tax rates will be applied to the 20_21 FY and for the average wage earner on $89,122, (AWOTE 2020) this would reduce the amount of tax they pay from $20,511.14 to $19,431.14 – a saving of $1,080 or just under $21 a week.
Phase three of the legislated tax cuts is still not due to be implemented until 1 July 2024 and given the debt burden by then, I wouldn’t be too excited about those prospects.
- Other initiatives include some changes to the low and middle income tax offset and eligibility as well as changes in the Medicare levy thresholds.
The Government proposes to provide two $250 economic support payments to be made from early December 2020 and early March 2021 to eligible recipients.
Small business incentives
This budget is targeted at jobs growth and helping our small businesses recover from shut downs.
- Change in the definition of small business from $10 million to $50 million which can give relatively large businesses access to a whole range of concessions.
- For businesses under $50 million of turnover, for the period 6 October 2020 to 30 June 2022 you will be able to deduct the full cost of eligible depreciable assets of any value, both new and second hand, in the year they are first used or installed. (Now don’t get too excited, they will be keeping a close eye on big toys like RVs, caravans, boats and jet ski’s sneaking on to the books L – Okay I might be the only one thinking about that?).
- Relaxation on some of the fringe benefit tax (FBT) rules for training (this year) and for the 21_22 financial year relaxation on FBT provisions for parking and devices like phones and laptops.
- Offsetting current losses against profits made in or after 2018_19. This means, as an example, if you make a loss in 21_22 financial year you can offset it against profits in years 18_19 or beyond and get a tax refund against those previous profits. Always good to give your accountants a headache!
- The apprentices’ subsidy has been boosted with businesses able to be reimbursed up to 50% of an apprentice or trainees wage (maximum of $7,000 a quarter).
- Businesses can access payments of up to $200 a week when hiring a new eligible employee. Not huge but every little bit helps.
CGT on Granny flats exemption
- The capital gains exemption for granny flats may be a welcome change for some of our clients. The concern has been that if your parent who had paid for the granny flat died, their interest in your property would be subject to capital gain. The government has recognised this can be problematic and is moving to remove the issue for formal arrangements after 6 October 2020. We will need more information on existing formal arrangements to see if the new rules will be retrospective.
- Increased home care packages (23,000 over 4 years) – welcome relief as these have been very hard to access.
- Additional aged care funding for a range of support mechanisms
Some good initiatives:
- Slowing the creation of multiple accounts as people move between jobs by having your super account follow you rather than having to use a default option;
- Keeping an eye on underperforming funds; and
- Reinforcement of ‘best financial interests’ by Trustees of super funds to ensure members funds are being used for retirement savings.
The increase in the superannuation guarantee is still scheduled to rise to 10.00% from 9.5% on 1 July 2021, though this was the subject of a lot of press in the run up to the budget.
- We can see both sides of the argument as we like the idea of retirement savings but also see this as a cost for small business and potentially reducing consumers’ disposable income in a period we need them to spend. We were surprised this wasn’t deferred.
Our friends at Challenger have put a far more detailed summary together if you are looking for more specific information: Federal-Budget-2020-21
There are a lot of variables and assumptions – a big one being on the creation of a viable vaccine. Currently there are five vaccines approved for early or limited use with 44 vaccines in clinical trials on humans. New York Times vaccine tracker
There is potential for a more rapid recovery and an increase in government receipts reducing the total deficit and length of time it takes to get the unemployment rate down.
In summary, the Government has made a very conscious decision to spend our way out of this mandated recession and to use one of Scott Morrison’s lines when talking about the ‘Victorian road map’, we are all hoping this is worst case.