On Tuesday night Treasurer Josh Frydenberg delivered the 2020-21 Federal Budget that had been deferred from May due to the COVID-19 pandemic. Issues we confront today couldn't contrast more to those conditions present at the time of his maiden 'back in black' budget in April 2019.
With real GDP expected to fall 3¾% in calendar year 2020 and the unemployment rate forecast to reach 8%, the focus was clearly to stimulate the economy out of our first recession since 1991. Combined with the support already provided since the onset of the pandemic, the additional spending in this budget brings the Government’s overall support to $507 billion (25.6% of GDP).
This budget incorporates significant support for the economy and should allay fears around ‘fiscal cliffs’. The Government’s strategy is to keep its foot on the fiscal pedal until the unemployment rate is comfortably below 6% before it contemplates reducing government debt.
This budget is focused on supporting jobs, boosting business and consumer confidence and supporting growth throughout the economy. This is at the cost of higher debt with an expected deficit of $213.7 billion for the 2021 financial year (11% of GDP). Net debt is expected to peak at 43.8% of GDP in the forward estimates and then fall to 39.6% by 30 June 2031. Budget forecasts are all predicated on a complex set of assumptions. The detail in this year’s Budget contains the very important assumption that there will be a COVID-19 vaccine program widely available in Australia by no later than the end of 2021.
Personal Income Tax
For the majority of Australians a key initiative is bringing forward the previously legislated changes to reduce personal income tax to take effect retrospectively from 1 July 2020.
The changes are summarised in the table below however key changes include increasing the low income tax offset (LITO) from $445 to $700; increasing the top threshold of the 19% bracket from $37,000 to $45,000; and increasing the top threshold of the 32.5% bracket from $90,000 to $120,000. These changes mean that an employee on $50,000 will be $1,080 better off in 2020-21, whilst an employee on $120,000 will be $2,430 better off.
To stimulate jobs and growth, the Government announced measures to support capital investment by business. The most noteworthy policies were:
- a temporary full (i.e. no limit) deduction for depreciable assets for all businesses with aggregated turnover of up to $5 billion (from the current $150,000 limit for businesses with aggregated turnover less than $500 million).
- a 'loss carry-back' rule for tax losses that are incurred in the 2019-20, 2020-21 or 2021-22 income years. Corporate taxpayers will have the ability to carry-back and offset those losses against taxes paid in the 2018-19 or later income years (currently losses can only be offset against future profits).
Social Security & Aged Care
Those not employed are also being further supported. The Government has confirmed announced extensions to the JobKeeper payments, provided clarification around COVID-19 payment supplements to those on JobSeeker and will make two $250 payments for eligible social security recipients. The Government has also developed a new JobMaker package which includes a hiring credit for employers who bring on younger Australians who have been on JobSeeker.
The Government provided for an additional 23,000 home care packages over the next 4 years.
As usual, many of the announcements require greater detail and successful passage of legislation. Time will tell if this 'money talks' budget hits the mark. For many Redwood clients we will be reviewing strategies in light of the personal income tax changes and business support measures to ensure they remain appropriate. We will continue to collaborate with clients' other professional advisers. If you have any further questions please reach out to your advisers.