Written by Hudson Adviser Phillip McGann
Generous Incentives for Small (and Large) Businesses to get Kick Start Investing in their Businesses
The Treasurer has pulled out a lot of rabbits from his hat this year to try and stimulate the business sector. He figures if business is encouraged via the tax system to spend, this will hopefully flow through to more job creation.
Business large and small have been the target – along with the tax cuts – to stimulate job creation including in two very targeted ways;
Instant Tax Write Off:
This has been a favourite of the government for many years as it plays to their core constituency. By helping small business spend it stimulates aggregate demand and leads to a virtuous cycle of demand and job creation.
From budget night 6th of October 99% of business will be able to deduct the full cost of eligible capital asset assets that are installed by 30 June 2022.
The aim is to turbo charge business investment in productive assets. The government is hoping businesses will be encouraged to buy new assets and perhaps employ staff to use the assets. A reasonable amount will probably be businesses bringing forward future activity but this is fine if it jolts the economy back to life.
Carry Back Tax Losses:
This is a clever addition to the government’s stimulus efforts and has been well received. It is focused on helping businesses use their tax losses more effectively to create cash flow from previous years tax payments. Instead of carrying forward losses you carrying them back to previous years.
Eligible companies are able to “carry back” losses. For tax years 2019/20, 2020/21 and 2021/22 the company can carry back losses to offset taxed profits in the 2018/19 or later financial years.
This will then create a refundable tax offset in the year in which the loss was made. The amount carried back can not exceed the earlier taxed profits.
This will provide a means for businesses to utilize current losses and turn them into tax refunds by offsetting them against profits from previous years.
Bogong Builders Pty Ltd has an aggregated annual turnover of $60 million for the 2021/22 income year. On 1 July 2021, Bogong purchases a truck-mounted concrete pump for $1 million, exclusive of GST. Bogong’s taxable income for 2021/22 was $600,000 before the purchase. Without temporary full expensing, Bogong would claim a tax deduction of around $300,000, resulting in a taxable profit of $300,000, and a tax bill of $90,000. Under temporary full expensing, Bogong will instead deduct the full cost of the asset equal to $1 million, resulting in a tax loss of $400,000. Under temporary loss carry-back, Bogong offsets this tax loss against profits in the 2018/19 financial year, resulting in a tax refund of $120,000. Without the refund, the company may have had to defer the investment until their cash flow position recovered, or they may not have purchased the new pump at all.
Source: Budget 2020-21, Economic Recovery Plan for Australia, JobMaker – Creating jobs and rebuilding our economy, Commonwealth of Australia 2020Read in full + comments 0 Comments
Written by Hudson Adviser Michal Park
First Home buyers
An extra 10,000 places in the federal government’s First Home Loan Deposit Scheme (FHLDS) will be available to first-home buyers this financial year, although the additional places are limited to new home builds.
The scheme allows eligible first home applicants to purchase a home (within certain price restrictions based on location) with a deposit of just 5 %, without paying lender’s mortgage insurance with the federal government guaranteeing up to 15% of the loan.
The Scheme’s price cap has been extended to $950,000 for Sydney, $850,000 for Melbourne, $650,000 for Brisbane, and $550,000 for other capital cities and regional centres across Australia.
Originally, 10,000 places were made available in the FHLDS for the 2020-21 financial year, with all 5,000 non-major lender quota places filled within the first three months of the financial year.
The opening up of new places in the scheme does have a tighter set of requirements than the initial scheme, restricted to the building of a new home or purchase of a newly built home, which was not a requirement of the original scheme.
Mr Frydenberg said the additional guarantees will be available until 30 June 2021 “and will drive more construction and support jobs as part of our economic recovery plan”.
The FHLDS can be used in conjunction with the First Home Super Saver Scheme and HomeBuilder grants, as well as relevant state and territory grants and concessions.
Below are some comparisons regarding the impact of the scheme:
Granny Flat tax exemption
To be implemented as of 1 July 2021, the Granny Flat Tax Exemption means capital gains tax will not apply to formal granny flat arrangements providing accommodation for older Australians, or people with disabilities. It will only apply to arrangements between family members, or people with other personal ties.
No change to negative gearing
The Federal Budget 2020 has not introduced any changes to negative gearing. This is particularly crucial due to landlords facing challenges amidst COVID-19 residential rental law changes.
The federal government has also indicated that it would be extending its guarantee for the National Housing Finance and Investment Corporation by a further $1 billion, which will go towards the construction of more affordable housing.
Indigenous Business Australia will also receive an additional investment of $150 million to extend the Indigenous Home Ownership Program.
This will deliver 360 construction loans in regional Australia, assisting Indigenous Australians into home ownership.
(Labor announced in its budget reply that it would invest $500 million to accelerate repairs on exisring social housing if in government)
The federal government is bringing forward the second stage of the already-legislated personal income tax cuts, which will benefit about 11.6 million Australians.
The tax cuts will be backdated to 1 July this year instead of July 2022.
Middle-income earners will receive tax relief of up to $2745 for singles and $5490 for dual-income families this year compared to 2017-18 rules.
A one-off additional benefit, worth up to $1080 per individual, will be also available to more than 10 million taxpayers.
Putting more money into the pockets of Australians will help prospective home buyers break into the property market sooner than expected, as they will be able to save more towards a home loan deposit as well as secure more finance.
The tax breaks will also help existing home owners to pay down their mortgages sooner.
A number of road, rail and transport upgrades will help boost local economies and job prospects across a number of Australian regions. Depending on the nature of infrastructure projects, surrounding housing markets could see a rise or fall in demand. Much of this year’s infrastructure allocation is in roadworks, which can have positive impacts on nearby housing by increasing accessibility to an area, but devalue properties with exposure to high traffic intensity, construction and noise pollution.
The Federal Budget 2020 committed to $7.5 billion on National Transport Infrastructure, which will improve business processes and human capital movement. Projects include:
- Queensland: $750 million for stage one of the Coomera Connector project;
- New South Wales: $560 million for Singleton Bypass on the New England Highway;
- Victoria: $528 million for Shepparton and Warrnambool rail line upgrades;
- South Australia: $200 million for Hahndorf township improvements;
- Tasmania: $150 million for the Midway Point Causeway and Sorell Causeway;
- Northern Territory: $120 million to upgrade the Carpentaria Highway;
- Western Australia: $88 million for Reid Highway Interchange with West Swan Road;
- Australian Capital Territory: $88 million for the Molonglo River Bridge.
The investment comes on top of the $100 billion over 10 years previously foreshadowed.
There has also been an additional $3 billion committed to shovel-ready jobs, which includes $2 billion for small-scale road safety projects and $1 billion for the Local Roads and Community Infrastructure Program.
Job security for renters
Having born the brunt of COVID-19 job losses, the federal government is offering incentives to encourage businesses to hire eligible young job seekers, under its JobMaker hiring credit scheme.
For the next 12 months, eligible employers will receive $200 per week for new employees aged 16-29 and $100 per week for new employees aged 30-35.
This measure will bolster job security for COVID-hit young Australians, many of whom are tenants who are currently struggling to pay their rent. This measure could help maintain demand in Australia’s rental market as fewer tenants will be forced to move out of their homes due to rent arrears.
Responsible lending laws relaxed
Up-sizers and down-sizers would likely see the most benefit from proposed changes to responsible lending laws flagged in budget documents.
Treasury’s budget overview said removing responsible lending obligations for most products – including home loans – would “streamline” the credit application process and “allow eligible borrowers to obtain credit faster”.
Interestingly, those in the property market, Federal Budget 2020 papers reveal Australians still believe in the dream of homeownership and the security it brings. This is reflected through taxation receipts estimates for property income, from a -14.3% loss to a significant rebound of 13.5% in 2021-22.
This shows that the Federal Government is confident in the property market; that all fiscal policies introduced in Federal Budget 2020 will, directly and indirectly, have a multiplier effect on the property market and will result in a surge in property demand between now and 2021-22.
Deposit sizeRead in full + comments 0 Comments
Written by Hudson Adviser Kris Wrenn
Employers to find existing Supers – Historically when a person starts a new job they often sign up to whatever Super fund the employer uses. This has meant people often “accumulate” Super funds, and this means extra FEES. It also often means multiple insurance policies, some of which (income protection) will not both pay out, so this really is money down the drain.
Approximately four and a half million of us have multiple Super accounts and studies suggest that cumulatively we are wasting nearly half a billion dollars in fees. According to the Productivity Commission by the time those people retire they may have $50,000 less than they would have.
From next year employers will be required to find the existing Super accounts for new employees and begin to pay into that, unless the employee specifically requests they pay into another. Such a law will also mean the Government has satisfied recommendation 3.5 of the 76 recommendations from the Royal Commission.
YourSuper – The Government also intends to introduce a new tool so that people can compare Super funds, with respect to their returns and their fees. Initially this will only include the MySuper funds, i.e. the low fee, default funds employers tend to use.
APRA to name and shame – APRA plans to benchmark Super funds each year and furthermore to identify which Super funds are underperforming compared to other funds. They will even force Super funds to contact their clients to inform them that they have underperformed! The plan is such that if the fund underperforms 2 years in a row, it will be banned from taking on new members Again this will start with the MySuper products but be extended beyond this from 2022.
Insurance – There are some that are concerned that if an employee does not take on the default Super with a new employee that they may not acquire the necessary insurances for the job. As such the Government is encouraging people to speak with their Super about what insurance they have with their Super and whether it is appropriate to them and their occupation. They are also seeking to simplify the industry, namely through introducing “universal” terms and exclusions to make them more user-friendly and easier to interpret.
If you would like your Super and/or Insurance policies reviewed call Hudson today on 1800 804 296.Read in full + comments 0 Comments
Written by Hudson Adviser Phillip McGann
Check out Phil's article here as a webinar.
The short answer is no - well not yet at least.
The longer answer is wait and see …
The level of government debt coming into this year was large and growing . The GFC from ten years ago continued to have a lasting impact on government budgets where deficits were the order of the day for the past decade.
Australia had not seen a budget surplus for over ten years and debt levels were growing.
The government was about to announce a budget surplus in the May 2020 budget and would say it was on track to paying down our debt levels.
Then Covid-19 hit in February.
Governments around the world in response to the medical pandemic effectively closed down huge swathes of their economies to protect their citizens from the virus.
The result - predictably - was a massive economic contraction. Up to 20% in the June quarter for the UK and 9% for the US. Locally we saw a 7% contraction in June.
So the government mandated slowdown was met with government stimulus. Locally the government instigated JobKeeper which has been responsible for supporting over 3 million jobs. It increased the payment rate for JobSeeker just as numbers ballooned away.
But the alternative was not worth thinking about.
If the government did not act a severe recession would have become a full blown depression and we saw how that ended up in the 1930’s - mass unemployment and long lasting economic contraction.
So governments locally and internationally went into stimulus mode and started spraying around cash. This had to be funded and so the level of debt has increased dramatically.
The best measure of this is to compare a countries government debt level to its GDP. In other words how much does a government owe compared to the productive output of its economy.
Debt to GDP ratio
Projected for 2020
Source: Trading Economics website
So looking at the table Australia compares favourably with other leading economies. And this is why we can easily fund out debt even though the actual numbers appear enormous. It is projected the crisis will see the Federal government spend upwards of $300 Billion.
The government body responsible for the issuance of Federal Government debt is the Australian Office of Financial Management (AOFM).
Over recent months it has been very active in the debt markets.
In July it issued 30 year government bonds at 1.94% and raised $15 billion.
In August it raised $21 billion of 10 year debt at a rate of 1.05%
Both issues were oversubscribed substantially so the demand is there from the market to meet the government’s needs.
So who is buying all this government debt?
Mostly it is offshore fund mangers and banks and large investment institutions that are keen to get set in AAA rate government debt at interest rates that are slightly better than they get overseas.
So does the level of government debt matter anymore?
I would argue no - well not yet anyway.
Investors are happy to fund the government spending for now but the future will hold many uncertainties around economic activity, interest rates and inflation.
Watch this space!Read in full + comments 0 Comments
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