What the 2020-21 Federal Budget means for you

Written by Shereen Churchill (Financial Adviser)

2020 has certainly been a year like no other.  From extreme weather conditions to a global pandemic, together we have faced more uncertainty than ever before. Against this backdrop, a retirement income review has been handed to Government, the next Intergenerational Report is due, and we have had several mini budgets full of COVID stimulus measures. These events have all strongly shaped the 2020-21 Federal Budget, which was delivered last night, 6 October 2020. The dominant themes from this years’ Budget include the provision of tax relief, encouraging job creation, rebuilding our economy, and securing Australia’s future. From a pure financial planning and wealth perspective, the positive news from this year’s Budget is that the changes are minimal and largely positive in nature.

As is always the case, these measures will need to pass through the legislative process before they become law and may change during that process.

To help you understand the key announcements made by the Treasurer, ITL Financial Planning have put together a written summary of the key areas specific to self-funded retirees, professional families, and successful business owners. BT’s Bryan Ashenden provides an overview for all Australians via video.

Self-Funded Retirees

For our self-funded retirees, the major announcements were in relation to tax relief in the lower and middle income bands as well as additional payments for those in receipt of age pension and/or carer payments.

Additional payments for eligible social security recipients

Two separate $250 payments will be made to eligible Australians in receipt of certain income support payments including the age pension, carer payment and family tax benefits, and also health care cardholders.

An individual may be eligible to receive both $250 payments however, they can only receive one $250 per round (even if they qualify per round in multiple ways). The payments will be exempt from taxation and not count as income for Social Security purposes.

Proposed tax relief and enhancements to the super system will also benefit many self-funded retirees. These changes are outlined under the “professional families” heading.

Professional Families

For our professional families, the biggest proposals were in relation to tax relief in the lower and middle income bands, enhancements to the super system as well as additional payments for those in receipt of Family Tax Benefit Payments and/or carer payments.

Tax Relief

You may not be a low or middle income earner, but you will still benefit from having more of your income taxed in a lower tax bracket.

The Government has announced Australian taxpayers are set to benefit immediately as planned tax cuts in Stage 2 of the Personal Income Tax Plan have been brought forward from 1 July 2022 to 1 July 2020.

Key highlights of this measure include the following:

  1. The top threshold of the 19% personal income tax bracket will increase from $37,000 to $45,000.
  2. The top threshold of the 32.5% personal income tax bracket will increase from $90,000 to $120,000.
  3. The Low Income Tax Offset (LITO) will increase from $445 to $700. The increased LITO will be withdrawn at a rate of 5 cents per dollar between taxable incomes of $37,500 and $45,000. The LITO will then be withdrawn at a rate of 1.5 cents per dollar between taxable incomes of $45,000 and $66,667.
  4. The Low and Middle Income Tax Offset (LMITO) will be retained for the 2020-21 financial year.

Importantly, the already legislated tax cuts will see 95 per cent of taxpayers face a marginal tax rate of no more than 30 cents in the dollar from 1 July 2024.

Super System Enhancements

This year’s Federal Budget has made enhancements to the super system to ensure your super is working harder for you. These are summarised below:

  1. From 1 July 2021, you will keep your super fund when you change jobs, stopping the creation of unintended multiple super accounts and the erosion of your super balance.
  2. Creation of the YourSuper comparison tool to help you decide which super product best meets your needs.
  3. By 1 July 2021, MySuper products will be subject to an annual performance test. If a fund is deemed to be underperforming, it will need to inform its members of its underperformance by 1 October 2021.
  4. Importantly, the rumoured changes to super guarantee (SG) arrangements have not eventuated so this means that from 1 July 2021, the rate of SG will start its gradual half percent increase per annum from the current 9.5% up to 12% by 1 July 2025.

Proposed social security payments will also benefit professional families. These are outlined under the “self-funded retiree” heading.

Successful Business Owners

For our successful business owners, the biggest proposals were in relation to the temporary loss carry-back provisions for business with turnover less than $5 billion and the temporary full expensing of eligible capital assets.

Temporary loss carry-back provisions for business with turnover less than $5 billion

To support business cash flow, eligible companies will be able to carry back tax losses from the 2019-20, 2020-21 or 2021-22 income years to offset previously taxed profits in 2018-19 or later income years. Companies with an aggregated turnover of less than $5 billion can apply tax losses against taxed profits in the previous years noted, generating a refundable tax offset in the year in which the loss is made.

Temporary full expensing of eligible capital assets

Business with aggregated annual turnover of less than $5 billion will be able to deduct the full cost of eligible capital assets acquired from 7.30pm AEDT on 6 October 2020 (Budget night) and first used or installed by 30 June 2022.

Full expensing in the year of first use will apply to new depreciable assets and the cost of improvements to existing eligible assets.

Businesses with aggregated annual turnover of less than $50 million can also apply full expensing to second-hand assets.

Businesses with aggregated annual turnover of less than $10 million can deduct the balance of their simplified depreciation pool at the end of the income year while full expensing applies. The provisions which prevent small businesses from re-entering the simplified depreciation regime for five years if they opt-out will continue to be suspended.

Businesses that hold assets eligible for the enhanced $150,000 instant asset write-off will have an extra six months, until 30 June 2021, to first use or install those assets.

Qualifying business will benefit from improved cash flow, with any capital investment brought forward to benefit the greater economic recovery.

The other major announcements were in relation to tax relief in the lower and middle income bands and enhancements to the super system. These last two proposals are outlined under the “professional families” heading.

Concluding thoughts

Overall, the changes are positive for self-funded retirees, professional families and successful businesses. As indicated earlier, these measures will need to pass through the legislative process before they become law and may change during that process.

This information has been prepared and issued by ITL Financial Planning and is current as at 7 October 2020. Material contained in this publication is an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This Information may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be accurate at its issue date. It should not be considered a comprehensive statement on any matter nor relied upon as such. ITL Financial Planning does not accept responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material. This information does not consider your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. The tax position described is a general statement and is for guidance only. It has not been prepared by a registered tax agent. It does not constitute tax advice and is based on current tax laws and our interpretation. Your individual situation may differ, and you should seek independent professional tax advice. It is important to note that the policies outlined in this publication are yet to be passed as legislation and therefore may be subject to change or further refinement.