Significant measures have been announced to support capital investment by business through an expanded instant asset write-off regime, coupled with a tax loss ‘carry-back’ rule which may provide additional cash to businesses. Additional measures are to be introduced to ensure certain Victorian Government Business Support Grants are not taxable.
Significant expansion to the instant asset write-off
The Government has announced a temporary full expensing of depreciable assets for all businesses with aggregated turnover of less than $5 billion. This is a significant enhancement to the current program which is limited to assets costing up to $150,000 for businesses with aggregated turnover less than $500 million.
Businesses with aggregated turnover of less than $5 billion that acquire eligible depreciating assets from 7:30pm (AEDT) 6 October 2020 which are first used or installed by 30 June 2022, should be entitled to deduct the full cost of asset in that income year, with no limitation on value. The cost of improvements to existing eligible assets can also be deducted. For entities with aggregated turnover less than $50 million, full deductions will also apply to second hand assets.
When coupled with the loss carry back rule (discussed below), this measure may result in refunds of prior year tax paid to the extent that losses are incurred due to the investment in assets. Accordingly, the measure will likely assist in promoting additional spending on projects. However, the measures are limited to depreciating assets and therefore will not apply to other capital works.
This is one of the most expensive budget measures, costing $26.7 billion over four years, and will generally be available to 99% of Australian businesses. While this is a welcome change, Pitcher Partners had advocated for a lower corporate tax rate as an alternative to this measure in our Pre-Budget submission. A lower tax rate would have delivered immediate cash to businesses and would have allowed the choice of spending the money on items other than depreciable assets (e.g. in promoting services businesses that are not capital intensive).
Tax loss carry-back rule
The Government has announced 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 be provided a choice to carry–back and offset those losses against taxes paid in the 2018-19 or later income years. The measure is applicable to corporate tax entities with aggregated turnover of less than $5 billion.
The measure allows tax refunds to be accessed when lodging the 30 June 2021 income tax return. Accordingly, taxpayers will need to wait to access cash returns from this measure. Whilst there is no maximum loss that can be carried back, the offset will be limited to the lower of tax paid in the respective years and the extent of franking credits available. The legislation implementing the regime will be crucial, as there have been many changes across the Australian income taxation landscape since the previous incarnation of the loss carry–back rule was released in the 2012-2013 income year. Those measures contained significant complexity, including integrity rules around continuity of ownership and interactions with the tax consolidation provisions.
Pitcher Partners welcomes the introduction of a targeted loss carry–back regime to assist previously profitable businesses. However, restricting the ability to carry–back tax losses from the 2019-20 income year until lodgement of the 30 June 2021 income tax return limits the ability of companies to access crucial cash flow support until at least July 2021. In this regard, it is noted that the recent introduction of loss carry-back measures in other jurisdictions such as New Zealand have expedited refunds to be paid in the current income year.
From a middle–market perspective, it is disappointing that the announcement is limited to company losses and does not extend to trust losses. Many taxpayers in the middle market operate through trusts and may make distributions to a corporate beneficiary. In such a case, if the trust has subsequently made a loss, it will not be able to recoup the amount against prior tax paid by the company. Furthermore, this measure may also provide limited or no benefit to corporate tax entities that have distributed prior year profits by way of franked dividends, resulting in a low franking balance which will act as a ceiling on the amount of refundable offset that can be obtained. In the middle market, this could be the case where companies are not part of a tax consolidated group and have already passed dividends to the holding company.
Treatment of business support grants
The Government has announced that certain Victorian Government business support grants for small and medium businesses will be treated as non-assessable, non-exempt (NANE) for income tax purposes. These arrangements would also be extended to all States and Territories on an application basis. Regardless of which State or Territory provides the grant, this measure will only be available to grants that are announced on or after 13 September 2020 and paid between 13 September 2020 and 30 June 2021.
Given the unprecedented circumstances that Victorian businesses face, Pitcher Partners welcomes the departure from the existing position that these grants would be assessable income which would otherwise reduce income tax losses. This will ensure that businesses retain more cash to keep operating. However, where grants are received by a company, individuals may face ‘top up’ tax if these amounts are distributed by way of a dividend to the shareholders. Given the number of support grants that have been made available, we would also encourage the Federal Government to provide clarity on which grants are eligible for NANE treatment and ensure easier income tax compliance for taxpayers.