Breaking down the 2020 federal budget for small business owners
April 6, 2021
Hi guys, it’s Michelle Knight from Little Miss Bookkeeping. Today I’ll be talking about the 2020 federal budget that recently got released and breakdown what it means specifically for small business owners in Australia. If you’re interested in finding out more, please keep watching!
Unless you’ve been hiding under a rock, information has been circulating around the 2020 federal budget following its release by our treasurer on Tuesday 6th October. What I’ll be doing is explaining the budget measures and focus on initiatives more specific to small business.
This won’t be a video about my opinion on the budget and if I think it’s good or bad or who missed out. I’ll be discussing what this means for small business owners so they can make informed business decisions for the future, with the impact of the 2020 budget in mind.
What is the federal budget?
Before I dive in, let’s quickly go through what the federal budget is. It’s essentially a document that sets out how our government’s estimated revenue and spending for the year. Normally it gets released in May of each year, however, due to COVID we only got the budget finalised this October. As a small business owner, it’s important to know what’s in the budget as some the incentives or tax changes can significantly impact your business.
What’s in the 2020-21 budget?
Next question, what’s in the 2020-21 budget? Instead of reinventing the wheel, I’m using the infographic created by Chartered Accountants Australia and New Zealand. I’ll use this to breakdown each of the budget measures, more specifically:
- Accelerated personal tax cuts
- Extended instant asset write off
- Incorporated small business loss carry back
- Super: employers to effectively stop offering a default fund
As expected, this budget will put Australia into a massive deficit! $213.7 billion deficit to be exact. In an effort to kickstart the economy, we as a nation are going into a hell of a lot of debt whilst we battle a slowing, COVID-affected environment. I make note of this deficit as unfortunately the money has to come from somewhere – no, the government does not grow money on trees. No doubt we will be paying this back via our tax system, but will this be over a number of years or generations? Only time will tell.
Just to note, the budget is quite an extensive document. I’ll insert a second infographic by CAANZ outlining some additional budget measures, but the majority of these I won’t touch in detail as there aren’t necessarily small business specific.
Accelerated Personal Tax Cuts
Whilst I could go through each of the numbers, a lot of you won’t really understand them if I just throw up some digits on the screen. So, I’ll explain what practically the tax cuts mean.
With changes to individual income tax brackets, employees are going to get more net pay in their hand, generally speaking. For business owners paying wages, your payroll software (like Xero, MYOB, Quickbooks etc.) will be able to account for these changes once the ATO have updated their PAYG withholding schedules – which at the time of filming this video has not yet been done. Stay tuned on how our software providers will deal with the payroll changes, but it’s important to note that it’s coming.
Now, I saw this very helpful post by Glen James and his team at My Millennial Money (p.s. love your work!) and want to expand on this and give my two cents as a tax accountant.
Now this is not one of those cashback schemes we have seen in the past, where the government shells out money via the Centrelink system. It’s more money in the hand through the payroll system for employees. Now this is an employee example, not a self-employed/sole trader example.
For business owners, if employees ask you questions about the budget tax cuts and how it applies to them, they typically get the benefit in 2 ways – pending their individual situation:
- For wages from the budget date onwards, there will less tax withheld on wages, hence more money in the employees’ hand (aka their net pay)
- For wages between 1 July 2020 to budget night (approx. 3 months) benefit to be applied when they lodge their 2021 tax return
If you are a business owner that processes your own payroll and see an employee’s net wage go up, but their gross wage unchanged, this is the effect of the tax cuts. More on this to come.
Extended instant asset write off
The extended instant asset write off is hot topic amongst accountants. The reality is, every time the instant asset write off gets increased (or decreased), we get the flood of phone calls from clients asking if they can purchase that new Dodge RAM/Toyota Landcruiser they’ve been eying off or an expensive piece of manufacturing equipment that will improve productivity by tenfold. And the answer generally is, IT DEPENDS!
The government has increased the instant asset write off to encourage businesses to spend money – where it is up to you as a business owner to make an informed decision as to if a new asset purchase is the right one.
As a small business owner, I suggest you ask yourself these key questions:
- Am I in a financial position to purchase a new asset? Unless you’ve got the cash and it makes financial sense, don’t got spending money you don’t have. Have you done your cashflow forecast for when things get really tough?
- What asset are you purchasing? Does it even fall in line with the ‘eligible assets’ definition? ‘Assets’ is a general term and ‘eligible assets’ in line with tax legislation can sometimes mean something different. For example, historically capital works purchase like installing a new floor or getting new air conditioning system did not come under instant asset write off rules in the past, but rather depreciated at a set rate.
Before making any significant asset purchases, speak with your tax professional first to avoid unnecessary heartache! Remember, a $100k new asset purchase does not mean a $100k tax refund and your accountant WILL NOT claim a tax deduction for that new ski boat just because it has your business logo on it!
Incorporated small business loss carry back
I won’t go detail about this, but just wanted to make a point that if you are small business trading as a company and have tax losses in income years 2020 to 2022, you may be eligible to carry back tax losses from the 2019 income year onwards. Long story short, your tax agent will deal with this and if you have any specific questions about the loss carry back rules do speak with them.
Super: employers to effectively stop offering default fund
Changes to superannuation means that employers will not have to pay superannuation into a default account. Employers will be able to obtain information about an employee’s existing super fund from the ATO. Some other changes include the review of underperformance of super funds, which I won’t go into detail about.
The issue, as business owners, is that sometimes employees are slack to get the super information to us. It is particularly prevalent for industries with a high turnover of staff, for example hospitality. In my role as an accountant, I help clients set up the payroll for a new staff member. In some circumstances it might take weeks or months to get the right super info from said staff member and before long the stop working for the employer and potentially not contactable.
Historically, as an alternative, the business owner pays the employees super into a default super fund. Unfortunately, what happens is that the employee ends up with a number of super funds spread all over the place. More often than not, these getting eaten up by fees and are typically underperforming. This initiative will mean that the business owners are be able retrieve any missing super info and pay it to the right account. A win for the business owner and a win for the employee.
JobMaker hiring credit for 16-35 year olds
The government has introduced measures aka JobMaker, to get businesses to hire young job seekers. From 7 October, eligible employers will be able to claim:
- $200 per week for each additional eligible employee hired between ages 16 to 29 years
- $100 per week for each additional eligible employee hired between ages 30 to 35 years
Similar to my instant asset write off example, it’s important as a business owner to ask yourself these key questions:
- Am I in a financial position to hire a new employee? Can I comfortably support my current wage obligations along with additional staff? Have you done your cashflow forecast for when things get tough?
- Can I continue to support a new employee long term? The decision to hire a new employee should not be taken lightly. It’s important to hire right the first time and abide by all Fair Work rules. Don’t hire for the sake of getting the JobMaker credit only to dump them after the money stops flowing from the government.
The JobMaker credit is capped at $10,400 for each new position created, so it’s not a bottomless bucket of money and does have an end date depending on when the new position was created.
I hope this video was helpful and provides some valuable insight into the 2020 Australian Federal Budget, specifically to all those small business owners out there.
As always, if you have any specific questions about your tax situation, please do speak with your trusted tax professional. Everyone’s situations are different, so it’s really important to get the right advice tailored to you.
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