Tax Reform: a great reason to Invest & Stay in Australia

On the 6 October the Australian Treasurer Josh Frydenberg delivered his 2020-21 budget. Customarily the Australian government’s budget is delivered mid-May so by all accounts it was nearly 5 months late. The timing has been impacted by two factors: the first is Australia’s first recession in 29 years, and the second; the impact of Covid-19 on the Australian economy, which has been price rather than volume. The two clear exceptions to this have been education and tourism.

At any time, about 2% of Australia’s population are international students, and it receives more than its share of international travelers.  Australia has continued to be a clean and reliable supply of food and other commodities. With the exceptions of iron ore and gold, most of our commodity prices and our currency have remained relatively strong in terms of US dollars. The national response to Covid-19 has been to close external, and also, many internal borders.

The key themes are:

• grow the economy – pump prime by government spending
• protect the people from Covid-19 and its economic consequences
• focus on value-added and smart manufacturing
• migration of people who can add to Australia’s growth story
• create 50,000 new jobs and 200+ billion of new investment.

Most measures in the budget were backdated to 1 July as Australia awoke to the realisation that it needed to restructure its economy given the whole world had changed. First, Australia would not receive the international inflow of migrants it was accustomed to, nor the growing numbers of international students choosing to study in Australia. This, because the doors are closed.

With commodity prices led by energy down there was a huge opportunity and need for reform. Australia had the benefit of a decade or more of prudent financial management complete with a Triple-A credit rating. It has been able to borrow funds and a cost of about 1% per annum. The economics of Thatcher and Reagan have been abandoned for those of Keynes.

The key areas of tax reform

The efforts have been aimed to give the economy a kickstart and push it out of hibernation by encouraging job creation, corporate investment and household spending. A traditional sugar hit to the economy.

For the economy it meant:

• Build transport, communications and energy infrastructure
• Foster a technically gifted workforce with strong technical skills
• Int total $74 billion to create 950,000 new jobs
• $27 in new investment tax allowances across the economy.
• $23.8 billion in individuals tax cuts – more spending power
• $16.0 billion for job creation – also creating demand
• $7.5 billion for transport infrastructure
• $5.0 billion for apprentices with a focus of engineering skills
• $4.5 billion for better internet (NBN)
• $2.0 billion for tax concessions for R&D
• $1.3 billion for advanced manufacturing
• $1.0 billion for university-based research which has commercialisation potential.

The budget contained a series of announcements each with the same intended purpose but we will focus on the main points:

• significant and retrospective personal tax cuts
• job creation initiatives including JobMaker hiring credits for new staff under 35 years of age
• immediate write-off for most businesses of assets purchased after 6% October
• we need the right migration

First, in stimulating the domestic economy the key is seen to put more money in people’s pockets with the belief that they will spend it rather than save it. The centerpiece of the Budget were the personal income tax cuts, including the continuation of the Low- and Medium-Income Tax Offset, which will flow to more than 11 million individual taxpayers. The changes are worth an estimated $1,080/year for people earning between $45,000 and $90,000. The benefits increase from there up to a maximum of $2,430/year for people earning more than $120,000. In addition, sole traders will also benefit from the unincorporated tax discount of $1000. Backdating these tax cuts to start on 1 July 2020 means the extra money will be in bank accounts as soon as the legislation is passed and payroll software is updated.  The legislation was passed within four days so we expect employers will be under pressure to pass on the tax cuts pronto.   

From an economy-wide perspective, these tax cuts will immediately put extra money in people’s pockets to spend in businesses, including small businesses. Given most people will receive an extra $500 and then $100 is expected that the majority spend and not save or increase in mortgage payments. It is seen that living with Covid-19 even in Australia has been depressing and people want to do things to make their life enjoyable. Government is focused on people spending money in Asian restaurants each having a high multiplier effect as they employ people who will also spend.

For those people who receive a range of government payments, including aged pension, carer payment and family tax benefit, they will receive two $250 cash payments paid in December and March 2021. These payments are also strategic as they will be made for Christmas or Easter, and are most likely will also be spent on services and locally produced consumables. Creating local jobs.

Second there are two new job creation schemes:

• JobMaker Hiring Credit – a 12-month wage subsidy for businesses that hire 16 to 35-year olds for at least 20 hours per week, who were on JobSeeker. It will be a $200/week subsidy for those under 30 and $100/week for those aged 30-35. 
• Apprentice wage subsidy scheme – businesses that hire new apprentices will be eligible for a 50% wage subsidy. The $1.2 billion scheme will support 100,000 apprentices and be available to businesses of all sizes.

Third and most critical for business investors are three initiatives which should act as a strong catalyst for investment:

• Extension of the Instant Asset Write-Off – currently businesses receive a deduction over the useful life of an asset. Some of an asset has a useful life of five years is tax depreciated 20% per annum. Until June 2022 new assets purchased can be expensed in the year of acquisition. It is seen by government that this will be of most help to small-to-medium businesses and that they will purchase these assets and have them serviced by from other small-to-medium businesses. This is seen to encourage investment in domestic manufacturing in particular.
• R&D tax incentive changes – for companies with a turnover of less than $20 million, including start-ups, the available research and development tax apps offset will be at 18.5%, with no cap, and refunded through the tax system. This is a clear incentive for all companies to involve themselves in research and development
• Loss carry-back provisions – companies will be able to reduce their taxable profits based on prior year losses. Effectively accompany who is making losses as they develop a product will be able to use those losses when that product makes profits.

Fourth, the one surprise announcement all in the Australian budget was that the domestic population is not expected to increase despite inward migration remaining at 160,000 pa.

The keys for migration are:

1. More of the right people but still 160,000 new people per annum.
2. Innovation and investment visas up from 6,862 to 13,500 (+97%)
3. Partner visas up from 39,799 to 72,300 (+82%)
4. Talented from 5,000 to 15,000 (+200%) visas with the aim of attracting talent
5. Stronger need to speak English
6. Focus on people with tertiary education – short-term existing foreign students stay and join Australia.
7. The losers are unskilled going to the regions. The regions need educated people also.
8. Non-English speakers can come but they need learn English within 4 years – partners are the focus for learning English to be part of Australian society.

The billions are going to:

• $1 billion for job Trainer fund
• $1.5 billion for modern manufacturing
• $1.9 billion for energy technologies
• $0.8 billion for the digital economy
• $0.4 billion for the regional Australia
• $0.3 billion for airfreight subsidy for exports
• the deficit will total at 21 3 billion in 2020, and will be 480 billion over four years and will peak at 1.7 trillion in 2031.

The winner are (the targeted sectors for government grants, tax concessions, visas…. )

1. AgTech
2. Space and Advanced Manufacturing
3. FinTech
4. Energy and Mining Technology
5. MedTech
6. Cyber Security
7. Quantum Information, Advanced Digital, Data Science and ICT

The Australian government is seeking to make the best environment for entrepreneurs to create new business and this is seen as encouraging people with talent and enthusiasm to back themselves as entrepreneurs to create the new businesses which will develop the jobs of the future for Australians.

One of the important things to note is that none of the existing incentives were removed. The incentives noted above are in addition to those that already existed on 6th October, 2020.

The Australian government has introduced the budget which it believes will reverse the trend which had led to the first recession in Australia in 29 years followed promptly by the impact of Covid-19. The government has taken the opportunity given to it by many years of prudent financial management, to be able to borrow for 10 to 15 years at about 1% per annum, to provide a sugar hit to the economy and to take it in a particular direction towards being more internally focused with more import substitution and advanced manufacturing as well as creating centres of excellence for areas of technology were Australia already has an established education such as agriculture, finance, mining, energy and medical.

The government is backing private investment into these areas to give the reform required to change the Australian economy whilst maintaining it in the hands of private enterprise. It is a wonderful opportunity for all those in and who come to Australia to invest and stay.

By Paul Raftery, CEO, Projects RH        –          October 20, 2020