Filled with measures aimed to stimulate spending by individuals and businesses right now, the Federal Budget 2020-21 focuses on encouraging expenditure in the short to medium term. The Budget will help some businesses invest in growth. However, the need for long-term structural reform in Australia can’t be forgotten which has left many industry stakeholders eager to see what the Government’s approach will be in the May Federal Budget next year, assuming it goes ahead as planned.

Theo Sakell
Partner & Executive Director
at Pitcher Partners

All aspects of this Budget are sizeable, from the $213 billion deficit and $900 billion of projected national borrowings through to the forecasts of at least three years toil to return economic activity and employment to pre-COVID levels.In the short term, the expenditure measures are likely to significantly support the reignition of the economy.

Practical for now, but the need for long-term structural reform can’t be forgotten

The question remains: Will this Budget support a structural shift for Australia to be an economy that creates value? In short, it’s a good first step, and support for moving to digital platforms for business, and developing advanced manufacturing capacity are logical, as is the re-establishment of a productive economy (even if it is underpinned by roads and housing), to get things moving.

Long-term structural reform may be something we see tackled in the next Federal Budget, which is now only seven months away, in May 2021 (assuming that we see a return to the normal schedule). As we know, now more than ever, seven months is a long time. We hope, and will lobby for, the Federal Budget 2021-22 to be aspirational for all Australians, including middle market businesses.

The Government must confront and plan for the next stage of economic transformation for the long-term health and viability of the nation. Having set a path to recovery, the Government must next address the complex

and labour systems, realign the education system for the future, and continue to promote and facilitate innovation to drive growth.

The Treasurer’s maiden Budget last year, which was all about the return to surplus and affirming the Government’s economic credentials heading into an election it was expected to lose, is a very distant memory.

Key tax and expenditure measures

From this year’s Budget, some of the key tax and expenditure measures for business and stakeholders include:

• Consumption stimulus through reduction in personal income tax rates.

• Business investment stimulus through immediate asset write-offs based investment allowances.

• Stimulus for advanced manufacturing with a $1.5B funding package for resources; food and beverages; medical products; recycling and clean energy; defence and space.

• Housing stimulus through an extension of 10,000 homes to the First Home Loan Deposit Scheme.

• Construction stimulus through $14B of infrastructure expenditure.

• Youth employment support through $5.2B of subsidies for apprentices and trainees and the JobMaker program.

• Recoupment of prior year tax payments with the introduction of loss carry-back rules.

International tax measures

The Government will introduce key corporate tax residency amendments for foreign incorporated companies, alongside a handful of minor international tax measures.

Amendments to clarify Australia’s corporate tax residency rules for foreign incorporated companies

Following the High Court decision in Bywater Investments Ltd v Federal Commissioner of Taxation (Bywater), the ATO expanded their view on the circumstances under which foreign incorporated companies would be considered Australian tax residents. This has resulted in considerable uncertainty for Australian businesses expanding offshore and increased exposure to significant adverse tax consequences and additional compliance costs.

This additional uncertainty led to the Government commissioning the Board of Taxation to provide recommendations to overcome the additional complexity and exposure for Australian businesses expanding overseas. Pitcher Partners has played an active role in the Board of Taxation’s recommendations and it is pleasing to see that the Government will be adopting those recommendations.

Going forward, a foreign incorporated company will be considered an Australian tax resident if it has both core commercial activities in Australia and its central management and control is exercised in Australia. This is expected to result in fewer foreign incorporated companies being considered Australian tax residents in contrast to the application of the ATO’s current view in Taxation Ruling (TR) 2018/5.

It is also encouraging to see that taxpayers will have the option of applying the new law retrospectively from 15 March 2017, thereby effectively preventing the adverse impacts of the Bywater decision at taxpayer discretion.

While this is a welcome update for taxpayers, the effectiveness of the new rules will be dependent on an appropriate definition of the new concept of ‘core commercial activity’ and clarification of whether the current voting power test will be retained. Pitcher Partners will continue to be actively involved in consultation in relation to the new legislation to ensure the new rules provide sufficient certainty for middle market businesses expanding overseas.

Strengthening Australia’s foreign investment framework

In June 2020, Treasurer Josh Frydenberg announced major reforms to Australia’s foreign investment regime. These reforms were enacted to ensure that Australia’s foreign investment framework keeps pace with emerging risks and global developments. The reforms addressed key risks associated with foreign investment such as introduction of a national security test, stronger enforcement powers, greater compliance monitoring and harsher penalties. To support these reforms, the Australian Government had provided net funding of $54.1 million in the July 2020 fiscal update.

The Government has announced further funding to implement a new information and communication technology (ICT) platform.

It is expected this platform will decrease Foreign Investment Review Board (FIRB) application processing times. The platform will also strengthen FIRB’s review and compliance activities. In addition, the ICT platform is expected to include a new consolidated Register of Foreign Ownership of Australian Assets.

The foreign investment fee framework is also expected to be simplified with adjusted fees taking effect from 1 January 2021. The revised fee framework will ensure that foreign investors (and not Australian taxpayers) bear the costs of administrating the foreign investment system.

Pathway to permanent residency to be extended to New Zealand Special Category visa holders but beware of tax consequences New Zealand Special Category (subclass 444) visa holders meeting certain taxable income conditions will be able to apply to take up Australian permanent residency.

While great news for eligible New Zealand citizens looking to take up the opportunity, applicants should be mindful of Australian tax consequences associated with Australian permanent residency. Subclass 444 visa holders who may be considered temporary tax residents should plan for the additional tax and complexity associated with permanent residency. A move to non-temporary resident status can bring foreign investment income and capital gains within Australia’s tax net and may open individuals to attribution of income under Australia’s controlled foreign company rules. Accordingly, care needs to be taken when considering the option from a taxation perspective.

Final observations

Pitcher Partners is pleased that several of the suggestions (or variants thereof) in our Pre-Budget Submission were adopted. This was based on feedback we obtained from our clients in our Pre-Budget survey.

In a year that has been challenging for so many, in so many ways, this is probably the Budget that was needed. For now, the middle market must focus on harnessing the considerable opportunities it presents and work to reestablish and then future proof themselves.

A final cautionary observation – the Budget forecasts are all predicated on a complex set of assumptions. Invariably, these will be concerned fundamentals such as growth, core commodity prices and general trading conditions. In a year that will be defined by its Black Swan event of the global pandemic, the detail in this year’s Budget contains the very important assumption that there will be a COVID-19 vaccine program widely available in Australia by no later than the end of 2021.