A lot has happened since my last column for Shirl’s Pearls. A new COVID variant, floods, war, and an election campaign … and we’re not even halfway through the year!
Case numbers surged on Australia’s east coast in December and January due to the Omicron COVID variant, resulting in a “shadow lockdown” – many people opted to stay home in spite of state governments easing restrictions.
In my last post, I compared the decision to enforce COVID safety measures to a “real option”. While these safety measures do carry a cost, remember what we learned: options are more valuable when there is more uncertainty, and this is exactly what we saw at the start of the Omicron outbreak. Even without a lockdown, people still changed their behaviour in response to the added uncertainty, with mass cancellations reported at restaurants due to virus concerns. As The Motley Fool’s Scott Phillips wrote on Twitter at the time:
“Keeping things open, and dropping restrictions sounds good … until people vote with their feet.
More restrictions and fewer cases would have meant more business!”
Also, because lots of people were off sick at once, businesses had to cope with staff shortages and supply chain disruptions (which are continuing to bite due to the war in Ukraine), with even less government assistance than in previous outbreaks. (Spare a thought for your local small business owners having to deal with all of this!)
Not surprisingly, consumer confidence fell as a result. In another tweet from Phillips: “When government abandons the field (restrictions, support) confidence plunges.”
With NSW still reporting over 10,000 cases a day, it looks like the virus is going to be with us for some time. While Omicron appears to cause less severe illness in most people once they have had their booster shot, it might pay to remain vigilant, particularly as we head into winter, given that hospitals are still stretched.
But on to the main topic of my post. The federal budget was handed down on 29 March, and I must admit, I found myself less motivated to read the budget papers compared to previous years. Perhaps this was due to the war in Ukraine and the humanitarian crisis that is still unfolding there as we speak – how fortunate are we to be living on the other side of the world, observing the conflict from the safety of our homes.
Apart from the usual “sweeteners” that you would expect to find in an election budget, there was little in the way of major tax-related changes. The announcements that are likely to be of the most interest to individuals and businesses are the increase in the low and middle income tax offset (LMITO), bonus deductions for small businesses that invest in skills, training and digital adoption, and changes to the employee share scheme rules.
In this post, I’ll look at the LMITO and the small business deductions. I’ll review the changes to the employee share scheme rules in more detail in my next post.
LMITO increased by $420 for 2021/22 only
The LMITO has been around for a few years now, and applies to individuals with a taxable income of up to $126,000, with the maximum tax offset (before the budget announcement) of $1,080 going to taxpayers earning between $48,001 and $90,000. (“Taxable income” refers to the taxpayer’s income from all sources – including salary and wages, ABN income, and any income from investments – less any deductions that they are able to claim.)
On budget night, the government announced that the LMITO would be increased by $420 for the 2021/22 financial year for all eligible individuals with taxable income up to $126,000, to help with cost of living pressures.
This means that the maximum tax offset for taxpayers earning between $48,001 and $90,000 will increase from $1,080 to $1,500.
This change is now law, so if you are in this category, this means that you can expect a bigger tax refund this year.
Importantly, the government has confirmed that 2021/22 will be the last year that the LMITO will be available, so taxpayers can expect a smaller tax refund next year.
20% bonus deduction for small business: skills and training and digital adoption
One quite interesting announcement in the budget relates to a 20% uplift of the amount deductible for expenditure incurred by small businesses on external training courses and digital technology. The 20% uplift will take the form of a bonus deduction, and applies to businesses with an annual turnover of less than $50 million.
No legislation is available yet, so the devil will be in the detail, but eligible expenses could include training courses provided to employees, portable payment devices (such as “contactless” card readers), cyber security systems, or subscriptions to “cloud-based” software.
Because the benefit is a bonus deduction, not a tax offset, businesses that make a loss won’t be able to benefit unless they paid tax in previous years. These businesses may be able to “carry back” the loss to a previous financial year, and obtain a refund of taxes that were paid previously.
If the business has been in a loss position for the past few years, it is out of luck here, as the only way it can benefit from the bonus deduction is by carrying forward the tax loss, which can be offset against future profits, reducing the amount of tax that is paid in future years.
For a profitable business, the tax benefit is worked out by applying the relevant tax rate – which for most small businesses will be 25%.
Example: Say a café owner decides to go out and buy a contactless card-reader for $100. Normally, she would deduct $100 from her taxable income, which would reduce her tax payable by $25. With the 20% uplift, however, her deduction will be increased to $120, reducing her tax payable by $30.
This doesn’t sound like much, but the 20% uplift could provide you with a useful incentive to invest in your business, either by providing your staff with additional training, or by upgrading software or equipment.
Of course, before you rush out and spend money, it’s important to consider how the investment will benefit your business. For example, will the additional training result in increased sales, or improved productivity? For digital adoption, how will the new tools be used in your business?
If the announced measures do become law, they could be a boon for training providers and purveyors of digital technology. Needless to say, with the government now in caretaker mode as of May 2022, the measures will be subject to consideration by the new government, so watch this space.
If you have any questions about how the information in this post applies to you, please speak to your tax agent or accountant.