Budget 2021: Growth dividend from $20.7bn ’tradie’ tax relief

Higher corporate tax receipts are funding tax relief measures designed to entrench the nation’s economic recovery from the pandemic.

The federal government is expecting an attractive growth and jobs dividend from a $20.7bn investment in tax relief for small to mid-sized businesses which has been extended for two years, most of it directed at boosting last year’s popular full expensing and loss carry-back provisions.

Treasurer Josh Frydenberg said the government’s investment incentives were “filling the order books of the nation”.

“Over 99 per cent of businesses, employing over 11 million workers, can write off the full value of any eligible asset they purchase,” the Treasurer said in his budget speech on Tuesday.

“This has seen their spending on machinery and equipment increase at the fastest rate in nearly seven years.

“We again go further, announcing the extension of these measures for a further year until June 30, 2023, so a tradie can buy a new ute, a farmer a new harvester and a manufacturer expand their production line.”

Under the scheme, businesses with less than $5bn in annual turnover will be able to deduct the full cost of eligible assets, including the cost of improving existing assets, between October 2020 and end-June 2023.

The measures are forecast to lift GDP by about $2.5bn in 2020-21, $7.5bn in 2021-22, and $8bn in 2022-23, creating about 60,000 jobs by the end of 2022-23.

The government will also extend the temporary loss carry-back to the 2022-23 income year, allowing similar-sized companies to recoup tax paid on prior year results as far back as the 2018-19 income year using 2022-23 tax losses.

This is designed to provide further cashflow support and encourage investment by using the extended full expensing measure while it’s still available.

The extended tax relief has been facilitated by a surge in company tax receipts.

Since the 2020-21 budget, receipts are forecast to be $8.8bn higher in 2020-21 and $11.8bn higher over the forward estimates, mainly due to the spike in iron ore prices lifting profits in the resources sector.

Prices, however, are expected to taper off in the latter years.

The tax relief package for the business community is designed to entrench and extend the economic recovery from COVID-19.

Treasury initially feared that unemployment could reach 15 per cent and the economy contract by more than 20 per cent, as contagion spread and activity stalled.

Instead, unemployment at 5.6 per cent is lower than when the government came to power in 2019, and the economy contracted by only 2.5 per cent.

This has been achieved through near-zero interest rates and record levels of stimulus spending, with the Morrison government providing $291bn in direct economic support to keep the economy afloat.

Unemployment is now forecast to fall below 5 per cent by late next year, while the economy will grow by 5.25 per cent in 2021 and 2.75 per cent in 2022.

The budget position has significantly deteriorated but by much less than expected.

With more people back at work and less people on welfare, the budget deficit will be $161bn this year — down $52.7bn from expectations only six months ago.

Net debt is now expected to increase to $617.5bn, or 30 per cent of GDP this year, and peak at $980.6bn, or 40.9 per cent of GDP, in June 2025 — about half of the level in the UK and the US.

The budget papers noted that businesses were capitalising on the government’s tax incentives, with investment in new machinery and equipment increasing at the fastest quarterly rate in almost seven years in the December quarter 2020.

Further, the outlook for the business sector had strengthened considerably and the latest December 2020 quarter ABS capital expenditure survey data suggested that firms’ capital investment intentions for 2020-21 had improved.

While most companies will welcome the tax relief, the Business Council of Australia said in its budget submission that the measures would only provide support for the recovery in the short term.

“The temporary and narrow scope of full expensing will also limit the benefits as it takes time for companies to receive both external (for example, regulatory) and internal board approvals for investment,” the BCA said.

“Eligibility for these measures could be expanded to all companies to better support the recovery and encourage more investment, especially in the larger projects.

“Every dollar released through expanding the incentive to businesses above the $5bn turnover threshold would have a multiplier effect through the economy, with the biggest gains from the larger projects.”

While immediate expensing would bring forward investment, the BCA also said it would not address the “longer-term stagnation” of investment, with the nation left with an uncompetitive corporate tax system which would undermine its ability to compete in the global race for capital.

New business investment was forecast in MYEFO (mid-year economic and financial outlook) to fall by 8.5 per cent in 2020-21 due to COVID disruption before growing by 5 per cent the following year, supported by a 7.5 per cent increase in non-mining investment.