In a measure estimated to reduce tax revenue by $26.7 billion dollars over the period to the end of June 2024, the full value of investments in new capital assets made after 6 October 2020 and first used or installed before 30 June 2022 can be deducted against taxable income in the year the investment is made.
The value of improvements to existing assets over this time period can also be deducted in full.
The measure will not be available to businesses with aggregated annual turnover above $5 billion dollars. Note that "aggregated turnover" has a specific meaning and relates to the world-wide turnover of company groups.
In related measures:
The full expensing of eligible investments will not have lasting impacts on the underlying budget position both because the measure is limited to investments made before July 2022 and because it impacts on the timing and not on the quantity of deductions for capital investments. For years after the year the investment is made, the measure will result in higher tax liabilities for the investing entity than would have been the case had the deductions been spread over the life of the asset.
Incorporated businesses will be able to carry back tax losses from the 2019-20, 2020-21 and 2021-22 years to offset previously tax profits in the 2018-19 or later years.
Companies with aggregated annual turnover of less than $5 billion by carrying-back losses can claim a refundable tax offset in the year the tax loss is made. The amount that can be claimed as a refund is limited both by the amount of taxed profits in 2018-19 and subsequent years and by the provision that the loss carry-back does not generate a franking account deficit.
In combination, the full expensing of capital assets and the loss carry-back measure will provide a significant cash flow boost to businesses and will encourage businesses to bring-forward existing investment plans and to approve additional investment.
For companies with enough franking account balances and that have had sufficient taxed profits in 2018-19 and subsequently, the loss carry-back provisions can assist in financing additional, fully-deductable investments that push the company into a tax loss position.
In a major change in policy and as argued for by Ai Group and others, the Government has significantly wound back changes to the Research and Development Tax Incentive that were passed by the Lower House in December 2019 and which have been the subject of a Parliamentary Inquiry. An earlier inquiry had recommended against similar changes prior to the last election.
Ai Group's main concerns were that the proposed changes would have been retrospective; that they would result in many businesses experiencing a vastly reduce incentive to invest in R&D; and would involve a number of complications and anomalies related to the proposal to base the amount of R&D Tax Incentive on the R&D intensity of different businesses.
The approach now proposed by the Government will address two of these concerns: the measure will not apply until the year beginning 1 July 2021 and the increase in the lowest rate of the incentive will ensure that the tax incentive will remain at 8.5 per cent of expenditure (companies subject to a 30 per cent tax rate can claim an offset of 38.5 cents for each dollar of eligible R&D expenditure).
The lower rate will apply for businesses with an R&D intensity (R&D spending as a proportion of total expenditure) of 2 per cent or below. A higher rate of 16.5 per cent of expenditure will apply for companies with an R&D intensity of greater than 2 per cent.
As proposed in the legislation, the Government introduced in December 2019, the cap on R&D expenditure that can be claimed will be raised from $100 million to $150 million.
Further changes relate to the refundable R&D tax offset available for companies with annual turnover of less than $20 million.
Chart 1: R&D tax incentives for small and large businesses
This Budget brings forward the personal income tax cuts that were scheduled to begin on 1 July 2020. Together with the additional benefit provided by retaining the Low and Middle Income Tax Offset (LMITO) for the 2020-21 tax year, these tax cuts will lift the spending power of households and underwrite domestic demand.
These tax cuts will be worth (Table 1 and Table 2):
In addition, the Low Income Tax Offset will rise from $445 to $700 and the Low and Medium Income Tax Offset of $1,080 will be retained to the end of the 2020-21 year.
For people on very low incomes and in receipt of a government pension, other stimulus measures will include additional one-off payments of $250 in December and March.
These measures will support local consumer spending immediately, with the tax cuts expected to be implemented by the ATO within weeks and available retrospectively, from 1 July 2020.
Table 1: Personal income tax liabilities
Table 2: Personal income tax scales
To assist with the recovery from the impact of COVID-19, the Australian government is providing wage subsidy support to all employers who engage a new apprentice or trainee. This wage subsidy is available to all employers and Group Training Organisations who take on a new apprentice or trainee.
Details of the wage subsidy include:
A new 'JobMaker' hiring credit will commence immediately, to encourage businesses to hire younger Australians. The JobMaker credit will be paid for up to twelve months to employers who hire people currently receiving JobSeeker who are aged 16-35. All businesses, other than the major banks, will be eligible. All new hires must work for at least 20 hours a week and be a genuinely new and additional to the business workforce. It will be paid at the rate of:
Treasury estimates that this program will support around 450,000 new jobs for younger people in 2020-21.
The JobKeeper subsidy targets people aged under 35 years because Treasury and PBO analysis shows younger workers have been disproportionately thrown out of work by COVID-19. The PBO says JobSeeker recipient numbers rose rapidly from about 793,000 people in March to a peak of around 1,464,000 people in May and remained above 1.4 million until at least August. An additional number of younger people are receiving Youth Allowance. Recipient numbers have risen across both genders and all age groups, but the largest increases have been for men aged in their 20s and 30s (chart 2).
 PBO, Jobseeker Payment, Report 03/2020, Sep 2020.
Chart 2: JobSeeker and Youth Allowance recipients, by gender and age, March to August 2020
The Australian Government is boosting investment in research and key research infrastructure through a number of new measures, including:
The Government will also invest $157 million over three years to implement the 2020 Research Infrastructure Investment Plan. This measure will support the Government’s ongoing investment in existing research infrastructure and support the commencement of four new projects in national research priority areas.
From $903.5 million over four years from 2020-21 to provide more university places and support for students. The funding includes:
The Government is also committing $24.8 million for a new program commencing from 2021 to create pathways to STEM careers for up to 500 women through industry-sponsored advanced apprenticeship-style courses.
As part of the 2020-21 Budget, the Government announced that it will invest $1.5 billion in a Modern Manufacturing Strategy (the Strategy).
There are three main planks to the strategy:
More information can be found on this Ai Group BIG Hub factsheet.
CSIRO An additional $459.2 million in funding for the Commonwealth Scientific and Industrial Research Organisation (CSIRO) over four years to address the impacts of COVID-19 on its commercial activities and ensure it is able to continue essential scientific research.
Supply Chain Resilience Initiative
To build a comprehensive understanding of critical supply chains, the government will work with industry to:
Government will work with industry to identify supply options to address vulnerabilities in domestic and international supply chains for identified critical products. The outcomes of this work will be published in Sovereign Manufacturing Capability Plans.
The COVID-19 experience means the program will start with health and medical products, including personal protective equipment. Food and food services, and chemicals and plastics will also be considered.
Other sectors, such as construction, will follow.
The Government will work with industry to identify supply options for critical products to address vulnerabilities in domestic and international supply chains.
This could mean:
The Government will commit government agencies to partner with industry, with a goal of finalising these plans by April 2021. This will include benchmarks for job creation, R&D levels and investment over two-, five- and ten-year windows.
The Budget affirms the Government’s recent announcement of committed investment of almost $800m over four years in the JobMaker Plan – Digital Business Plan to provide incentives to digital technology uptake and remove outdated regulatory barriers.
COVID-19 has highlighted how many businesses are essential to our economy and digital technologies has been an enabler for many to remain open for business. This unstable environment also presents an opportunity for industry to emerge more globally competitive by taking fuller advantage of Industry 4.0 and digitalisation.
The Government's announced initiatives has the potential to build on inadvertent gains made by businesses and the community adapting to COVID restrictions, while also closing the gap during this turbulent period.
Key elements of the Digital Business Plan that may be of direct benefit to industry include:
Where regulatory reforms are being proposed, we look forward to working with Government on the stakeholder consultation process. For instance:
These measures build on and complement the Government’s recently announced $4.5 billion NBN investment plan and $1.7 billion investment in the 2020 Cyber Security Strategy. The Government also considers that this will contribute to the Australia-Singapore Digital Economy Agreement.
In addition to the above initiatives, the Government has also included in the Budget the following digital related measures:
Measures to support cyber security systems for business
As part of the 2020 Cyber Security Strategy, Ai Group welcomes the Government's $1.7 billion commitment over ten years to invest in strengthening Australia's security through initiatives designed to improve cyber security. The 2020-21 Budget provides an opportunity to get started on the implementation of these commitments.
Given the rapidly evolving state of cyber threats and attacks, including the Government’s recent announcement about malicious cyber activity against Australian organisations, it is essential that our nation is sufficiently resourced and supported through industry and government collaboration to ensure national security and to protect businesses and the community against global cyber crime and related threats.
The Budget refers to the Strategy and includes an additional $201.5 million over four years from 2020-21 (and $40.5 million per year ongoing) for Government departments and agencies to implement the 2020 Cyber Security Strategy.
The Strategy outlines several positive funding commitments directly targeted at assisting and working with industry, including:
We look forward to working with Government on implementation of these initiatives, including involvement in consultation where there are regulatory implications for businesses.
In line with Ai Group’s recommendation, the Government will invest $6.6 million over four years to pursue new free trade agreement opportunities around the world and boost digital trade within our region. These efforts build on our ongoing free trade agreement negotiations with key trading partners including the European Union and the United Kingdom.
The Budget provides $317.1 million to extend the International Freight Assistance Mechanism until the middle of next year to restore global supply chains and keep international freight routes and flights operating during COVID‑19. To register your interest in accessing these flights visit this site https://www.austrade.gov.au/news/news/international-freight-assistance-mechanism
Export Market Development Grant.
There is no additional funding for EMDG, however exporters should be aware of proposed changes to the EMDG as the result of a review of the program.
In the reoriented EMDG program, multi-year grants will be available for eligible SMEs at three stages of their export journey:
To be eligible for the EMDG program, SMEs will need to be export-ready and have a turnover of less than $20 million.
Unlike the current reimbursement scheme which saw exporters waiting up to two years for payments, eligible SMEs will be able to get upfront funding certainty over multiple years for eligible marketing and promotional activities.
More information is available from Austrade here.
In July this year, the Government announced its Defence strategic and funding commitments through the 2020 Defence Strategic Update and Force Structure Plan (Defence Update and Plan), including a $270 billion investment to 2029-30. The Defence Update and Plan set clear strategic objectives for the nation and provide long-term funding certainty for Defence.
The funding in the Defence Update and Plan includes:
Particular opportunities for industry arising from this Defence Update and Plan include:
In addition to these budget measures, Defence industry has been recognised as one of the six National Manufacturing Priorities in the Government’s Modern Manufacturing Strategy released on 1 October 2020.
The budget includes measures to help defence industry, its supply chains and Defence to meet the challenges set out in the Defence Update and Plan. In response to the Budget, the Minister for Defence reaffirmed the Government’s commitment to its 10-year Defence Update and Plan, and identified the following areas in the Budget that will contribute to these (in addition to Defence and Australian Signals Directorate funding), including:
In addition, the Budget also includes $2.4 million over two years towards supporting the continued delivery of the School Pathways Program in South Australia and Western Australia to build work and career pathways in defence industry.
Along with updates to the Commonwealth Procurement Guidelines, and the anticipated changes to Defence's Australian Industry Capability (AIC) contractual framework and Independent AIC Audit Program, the Budget announcements are an important step to spur Australia’s defence industry.
Implementing initiatives that arise from these funding commitments will require ongoing partnership between the defence industry, its supply chains and Defence. This includes understanding more detail on the individual projects to allow the defence industry the opportunity for more detailed decision-making on investment and workforce skilling. We also look forward to working closely with the Government in relation to the consultation and implementation of the new AIC contractual framework.
 Australian Government, Media Release, 1 July 2020, https://www.pm.gov.au/media/defending-australia-and-its-interests.
 2020 Defence Strategic Update, pp. 36-42. Link: https://www.defence.gov.au/StrategicUpdate-2020/docs/2020_Defence_Strategic_Update.pdf.
 Australian Government, Media Release, 6 October 2020, https://www.minister.defence.gov.au/minister/lreynolds/media-releases/safer-and-stronger-australia-budget-2020-21.
 Budget 2020-21, Budget Measures (Budget Paper No. 2, 2020-21, 6 October 2020), p. 70, https://budget.gov.au/2020-21/content/bp2/download/bp2_complete.pdf; Australian Government, Media Release, 26 August 2020, https://www.pm.gov.au/media/1b-accelerate-defence-initiatives-covid-19-recovery.
 Budget 2020-21, Budget Measures (Budget Paper No. 2, 2020-21, 6 October 2020), p. 71, https://budget.gov.au/2020-21/content/bp2/download/bp2_complete.pdf.
 Budget 2020-21, Budget Measures (Budget Paper No. 2, 2020-21, 6 October 2020), p. 70, https://budget.gov.au/2020-21/content/bp2/download/bp2_complete.pdf.
 Budget 2020-21, Budget Measures (Budget Paper No. 2, 2020-21, 6 October 2020), p. 71, https://budget.gov.au/2020-21/content/bp2/download/bp2_complete.pdf.
 Budget 2020-21, Budget Measures (Budget Paper No. 2, 2020-21, 6 October 2020), p. 72, https://budget.gov.au/2020-21/content/bp2/download/bp2_complete.pdf.
The already announced investments in ARENA and other clean economy measures are very positive building blocks for long-term abatement. Further policies to underpin private investment in mass rollout of clean technology will be needed in coming years, given the scale of the challenge and opportunity.
There remains a huge opportunity to boost growth, cut energy bills, slash emissions and help Australians adapt to extreme heat by upgrading existing buildings. This should be a major focus for further efforts to support the economy in the May Budget.
Ai Group welcomes the Budget’s confirmation of $249.6 million to be invested over four years to modernise our recycling infrastructure, reduce waste and recycle more onshore. Of this, $59.6 million will be used to implement the National Waste Policy Action Plan (NWPAP), and $190 million will be used for the Recycling Modernisation Fund (RMF).
The RMF is expected to generate $600 million of recycling investment and drive a billion-dollar transformation of Australia’s waste and recycling capacity. The RMF, combined with the NWPAP, is expected to divert over 10 million tonnes of waste from landfill and increase the number of jobs in the Australian waste and recycling sector by 32 per cent (10,000 new jobs).
Waste and circular economy remains a critical area of importance in Australia and will require further government investment over time, paying close attention to the outcomes of these current funding initiatives as well as new and emerging opportunities.
This Budget increases the infrastructure investment pipeline by $10 billion to $110 billion over the next ten years in a bid to boost a range of state and territory projects currently in the planning phase. The COVID-19 infrastructure package will provide significant near-term investments in major road and rail projects, road safety and community infrastructure.
Since the start of the COVID-19 pandemic in March, the Government has committed to invest an additional $14 billion in new and accelerated infrastructure projects over the next four years. These projects will support a further 40,000 jobs during their construction.
This investment is part of the Government’s record 10-year transport infrastructure investment pipeline, (now expanded to $110 billion) and is already supporting 100,000 jobs on worksites across the country.
Specific projects highlighted for this year’s budget expenditure (in 2020-21) include:
New South Wales new projects and additional funding for existing projects can be found here
Victorian new projects and additional funding for existing projects can be found here
Queensland new projects and additional funding for existing projects can be found here
South Australian new projects and additional funding for existing projects can be found here
Tasmanian new projects and additional funding for existing projects can be found here
A.C.T. new projects and additional funding for existing projects can be found here
For information on infrastructure projects in your area click here
In addition to the large infrastructure projects, this Budget supports national home building by supporting an additional 10,000 first home buyers to purchase a new home sooner under the extension to the First Home Loan Deposit Scheme. The additional 10,000 places will be provided in 2020-21 to support the purchase of a new home or a newly built home. This will allow first home buyers to secure a loan to build a new home or purchase a newly built dwelling with a deposit of as little as 5 per cent, with the Government guaranteeing up to 15 per cent of a loan. the Government will also enable an additional $1bn of low-cost finance to construct affordable housing.
These initiatives will provide support for smaller residential housing builders as well as developers and builders constructing multi-storey developments. Flow-on benefits will be seen by construction supply chain businesses manufacturing and distributing construction materials such as steel, concrete and glass as well as electrical and plumbing amongst other products.
Other Government programs that will help support construction activity include:
While the announcements are welcome, job creation and the economic benefits from expenditure on major infrastructure projects do not address other aspects of the drivers of construction and employment. What is needed is a national construction strategy that approaches the issues from a holistic perspective and focuses on the key constraints on the industry as well as the key drivers for success. This will be the focus of Ai Group's Construction Supply Chain Council.
This Budget assumes that national borders will gradually open to students and permanent migrants from mid 2021. As a result, net overseas migration (NOM) will fall from around 154,000 persons in 2019-20 to an absolute drop of around -72,000 persons by the end of 2020-21, before gradually increasing to around 201,000 persons in 2023-24. This will be the first time that net overseas migration has turned negative since 1946.
Australia’s total population growth is expected to slow to just 0.2% in 2020-21 and 0.4% in 2021-22, which will be the weakest growth in over a century (since WW1). This will be due to an expected fall in the birth rate as well as an absolute decline in net migration in these years.
While migration will eventually return to the levels we are accustomed to, these lost years of net migration – and the growth they would have brought – will not be replaced.
This fall in population and migration will be a key factor contributing to slower GDP growth in the years ahead. The residential construction sector is a clear example as are the range of industries supplying house building and fit out.
The cap for new migrants under the permanent migration program remains the same as last year at 160,000 (compared with 190,000 the year before). With border restrictions unlikely to be fully lifted soon, it is difficult to imagine this cap being reached. Around 70% of new migrants will be in the skilled category as in previous years.
For businesses that might have looked to skilled migration to fill skill gaps in their workforce, the expected drop in migration will require more dynamic management, more flexible workplace relations, a much greater emphasis on lifting workforce skills and a step up in innovation.
It will also require governments to do their job more efficiently: better regulation, less harmful tax arrangements and encouraging federation-wide cooperation in a range of areas including in education and training, recognition of occupational licensing and in infrastructure investment.
The COVID-19 recession means that government taxation revenue has declined, at the same time as spending requirements are increasing. This will require the budget deficit (underlying cash balance) to increase to more than $200bn in 2020-21, but economic recovery – and rising taxation revenue - is expected to help to reduce the deficit in each subsequent year (Table 3).
On the revenue side, total receipts are expected to be $52.8 billion lower in 2020 21 than was estimated at the 2019 20 MYEFO (published in December 2019), with tax receipts $55.2 billion lower and non tax receipts $2.3 billion higher. These revisions have been driven by both the impact of the COVID 19 pandemic on the Australian economy and the Government’s economic recovery measures in this Budget, which will lower taxes substantially in the near term. Significant policy decisions in this Budget are expected to reduce tax receipts by $13.5 billion in 2020 21 and by $56.5 billion over the four years to 2023 24. Significant measures include:
Looking ahead, Treasury notes that “There is significant uncertainty around the outlook for tax receipts. This is driven by the economic outlook and how it will impact taxpayer behaviour and the timing of when tax is collected.”
On the spending side, the biggest increases are concentrated in the 2020-21 tax year and are not ongoing. Government spending is expected to peak in 2020-21 in absolute terms and as a share of GDP, before falling again as a share of GDP (Table 3). Much of this future fall in spending is predicated on expectations of a reasonable recovery in business activity and employment in 2021.
Table 3: Australian Government general government sector budget aggregates
The COVID-19 recession necessitates a large rise in Australian Government net debt and in government bonds (securities on issue).
As both the Reserve Bank and the Treasurer have pointed out, Australia’s level of government debt is large and rising (table 4). But it is wholly manageable and is considerably lower than in most other developed countries. With interest rates looking like they will remain low for a number of years, the cost of servicing that extra debt is also low, relative to GDP and relative to government debt during previous Australian recessions (table 4 and chart 3). Indeed, as a share of GDP, the net interest payments on total Australian Government debt is projected to rise to 0.7% of GDP in 2020-21, compared to a peak of 1.7% of GDP in the aftermath of the recessions in the 1990s (1995 and 1996) and 1980s (1986).
The fiscal measures the Government is taking to ward off a much more damaging downturn makes good sense and indeed further fiscal support will be required in the October Budget.
Table 4: Australian Government general government sector net debt and net interest payments(a): selected historical years and forecasts
Chart 3: Net interest payable per year, 1980 to 2025, $bn and % of GDP
The Budget’s update on the economic outlook indicates that the worst of the economic effects of the COVID-19 pandemic are already over and the national economy is already on the road to recovery. At its peak, real GDP fell by 7% in Q2 of 2020 and 1.3 million people (10% of the total workforce) lost their job or were stood down. Treasury estimates that the ‘effective’ unemployment rate peaked at around 15% of the workforce in Q2 of 2020. This is double the ‘official’ unemployment rate, which peaked at 7.5% in July.
As bad as these impacts have been, the effects would have been worse, if not for the immediate support provided by Government (charts 4 and 5).
The Treasury says that economic growth is already returning in Q3 (at a national average level) and that 760,000 people – 60% of those who had lost work – have returned to work. Even so, with over 1.4 million people receiving JobKeeper (as of August, according to the PBO), more people will be actively seeking work over coming months and so the official unemployment rate is expected to rise to a peak of around 8% by the end of 2020 (up from 6.8% in August). This impending rise in the unemployment rate will be due to more people who are currently not able to actively search for work (that is, currently not participating in the labour market) coming back into active job-searching, rather than because more people are likely to lose their jobs. Employment growth will take longer to recover in Victoria than in other states, due to the longer, tighter, activity restrictions in Melbourne compared to other cities.
Looking ahead to 2021 and beyond, Treasury’s ‘base case’ assumes falls in almost all components of Australian GDP in 2020-21, other than mining investment and government spending (Table 4). All components of GDP expenditure will begin to recover in 2021-22, with employment recovering in response.
Treasury expects inflation and "wage growth to remain below average over the forecast period, reflecting significant spare capacity in the labour market. However, a declining unemployment rate beyond the December quarter 2020 is expected to support a gradual pick up in wages." Treasury appears to be rather more optimistic than the RBA with regard to inflation and wages, with Treasury’s forecasts for both CPI and WPI tracking more strongly in 2022 and 2022 than the RBA's latest detailed forecasts (as of August).
The Treasury’s ‘base case’ rests on the following key assumptions about COVID-19 and Australia’s responses to it:
Delays or setbacks to any of these milestones will lead to downward revisions to the outlook, and a slower recovery in the economy. Based on Australia's experience of 'wave 1' in Q2 of 2020, Treasury has calculated that if further COVID-19 outbreaks occur that "necessitate the reimposition of severe containment measures on around 25 per cent of the national economy from 1 January 2021 to 30 June 2022" then "Economic growth would be 1 percentage point lower in both 2020 21 and 2021 22 compared with the forecasts" (table 5).
Table 5: Australian economic growth rates in 2019-20 and Treasury forecasts
Turning to Australia’s long-term economic outlook, the huge disruption of the COVID-19 recession is expected to have a long-lasting impact on Australian economic growth and productivity, due to structurally lower levels of population and business investment over an extended period of time. As a result, Treasury has downgraded its estimates of Australia’s ‘potential GDP growth rate’ (that is, the maximum GDP growth rate that can be achieved with our resources), and potential productivity growth as a result of the pandemic (chart 5):
“Potential GDP growth is estimated to fall below 2 per cent per annum in the near term before gradually returning to 2¾ per cent towards the end of the medium‑term projection period. …. The downgrade to potential growth in the first half of the projection period largely reflects the downgrade to population growth as a result of the COVID‑19 pandemic, including through its effect on trend participation.
…The protracted period of weakness in business investment due to the COVID‑19 pandemic will lower growth in the capital stock and in turn labour productivity and future productive capacity until there is a recovery in business investment. This is partly offset by economic support measures that are expected to increase business investment and in turn lead to higher labour productivity growth than otherwise would have occurred.”
Chart 6: Treasury estimates of Australia's 'potential GDP' (MYEFO and 2020-21 Budget)