Federal Budget 2020: Overview & analysis

By October 7, 2020 Accounting
2020 budget

This year’s budget was definitely aimed at business rather than individuals, and it needed to be. The main goal of the federal budget is to create jobs to repair the damage that Covid has done to the economy and Australian community.

Therefore, if you already have a job, there’s not much good news for you in the budget. However, there is plenty of good news for the Australian economy which will probably enhance the share market and property investment returns.

What’s in it for individuals?

The major benefit contained in the budget for individuals was income tax cuts. These tax cuts are backdated to begin on 1 July 2020. The table below sets out the tax savings (second column from the right) that you may enjoy.

Budget 2020 tax cuts

The budget also included some other miscellaneous benefits, which are listed below.

Improving the super industry and performance

The government will direct employers to pay super into existing accounts (as advised by the ATO) to avoid opening a new account with a new super fund when you start a new job. This will avoid workers unknowingly accumulating multiple super accounts.

The government will also take measures to improve the accountability and transparency of super funds, which is a problem I have written about previously. This includes building a MySuper website which will allow people to rank investment returns and fees. Any improvements in this space are long overdue.

Interestingly, the government did not announce that it would postpone the increase to the compulsory super contribution rate from 9.5% to 10% p.a. At this stage, this is still set to begin on 1 July 2021.

Granny flat arrangements

Granny flats will now be exempt from CGT where a formal written agreement is in place.

Relaxing the paid parental leave qualification criteria

Parents will qualify for parental leave payments if they have worked in 10 of the last 20 months, instead of 10 of the last 13 months, preceding the birth or adoption of a child. This is to accommodate the impact of Covid.

Additional government grantees for first home buyers

The government will make available an additional 10,000 First Home Loan Deposit Scheme guarantees in the 2020/21 financial year. This arrangement allows first home buyers to borrow up to 95% of a property’s value without needing to pay for Lenders Mortgage Insurance (LMI).

Summary of major incentives for business

The below sets out a list of incentives for businesses:

  • Full write off of any capital expenses (no cap) incurred before 30 June 2022 for businesses with a turnover of less than $5 billion. This means large business will be able to get a full tax deduction for any asset purchases they make over the next 2 years.
  • If a business makes a loss in the 2020/21 and/or 2021/22 financial years, they can offset that loss against tax previously paid in the 2018/19 and 2019/20 financial years. This means they may receive a refund of tax previously paid.
  • If businesses employ an apprentice between 5 October 2020 and 30 September 2021, they will be able to claim a reimbursement of up to 50% of their wages up to a maximum of $7,000 per quarter.
  • Eligible businesses will be entitled to a credit of $200 per week for one year beginning 7 October 2020 for each new employee they hire that is aged between 16 and 29 years (or $100 per week if aged between 30 and 35 years).
  • The government will reduce FBT record keeping obligations.

Please contact us if you would like more information above any of the above initiatives.

Treasury’s economic forecasts

The good news is that off the back of these very substantial business indicatives, Treasury estimate that real GDP growth will rebound strongly next financial year by 4.75%. Admittedly, this is off a lower base, with estimates suggesting that GDP will decline by 1.5% this financial year.

Treasury estimates that the unemployment rate will be 7.25% by June 2021. It forecasts it will gradually fall to 5.5% by June 2024, which is almost at pre-Covid levels.

Government debt will increase from circa 25% of GDP (in June 2020) to 40% by June 2022. This still very low by global standards and somewhat unavoidable.

Enhancement of share market returns

Whilst Australian equity markets are substantially influenced by global markets, particularly the US, I think these budgetary measures will be positive for our bourse.

In particular, the personal income tax cuts, business employment incentives, business investment incentives and relaxing of mortgage lending rules will greatly assist the big 4 Australian banks. The banks account for approximately 17.6% of the top 200 (ASX200) index. Only two years ago, they accounted for 23.5% of the index but due to Covid, their share prices have been smashed. As such, the Australia’s stock market’s recovery is heavily dependent on the recovery of the big banks. And the initiatives outlined in the budget will go a long way to aiding this recovery.

According to data published yesterday by ANZ economics (see chart below), personal spending around Australia is tracking at or above the same level compared to one year ago, with Victoria the only exception. That said, interestingly, spending in Victoria appears to be recovering from its Stage 4 lockdown lows. On the whole, considering the events this year, the Australian economy is faring pretty well.

ANZ spending data

Property market recovery and growth

My article that appeared in The Australian newspaper over the weekend (click here) cited a number of reasons why I believe higher value property (i.e. > $1m) will lead the property market’s recovery. The initiatives contained in the 2020 Federal Budget do nothing to loosen that view.

I believe that properties (1) located in blue-chip inner-city suburbs and (2) regional centres that offer a balance of work-from-home convenience and lifestyle benefits will perform the best over the next couple of years.

Locations that are dominated by lower-income earners may lag in the recovery. But on the whole, I think the prospects for the property market are positive.

Good news for Australia

In summary, the 2020 Federal Budget is relatively good news for the Australian economy and our Covid recovery. Whilst there are not a lot of financial planning opportunities, the good news is that it will likely have a positive impact on our property and share investments.