Are you disappointed in this budget? Did you want free childcare? Social housing? A permanent boost to the dole? Fair enough. Those are all good things. And they are not what this budget has delivered.
Instead, the centrepiece of this budget is large tax cuts aimed at the business sector.
But before you go writing off this budget off as a political free kick to the Liberal Party base, it’s worth understanding the context of this budget and how it represents a next crucial – although by no means the last – step in Australia’s so far very successful effort to save livelihoods from the ravages of the coronacession.
Australians can be rightly proud of the way our policymakers stepped in quickly in March to staple as many employees as possible to their jobs via the JobKeeper wage subsidy.
But JobKeeper can’t last forever. Why? Because JobKeeper keeps us frozen in time. COVID-19 has radically reformed our economy. Many businesses which made sense before may never stack up again absent artificial government support.
In Treasury’s dispassionate language from Tuesday’s budget papers: “The crisis is driving a significant reallocation of capital and labour resources across the economy.”
Economists have learnt over many long years that the key to boosting living standards is in letting resources – people and capital – flow to their most productive use. And that is what this budget’s “JobMaker Plan” is about doing.
How? Unfortunately, it’s a bit hard to explain. Indeed, the two headline support measures for job creation in this budget come with the abhorrently complex names of “temporary full expensing” and “loss carry back”. Yuck.
I know. I don’t want to write about them, so I understand if you don’t want to read about them. But lean in, dear reader, this is important.
Number one: temporary full expensing – also known as instant asset write-off – expected to cost the budget a whopping $27.6 billion – is by far the biggest measure.
It’s a bit like if you or I were suddenly given the green light by government to go the shops and buy anything we wanted – up to any value – and then claim that amount at tax time to reduce our taxable income, and therefore tax owing. We’d still have to pay for the stuff, of course, but the real out of pocket cost would be lowered by whatever your marginal tax rate is.
The temporary full expensing measure is like that but for business owners, including sole traders, trusts and partnership structures registered to pay tax.
If this is you: it’s time to get shopping for any business asset that depreciates in value. Harvesters for farmers. New canning equipment for food producers. A new van for florists. A new car to visit customers. New computers or mobile phones for your staff. A new trailer – or even caravan – to take your hair salon or coffee shop mobile. You can also pay for upgrades to existing equipment.
And it doesn’t just have to be physical stuff. The budget papers give the example of a medical company paying for new tailored software. Not only does this boost the potential productive output of the medical company – and therefore its ability to employ staff – the purchase also provides revenue for the software firm, which can also employ more staff as a result. Win. Win.
Such is the circular nature of our economy. One person’s spending is another person’s revenue.
The government expects this measure to unleash about $200 billion of business investment.
The only problem, of course, is that after a year of closures and lockdowns, many businesses lack the cash flows to afford the upfront cost of such purchases.
Indeed, many previously profitable businesses are staring down the barrel of severe financial losses this financial year.
Which is where the budget’s second most significant boost to business – the $4.9 billion “loss carry back” scheme – will help. This one’s only for incorporated enterprises, so sole traders sit down.
Under the old rules, if your company makes a loss in any year – essentially your revenues do not exceed your costs – you have to wait until a future year when you make a profit again, and then you are entitled to deduct the value of your old loss from your new profit, reducing your taxable profit and therefore tax payable.
Well, after this budget, you can take that and turn it on its head.
Say, for example, you make a $2 million loss this financial year. You can now apply to the Tax Office to have your previously assessed profits reduced by that amount, meaning an immediate cash refund of previous taxes paid. Assuming you’d made $2 million of profit in a previous year, at a company tax rate of 30 per cent, that’d be a cash refund of about $600,000 of tax paid. A handy cash boost to businesses most in need, and exactly when they most need it.
Combined, the two measures interact to both incentivise investment AND cushion against losses. And both of those things help businesses to keep on staff, or potentially hire new ones.
Business has welcomed the budget with open arms, as you would expect. Much now depends on whether companies actually embrace the incentives.
Treasury thinks they will, and that combined, they will create 50,000 jobs and boost economic output by $12.5 billion. More direct support for job creation may very well be needed down the track. But in the meantime, this is well worth a try.
Jessica Irvine is a regular columnist.
Source: Thanks smh.com