COVID-19: The Government Stimulus Package: What you need to know

 In Accounting & Business Advisory, Financial Planning, News, SMSF

IN SUMMARY

Business

  • Tax-free payments up to $100,000 for small business and not-for-profit employers. An increase in the previously announced initial tax-free payments for employers to a maximum of $50,000. In addition to this, a second round of payments will be made up to a maximum of $50,000, accessible from July 2020.
  • Increase and extension of the instant asset write-off – the instant asset write-off threshold will increase from $30,000 to $150,000, and access to the write-off will be expanded to businesses with aggregated annual turnover of less than $500 million until 30 June 2020.
  • Solvency safety net – temporary 6 month increase to the threshold at which creditors can issue a statutory demand on a company from $2,000 to $20,000, and an increase in the time companies have to respond from 21 days to 6 months. Directors also are provided with temporary relief from personal liability for trading while insolvent for 6 months.
  • Access to working capital – Introduction of a Coronavirus SME guarantee scheme protecting financial institutions by guaranteeing 50% of new loans to SMEs up to $250,000.
  • Sole traders and self-employed eligible for Jobseeker payment – the eligibility criteria to access income support relaxed for the self-employed and sole traders.
  • Temporary relief from some Corporations Act requirements

Individuals

  • Early release of superannuation – Eligible individuals in financial distress able to access up to $10,000 of their superannuation in 2019-20, and a further $10,000 in 2020-21. The withdrawals will be tax-free and will not affect Centrelink or Veterans’ Affairs payments.
  • Retirees – Temporary reduction in minimum superannuation draw down rates – superannuation minimum drawdown requirements for account based pensions and similar products reduced by 50% in 2019-20 and 2020-21.
  • Pensioners and those considering age care – Deeming rates reduced – from 1 May, superannuation deeming rates reduced further to a lower rate of 0.25% and upper rate of 2.25%.
  • Supplements increased, access extended and eased – for 6 months from 27 April 2020:
    • A temporary coronavirus supplement of $550 will be paid to existing income support recipients (people will receive their normal payment plus $550 each fortnight for 6 months).
    • A second one-off stimulus payment of $750 will be paid automatically from 13 June 2020 to certain income support recipients (in addition to the payment made from 31 March 2020).
    • Eligibility for access to income support eased to include sole traders and the self-employed, and to those caring for someone infected or in isolation.
    • Waiting periods and assets tests temporarily waived.
  • Bankruptcy safety net – temporary 6 month increase to the threshold for the minimum amount of debt required for a creditor to initiate bankruptcy proceedings against a debtor from $5,000 to $20,000.

Life Insurance 

From an Insurance point of view we can confirm the following.  If you have a retail life insurance policy and you die of the virus or any other health issue your family is protected.  You may wish to check if your life policy is under an industry Super fund such as Rest or Australian Super and enquire with the Super fund directly however we are of the opinion that you would be covered.

If you have Income Protection and you become infected and are unable to work due to the infection then after your waiting period you are still unable to work you should contact us or your Insurance Company and proceed to making a claim. If however you have been told you must be in isolation only and not ill then you are not able to make a claim. If you lose your job due to the virus or your employer has to let you go as they are unable to work then sadly you are also not covered.

If you have Total and Permanent disablement it would be difficult to prove that you are permanently disabled and very unlikely to be able to make a claim.

Thoughts and Comments From the Financial Planning Team

Successful investing can be really difficult in times like the present with considerable uncertainty around the impact of Coronavirus on the outlook.
This makes it all the more important to stay focussed on the basic principles of successful investing.

While we haven’t seen a pandemic driven bear market before, the basic rules of investing haven’t changed. We draw on an article by Dr Shane Oliver, chief economist AMP capital who refers to five basic rules.

  1. The power of Compound interest

The value of $1 invested in 1900 in cash is now valued at $242, in bonds $1017, and $481,910 if in shares. Residential property has been approximately the same as shares. Despite all that has occurred even with collapses etc, proves that over time the benefits of growth assets are clear.

  1. Don’t get diverted by cyclical swings

Since 1900 for Australian shares two years out of 10 have had negative returns but no negative returns over rolling over 20 year periods, with an average return of over 10% pa. Short term volatility is a fact of life as the longer term benefits remain clear.

  1. Roller coaster of investor emotion

Once a cycle turns down in a bear market, euphoria gives way to anxiety, denial, capitulation, and depression. We see this as the time of maximum opportunity. We aren’t there yet but it will come i.e. depression gives way to hope, optimism then euphoria again.

The message be wary of getting sucked into this emotional roller coaster. Doing this is easier said than done that’s why many investors get wrong footed.

  1. The wall of worry

There is always something to worry about and social media doesn’t help. Worries are normal and sometimes they becomes intense but they eventually pass.

Remembering back in January we had bushfires lives and homes lost but since then rain has come, and the green shoots of life come again.

With Coronavirus it too will pass eventually.

  1. Timing is hard

The temptation to time the markets is immense.

20:20 hindsight is always accurate. Trying to time the market is difficult. Research has shown for the Australian share market from January 1995 you would have received 8% pa (not allowing for franking, tax and fees) However, if you had missedthe 10 best days by not holding the investmentsthe return falls to 6.1% and if you had missed the best 40 days it drops to 2.2% pa. The message here is trying to time the share market is not easy.

If any of the above provokes thought and/ or queries please contact your financial advisor to discuss the options for your situation and objectives.

THE DETAIL

SUPPORT FOR BUSINESS

Tax-free payments up to $100,000 for employers

  • From: 28 April 2020
  • Eligibility: Small and medium business entity employers and not-for-profit entities, with an aggregated annual turnover under $50 million.

The Government has increased the previously announced measures to provide cash flow support to business.

Now, eligible businesses with a turnover of less than $50 million will initially be able to access tax-free cash flow support, with the minimum amount being increased to $10,000 and the maximum amount increased to $50,000 (previously $2,000 to $25,000). However, additional support will be provided in the July – October 2020 period so that eligible entities will receive total minimum support of $20,000 and up to $100,000.

In order for a business to qualify for this support it must have been established prior to 12 March 2020. The rules are more flexible for charities because the Government recognises that new charities might be established in response to the pandemic.

The cash flow support measures will be provided in the form of a credit in the activity statement system. The support will be provided in two phases.

  • The first phase ensures that eligible employers receive a credit equal to 100% of the PAYG amounts withheld from salary and wages paid to employees during the relevant period, up to the maximum amount of $50,000.
  • The second phase ensures that eligible employers receive another series of credits, equal to the credits that were received under the first phase. For example, if a business received $40,000 of credits in the first phase it will receive a further $40,000 of credits in the second phase. These additional credits will be spread over two or four activity statement periods, depending on whether the employer lodges on a quarterly or monthly basis.

If a business pays salary and wages to employees but is not required to withhold any tax then a minimum payment of $10,000 will be made in the first phase and a further payment of $10,000 will be made in the second phase.

The credits are automatically calculated by the ATO and employers will need to lodge an activity statement to trigger the entitlement. If the credit puts the business in a refund position the excess amount will be refunded by the ATO within 14 days.

Businesses that lodge activity statements on a quarterly basis will be eligible to receive credits in the first phase for the quarters ending March 2020 and June 2020. Credits in the second phase will be available for the quarters ending June 2020 and September 2020. The minimum $10,000 payment will be applied to the first lodgement.

Business that lodge on a monthly basis will be eligible for the credits in the first phase for the March 2020, April 2020, May 2020 and June 2020 lodgements. Credits in the second phase will be available for the June 2020, July 2020, August 2020 and September lodgements. The minimum $10,000 payment will be applied to the first lodgement.

Eligibility for the measure will be based on prior year turnover. We will have to wait for the legislation for the finer details.

Not-for-profit employers, including charities, with an aggregated turnover under $50 million will also be able to access the cash flow support.

Increase and extension of the instant asset write-off

From 12 March 2020, the instant asset write-off threshold will increase from $30,000 to $150,000, and access to the write-off will be expanded to include businesses with aggregated annual turnover of less than $500 million until 30 June 2020.

The instant asset write-off is a tax deduction that reduces the tax liability of your business. It enables your business to claim an upfront deduction for depreciating assets in the year the asset was purchased and used (or installed ready to use). For example, if your business is a base rate entity (turnover under $50m) in a company structure you will get back 27.5% in your 2019-20 company return if the company acquires an asset that is used by 30 June 2020. If your business is likely to make a tax loss for the year, then the instant asset write-off is unlikely to provide a short-term benefit to you.

This is the fourth increase or extension to the instant asset write-off and businesses will need to be wary of what they are claiming and when:

Instant asset write-off thresholds Small Business* Medium Business** Large Business***
1 July 2018 – 28 January 2019 $20,000
29 January – 2 April $25,000
2 April – 12 March 2020 $30,000 $30,000
12 March  – 30 June 2020 $150,000  $150,000  $150,000

* aggregated turnover under $10 million
** aggregated turnover under $50 million
***aggregated turnover under $500 million

Assets will need to be used or installed ready for use from when the changes were announced on 12 March 2020 until by 30 June 2020 to qualify for the higher threshold. Anything previously purchased does not qualify for the higher rate but may qualify for one of the other thresholds. Similarly, anything purchased but not installed ready for use by 30 June 2020 will not qualify.

The instant asset write-off only applies to certain depreciable assets such as a concrete tank for a builder, a tractor for a farming business, and a truck for a delivery business. You will also need ensure that there is a relationship between the asset purchased by the business and how the business generates income. You can’t for example just go and purchase multiple television sets if they have no relevance to your business.

There are some assets that don’t qualify such as horticultural plants, capital works (building construction costs etc.), assets leased to another party on a depreciating asset lease, etc.

What businesses can access the instance asset write-off

To access the instant asset write-off, your business needs to be a trading business (the entity buying the assets needs to carry on a business in its own right). It also needs to have an aggregated turnover under $500 million. Aggregated turnover is the annual turnover of the business plus the annual turnover of any “affiliates” or “connected entities”. The aggregation rules are there to prevent businesses splitting their activities to access the concessions.  Another entity is connected with you if:

  • You control or are controlled by that entity; or
  • Both you and that entity are controlled by the same third entity.

Accelerated depreciation deductions

In addition to the increased instant asset write-off rules, accelerated depreciation deductions will apply from 12 March 2020 until 30 June 2021. This will bring forward deductions that would otherwise be claimed in later years.

Businesses with a turnover of less than $500 million will be able to deduct 50% of the cost of the asset in the year of purchase. They can also claim a further deduction in that year by applying the normal depreciation rules to the balance of the asset’s cost. This will presumably only be relevant if the business cannot already claim an immediate deduction for the full cost of the asset.

For example, let’s assume that a business purchases a new truck for $250,000 (exclusive of GST) in July 2020. In the 2021 tax return the business would claim an upfront deduction of $125,000. The business would also claim a further deduction for the depreciation that would have arisen on the balance of the cost. If the business is a small business entity and using the simplified depreciation rules, this would mean an additional deduction of $18,750 (i.e., 15% x $125,000).
The total deduction in the 2021 tax return would be $143,750. Without the introduction of this investment incentive the business would have claimed a deduction of $37,500 (i.e., 15% x $250,000).

This incentive will only be available in relation to new assets that are acquired after 12 March 2020 and are first used or installed ready for use by 30 June 2021. It will not apply to second-hand assets or buildings and other capital works expenditure.

Solvency safety net

A safety net has been put in place to protect businesses in temporary financial distress as a result of the pandemic by lessening the threat of actions that could unnecessarily push them into insolvency and force the winding up of the business. These include:

  • A temporary 6 month increase to the threshold at which creditors can issue a statutory demand on a company from $2,000 to $20,000.
  • The time a company has to respond to statutory demands will increase from 21 days to 6 months.
  • For 6 months, directors will be provided with temporary relief from personal liability for trading while insolvent.
  • See also bankruptcy safety net below

It will be more important than ever for business to stay on top of their debtors.

Debts incurred will still be payable by the business. Only those debts incurred in the ordinary course of the business will be subject to the safety net measures.

Access to working capital for SMEs – supporting lenders

The Government has announced a Coronavirus SME guarantee scheme that will guarantee 50% of new loans to SMEs up to $20 billion. These loans are new short-term unsecured loans to SMEs.

SMEs with a turnover of up to $50 million will be eligible to receive these loans.

The Government will provide eligible lenders with a guarantee for loans with the following terms:

  • Maximum total size of loans of $250,000 per borrower.
  • The loans will be up to three years, with an initial six month repayment holiday.
  • The loans will be in the form of unsecured finance, meaning that borrowers will not have to provide an asset as security for the loan.

Loans will be subject to lenders’ credit assessment processes with the expectation that lenders will look
through the cycle to sensibly take into account the uncertainty of the current economic conditions.

This latest measure builds on the previous initiatives to ensure small business can access capital, including:

Sole traders and self-employed eligible for Jobseeker payment

The eligibility criteria to access income support payments will be relaxed to enable the self-employed and sole traders whose income has been reduced, to access support.
See:

Temporary relief from Corporations Act requirements

The Treasurer has been given a temporary instrument-making power to amend the Corporations Act to provide relief or modifications to specific compliance obligations.

ASIC has announced measures for those companies with a 31 December financial year that need to hold their AGMs by 31 May 2020, providing a two month no action period and enabling hybrid virtual AGMs.

INDIVIDUALS

Early release of superannuation

From mid-April subject to legislation, individuals in financial distress will be able to access up to $10,000 of their superannuation in 2019-20, and a further $10,000 in 2020-21. The withdrawals will be tax free and will not affect Centrelink or Veterans’ Affairs payments.

For members of Self-Managed Super Funds the details have yet to be released from Canberra.

Please note that accessing super benefits in this time of market downturn is normally not recommended as it may crystallise losses. However, for those impacted, this measure may provide immediate financial relief and the basis to rebuild.

To be eligible to access your superannuation you need to meet the following requirements:

  • you are unemployed; or
  • you are eligible to receive a job seeker payment, youth allowance for jobseekers, parenting payment (which includes the single and partnered payments), special benefit or farm household allowance; or
  • on or after 1 January 2020:
    • you were made redundant; or
    • your working hours were reduced by 20% or more; or
    • if you are a sole trader — your business was suspended or there was a reduction in your turnover of 20% or more.

For those eligible to access their superannuation, you can apply directly to the ATO through the myGov website from mid-April.

Temporary reduction of minimum pensioner payments

To provide retirees with more flexibility in managing retirement income. Superannuation minimum drawdown requirements for account-based pensions and similar products e.g. term Allocated pensions will be reduced by 50% in 2019-20 and 2020-21. (Similar measures applied post 2008 G.F.C)

So for those who have already taken 50% or more of the required minimum payments and the 19/20 year could cease further payments.

Age Default minimum drawdown  rates (%) Reduced rates by 50% for the 2019-2020 and 2020-2021
Under 65 4 2
65-74 5 2.5
75-79 6 3
80-84 7 3.5
85-89 9 4.5
90-94 11 5.5
95 or more 14 7

The upper and lower social security deeming rates will be reduced further. As of 1 May 2020, the upper deeming rate will be 2.25% and the lower deeming rate 0.25%.

Time limited fortnightly $550 ‘coronavirus supplement’

For the next 6 months, the Government is introducing a new Coronavirus supplement to be paid at a rate of $550 per fortnight. This supplement will be paid to both existing and new recipients in the eligible payment categories.

The payment will be made to those receiving:

  • Jobseeker payment (and those transitioning to the jobseeker payment)
  • Youth allowance jobseeker
  • Parenting payment
  • Farm household allowance
  • Special benefits recipients

In addition, eligibility to income support payments will be expanded to:

  • Permanent employees who are stood down or lose their job
  • Casual workers
  • Sole traders
  • The self-employed
  • Contract workers who meet the income test

The Government notes that these criteria could include those required to care for someone affected by the Coronavirus.

Asset testing has also been reduced and will be waived for 6 months. Income testing will still apply.

The payment is not available if you have access to any employer entitlements such as annual or sick leave or income protection insurance.

Second $750 payment to households

The Government is now providing two separate $750 payments to social security, veteran and other income support recipients and eligible concession card holders residing in Australia (see the full list here). The payment will be exempt from taxation and will not count as income for the purposes of Social Security, Farm Household Allowance and Veteran payments.

  • Payment 1 from 31 March 2020 (previously announced on 12 March): Available to people who are eligible payment recipients and concession card holders at any time between 12 March 2020 to 13 April 2020;
  • Payment 2 from 13 July 2020: Available to people who are eligible payment recipients and concession card holders on 10 July 2020.

The payments will be made automatically to those that meet the criteria.

Bankruptcy safety net

A temporary 6 month increase to the threshold for the minimum amount of debt required for a creditor to initiate bankruptcy proceedings against a debtor will increase from $5,000 to $20,000. In addition, the time a debtor has to respond to a bankruptcy notice will be temporarily increased from 21 days to six months.

Where someone declares their intention to enter voluntary bankruptcy, the period of protection from unsecured creditors will be extended from 21 days to 6 months.

More information:

We trust these summaries will be of assistance to our clients. There will be more measures released by the Government and we will keep you informed as these come to hand.

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