Thursday 8 October 2020

How the budget provides business stimulus at no cost (over time)

With Covid-19 having dumped Australia into its first recession in decades, this week's Federal budget went to great pains to provide massive amounts of stimulus to business in order to protect as many jobs as possible, and to provide the means for businesses to survive and grow the economy (as soon as a Covid-19 vaccine becomes widely available and things such as immigration, tourism and foreign students can start to recover). Two of the key strategies in the budget to support and stimulate business were the carry backwards of business losses (i.e. rather than having to record business losses this year and deduct them against future profits (if the company services), businesses will be able to offset losses this year against previous year's business income, and get a tax refund of previous taxes paid), and to be able to immediately 'write off' business expenses (rather than apply the normal depreciation rates, which make the expense a deduction over the working life of the item). The SMH has a good article providing some more details about these budget measures.

What is especially smart about providing business with immediate assistance via these budget measures is that although they provide an immediate cash flow boost to business in this financial year (when its needed most), they will actually not cost the government much over time. The reason being that unlike government expenditure on stimulus measures such as business grants, increases JobSeeker payments, or building vast tracts of public housing, these measures are being paid for from money that the government would have had to pay back to business anyhow - just in future tax years under normal circumstances.

So, rather than business losses this FY reducing tax takes in future years, the government is refunding immediately some tax collected in previous years. But as those losses will have been used up this year, future business tax revenue will increase by this same amount. They are simply moving tax revenue and refunds from one financial year (or years) into another. No net tax cost to the government - just adjusting its timing.

And rather than business expenses this year reducing business taxes over several years, the expense will reduce tax liability this financial year in one hit. But the net deduction over the life of the item will remain unchanged.

Overall, a very clever way to provide extra immediate cash flow benefits to businesses this financial year without building it costing the government anything over the long term! Basically businesses will end up with more cash flow to stay in operation and employing people this year, but will pay it back in future years.

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