Federal Budget 2021/2022
The Federal Treasurer, the Hon. Josh Frydenberg MP, delivered the 2021/2022 Federal Budget at 7:30pm (AEDT) on 11 May 2021.
A summary of the key taxation measures are as follows:
1. Personal Income Tax Rate Changes
1.1 Retaining the Low and Middle Income Tax Offset (‘LMITO’) for the 2022 income year
The Government is retaining the LMITO for one more year so that it will still be available for the 2022 income year. Under current legislation, the LMITO was due to be removed from 1 July 2021.
The LMITO provides an offset of between $255 and $1,080 for taxpayers with income up to $126,000. The maximum offset of $1,080 is available for individuals with income between $48,000 and $90,000.
1.2 Increasing the Medicare levy low-income thresholds
The Government will increase the Medicare levy low-income thresholds for singles, families, and seniors and pensioners from the 2020-21 income year as follows:
The threshold for singles will be increased from $22,801to $23,226.
The family threshold will be increased from $38,474 to $39,167.
The threshold for single seniors and pensioners will be increased from $36,056 to $36,705.
The family threshold for seniors and pensioners will be increased from $50,191 to $51,094.
For each dependent child or student, the family income thresholds increase by a further $3,597, up from the previous amount of $3,533.
1.3 Modernising the individual tax residency rules
The Government has announced that it will replace the individual tax residency rules with a new, modernised framework. The primary test will be a simple ‘bright line’ test –a person who is physically present in Australia for 183 days or more in any income year will be an Australian tax resident.
Individuals who do not meet the primary test will be subject to secondary tests that depend on a combination of physical presence and measurable, objective criteria.
Australia’s current tax residency rules are difficult to apply in practice, creating uncertainty and resulting in high compliance costs for individuals and their employers.
The new framework is based on recommendations made by the Board of Taxation in its 2019 report to Government, ‘Reforming individual tax residency rules –a model for modernisation’. According to the Government, this new framework will be easier to understand and apply in practice, deliver greater certainty, and lower compliance costs for globally mobile individuals and their employers.
This measure will have effect from the first income year after the date of Royal Assent of the enabling legislation.
1.4 Reducing compliance costs for individuals claiming self-education expense deductions
The Government is removing the exclusion for the first $250 of self-education expenses for prescribed courses.
Currently, the first $250 of a prescribed course of education expense is not tax deductible. Removing this $250 exclusion is expected to reduce compliance costs for individuals claiming self-education expense deductions.
This measure will have effect from the first income year after the date of Royal Assent of the enabling legislation.
1.5 Employee Share Schemes – removing ‘cessation of employment’ as a taxing point and reducing red tape
The Government is amending the Employee Share Scheme (‘ESS’) rules to removing cessation of employment as a deferred taxing point. This removes a cash flow difficulty that occurred, where the employee was subject to tax but may not have been able to sell the shares to fund it.
Where the taxing point of the ESS is deferred, the tax will now be deferred until the earliest of the remaining taxing points, being:
In the case of shares, when there is no risk of forfeiture and no restrictions on disposal.
In the case of options, when the employee exercises the option and there is no risk of forfeiting the resulting share and no restrictions on disposal.
A maximum period of 15 years.
This change applies to ESS interests issued on or after 1 July following Royal Assent of the legislation.
There will also be changes to disclosure requirements of ESSs, aimed at reducing red tape.
This measure aims to help Australian companies to engage and retain the talent they need to compete on a global stage, consistent with recommendations from the Global Business and Talent Attraction.
2. Changes affecting business taxpayers
2.1 Extension of Temporary Full Expensing
In the prior year Federal Budget, the Government announced amendments to allow businesses with an aggregated turnover of less than $5 billion to access a new temporary full expensing of eligible depreciating assets until 30 June 2022.Temporary full expensing became law when Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Bill 2020 received Royal Assent on14 October 2020.
In the 2021/22 Federal Budget, the Government has announced that temporary full expensing will be extended by 12 months to allow eligible businesses with aggregated annual turnover or total income of less than $5 billion to deduct the full cost of eligible depreciable assets of any value, acquired from 7:30pm AEDT on 6 October 2020 and first used or installed ready for use by 30 June 2023. All other elements of temporary full expensing will remain unchanged, including the alternative eligibility test based on total income, which will continue to be available to businesses.
2.2 Temporary loss carry-back extension
In the prior year (2020/21) Federal Budget, the Government announced amendments to introduce a temporary loss carry-back measure. Broadly, this initial measure allowed ‘corporate tax entities’ with an aggregated turnover of less than$5 billion to carry back tax losses made in the 2020, 2021 and/or 2022 income years to claim a refund of tax paid (by way of a tax offset) in relation to the 2019, 2020 and/or 2021income years. The rules relating to the temporary loss carry-back regime have been enacted and are contained in Division 160 of the ITAA 1997.
In the 2021/22 Federal Budget, the Government has announced that the loss carry-back measure will be extended to allow eligible companies (i.e., with aggregated turnover of less than $5 billion) to also carry back (utilise) tax losses from the 2023 income year to offset previously taxed profits as far back as the 2019 income year when they lodge their tax return for the 2023 income year.
Consistent with the current law, the tax refund available under this measure is limited by requiring that the amount carried back is not more than the earlier taxed profits and does not generate a franking account deficit. Companies that do not elect to carry back losses under this measure can still carry losses forward as normal.
2.3 Digital economy strategy (including self-assessing the effective life of intangible depreciating assets)
The Government will provide $1.2 billion over six years from 2022 for the Digital Economy Strategy, to support Australia to be a leading digital economy and society by 2030. From an income tax, investment incentive perspective, the Digital Economy Strategy includes the following:
(a) The Government will allow taxpayers to self-assess the tax effective lives of eligible intangible depreciating assets, such as patents, registered designs, copyrights and in-house software. This measure will apply to assets acquired from 1 July 2023, after the temporary full expensing regime has concluded.
The tax effective lives of such assets are currently set by statute. Allowing taxpayers to self-assess the tax effective life of an asset will allow for a better alignment of tax outcomes with the underlying economic benefits provided by the asset. It will also align the tax treatment of these assets with that of most tangible assets.
Taxpayers will continue to have the option of applying the existing statutory effective life to depreciate these assets.
(b) The Government will provide $18.8 million over four years from 2022 for a Digital Games Tax Offset to provide a 30% refundable tax offset for qualifying Australian digital games expenditure ongoing from 1 July 2022, with the criteria and definition of qualifying expenditure to be determined through industry consultation.
(c) The Government will provide $200.1 million over two years from the 2022 income year to develop and transition government services to a new, enhanced myGov platform, providing a central place for Australians to find information and services online.
2.4 Patent Box
From 1 July 2022, the patent box will tax income derived from Australian medical and biotech patents at a 17% effective concessional corporate tax rate. Only granted patents, which are applied for after the Budget announcement, will be eligible. This measure is aimed at encouraging businesses to undertake their R&D in Australia and to keep patents here.
The Government will follow the OECD’s guidelines on patent boxes to ensure they meet internationally accepted standards. The Government will also consult with industry on the design of the patent box and to determine whether a patent box is also an effective way of supporting the clean energy sector.
2.5 Debt recovery for small business
The Government has announced that it will allow small business entities (including individuals carrying on a business) with an aggregated turnover of less than $10 million per year to apply to the Small Business Taxation Division of the Administrative Appeals Tribunal (the ‘Tribunal’) to pause or modify ATO debt recovery actions, such as garnishee notices and the recovery of general interest charge or related penalties, where the debt is being disputed in the Tribunal.
Currently, small businesses are only able to pause or modify ATO debt recovery actions through the court system, which can be costly and time consuming. It is expected that applying to the Tribunal instead of the courts will save small businesses at least several thousands of dollars in court and legal fees and as much as 60 days of waiting for a decision.
These new powers for the Tribunal will be available in respect of proceedings commenced on or after the date of Royal Assent of the enabling legislation.
2.6 Tax treatment of qualifying storm and flood grants
The Government will provide an income tax exemption for qualifying grants made to primary producers and small businesses affected by the storms and floods in Australia.
Qualifying grants are Category D grants provided under the Disaster Recovery Funding Arrangements 2018, where those grants relate to the storms and floods in Australia that occurred due to rainfall events between 19 February 2021 and 31 March 2021. These include small business recovery grants of up to $50,000 and primary producer recovery grants of up to $75,000. The grants will be made non-assessable non-exempt income for tax purposes.
3. Superannuation related changes
3.1 Removing the work test for voluntary contributions
The Government has announced that it will allow individuals aged 67 to 74 years (inclusive) to make or receive non-concessional contributions (including under the bring-forward rule) and salary sacrifice contributions without meeting the work test, subject to existing contribution caps.
Individuals aged 67 to 74 years (inclusive) will still have to meet the work test to make personal deductible contributions.
The measure will have effect from the start of the first income year after Royal Assent of the enabling legislation, which the Government expects to have occurred prior to 1 July 2022.
Currently, individuals aged 67 to 74 years (inclusive) can only make voluntary contributions (both concessional and non-concessional) to their superannuation fund, or receive contributions from their spouse, if they satisfy the work test (subject to a limited work test exemption). Generally, to satisfy the work test, an individual must be working for at least 40 hours over a period of not more than 30 consecutive days in the income year the relevant contribution is made.
Removing the requirement to meet the work test when making non-concessional or salary sacrifice contributions will simplify the rules governing superannuation contributions and will increase flexibility for older Australians to save for their retirement through superannuation.
3.2 Reducing the age limit for downsizer contributions
The Government will reduce the age limit from which downsizer contributions can be made by eligible individuals, from 65 to 60 years of age.
The measure will have effect from the start of the first income year after Royal Assent of the enabling legislation, which the Government expects to have occurred prior to 1 July 2022.
The downsizer contribution allows eligible individuals to make a one-off, after-tax contribution to their superannuation fund, of up to $300,000 per person, following the disposal of an eligible dwelling, where certain conditions are satisfied. Under the current requirements, an individual must be at least 65 years of age at the time of making the relevant contribution, for the contribution to qualify as a downsizer contribution.
3.3 Removing the $450 per month threshold for Superannuation Guarantee (‘SG’) eligibility
The Government will remove the current $450 per month minimum income threshold, under which employees do not have to be paid SG contributions by their employer.
The measure will have effect from the start of the first income year after Royal Assent of the enabling legislation, which the Government expects to have occurred prior to 1 July 2022.
3.4 Relaxing the residency requirements for Self-managed Superannuation Funds (‘SMSFs’)
The Government will relax residency requirements for SMSFs and small APRA-regulated funds by:
extending the central control and management test safe harbour from two years to five years for SMSFs; and
removing the active member test for both types of funds.
The measure will have effect from the start of the first income year after Royal Assent of the enabling legislation, which the Government expects to have occurred prior to 1 July 2022.
This measure will allow SMSF members and small APRA fund members to continue to contribute to their superannuation fund whilst temporarily overseas, ensuring parity with members of large APRA regulated funds.
3.5 Exiting legacy retirement products
The Government has announced that it will allow individuals the temporary option to exit and convert from a specified range of legacy retirement products (together with any associated reserves) into more flexible and contemporary retirement products, for a two-year period.
The products covered by this measure include market-linked, life-expectancy and lifetime products that were first commenced before 20 September 2007 from any provider (including an SMSF), but not flexi-pension products or a lifetime product in a large APRA-regulated or public sector defined benefit scheme.
The measure will have effect from the first income year after the date of Royal Assent of the enabling legislation.
Currently, these products can only be converted into another like product and limits apply to the allocation of any associated reserves without counting towards an individual’s contribution caps.
This measure will permit full access to all of the product’s underlying capital, including any reserves, as part of transitioning into a more flexible and contemporary retirement product.
Social security and taxation treatment will not be grandfathered for any new products commenced with commuted funds, and the commuted reserves will be taxed as an assessable contribution.
3.6 Increase in superannuation withdrawal under the First Home Super Saver (‘FHSS’) Scheme
The maximum releasable amount of voluntary concessional and non-concessional contributions under the FHSS Scheme will be increased from $30,000 to $50,000. Voluntary contributions made from 1 July 2017 up to the existing limit of $15,000 per year will count towards the total amount able to be released.
The increase will apply from the start of the first financial year after Royal Assent of the legislation, which is expected to be 1 July 2022.
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