We have pleasure in enclosing a summary of the significant announcements from the Federal Government’s 2021/22 Budget.
While there were no particular surprises in this year’s budget, just about everyone is a winner. Many of the announcements were released prior to the budget but it continues on with the COVID-19 measures which includes the extension of tax cuts, significant measure to enhance women’s economic security and a $15 billion infrastructure spend.
There were however some interesting superannuation refinements which present quite a number of planning opportunities – see below
Mr Josh Frydenberg, the Federal Treasurer, has handed down his third Budget. Mr Frydenberg said the tax measures are a way to ensure the momentum of Australia’s economic recovery from the onslaught of COVID-19.
Here are the tax, superannuation, and social security highlights:
Modernising the individual tax residency rules
The Government 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. The measure will have effect from the first income year after the date of Royal Assent of the enabling legislation. 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, based on recommendations made by the Board of Taxation in its 2019 report to Government Reforming individual tax residency rules — a model for modernisation, will be easier to understand and apply in practice, deliver greater certainty, and lower compliance costs for globally mobile individuals and their employers
Source: Budget Paper No 2, p 21.
Personal Income Tax — 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 1 July 2020 to take account of recent movements in the CPI so that low-income taxpayers generally continue to be exempt from paying the Medicare levy. The threshold for singles will be increased from $22,801 to $23,226. The family threshold will be increased from $38,474 to $39,167. For single seniors and pensioners, the threshold 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 instead of the previous amount of $3,533.
Source: Budget Paper No 2, p 24.
Retaining the low and middle income tax offset for the 2021-22 income year Receipts
The Government will retain the low and middle income tax offset (LMITO) for the 2021-22 income year, providing further targeted tax relief for low- and middle-income earners. The LMITO provides a reduction in tax of up to $1,080. Taxpayers with a taxable income of $37,000 or less will benefit by up to $255 in reduced tax. Between taxable incomes of $37,000 and $48,000, the value of the offset increases at a rate of 7.5 cents per dollar to the maximum offset of $1,080. Taxpayers with taxable incomes between $48,000 and $90,000 are eligible for the maximum offset of $1,080. For taxable incomes of $90,000 to $126,000, the offset phases out at a rate of 3 cents per dollar. Consistent with current arrangements, the LMITO will be received on assessment after individuals lodge their tax returns for the 2021-22 income year. Retaining the LMITO for 2021-22 provides low- and middle-income earners with a further benefit and provides additional support to help secure the economic recovery.
Source: Budget Paper No 2, p 27.
Reducing compliance costs for individuals claiming self-education expense deductions
The Government will remove the exclusion of the first $250 of deductions for prescribed courses of education. The measure will have effect from the first income year after the date of Royal Assent of the enabling legislation. The first $250 of a prescribed course of education expense is currently not deductible. Removing the $250 exclusion for prescribed courses of education will reduce compliance costs for individuals claiming self-education expense deductions.
Source: Budget Paper No 2, p 26.
2021 Storms and Floods — tax treatment of qualifying 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.
Source: Budget Paper No 2, p 12.
Digital Economy Strategy — self-assessing the effective life of intangible depreciating assets
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 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. This measure will allow taxpayers to adopt a more appropriate useful life and encourage investment and hiring in research and development.
Source: Budget Paper No 2, p 14.
Employee Share Schemes — removing cessation of employment as a taxing point and reducing red tape
The Government will remove the cessation of employment taxing point for the tax- deferred Employee Share Schemes (ESS) that are available for all companies. This change will apply to ESS interests issued from the first income year after the date of Royal Assent of the enabling legislation. Employers use ESS to attract, retain and motivate staff by issuing interests such as shares, rights (including options) or other financial products to their employees, usually at a discount. Currently, under a tax deferred ESS, where certain criteria are met employees may defer tax until a later tax year (the deferred taxing point). The deferred taxing point is the earliest of:
- cessation of employment
- 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 restriction on disposal
- the maximum period of deferral of 15 years.
This change will result in tax being deferred until the earliest of the remaining taxing points. The Government will also reduce red tape for ESS by:
- removing regulatory requirements for ESS, where employers do not charge or lend to the employees to whom they offer ESS
- where employers do charge or lend, streamlining requirements for unlisted companies making ESS offers that are valued at up to $30,000 per employee per year.
This measure will help Australian companies to engage and retain the talent they need to compete on a global stage, which is consistent with recommendations from the Global Business and Talent Attraction Taskforce.
Source: Budget Paper No 2, p 16.
First Home Super Saver Scheme — increasing the maximum releasable amount to $50,000
The Government will increase the maximum releasable amount of voluntary concessional and non-concessional contributions under the First Home Super Saver Scheme (FHSSS) 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 in maximum releasable amount will apply from the start of the first financial year after Royal Assent of the enabling legislation, which the Government expects will have occurred by 1 July 2022. This measure will ensure the FHSSS continues to help first home buyers in raising a deposit more quickly.
Source: Budget Paper No 2, p 17.
First Home Super Saver Scheme — technical changes
The Government will make four technical changes to the legislation underpinning the First Home Super Saver Scheme (FHSSS) to improve its operation as well as the experience of first home buyers using the scheme. These four changes assist FHSSS applicants who make errors on their FHSSS release applications by:
- increasing the discretion of the Commissioner of Taxation to amend and revoke FHSSS applications
- allowing individuals to withdraw or amend their applications prior to them receiving a FHSSS amount, and allow those who withdraw to re-apply for FHSSS releases in the future
- allowing the Commissioner of Taxation to return any released FHSSS money to superannuation funds, provided that the money has not yet been released to the individual
- clarifying that the money returned by the Commissioner of Taxation to superannuation funds is treated as funds’ non-assessable non-exempt income and does not count towards the individual’s contribution caps.
Source: Budget Paper No 2, p 17.
Flexible Super — reducing the eligibility age for downsizer contributions
The Government will reduce the eligibility age to make downsizer contributions into superannuation from 65 to 60 years of age. The measure will have effect from the start of the first financial year after Royal Assent of the enabling legislation, which the Government expects to have occurred prior to 1 July 2022. The downsizer contribution allows people to make a one-off, post-tax contribution to their superannuation of up to $300,000 per person from the proceeds of selling their home. Both members of a couple can contribute in respect of the same home, and contributions do not count towards non-concessional contribution caps. This measure will allow more older Australians to consider downsizing to a home that better suits their needs, thereby freeing up the stock of larger homes for younger families.
Source: Budget Paper No 2, p 18.
Flexible Super — repealing the work test for voluntary superannuation contributions
The Government will allow individuals aged 67 to 74 years (inclusive) to make or receive non-concessional (including under the bring-forward rule) or salary sacrifice superannuation contributions without meeting the work test, subject to existing contribution caps. Individuals aged 67 to 74 years will still have to meet the work test to make personal deductible contributions. The measure will have effect from the start of the first financial 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 can only make voluntary contributions (both concessional and non-concessional) to their superannuation, or receive contributions from their spouse, if they are working at least 40 hours over a 30 day period in the relevant financial year. 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.
Source: Budget Paper No 2, p 19.
Removing the $450 per month threshold for superannuation guarantee eligibility
The Government will remove the current $450 per month minimum income threshold, under which employees do not have to be paid the superannuation guarantee by their employer. The measure will have effect from the start of the first financial year after Royal Assent of the enabling legislation, which the Government expects to have occurred prior to 1 July 2022. This measure will improve equity in the superannuation system by expanding the superannuation guarantee coverage for cohorts with lower incomes. The Retirement Income Review estimated that around 300,000 individuals would receive additional superannuation guarantee payments each month, 63 per cent of whom are women,
Source: Budget Paper No 2, p 26.
Self-managed Superannuation Funds — legacy retirement product conversions
The Government will allow individuals to exit a specified range of legacy retirement products, together with any associated reserves, for a two-year period. The measure will have effect from the first financial year after the date of Royal Assent of the enabling legislation. The measure will include market-linked, life-expectancy and lifetime products, but not flexi-pension products or a lifetime product in a large APRA-regulated or public sector defined benefit scheme.
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, and allow individuals to potentially shift to more contemporary retirement products. 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. Self-managed Superannuation Funds — relaxing residency requirements
Source: Budget Paper No 2, p 27.
Self-managed Superannuation Funds — relaxing residency requirements
The Government will relax residency requirements for self-managed superannuation funds (SMSFs) and small APRA-regulated funds (SAFs) by extending the central control and management test safe harbour from two to five years for SMSFs, and removing the active member test for both fund types. The measure will have effect from the start of the first financial 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 and SAF members to continue to contribute to their superannuation fund whilst temporarily overseas, ensuring parity with members of large APRA-regulated funds. This will provide SMSF and SAF members the flexibility to keep and continue to contribute to their preferred fund while undertaking overseas work and education opportunities
Source: Budget Paper No 2, p 28.
SMALL BUSINESS MEASURES
Increased powers for the Administrative Appeals Tribunal in relation to small business taxation decisions
The Government will extend the power of the Administrative Appeals Tribunal (AAT) to pause or modify ATO debt recovery action in relation to disputed debts that are being reviewed by the Small Business Taxation Division (SBTD) of the AAT. This measure will take effect from the date of Royal Assent of the enabling legislation
Small business entities that file an application in relation to tax matters before the SBTD of the AAT on or after the commencement date will be able to apply for a pause or modification of the Commissioner’s debt recovery actions, until the underlying dispute has been decided by the AAT. When considering applications, the AAT will be required to consider the potential effect on the integrity of the tax system and ensure that applications are in relation to genuine disputes. This measure will provide an avenue for small businesses to ensure they are not required to start paying a disputed debt until the matter has been determined by the AAT.
Source: Budget Paper No 2, p 19.
Temporary full expensing extension
The Government will extend the 2020-21 Budget measure titled JobMaker Plan — temporary full expensing to support investment and jobs for 12 months until 30 June 2023 to further support business investment and the creation of more jobs. Temporary full expensing will be extended 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. The 12-month extension will provide eligible businesses with additional time to access the incentive. This will encourage businesses to make further investments, including in projects requiring longer planning times, and continue to support economic recovery in 2022-23. 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. From 1 July 2023, normal depreciation arrangements will apply. This measure is estimated to decrease receipts by $17.9 billion over the forward estimates period and $3.4 billion over the medium term. The impact on receipts is reduced over the medium term as the measure brings forward deductions that would have been made in future years.
Source: Budget Paper No 2, p 29.
Temporary loss carry-back extension
The Government will further support Australia’s economic recovery and business investment by extending the 2020-21 Budget measure titled JobMaker Plan — temporary loss carry-back to support cash flow. The extension will allow eligible companies to carry back (utilise) tax losses from the 2022-23 income year to offset previously taxed profits as far back as the 2018-19 income year when they lodge their 2022-23 tax return. Loss carry-back encourages businesses to invest, utilising the 2021-22 Budget measure titled Temporary full expensing extension by providing eligible companies earlier access to the tax value of losses generated by full expensing deductions. Companies with aggregated turnover of less than $5 billion are eligible for temporary loss carry-back. The tax refund is limited by requiring that the amount carried back is not more than the earlier taxed profits and that the carry-back 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.
Source: Budget Paper No 2, p 30.