Key tax and superannuation measures
Federal Treasurer Mr Josh Frydenberg handed down his third Federal Budget on Tuesday, 11 May 2021. During his budget speech, the Treasurer said the Australian economy has rebounded at its fastest pace on record over the latter half of 2020 whilst at the same time having to deal with an ever-continuing COVID landscape.
This year’s Federal Budget measures are guided by values; reward for effort, the power of aspiration and enterprise, upholding personal responsibility and always providing a helping hand to those who need it.
The Budget comprises a tapestry of measures, intricately woven together to enable Australia’s economic recovery to gain further momentum.
The focus on this year’s Budget is addressing core policy topics that will further lay a foundation for continued overall economic stability, additional job creation initiatives and a pledge to sustain key essential services such as childcare, health and aged care, education/training, and infrastructure.
Summary of Support measures:
- Personal Tax
- Business Taxation
- Tax Compliance & Integrity
- Superannuation
Personal Taxation
Personal tax rates – no changes were made to personal tax rates, the Government having already brought forward the Stage 2 tax rates to 1 July 2020. The Stage 3 personal income tax cuts remain unchanged and will commence in 2024-25 as already legislated.
LMITO retained for 2021-22 – the Government will retain the low- and middle-income tax offset for the 2021-22 income year. The LMITO provides a reduction in tax of up to $1,080.
Extension of LMITO
The extension of LMITO for another income year will deliver tax cuts for lower- and middle-income families. This is a clear indication that the Government wants to fill taxpayers’ hands with money so that they will continue to spend. Also, it may have been politically unpalatable for the Government to be facing the next election with there being a view that the Government had “increased” taxes for individuals. Once benefits such as LMITO are put in place, it’s not easy to take them away, especially with an election on the horizon.
Increasing the Medicare levy low-income thresholds
The Government will increase the Medicare levy low-income thresholds for singles, families and seniors and pensioners for the 2021 income year, as follows:
- 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
- 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.
Childcare subsidies to change 1 July 2022
The Budget confirmed that the Government will make an additional $1.7b investment in childcare. The changes will commence on 1 July 2022, i.e. not in the next financial year. These measures were previously announced on 2 May 2021.
Commencing on 1 July 2022, the Government will:
- increase the childcare subsidies available to families with more than one child aged 5 and under in childcare by adding an additional 30 percentage point subsidy for every second and third child (stated to benefit around 250,000 families).
- remove the $10,560 cap on the Child Care Subsidy (stated to benefit around 18,000 families).
The Treasurer states that, under the Government’s changes, a single parent on $65,500 with 2 children in 5 days of long day care who chooses to work a fifth day will be $71 a week better off compared to the current system.
He further states that, under these changes, a family earning $110,000 a year will have the subsidy for their second child increase from 72% to 95% and would be $95 per week better off for 4 days of care – date of effect 1 July 2022.
More Clarity on how residency of individuals is determined
The Government has adopted the recommendations of the Board of Taxation to fundamentally change the way an individual tax resident is to be determined. The key part of the change is the “bright line” test of whether an individual has been in Australia for more than 183 days. If yes, the person is a tax resident of Australia.
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.
Self-education
It is good to see the removal of the curious $250 reduction in the amount that can be deducted in relation to prescribed education courses.
There is a review being conducted of the ability to claim a tax deduction for self-education but there was no information on that in the budget papers.
Changes to the First Home Super Saver (‘FHSS’) scheme
The Government has announced that it will make the following changes to the FHSS 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 FHSS scheme from $30,000 to $50,000, to assist first home buyers in raising a deposit more quickly.
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. This change will apply from the start of the first income year after Royal Assent of the enabling legislation, which the Government expects will have occurred by 1 July 2022.
Under the current FHSS scheme, an eligible individual can apply to have a maximum of $15,000 of their voluntary contributions from any one income year included in their eligible contributions to be released under the FHSS scheme, up to a total of $30,000 contributions across all years, together with an amount of earnings that relate to those contributions.
Changes to improve the operation of the FHSS scheme
The Government will make four technical changes to the legislation underpinning the FHSS scheme to improve its operation as well as the experience of first home buyers using the scheme.
These four changes will apply retrospectively from 1 July 2018, and will assist FHSS scheme applicants who make errors on their FHSS scheme release applications by:
- increasing the discretion of the Commissioner of Taxation to amend and revoke FHSS scheme applications.
- allowing individuals to withdraw or amend their applications before receiving a FHSS scheme amount and allow those who withdraw to re-apply for FHSS scheme releases in the future.
- allowing the Commissioner of Taxation to return any released FHSS scheme money to superannuation funds, provided that the money has not yet been released to the individual; and
- clarifying that the money returned by the Commissioner of Taxation to superannuation funds is treated as a fund’s non-assessable non-exempt income and does not count towards the individual’s contribution caps.
Pension Loan Scheme
The Pension Loan Scheme will be expanded and improved. This scheme allows for pensioners who have equity in Australian Real Estate to receive payments (i.e. a loan) in addition to the standard fortnightly pension.
The expansion will allow access to up to two lump sums advances in any 12-month period to a maximum of 50% of the annual Age Pension amount. In addition, to ensure pensioners do not have negative equity in their property the Government will introduce a ‘no negative equity’ guarantee.
What does this mean for you?
The measure will be of interest to those eligible for the Age Pension who are seeking to supplement their existing income to meet living expenses.
Focus on Women
After criticism that last year’s Budget did not do enough to support women’s economic engagement, this Budget works to improve gender equity. The Women’s Budget Statement outlines total spending of $3.4 billion on women’s safety and economic security.
Funding initiatives include:
- Funding for domestic violence prevention more than doubled to at least $680 million.
- Funding for women’s health, including cervical and breast cancer and endometriosis and reproductive health, boosted by $354 million over the next four years.
Business Taxation
Extending the full expensing of assets for another year
In the prior year (2020/21) 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 on 14 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.
Extending the loss carry-back rules
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.
It is to be remembered that the ability to carry-back losses is only available to companies. This means that many small businesses who often operate in non-corporate structures cannot benefit from this concession.
Employee share schemes (ESS)
Over many years, there have been various amendments to the ESS rules to try and get them more conducive to retaining and incentivising employees.
The Government will remove the ‘cessation of employment’ taxing point for 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.
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; and
- the maximum period of deferral of 15 years.
This change will remove the ‘cessation of employment’ taxing point (i.e., point (a) above) and result in tax being deferred until the earliest of the remaining taxing points (i.e., points (b) to (d) above).
In addition to this change, the Government will also reduce red tape for ESS:
- where employers do not charge or lend to the employees to whom they offer ESS – by removing regulatory requirements for ESS; and
- where employers do charge or lend – by streamlining requirements for unlisted companies
- making ESS offers that are valued at up to $30,000 per employee per year
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
Intangible assets depreciation: option to self-assess effective life
The Budget confirmed that the income tax law will be amended to allow taxpayers to self-assess the effective life of certain intangible assets (such as intellectual property and in-house software), rather than being required to use the effective life currently prescribed in the table in s 40-95(7) of the ITAA 1997.
This amendment, previously announced on 6 May 2021 as part of the Government’s Digital Economy Strategy, will apply to patents, registered designs, copyrights, and in-house software for tax purposes. Taxpayers will be able to bring deductions forward if they self-assess the assets as having a shorter effective life to the statutory life.
Date of effect: the self-assessment of effective lives will apply to eligible assets acquired following the completion of temporary full expensing (introduced in the 2020-21 Budget)), i.e. to assets acquired from 1 July 2023.
Extended consultation on corporate tax residency rules
In the 2020-21 Budget, the Government announced that it would amend the law to provide that a company that is incorporated offshore will be treated as an Australian tax resident if it has a “significant economic connection to Australia”.
This test will be satisfied where both the company’s core commercial activities are undertaken in Australia and its central management and control is in Australia. As a result the treatment of foreign incorporated companies will reflect the position before the High Court’s decision in Bywater.
The Government has now announced that it will consult on broadening this amendment to trusts and corporate limited partnerships. The Government will seek industry’s views as part of the consultation on the original corporate residency amendment.
Date of effect: the amendments, as they affect companies incorporated offshore, will have effect from the first income year after the date the enabling legislation receives assent, but taxpayers will have the option of applying the new law from 15 March 2017 (the date on which the ATO withdrew Ruling TR 2004/15). It not known whether the same arrangements will apply for the start date for trusts and corporate limited partnerships should they be brought under the new rules.
Venture capital tax concessions
Govt to undertake review as part of its Digital Economy Strategy, the Government will undertake an assessment review of the venture capital tax concession programs to ensure they are achieving their intended objectives. Public consultation will be undertaken in 2021. The programs in scope for the review include:
- Venture Capital Limited Partnerships (VCLPs)
- Early-Stage Venture Capital Limited Partnerships (ESVCLPs)
- Australian Venture Capital Fund of Funds (AFOFs); and
- Investments made directly by foreign residents registered under Pt 3 of the Venture Capital Act 2002
Tax exemption for grants made to businesses affected by storm and floods
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
Tax Compliance & Integrity
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.
ATO “early engagement service” for first time foreign investors
A Budget information sheet states that the ATO will introduce a new early engagement service to encourage and support new business investments into Australia. This is not contained within the formal Budget papers themselves.
Date of effect: the ATO will consult with business and other stakeholders to develop the early engagement service during May and June 2021. The service will be available for eligible investors from 1 July 2021.
Superannuation
Super Guarantee Contributions
It seems that the proposed SG contributions will occur as planned. This means that the SG rate increases to 10% from 1 July 2021 and increases by 0.5% per year thereafter until it reaches 12%. This will have saved the Government from an advertising campaign led by the industry super funds and unions leading up to an election.
Abolition of the $450 super threshold
This has been promoted by ASFA and, perhaps, others. It will mean that people on low incomes or doing small amount of employee work will still receive some superannuation contributions for their work. It is a change that is particularly favourable for women.
The change seems to imply that super contributions must be paid for every $1 of employment income. This will bring a number of people into the superannuation net and, I suspect, many employers will find the extra administrative burden tiresome. I wonder whether some threshold level will be set – say $50 so that employers are not engaged in very small-scale superannuation contributions with all of the administrative work that goes with that.
Benefits for older people
The reduction in the age in relation to downsizer contributions and the abolition of the work test in relation to people aged 67 to 74 is a good change. Many people feel they are under-superannuated as they arrive in their 60s and these changes will facilitate these people getting more funds into retirement.
SMSF residency changes
These changes extend the safe harbour period from 2 to 5 years and abolish the active member requirements. Both of these changes are to be commended, particularly in light of the impact of COVID-19. The downside of failing the central management and control test is too harsh for funds that always were, essentially, managed and controlled in Australia, even though members may be overseas for a prolonged period.
Superannuation contributions work test to be repealed from 1 July 2022
The superannuation contributions work test exemption will be repealed for voluntary non-concessional, and salary sacrificed contributions for those aged 67 to 74 from 1 July 2022.
As a result, individuals under age 75 will be allowed to make or receive non-concessional (including under the bring-forward rule) or salary sacrifice contributions from 1 July 2022 without meeting the work test, subject to existing contribution caps. However, individuals aged 67 to 74 years will still have to meet the work test to make personal deductible contributions.
Currently, individuals aged 67 to 74 years (i.e. under 75) can only make voluntary contributions (both concessional and non-concessional), or receive contributions from their spouse, if they work at least 40 hours in any 30-day period in the financial year in which the contributions are made (the “work test”): reg 7.04 of the SIS Regulations. Note that the work test age threshold was increased from 65 to 67 from 1 July 2020 as part of the 2019-20 Budget.
Date of effect: 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.
Non-concessional contributions and bring forward
The Government confirmed that individuals under age 75 will be able to access the non-concessional bring forward arrangement (i.e. 3 times the annual non-concessional cap over 3 years), subject to meeting the relevant eligibility criteria. However, note that the Government is still yet to legislate its 2019-20 Budget proposal to extend the bring forward age limit so that anyone under age 67 can access the bring-forward rule from 1 July 2020. The proposed legislation for this 2019-20 Budget measure – Treasury Laws Amendment (More Flexible Superannuation) Bill 2020 – is yet to be passed by the Senate.
The Government also noted that the existing restriction on non-concessional contributions will continue to apply for people with total superannuation balances above $1.6m ($1.7m from 2021-22).
Aged Care and Seniors
Government unveils extra home care packages in $18 billion aged care royal commission response. These include:
- 80,000 additional home care packages will be released
- Every aged care resident to receive 3 hours and 20 minutes of care a day
- An additional 33,800 training places will be created over two years for personal care workers
Areas not covered in the Federal Budget
There are some tax issues that we were hoping to see in the Budget, but on which there was not a word:
- It doesn’t appear that the submission made to Treasury to fix the omission of small businesses from the opting out of full expensing of assets has been listened to. The budget papers state that, apart from the extension of the full expensing of assets until 30 June 2023, there will be no other change to the legislation.
- There was no mention of the proposed changes to Division 7A. One could assume that these proposed changes are never going to occur? This is certainly an area to look out for over the coming year.
Please don’t hesitate to get in touch if you have any queries relating to the above information.
