The Federal Budget for 2021/22 was handed down by the Treasurer, Mr Josh Frydenberg, at 7.30 pm (AEST) on 11 May 2021.
The Budget is weighted towards building on the measures announced in the October 2020 budget.
The key tax and superannuation highlights from the Budget are summarised below.
Income tax – Personal
Retaining the low and middle income tax offset for the 2021-22 income year
The low and middle income tax offset (LMITO) will be retained 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.
Reducing compliance costs for individuals claiming self-education expense deductions
The non-deductibility of the first $250 of deductions for prescribed courses of education will be removed. 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.
Increasing the Medicare levy low-income thresholds
The Medicare levy low-income thresholds for singles, families, and seniors and pensioners will be increased 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. For families the 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.
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.
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.
Income tax – Business
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.
Patent Box — tax concession for Australian medical and biotechnology innovations
The Government will introduce a patent box tax regime to further encourage innovation in Australia by taxing corporate income derived from patents at a concessional effective corporate tax rate of 17 per cent, with the concession applying from income years starting on or after 1 July 2022.
The patent box will apply to income derived from Australian medical and biotechnology patents. The Government will also consult on whether a patent box would be an effective way of supporting the clean energy sector.
Australia currently taxes profits generated by patents at the headline corporate rate (30% for large businesses and 25% for small to medium enterprises from 1 July 2021).
The patent box will offer a competitive tax rate for profits generated from Australian owned and developed patents. The requirement for domestic development will encourage additional investment and hiring in research and development activity and encourage companies to develop and apply their innovations in Australia. The Government will consult with industry before settling the detailed design of the patent box.
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 will 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.
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 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.
Corporate collective investment vehicle revised start date
The Government will finalise the corporate collective investment vehicles (CCIV) component of the measure titled “Ten Year Enterprise Tax Plan”, implementing a new suite of collective investment vehicles announced in the 2016-17 Budget, with a revised commencement date of 1 July 2022. The CCIV is an investment vehicle with a corporate structure that provides flow-through tax treatment. This investment vehicle will enhance the international competitiveness of the Australian managed funds industry by allowing fund managers to offer investment products using vehicles that are more familiar to overseas investors.
COVID-19 Response Package – ensuring New Zealand maintains its primary taxing right over members of its sporting teams and support staff due to COVID-19
The Government will ensure New Zealand maintains its primary taxing right over members of its sporting teams and support staff in respect of Australian income tax and fringe benefits tax liabilities that arise from exceeding the 183-day test in the Convention between Australia and New Zealand as a result of being located in Australia for league competitions because of COVID-19. The measure will apply to the 2020-21 and 2021-22 income and fringe benefits tax years.
Digital Economy Strategy – self-assessing the effective life of intangible depreciating assets
Taxpayers will be allowed 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. This measure will allow taxpayers to adopt a more appropriate useful life and encourage investment and hiring in research and development.
Taxation of Financial Arrangements – hedging and foreign exchange deregulation
The Government will make technical amendments to the Taxation of Financial Arrangements legislation which will include facilitating access to hedging rules on a portfolio hedging basis. The amendments will also reduce compliance costs and correct unintended outcomes, so that taxpayers are not subject to unrealised taxation on foreign exchange gains and losses unless this is elected. These changes will take effect for relevant transactions entered into on or after 1 July 2022.
International Tax – removing the preferential tax treatment for Offshore Banking Units
The Government will remove the concessional 10 per cent effective tax rate that applies to income derived from eligible offshore banking activities. Existing Offshore Banking Units (OBUs) can continue to access the concessional 10 per cent effective tax rate until the end of their 2022-23 income year.
The Government will also close the OBU regime to new entrants, effective from 26 October 2018. In October 2018, the Organisation for Economic Cooperation and Development (OECD) raised concerns about Australia’s OBU regime as part of its practice of reviewing jurisdictions preferential tax regimes. Removing the concessional 10 per cent effective tax rate and closing the regime to new entrants will address the OECD’s concerns. As part of these changes, from 1 January 2024 the Government will remove the current exemption from withholding tax that applies to interest and gold fees paid by OBUs on certain offshore borrowings. Legislation giving effect to this measure was introduced into Parliament on 17 March 2021.
International Tax – updating the list of exchange of information countries
The Government will update the list of jurisdictions that have an effective information sharing agreement with Australia. Residents of listed jurisdictions are eligible to access the reduced Managed Investment Trust (MIT) withholding tax rate of 15 per cent on certain distributions, instead of the default rate of 30 per cent. The updated list will be effective from 1 January 2022.
A jurisdiction can be listed as an information exchange country when it has an effective exchange of information (EOI) arrangement with Australia. This measure will add Armenia, Cabo Verde, Kenya, Mongolia, Montenegro and Oman to the information exchange countries list.
These new jurisdictions have entered into effective information sharing agreements as assessed by the ATO as of 1 January 2021. The measure will help maintain alignment between the EOI relationships that have been established and the concessional MIT withholding rate, to encourage jurisdictions to establish information sharing agreements with Australia. These agreements form an important part of Australia’s commitment to safeguard against offshore tax avoidance and evasion.
Aligning the excise refund scheme for brewers and distillers with the producer rebate for wine producers
The Government will increase the support available to brewers and distillers by aligning the excise refund scheme for alcohol manufacturer with the wine equalisation tax producer rebate.
From 1 July 2021, eligible brewers and distillers will be able to receive a full remission (up from 60 per cent) of any excise they pay, up to a cap of $350,000 (increased from $100,000) per financial year.
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.
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.
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.
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 concessional 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.
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.
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.
Transfer of superannuation to the KiwiSaver Scheme
The Government will provide $11 million over four years from 2021-22 (and $1 million per year ongoing) to the Australian Taxation Office to administer the transfer of unclaimed superannuation money directly to KiwiSaver accounts (the New Zealand equivalent of Australian superannuation funds).
Not-for-profits — enhancing the transparency of income tax exemptions
The Government will provide $1.9 million capital funding in 2022-23 to the ATO to build an online system to enhance the transparency of income tax exemptions claimed by not-for-profit entities (NFPs).
Currently non-charitable NFPs can self-assess their eligibility for income tax exemptions without an obligation to report to the ATO.
From 1 July 2023, the ATO will require income tax exempt NFPs with an active Australian Business Number (ABN) to submit online annual self-review forms with the information they ordinarily use to self-assess their eligibility for the exemption. This measure will ensure that only eligible NFPs are accessing income tax exemptions.
An Enhanced Payment Times Reporting Scheme
The Government will provide an additional $16 million over four years from 2021-22 to ensure the effective operation of the Payment Times Reporting Scheme, which came into effect on 1 January 2021. The Scheme requires large businesses to report on their payment times to small businesses.
The Government will continue to examine ways to improve Australia’s insolvency laws, including consulting on options to:
- clarify the treatment of trusts with corporate trustees under Australia’s insolvency law; and
- improve schemes of arrangement processes to better support businesses, including by introducing a moratorium on creditor enforcement while schemes are being negotiated.
The Government will also:
- increase the minimum threshold at which creditors can issue a statutory demand on a company from $2,000 to $4,000, and
- commence an independent review of the insolvent trading safe harbour.
SME Recovery Loan Scheme
The Government will support the economic recovery of and provide continued assistance to firms that received JobKeeper or are eligible flood-affected businesses through the SME Recovery Loan Scheme.
The Government will provide participating lenders with a guarantee for 80 per cent of secured or unsecured loans of up to $5 million for a term of up to 10 years and with interest rates capped at 7.5 per cent, with some flexibility around variable rate loans.
Loans can be used by the SME for a broad range of business purposes, including to support investment and refinancing existing loans. Lenders will be able to offer borrowers a repayment pause of up to two years. To be eligible, SMEs (including self-employed individuals and non-profit organisations) will have a turnover of up to $250 million and have been either:
- recipients of the JobKeeper Payment between 4 January 2021 and 28 March 2021; or
- located or operating in a local government area that has been disaster declared as a result of the March 2021 New South Wales floods and were negatively economically impacted.