2021/22 Federal Budget

Last night the Federal Treasurer, Mr Josh Frydenberg, handed down the 2021–22 Federal Budget. The deficit of $161 billion is $52.7 billion lower than expected due to a stronger economic recovery from the COVID-19 recession. As the virus continues to threaten the global economy, this Budget contains various measures intended to support businesses and individuals through job creation, incentives, tax relief and superannuation changes.

A positive announcement was the extension of a number of COVID-related concessions. Of notable mention is the extension of the loss carry back regime and the temporary full expensing for eligible new assets.

New measures were announced to support innovation and encourage local R&D. This included the introduction of the Patent Box for medical and biotech patents.

Other key changes include a modernised individual tax residency bright-line test and the removal of the $450 threshold to be eligible for superannuation guarantee.

Below is our summary of the key highlights or click on the headings for a more detailed tax, superannuation and social security update.

Our Summary

 

Individuals

The low- and middle-income tax offset will remain available to taxpayers earning less than $126,000 per year for the 2021–22 income year, individual tax residency rules are to be simplified, and the current limitations on claiming a self-education expenses have been removed.  Funding has also been provided to increase home ownership, support jobs in the residential construction sector, and enhance housing data.

Companies and business

Both the full expensing of eligible assets, and the temporary loss carry back offset will be extended by one year to apply for the 2022–23 income year, and taxpayers will be able to self-assess the effective life of intangible depreciating assets from 1 July 2023.  There will no longer be an exemption of superannuation guarantee for employees earning less than $450 in a month, employee share schemes will no longer have an employment taxing point for tax-deferred schemes and the Boosting Apprenticeship Commencements wage subsidy will be expanded. Corporate income derived from certain patents will be taxed at a concessional rate of 17%, and the heavy vehicle road user charge will be increased from 25.8 cents per litre to 26.4 cents per litre from 1 July 2021.

Superannuation

There will be a 3-year extension to the central management and control for SMSF’s to be considered an Australian superannuation fund, the work test is being abolished, and there are proposed changes to the downsizer and the first home super saver schemes.

Not-for-profits

New regulation for income tax exempt NFPs will begin in 2023 and there have been some additions and extensions made to the DGR listings.

International tax

The existing concessional tax treatment for offshore banking units will be removed, and information sharing will be expanded, while New Zealand will maintain its primary taxing right over members of its sporting teams and support staff located in Australia due to COVID-19.

Social Services

Funding has been provided to aged care initiatives, the childcare subsidy, and several unemployment benefits.

Individuals

There were a few concessions and incentives for individuals in this year’s budget.  Most significantly, the extension of the low- and middle-income tax offset for taxpayers earning less than $126,000 per annum has been extended to include the 2022 financial year.  Additionally, there has been a promise to “simplify” the tax residency rules to assist in attracting talent to Australia, and the limitations on the first $250 of self-education expenses has been removed.  A home ownership funding packaged has also been proposed, which aims to increase home ownership, support jobs in the residential construction sector and enhance housing data.

Low- and middle-income tax offset extended to include the 2021–22 financial year

The low- and middle-income tax offset (LMITO) has been extended for another year to include the 2021–22 financial year. The LMITO was due to be removed on 30 June 2021.

The low- and middle-income tax offset is calculated as per the below:

Taxable income	Low- and middle-income tax offset
Less than $37,000	$255
Between $37,000 and $48,000	Increase 7.5 cents per $1, capped at $1,080
Between $48,000 and $90,000	$1,080
Between $90,000 and $126,000	Reducing from maximum at 3 cents per $1
Above $126,000	$0

Source: Budget Paper No 2, p 27.

Individual tax residency rules simplified

The current rules around individual tax residency in Australia will be simplified by replacing them with a new framework, focused on a primary physical presence test.

Under this test, a person who is physically present in Australia for 183 days or more in any income year will be an Australian tax resident for tax purposes. Individuals who do not meet the primary test will be subject to secondary tests that consider a combination of physical presence and other measurable criteria.

Currently, an individual who is physically present in Australia for 183 days or more in an income year will not be an Australian resident if their usual place of abode is overseas and they have no intention to take up residence in Australia. The new framework is based on recommendations made by the Board of Taxation in the 2019 report Reforming individual tax residency rules — a model for modernisation.

The measure will have effect from the 1 July following assent of the enabling legislation.

Source: Budget Paper No 2, p 21–22; Budget Fact Sheet “Tax incentives to support recovery”, p 8.

Limitation on the first $250 of self-education deductions to be removed

Currently, an individual claiming self-education expenses is disallowed the first $250 of the deduction. The proposed removal of the $250 exclusion for prescribed courses of education will make it easier for individuals to work out their allowable deductions in the years they incur these expenses, and subsequently deduct the full value of the education expense.

The change will come into effect from the income year following the date of assent of the relevant legislation.

Source: Budget Paper No 2, p 26.

Home ownership funding package

The government will provide $782.1 million over 4 years from 2021–22 to a new home ownership funding package.  The package will include:

• $774.8 million over 2 years from 2021–22 for the HomeBuilder program to extend the construction commencement requirement from 6 months to 18 months for all existing applicants;
• establishing the Family Home Guarantee with 10,000 places from 2021–22 to support single parents with dependents to enter, or re-enter, the housing market with a deposit of 2%;
• extending the first home loan deposit scheme to provide an additional 10,000 new home guarantees in 2021–22 to allow eligible first home buyers to build a new home or purchase a newly constructed home with a deposit of 5%;
• $5.8 million over 3 years from 2021–22 to continue to support the Australian Housing and Urban Research Institute to deliver the National Housing and Urban Research Program; and
• $1.2 million over 4 years from 2021–22 for the Australian Institute of Health and Welfare to maintain and enhance the Housing Data Dashboard website, with costs partially offset by National Housing Finance and Investment Corporation research funding.

Source: Budget Paper No 2, pp 187 and 188.

Companies and business

The 2021-22 Budget continues to provide support for businesses by extending the two tax incentives announced in the previous Budget and introduced a number of new measures outlined below:

Temporary full expensing of eligible assets will be extended by 12 months to 30 June 2023

 Eligible businesses with aggregated turnover less than $5 billion will be able to deduct the full cost of eligible depreciating assets acquired from 7:30pm AEDT on 6 October 2020 and first used or installed ready for use by 30 June 2023. Normal depreciation arrangements will apply from 1 July 2023.

Source: Budget Paper No 2, p 29; Budget Fact Sheet “Tax incentives to support the recovery”, p 2.

The temporary loss carry back offset will be extended by one year to apply for 2022–23 income year losses

 Eligible corporate tax entities with aggregated turnover less than $5 billion will be able to carry back losses from the 2022–23 income year to offset previously taxed profits made in or after the 2018–19 income year. The loss that can be carried back is limited by the amount of earlier taxed profits and cannot generate a franking account deficit.

Source: Budget Paper No 2, p 30, Budget Fact Sheet “Tax incentives to support the recovery”, p 2.

Removing the $450 per month superannuation guarantee threshold

 The employer exemption from superannuation guarantee payments for individuals earning less than $450 in salary or wages in a calendar month will be removed.

The measure will take effect from the 1 July following legislation receiving assent. The government expects to have removed this exemption category before 1 July 2022.

Source: Budget Paper No 2, p 26.

Fuel tax credits — heavy vehicle road user charge increased

The heavy vehicle road user charge will be increased from 25.8 cents per litre to 26.4 cents per litre from 1 July 2021. The charge is applied to reduce the fuel tax credit rate per litre available for vehicles with a GVM greater than 4.5 tonnes.

Source: Budget Paper No 2, p 150.

Tax-deferred employee share schemes — ceasing employment no longer a taxing point

The cessation of employment taxing point will be removed for tax-deferred employee share schemes (ESS) that are available for all companies. The change will apply to ESS interests issued from the first income year after assent of the amending legislation.

The following regulatory changes will also be made for ESS where employers do not charge or lend to employees under the ESS:

• disclosure requirements will be removed and the offer will be exempted from licensing, anti-hawking and advertising prohibitions, and
• for shares in an unlisted company, the maximum value of shares that can be issued to an employee with the simplified disclosure requirements and above exemptions will be increased from $5,000 to $30,000 per employee per year (no such value cap exists for listed companies).

The regulatory changes will apply 3 months after assent of the amending legislation.

Source: Budget Paper No 2, p 16; Budget Fact Sheet “Tax incentives to support the recovery — Supporting households, driving business investment, and creating jobs”.

Self-assessment of intangible depreciating assets to be allowed

Taxpayers who purchase patents, registered designs, copyrights or in-house software will be given the opportunity to self-assess their effective life for decline in value. The measure comes into effect for specified intangible assets acquired after 1 July 2023.

Source: Budget Paper No 2, p 14.

Concessional taxation of corporate income derived from certain patents

Corporate income derived from Australian medical and biotechnology patents in income years starting on or after 1 July 2022 will be taxed at a concessional effective tax rate of 17%.

The patent box measure builds on the JobMaker Research and Development Tax Incentive announced in the 2020–21 Budget, by offering a competitive tax rate for profits generated from Australian owned and developed patents.

Source: Budget Paper No 2, p 23.

Apprenticeship wage subsidy expanded

The Boosting Apprenticeship Commencements wage subsidy will be expanded to support businesses and Group Training Organisations that take on new apprentices and trainees.

This measure will uncap the number of eligible places (currently capped at 100,000 places). The duration of the 50% wage subsidy will be increased to 12 months from the date an apprentice or trainee commences with their employer. The subsidy will now be available from 5 October 2020 to 31 March 2022 and businesses of any size can claim the wage subsidy for new apprentices or trainees who commence during this period. Eligible businesses will be reimbursed up to 50% of an apprentice or trainee’s wages of up to $7,000 per quarter for 12 months.

Source: Budget Paper No 2, p 88.

Digital games tax offset to be introduced to promote growth of gaming industry

A digital games tax offset will be introduced to promote the growth of the digital games industry in Australia. This will be a refundable tax offset for a minimum investment of $500,000 from 1 July 2022 in “qualifying Australian games expenditure”. However, games with gambling elements will be excluded.

Source: Budget Paper No 2, pp 72–73; Budget Fact Sheet “Tax incentives to support the recovery — Supporting households, driving business investment, and creating jobs”.

Corporate collective investment vehicle framework revised start date

The corporate collective investment vehicles (CCIV) component of the Ten Year Enterprise Tax Plan — implementing a new suite of collective investment vehicles measure announced in the 2016–17 Budget will be finalised with a revised commencement date of 1 July 2022. The measure proposed introducing a tax and regulatory framework for CCIVs.

Source: Budget Paper No 2, p 13.

Excise relief for small distillers and brewers

From 1 July 2021, eligible brewers and distillers will be able to receive a full remission of any excise they pay, up to an annual cap of $350,000. Currently, eligible brewers and distillers are entitled to a refund of 60% of the excise they pay, up to an annual cap of $100,000.

This will align the benefit available under the excise refund scheme for brewers and distillers with the wine equalisation tax producer rebate.

Source: Budget Paper No 2, p 12; Treasurer and Assistant Treasurer’s media release “Tax relief for small brewers and distillers to support jobs”, 1 May 2021.

Storm and floods income tax exemption on qualifying grants

Primary producers and small businesses affected by the storms and floods in Australia between 19 February 2021 and 31 March 2021 will be eligible for an income tax exemption for qualifying grants, provided under the Disaster Recovery Funding Arrangements 2018 Category D.

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.

Superannuation

Central management and control safe harbour test extended for SMSFs

The central management and control safe harbour test for an SMSF to be considered an Australian superannuation fund will be extended from 2 years to 5 years. This extension will allow an individual who is overseas to continue active control of their SMSF, as opposed to appointing a legal personal representative as the trustee of the SMSF under an enduring power of attorney.

The government intends to remove the active member test when determining whether an Australian superannuation fund is a complying fund. Currently, at least 50% of the total market value of an SMSF or small APRA fund is required to be held on behalf of active members who are Australian residents.

Work test for superannuation contributions to be abolished

From 1 July 2022, individuals aged 67 to 74 will no longer be required to meet the work test when making or receiving non-concessional superannuation contributions or salary sacrificed contributions.

These individuals will also be able to access the non-concessional bring-forward arrangement, subject to meeting the relevant eligibility criteria.

The existing $1.6 million cap on lifetime superannuation contributions will continue to apply (increasing to $1.7 million from 1 July 2021). The annual concessional and non-concessional caps will also continue to apply.

Access to concessional personal deductible contributions for individuals aged 67 to 74 will still be subject to meeting the work test.

Eligible age for downsizer contributions lowered to 60 years

From 1 July 2022, the eligibility age to make downsizer contributions into superannuation will be reduced from 65 to 60 years of age.

The downsizer contribution will allow individuals to make a one-off, post-tax contribution to their superannuation of up to $300,000 per person (or $600,000 per couple) from the proceeds of selling their home, provided that the home has been held for at least 10 years. Both members of a couple can contribute in respect of the same home, and contributions do not count towards non-concessional contribution caps.

Individuals with balances over the transfer balance cap ($1.7 million from 1 July 2021) are also able to make a downsizer contribution, however the downsizer amount will count towards that cap when savings are converted to the retirement phase.

SMSF legacy pensions to be allowed conversion

A 2-year window will be created in which a member of an SMSF with a market-linked, life expectancy or lifetime pension can convert their pension into an account-based pension.

When reasonable benefits limits were abolished on 1 July 2007, these types of existing pensions could not be commuted into a new account-based pension except in very limited circumstances.

On conversion, a pensioner may have amounts allocated to their account-based pension from a reserve account. The commuted reserve will be taxed in the fund as an assessable contribution. The assessable contribution will not count towards the individual’s concessional contributions cap and will not trigger excess contributions.

The government has announced that there will be no grandfathering of social security treatments on conversion of a legacy pension account. Importantly, it will not be compulsory for individuals to convert these products

Not-for-profits

 Accessing income tax exemptions by not-for-profits

From 1 July 2023 non-charitable not-for-profits (NFPs) with active ABNs will be required to submit the information used to self-assess their eligibility for income tax exemptions in an online self-review form. This will be an annual requirement.

Currently non-charitable NFPs self-assess their eligibility for income tax exemptions, but there is no obligation to report to the ATO.

The ATO will be provided with $1.9 million capital funding to build an online system to support the measure.

Source: Budget Paper No 2, p 22.

International tax

Changes to offshore banking unit regime

Concessional tax treatment for offshore banking units (OBUs) will be removed.

The concessional 10% effective tax rate applying to income derived from eligible offshore banking activities will be removed. Existing OBUs will have access to the concessional tax rate until the end of the 2022–23 income year. The withholding tax exemption for interest and gold fees paid by OBUs on certain offshore borrowings will be removed from 1 January 2024. The OBU regime will also be closed to new entrants from 26 October 2018.

The government will consult on alternative measures to support the industry and ensure activity remains in Australia.

Source: Budget Paper No 2, p 20–21; Treasurer’s press release “Amending Australia’s Offshore Banking Unit Regime”, 12 March 2021.

List of exchange of information jurisdictions to be updated

The list of jurisdictions that have an effective information sharing agreement with Australia will be updated.

The following countries will be added to the existing jurisdictions: Armenia, Cabo Verde, Kenya, Mongolia, Montenegro and Oman.

Residents of listed jurisdictions will be eligible to access the reduced managed investment trust withholding rate of 15% on certain distributions, instead of the default rate of 30%.

The updated list will be effective from 1 January 2022.

Source: Budget Paper No 2, p 21.

NZ to maintain primary taxing right over sporting teams and support staff in Australia

The government has announced that it 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 Australia–New Zealand double tax agreement 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.

Source: Budget Paper No 2, pp 13 and 14.

ATO early engagement service for foreign investors

From 1 July 2021, a new early engagement service will be implemented to assist foreign investors and give them confidence to invest in Australian businesses. The service will:

• provide “up front” confidence to investors about how Australian tax laws will apply, as well as federal tax obligations
• be tailored to the particular needs of each investor
• be specific in relation to project timeframes
• integrate tax aspects of the foreign investment review board approval process, as well as assist in the time sensitive aspects of an investment transaction, and
• facilitate access to an expedited private binding rulings and advance pricing agreements where necessary.

Source: Budget Fact Sheet “Tax incentives to support the recovery — Supporting households, driving business investment, and creating jobs”.

Social services

Childcare subsidy to increase

The childcare subsidy will be increased up to a maximum of 95% from 1 July 2022.

Under the current arrangements the maximum childcare subsidy payable is 85% of childcare fees. For families with more than one child in childcare, the level of subsidy received will increase by 30% to a maximum subsidy of 95% of fees paid for their second and subsequent children.

From 1 July 2022, the annual $10,560 cap on childcare fee rebates will also be abolished. Currently families with combined incomes above $189,390 are subject to a childcare subsidy cap of $10,560 per child per year.

The government estimates 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 they would also be $95 per week better off for 4 days of care
• a family earning $80,000, with 3 children, will have the subsidy increase from 82% to 95% for their second and third children and would also be $108 per week better off for 4 days of care.

Source: Budget Paper No 2, p 81; Treasurer’s media release “Making childcare more affordable and boosting workforce participation”, 2 May 2021.

Unemployment benefits to increase

The base rate of certain benefits will increase by $50 per fortnight from 1 April 2021. This increase applies to JobSeeker Payment, Youth Allowance, Parenting Payment, Austudy, ABSTUDY Living Allowance, Partner Allowance, Widow Allowance, Special Benefit, Farm Household Allowance and for certain Education Allowance recipients under the Department of Veterans’ Affairs Education Scheme.

Other changes include:

• The income-free area of certain benefits will increase to $150 per fortnight from 1 April 2021. This applies to JobSeeker Payment, Youth Allowance, Parenting Payment Partnered, Widow Allowance and Partner Allowance.
• The temporary waiver of the Ordinary Waiting Period for certain payments will be extended for a further 3 months to 30 June 2021.
• The expanded eligibility criteria for the JobSeeker Payment and Youth Allowance will be extended for a further 3 months to 30 June 2021 for those required to self-isolate or care for others as a result of COVID-19.
• The $2,000 relocation assistance payment will be paid upfront, with eligibility expanded to enable job seekers to access the incentive when they take up ongoing work of more than 20 hours per week.

Source: Budget Paper No 2, p 181.

Changes to the pension loans scheme

The following changes to the pension loans scheme are intended to improve uptake:

• participants in the scheme will be allowed to access up to 2 lump sum advances in any 12 month period, up to a total value of 50% of the maximum annual rate of the age pension
• a “no negative equity guarantee” will be introduced so borrowers will not have to repay more than the market value of their property.

Source: Budget Paper No 2, p 182.