A summary of the key items released in last night’s Federal Budget:Josh Frydenberg’s 2021-22 Federal Budget announced a forecast budget deficit for the 2021 year of $161 billion and then continued deficit’s over the following four years – $106.6 billion in 2021-22; $99.3 billion in 2022-23; $79.5 billion in 2023-24 and $57 billion in 2024-25. The economy’s real GDP (inflation adjusted) is now forecast to grow by 1.25% in the current year, 4.25% in 2021-22, 2.5% in 2022-23; 2.25% in 2023-24 and 2.5% in 2024-25.
Unemployment is expected to be 5.5% by 30 June 2021; 5.0% at 30 June 2022, 4.75% by 30 June 2023 and falling to 4.5% in the 2024 and 2025 financial years. Inflation is expected at 3.5% for 2020-21; 1.75% for 2021-22; 2.25% for 2022-23; and 2.5% for 2023-24 and 2024-25.
Gross federal government debt is forecast for the 2020-21 year at $829 billion (40.2% of GDP) and will increase over the following four years – $963 billion (45.1% of GDP) in 2021-22; $1,058 billion (48.6% of GDP) in 2022-23; $1,134 billion (49.7% of GDP) in 2023-24 and $1,199 billion (50% of GDP) in 2024-25.
The key revenue measures comprise:
- Extending the low and middle income tax offset for an additional year
- Extending the instant asset tax write-offs for an additional year
- Extending the temporary loss carry-back for companies for an additional year
- New patent box rules
- Superannuation changes to the work test and the downsizer contributions
- Removal of the $450 minimum threshold for superannuation guarantee contributions
It is important to remember that what follows is a series of proposals that must be passed by Federal Parliament before they become law.
Personal Income Tax RatesThere have been no changes to the income tax rates for resident individuals announced. The income tax rates for resident individuals will continue as follows:
| Taxable Incomes (T.I.)|| Rate || Tax Payable|
| Up to $18,200|| 0%|| $Nil|
| $18,201 to $45,000|| 19%|| $Nil + 19% over $18,200|
| $45,001 to $120,000 || 32.5%|| $5,092 + 32.5% over $45,000|
| $120,001 to $180,000 || 37%|| $29,467 + 37% over $120,000|
| $180,001 and above|| 45%|| $51,667 + 45% over $180,000|
There was also no announcement in respect of the previously legislated (Stage 3) resident individual income tax rates to apply from 1 July 2024, so they remain as follows:
| Taxable Incomes (T.I.)|| Rate || Tax Payable|
| Up to $18,200|| 0%|| $Nil|
| $18,201 to $45,000|| 19%|| $Nil + 19% over $18,200|
| $45,001 to $200,000 || 30%|| $5,092 + 30% over $45,000|
| $200,001 and above|| 45%|| $51,592 + 45% over $200,000|
Low and Middle Income Tax OffsetThis offset is extended for another year to 2021-22. The maximum non-refundable annual tax offset will be $1,080 and the base offset will be $255 for resident individuals. This offset benefit will be calculated as follows:
| Taxable Incomes (T.I.)|| Offset|
| Up to $37,000|| $255|
| $37,001 to $48,000|| $255 + 7.5% over $37,000 to a maximum|
benefit of $1,080
| $48,001 to $90,000 || $1,080 maximum|
| $90,000 to $126,000 || $1,080 – 3% over $90,000|
| $126,001 and above|| Nil|
The offset will not be incorporated into the Pay As You Go Withholding tables, instead it will be credited as a lump sum on the annual income tax assessment.
Medicare Levy to Remain at 2%
The Medicare Levy will remain at 2% and there will be the usual indexation of the Medicare Levy low income thresholds as follows:
| Low income |
| Threshold from |
1 July 2020
|Threshold as at |
30 June 2020
| Singles|| $23,226|| $22,801|
| Families|| $39,167|| $38,474|
| Single seniors and pensioners|| $36,705|| $36,056|
| Family – Seniors and pensioners|| $51,094|| $50,191|
| Threshold increment for each|
additional dependent child/student
| $3,597|| $3,533|
Individual tax residency rules simplified
The individual tax residency rules will be replaced by a new framework with a primary physical presence test.
Under the new primary 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, objective 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.
$250 exclusion on self-education deductions to be removed
The current limitation for individuals claiming self-education expenses, where the first $250 of the deduction is denied, will be removed. The 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.
The change will come into effect from the income year following the date of assent of the relevant legislation.
There is no change to the general provisions for claiming a self-education deduction, such as requiring the expense to come from a prescribed course of education.
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.
Under existing rules for a tax-deferred ESS, where certain criteria are met employees may defer tax until a later tax year (known as the deferred taxing point). By removing the cessation of employment taxing point, the deferred taxing point will be the earliest of:
- 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.
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.
Instant Asset Write Off ExtendedTemporary full expensing of eligible assets will be extended by 12 months to 30 June 2023.
All businesses with an annual aggregated turnover of less than $5 billion will be able to deduct the full cost of eligible depreciable assets acquired from 7.30pm AEDT on 6 October 2020 and first used or installed by 30 June 2023.
The full tax deduction of the cost in the first year of use will apply to new depreciable assets and to the cost of improvements to existing eligible assets. For business with an aggregated annual turnover of less than $50 million, eligible assets will also include purchased second-hand assets.
Normal depreciation arrangements will apply from 1 July 2023.
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.
These assets are currently set to statutory effective life calculations. Where the taxpayer cannot reasonably estimate an effective useful life, or otherwise chooses not to self-assess, they may continue to use the statutory depreciation rates.
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 mechanism by which this “patent box” concession will be delivered is subject to consultation with industry. The government intends to extend consultation in relation to the patent box with a view to determining its appropriateness for supporting the clean energy sector.
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 30% refundable tax offset for eligible businesses that spend a minimum of $500,000 from 1 July 2022 in “qualifying Australian games expenditure”.
The criteria and definition of qualifying expenditure will be determined following industry consultation. However, games with gambling elements will be excluded.
Extended powers for AAT to pause or modify ATO debt recovery
Small businesses will be able to apply to the AAT to pause or modify ATO debt recovery actions for debts being disputed in the AAT.The Small Business Taxation Division of the Administrative Appeals Tribunal (AAT) will be allowed to pause or modify any ATO debt recovery actions, such as garnishee notices and the recovery of general interest charges or related penalties, until the underlying dispute is resolved by the AAT. The AAT will be required to ensure applications are in relation to genuine disputes and to consider the potential effect of an application on the integrity of the tax system.
The measure will apply to small business entities (including individuals carrying on a business) with an aggregated turnover of less than $10 million per year that have filed an application in relation to tax matters before the Small Business Taxation Division of the AAT.
These new powers for the AAT will be available in respect of proceedings commenced on or after the date of assent of the legislation.
Temporary Loss Carry-Back ProvisionsThe temporary loss carry back offset will be extended by one year to apply for 2022–23 income year losses.
Companies with an annual aggregated turnover of less than $5 billion will be allowed to carry-back losses from the 2019-20, 2020-21, 2021-22 and 2022-23 years against their taxable incomes from the 2018-19, 2019-20, 2020-21 and 2021-22 years.
The loss that is carried back against a taxed net income from a previous year will generate a refundable tax offset in the year in which the loss is made. Eligible companies can elect to claim the tax refund when they lodge their 2020-21, 2021-22 and 2021-23 tax returns.
The tax refund will be limited in two ways:
- The amount of the loss carried back must not be more than the earlier taxed net income: and
- The carry-back must not cause a franking account deficit.
Eligible companies that do not elect to carry-back their loss can still carry forward their loss in accordance with the existing provisions.
Company Tax Residency Test
In the last budget, changes to the residency test for companies were announced to seek to clarify the residency test for companies incorporated offshore in response to Board of Taxation recommendations.
These changes are not yet legislated and in this budget the government has announced it will consult on expanding these amendments to cover trusts and corporate limited partnerships. No time frame for this consultation process has been set out.
Work test for superannuation contributions to be abolishedFrom 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.
Maximum releasable amount under first home super saver scheme increased to $50,000
The maximum amount of contributions that can be released from superannuation under the first home super saver scheme (FHSSS) will be increased from $30,000 to $50,000.
The FHSSS applies to voluntary contributions made into superannuation on or after 1 July 2017. Voluntary contributions made from that date will count towards the total amount able to be released.
First home super saver scheme — technical amendments
The government will make 4 technical changes to the first home super saver scheme (FHSSS) legislation to improve its operation and assist FHSSS applicants who make errors on their 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 receiving an FHSSS amount, and allowing 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.
Central management and control safe harbour test extended for SMSFsCurrently, an SMSF will remain an Australian superannuation fund where the members/trustees of the SMSF are overseas temporarily for a period not exceeding 2 years. The government has announced a proposal to extend this safe harbour test 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.
Also, 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.
The new safe harbour test will be in effect on the 1 July following assent of the enabling legislation. The government has announced in the budget that it expects the enactment of legislation to be prior to 1 July 2022.
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. In this instance, 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.
The 2-year window will commence from the first financial year following assent of the enabling legislation. However, the conversion will not be available for pensioners with a flexi-pension product, or a lifetime defined benefit product with an APRA-regulated or public sector fund.
No early release of super for victims of family and domestic violence
The government will not proceed with a measure to extend early release of superannuation to victims of family and domestic violence.
Under the proposed measure, victims of family and domestic violence would have been able to withdraw up to $10,000 from their superannuation on compassionate grounds.
Transfer of superannuation to KiwiSaver accounts
The ATO will be given an additional $11 million over 4 years from 2021–22 to administer the transfer of unclaimed superannuation money directly to KiwiSaver accounts (the New Zealand equivalent of Australian superannuation funds).
From 11 December 2021 the ATO may, if directed by a person for whom unclaimed money is held, pay amounts directly to a KiwiSaver scheme provider. Prior to this date, retirement savings can only be transferred between Australian complying superannuation funds (other than SMSFs) and New Zealand KiwiSaver schemes.
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.
The material contained in this newsletter is in the nature of general comment and information only and neither purports, nor is intended, to be advice on any particular matter. Readers should not act or rely upon any matter or information contained in or implied by this newsletter without taking appropriate professional advice.