The Treasurer handed down the Federal Budget 2021-22 on 11 May 2021. Detailed below is a summary of the significant tax measures announced, followed by further detail regarding each of those measures.
Significant tax announcements
- Employee share schemes – The Government will remove the cessation of the employment taxing point for tax-deferred Employee Share Schemes.
- Temporary full expensing extension – The temporary full expensing measure to support investment and jobs will be extended for 12 months until 30 June 2023.
- Temporary loss carry-back extension – The temporary loss carry-back measure announced in the 2020-21 Budget to support investment and jobs will be extended for 12 months until 30 June 2023.
- Intangible depreciating assets – Taxpayers will be able to self-assess the effective lives of eligible intangible depreciating assets acquired from 1 July 2023.
- Superannuation Guarantee – 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.
- 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.
- Not-for-profits – From 1 July 2023, non-profits which self-assess for income tax exemptions will be required to submit online annual self-review forms with the Australian Tax Office (ATO).
The extension of temporary full expensing and the temporary loss carry-back is welcome and will improve cash flow for qualifying businesses. The temporary loss carry-back effectively allows a company to carry back tax losses and obtain a cash refund for taxes paid in earlier years.
The removal of automatic taxation when an employee leaves a company is positive. Currently, under a tax-deferred Employee Share Schemes (ESS), employees will incur a tax liability simply because they change employment, and may need to sell their ESS interests in order to fund their tax liability. Additionally, such employees may not be able to access the Capital Gains Tax (CGT) 50% discount on the capital growth of those ESS interests due to the way in which the deferral rules interact with the CGT 50% discount.
The new ‘bright line’ test for individual tax residency, where individuals will be deemed Australian tax residents if they are physically present in Australia for at least 183 days, is a simplification of the current complex residency tests. While simplified residency rules are desirable, the new test may unwittingly catch individuals who did not intend to become Australian tax residents. Currently, the ‘183-day’ residency test does not apply to an individual if they have a usual place of abode overseas, and no intention to take up residency in Australia. It appears that these factors will be irrelevant under the new test, and the simple fact of being physically present in Australia for 183 days will trigger tax residency.
Tax measures in detail
Personal income tax
The Government has announced $7.8 billion in personal income tax cuts to support more than 10 million low- and middle- income earners worth up to $1,080 for individuals or up to $2,160 for couples.
Retaining the low and middle-income tax offset for 2021-22
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 individuals with 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.
Increasing the Medicare levy low-income thresholds
The Government will increase the Medicare levy low-income thresholds for singles, families, seniors and pensioners from 1 July 2020 to take account of recent consumer price index movements so that low-income taxpayers generally continue to be exempt from paying the Medicare levy.
The changes will be as follows:
- the threshold for singles will increase from $22,801 to $23,226;
- the family threshold will increase from $38,474 to $39,167;
- for single seniors and pensioners, the threshold will increase from $36,056 to $36,705;
- the family threshold for seniors and pensioners will increase from $50,191 to $51,094;
- for each dependent child or student, the family income thresholds will increase by a further $3,597 instead of the previous amount of $3,533.
Reducing compliance costs for self-education deductions
The Government will remove the exclusion of the first $250 of deductions for prescribed courses of self-education.
The measure will have effect from the first income year after the date of Royal Assent of the enabling legislation.
Digital economy strategy
Self-assessing the effective life of intangible depreciating assets
The Government will allow taxpayers to self-assess the 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 intangible assets are currently set by statute. Allowing taxpayers to self-assess the tax-effective lives of such assets will allow for a better alignment of tax outcomes with the underlying economic benefits provided by the asset. Taxpayers will continue to have the option of applying the existing statutory effective lives to depreciate assets.
The Government will provide $18.8 million over four years from 2021-22 for a Digital Games Tax Offset to provide a 30% refundable tax offset for qualifying Australian digital games expenditure, with the criteria and definition of qualifying expenditure to be determined through industry consultation.
Employee share schemes
The Government will remove the cessation of the employment taxing point for tax-deferred ESS. 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), usually at a discount.
Currently, under a tax-deferred ESS, where certain criteria are met, employees may defer tax until a later income year (the ‘deferred taxing point’). The deferred taxing point is the earliest of the following:
- the employee’s 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; or
- 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 is intended to help Australian companies engage and retain the talent they need to compete on a global stage.
Temporary full expensing extension
The Government will extend the temporary full expensing 2020-21 Budget measure to support investment and jobs for 12 months until 30 June 2023.
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.
This extension will encourage businesses to make further investments, including in projects requiring longer planning times, and continue to support economic recovery in 2022-23.
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 temporary loss carry-back measure announced in the 2020-21 Budget.
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 companies lodge their 2022-23 tax return.
Companies with an 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.
Removing the $450 monthly threshold for superannuation guarantee
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 individuals with lower incomes.
Reducing 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. This measure will have effect from the start of the first financial year after Royal Assent of the enabling legislation, which is anticipated 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.
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.
Repealing the work test for voluntary 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 superannuation caps.
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 can only make voluntary contributions 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.
This measure will have effect from the start of the first financial year after Royal Assent of the enabling legislation, which is expected to occur prior to 1 July 2022.
Self-managed superannuation funds
Relaxing residency requirements
The Government will relax residency requirements for self-managed superannuation funds (SMSFs) and small Australian Prudential Regulation Authority-regulated funds 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.
This measure will allow members to continue to contribute to their superannuation fund whilst temporarily overseas, ensuring parity with members of large APRA-regulated funds. This will provide fund members the flexibility to keep and continue to contribute to their preferred fund while undertaking overseas work and education opportunities.
The measure will have effect from the start of the first financial year after Royal Assent of the enabling legislation, which is expected to have occurred prior to 1 July 2022.
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 include market-linked, life-expectancy and lifetime products. 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.
The measure will have effect from the first financial year after the date of Royal Assent of the enabling legislation.
First home super saver scheme
The following changes have been announced under the First Home Super Saver Scheme (FHSSS):
- 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 FHSSS from $30,000 to $50,000. This increase will apply from the start of the first income year after Royal Assent of the enabling legislation.
- Technical changes – The Government will make technical changes to the legislation underpinning the FHSSS to improve its operation, including allowing the ATO to amend or revoke FHSSS applications, and to return any released FHSSS money to superannuation funds, provided the money has not yet been released to the individual.
International tax measures
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.
This measure will have effect from the first income year after the date of Royal Assent of the enabling legislation.
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. This measure will add Armenia, Cabo Verde, Kenya, Mongolia, Montenegro and Oman to the information exchange countries list.
The updated list will be effective from 1 January 2022.
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 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.
Other significant tax announcements
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.
Increased powers of the administrative appeals tribunal
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 revised by the Small Business Taxation Division (SBTD) of the AAT.
Small business entities that file an application in relation to tax matters before the SBTD or 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.
This measure will take effect from the date of Royal Assent of the enabling legislation.
Tax concession – 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 rate of 17%, 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.
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.
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