The Morrison Government has recently announced its 2021/22 Federal Budget, with a strong focus on job creation and economic stimulus. But what does this mean for your personal and business finances?
Here’s a summary of some of the significant changes in three key areas:
- Personal tax
- Business tax
Changes to personal income tax
1. Retaining the Low and Middle Income Tax Offset
The Government announced it will retain the Low and Middle Income Tax Offset (LMITO) for one more income year, so that it will still be available for the 2022 income year.
The LMITO is a non-refundable tax offset that provides tax relief for low and middle income taxpayers and is available in addition to the Low Income Tax Offset (LITO).
The LMITO is proposed to apply as follows, and will be applied to reduce the tax payable by individuals when they lodge their tax returns for the 2022 income year.
2. 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.
3. Modernising the individual tax residency rules
Individual tax residency rules will be replaced with a new, modernised framework.
The primary test is simple – 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 new framework will be easier to understand and apply in practice, delivering greater certainty and lower compliance costs for individuals and their employers.
4. Reducing compliance costs for self-education deductions
The Government will remove the exclusion of the first $250 of deductions for prescribed courses of education.
Currently, the first $250 of a prescribed course of education expense is not tax deductible. Removing this $250 exclusion is expected to reduce compliance costs for individuals claiming self- education expense deductions.
5. Reducing red tape for Employee Share Schemes
The Government will remove the ‘cessation of employment’ taxing point for tax-deferred Employee Share Schemes (‘ESS’) that are available for all companies.
Currently, under a tax-deferred ESS employees may defer tax until a later tax year (‘the deferred taxing point’). The deferred taxing point is the earliest of:
- (a) cessation of employment;
- (b) in the case of shares, when there is no risk of forfeiture and no restrictions on disposal;
- (c) 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
- (d) the maximum period of deferral of 15 years.
This change will remove the ‘cessation of employment’ taxing point and result in tax being deferred until the earliest of the remaining taxing points.
In addition, 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.
6. Exemption for pay and allowances for Operation Paladin
The Government will provide a full income tax exemption for the pay and allowances of Australian Defence Force personnel deployed to Operation Paladin.
The exemption will apply from 1 July 2020 (i.e., from the 2021 income year).
Changes to business tax
1. Temporary full expensing extension
In last year’s 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.
The Government 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 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 remain unchanged, including the alternative eligibility test based on total income, which will continue to be available to businesses.
2. Temporary loss carry-back extension
In last year’s Federal Budget, the Government announced amendments to introduce a temporary loss carry-back measure. This allowed ‘corporate tax entities’ with an aggregated turnover of less than $5 billion to carry back tax losses made in the 2020, 2021 and/or 2022 income years to claim a refund of tax paid (by way of a tax offset) in relation to the 2019, 2020 and/or 2021 income years.
The Government announced that the loss carry-back measure will be extended to allow eligible companies 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.
3. Digital economy strategy
The Government will provide $1.2 billion over six years from 2022 for the Digital Economy Strategy, to support Australia to be a leading digital economy and society by 2030. This includes the following:
(a) The Government will allow taxpayers 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.
(b) The Government will provide $18.8 million over four years from 2022 for a Digital Games Tax Offset to provide a 30% refundable tax offset for qualifying Australian digital games expenditure ongoing from 1 July 2022, with the criteria and definition of qualifying expenditure to be determined through industry consultation.
(c) The Government will provide $200.1 million over two years from the 2022 income year to develop and transition government services to a new, enhanced myGov platform, providing a central place for Australians to find information and services online.
4. Debt recovery for small business
The Government announced it will allow small business entities 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 legal fees and as much as 60 days of waiting for a decision.
5. Tax treatment of qualifying storm and flood 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.
Changes to superannuation
1. Removing the work test for voluntary contributions
Individuals aged 67 to 74 years will now be allowed to make or receive non-concessional contributions (including under the bring-forward rule) and salary sacrifice contributions without meeting the work test, subject to existing contribution caps.
Individuals aged 67 to 74 years (inclusive) 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 (both concessional and non-concessional) to their superannuation fund, or receive contributions from their spouse, if they satisfy the work test (subject to a limited work test exemption).
Generally, to satisfy the work test, an individual must be working for at least 40 hours over a period of not more than 30 consecutive days in the income year the relevant contribution is made. Removing the requirement to meet the work test will simplify the rules governing superannuation contributions and will increase flexibility for older Australians to save for their retirement.
2. Reducing the age limit for downsizer contributions
The Government will reduce the age limit from which downsizer contributions can be made by eligible individuals, from 65 to 60 years of age.
This allows eligible individuals to make a one-off, after-tax contribution to their superannuation fund, of up to $300,000 per person, following the disposal of an eligible dwelling, where certain conditions are satisfied.
Under the current requirements, an individual must be at least 65 years of age at the time of making the relevant contribution, for the contribution to qualify as a downsizer contribution.
3. Removing the 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 SG contributions by their employer.
4. Relaxing the residency requirements for SMSFs
The Government will relax residency requirements for SMSFs and small APRA-regulated funds by:
- extending the central control and management test safe harbour from two years to five years for SMSFs; and
- removing the active member test for both types of funds.
This will allow SMSF members and small APRA fund members to continue to contribute to their superannuation fund whilst temporarily overseas, ensuring parity with members of large APRA regulated funds.
5. Exiting legacy retirement products
The Government has announced that it will allow individuals the temporary option to exit and convert from a specified range of legacy retirement products (together with any associated reserves) into more flexible and contemporary retirement products, for a two-year period.
The products covered by this measure include market-linked, life-expectancy and lifetime products that were first commenced before 20 September 2007 from any provider (including an SMSF), but not flexi-pension products or a lifetime product in a large APRA-regulated or public sector defined benefit scheme.
This measure will permit full access to all of the product’s underlying capital, including any reserves, as part of transitioning into a more flexible and contemporary retirement product.
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.
6. Changes to the First Home Super Saver 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.
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.
Need help understanding what the Budget means for you?
Our team is always happy to work with clients to help them understand the significance of any changes to their personal and business finances. Please contact us on email via firstname.lastname@example.org, or phone our office to arrange a chat with one of our consultants.