Budget overview
On Tuesday 11 May, the Treasurer, the Hon Josh Frydenberg MP, delivered the Federal Budget 2021–22, his third Budget.
Two years ago, in his first Budget speech, the Treasurer announced that the Budget “is back in the black”. One pandemic later, there is only red.
So far, the Government has committed $291 billion (or 14.7% of GDP) in direct economic support for individuals, households and businesses. The Budget deficit for 2020–21 is forecast to be $161 billion, although that is almost $53 billion less than what was forecasted in last year’s Budget. The Treasurer has not produced an austerity Budget – net debt as a share of GDP is predicted to peak at just over 40% in 2024–25. “Debt and deficit” are seemingly no longer bad.
As emergency COVID-19 support concludes, the Government says it will focus on the transition to sustainable private sector-led growth to create jobs. The unemployment rate is forecast to fall to 4.75% by mid-2023 (lower than pre-pandemic levels).
The Government acknowledges that the continued economic recovery will rely on the effective containment of COVID-19 outbreaks both in Australia and abroad and will be a key factor in the timing of the reopening of international borders, which could weigh on the outlook for the tourism and education sectors.
Further, ongoing global trade tensions and the potential for further trade actions continue to pose risks to the outlook for Australian exports. More broadly, downside risks to the outlook for the global economy from ongoing outbreaks of the virus in major economies, including India, could have implications for Australia’s domestic economy.
If you want to read the Budget papers, you can find them at budget.gov.au.
Big picture highlights of this year’s Budget
Spending measures
Some of the key spending measures are:
Childcare
An additional $1.7 billion over 5 years, by increasing the maximum child care subsidies for second and subsequent children aged 5 and under from 85% to 95% (from 11 July 2022) and removing the $10,560 cap for families with combined incomes above $189,390 (from 1 July 2022).
The Government estimates that a family with 2 children earning $110,000 a year will be $95 per week better off for 4 days of care and a family with 3 children on $80,000 will be $108 per week better off for 4 days of care.
Aged care
An additional $17.7 billion over 5 years in response to the Royal Commission into Aged Care Quality and Safety, including:
$7.8 billion to implement a new funding model and increase the Government’s Basic Daily Fee supplement by $10 per resident per day;
$6.5 billion for the release of 80,000 additional Home Care Packages over the next 2 years, $798.3 million to support informal carers of older Australians (e.g. increased access to respite services and more targeted assistance for carers of people with dementia);
$630.2 million to improve access to high-quality aged care services for those in regional, rural and remote areas, Aboriginal and Torres Strait Islander people, and special needs groups;
$942 million to support older Australians to access safe and quality care and $652 million to skill the aged care workforce for the future.
National Disability Insurance Scheme (NDIS)
An additional $13.2 billion over 4 years for the NDIS.
Home ownership
An additional 10,000 places in 2021–22 under the New Home Guarantee (allowing first home buyers to build a new home or purchase a newly built home with a deposit of as little as 5%);
10,000 single parents with dependants will be able to purchase a home with a deposit of as little as 2% (the Family Home Guarantee scheme);
Increasing the maximum amount of voluntary contributions that can be released under the First Home Super Saver Scheme to $50,000 (see below);
Extending the deadline for construction to be started under the HomeBuilder program from 6 months to 18 months for existing applicants.
Women’s Economic Security
$120.7 million on programs designed to improve women's workforce participation and economic security (in addition to the $1.7 billion child care package).
Women’s health
$148 million over 5 years for health care services for women and girls
Mental health
$2 billion over 4 years (from 2021–22) for the National Mental Health and Suicide Prevention Plan
Health (general)
A further $1.9 billion in Australia’s COVID-19 Vaccination Strategy; $879 million over 2 years to continue the health response to the COVID-19 pandemic, to support access to health care services and reduce the risk of community transmission of COVID-19;
$487 million over 2 years to expand quarantine services in the Northern Territory; $115.2 million over 4 years (from 2021-22) to expand and improve dental health services; $80.9 million over 5 years for initiatives to support the delivery of primary care and the health workforce in rural and remote Australia.
Domestic violence:
$998.1 million over 4 years for initiatives to reduce, and support the victims of, Family, Domestic and Sexual Violence (FDSV) against women and children; $123.8 million over 4 years to support the reform of the family law system and improve access and safety for children and families.
Workplace
$9.3 million over 4 years to support the implementation of the Government’s response to the Respect@Work: Sexual Harassment National Inquiry Report
Training and skills
Scrapping the JobMaker hiring credit, but providing an extra 163,000 places on subsidised training courses by extending the JobTrainer scheme (subject to matched funding by State and Territory governments); an additional $2.7 billion on extending and expanding the Boosting Apprenticeship Commencements wage subsidy; 2,700 places in Indigenous girls’ academies; and 5,000 gateway and in-training support services for women starting in non-traditional trades
Jobs and wages
Wage subsidies available through Jobactive, Transition to Work (the Government’s specialist youth employment service) and ParentsNext will be increased to $10,000; the Local Jobs Program will be expanded and extended to 51 employment regions; Transition to Work will receive an additional $481.2 million over the forward estimates; a more efficient employment services program (the New Employment Services Model) will replace Jobactive from 1 July 2022 at a cost of $860.4 million over 4 years
Tourism
An additional $1.2 billion targeted support package to the aviation and tourism sectors
Education
$2 billion in ongoing funding for preschools through a 4-year Strategic Reform Agreement (funding will be contingent on the states and territories agreeing to a robust reform timeline focused on increasing participation and school readiness); $53.6 million to support Australian education providers most reliant on international students
Infrastructure (general)
An additional $1 billion to extend the Local Roads and Community Infrastructure Program; extending the Road Safety Program to 2022–23, with additional funding of $1 billion; an additional $250 million for the Building Better Regions Fund; $189.6 million over 5 years to create jobs and support sustainable economic growth in Northern Australia; $84.8 million to improve internet and mobile access in regional Australia; $1.3 billion in off-farm irrigation infrastructure
Infrastructure (specific projects):
$2 billion for the Melbourne Intermodal Terminal; $2.6 billion for the North-South Corridor-Darlington to Anzac Highway in South Australia; $2 billion for the Great Western Highway Upgrade (Katoomba to Lithgow) in NSW; $400 million in additional funding for the Bruce Highway in Queensland; $380 million for the Pakenham Roads Upgrade in Victoria; $237.5 million for the METRONET to support grade separations and the elevation of stations in Western Australia; $150 million for the Northern Territory National Highway Network; $132.5 million for the Canberra Light Rail - Stage 2A; $113.4 million for the Midland Highway Upgrades in Tasmania
Vaccines
Funding will be provided for the development of an onshore mRNA vaccine manufacturing capability in Australia.
Agriculture
$850.4 million over 5 years for a package of measures to back-in the farm sector’s ambition of a $100 billion industry by 2030 and support Australia’s soils and biodiversity stewardship; $172.5 million over 4 years to support the long-term drought resilience and preparedness of primary producers, rural and regional communities; $14.7 million to waive farm business income reconciliation debts incurred by Farm Household Allowance recipients up to the end of 2019–20.
Deregulation
$134.6 million over 4 years to progress the Commonwealth’s deregulation agenda.
Natural disasters
$1.2 billion over 5 years to improve Australia's capability to better prepare for, respond to, and recover from natural disasters.
Defence
An additional $747 million for defence training facilities in the Northern Territory.
Veterans
$460.4 million to ensure the Department of Veterans’ Affairs has adequate capacity to meet veteran support needs and enhance its capacity to address veteran suicide, including through faster processing of compensation claims; $145.3 million over 2 years for the Royal Commission into Defence and Veteran Suicides.
Not-for-profits
$1.9 million in 2022–23 for the ATO to build an online system to enhance the transparency of income tax exemptions claimed by not-for-profit entities.
Budget measures for individuals
Tax and superannuation highlights
Low- and middle-income offset retained (again)
As widely predicted, the low- and middle-income tax offset (LMITO) will be retained for 2021-22, thus avoiding an effective tax increase for many taxpayers. This is how the LMITO (also called the Lamington) is calculated. The benefit will depend on a taxpayer’s taxable income.
The low-income offset (LITO) has not been touched. The maximum amount of the LITO is $700, payable for taxable incomes up to $37,500. No LITO is payable once taxable income reaches $66,667.
Medicare levy thresholds
The Medicare levy low-income threshold for singles for 2020–21 is $23,226 (compared to $22,801 for 2019–20). The family income threshold is $39,167 (compared to $38,474 for 2019-20), increasing by $3,597 for each dependent child or student (compared to $3,533 for 2019-20).
For single seniors and pensioners eligible for the senior Australians and pensioners tax offset (SAPTO), the Medicare levy low-income threshold for 2020–21 is $36,705 (compared to $36,056 for 2019–20). The family threshold for seniors and pensioners eligible for SAPTO is $51,094 (compared to $50,191 for 2019-20). The threshold increases by $3,597 for each dependent child or student.
No changes to tax rates
There were no changes to the income tax rates. As a reminder, the rates in the table below are legislated to apply for the 2020–21, 2021–22, 2022–23 and 2023–24 income years.
The rates legislated to apply from 2024–25 are also unchanged. From 2024–25, a 30% rate will apply to the $45,001–$200,000 bracket, doing away with the 32.5% and 37% rates.
Simplified residency test
The individual tax residency rules will be replaced with a new, modernised framework. The primary test will be straightforward – 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 is based on recommendations made by the Board of Taxation in its 2019 report on the residency rules. It will apply from the first income year after the enabling legislation receives assent.
Working holiday makers who stay in Australia for more than 6 months will become residents under the simplified test. Will the so-called “backpacker tax” be scrapped as a consequence? The Budget papers are silent.
Self-education expenses
The first $250 of a prescribed course of education expense is currently not deductible. The Government will remove that limitation, with effect from the first income year after the enabling legislation receives assent.
Pension Loans Scheme
The flexibility of the Pension Loans Scheme will be improved by providing access to advance payments through allowing participants to access up to 26 fortnights’ worth of top-up payments as a lump sum and introducing a No Negative Equity Guarantee.
New deductible donations
The Government announced 3 new organisations (DGRs) eligible to receive tax deductible donations:
Australian Associated Press Ltd – from 1 July 2021 to 30 June 2026;
Virtual War Memorial Limited – from 1 July 2021 to 30 June 2026;
Scripture Union Queensland – from 1 July 2021 to 30 June 2023.
In addition, the DGR status of Cambridge Australia Scholarships Limited and Foundation 1901 Limited has been extended for 5 years (to 30 June 2026 and 31 August 2026 respectively).
ADF personnel
A full income tax exemption will be available for the pay and allowances of Australian Defence Force (ADF) personnel deployed to Operation Paladin from 1 July 2020. Under Operation Paladin, ADF personnel are deployed in Israel, Jordan, Syria, Lebanon and Egypt.
Members of NZ sporting teams
The Government will ensure that New Zealand maintains its primary taxing right over members of its sporting teams and support staff in respect of Australian income tax and FBT liabilities that arise from exceeding the 183-day test in the Australia-NZ 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 FBT years.
Budget measures for business
Temporary full expensing extended
The temporary full expensing incentive will be extended for 12 months until 30 June 2023. Temporary full expensing allows businesses with an annual aggregated turnover under $5 billion to deduct the full cost of eligible depreciating assets, as well as the full amount of the second element of cost (e.g. improvement costs and transport costs).
Temporary full expensing only applies to new assets located and principally used in Australia. Taxpayers can choose not to apply temporary full expensing to a depreciating asset (the choice cannot be revoked).
Loss carry-back extended
The loss-carry back available to companies with an annual aggregated turnover of less than $5 billion will be extended by 12 months. This 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.
The amount carried back cannot be more than the earlier taxed profits and the carry-back cannot generate a franking account deficit.
Companies that do not elect to carry back losses can still carry losses forward as normal.
Pausing ATO debt recovery actions
The Government will allow small businesses to apply to the AAT (the Small Business Taxation Division) to pause or modify ATO debt recovery actions where the debt is being disputed in the AAT. A small business is one with annual aggregated turnover less than $10 million.
When considering applications, the AAT will be required to consider the potential effect on the integrity of the tax system and ensure that there is a genuine dispute with the ATO.
This measure will apply in respect of proceedings commenced on or after the date the enabling legislation receives assent. It could save small businesses several thousands of dollars in court and legal fees.
Employee share schemes
The Government will remove the cessation of employment taxing point for tax- deferred employee share schemes (ESS). This change will apply to ESS interests issued from the first income year after the enabling legislation receives assent.
As a result, tax will be deferred until the earliest of the remaining taxing points:
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.
In addition, the Government will reduce red tape for ESS by:
removing regulatory requirements, where employers do not charge or lend to the employees to whom they offer ESS; and
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.
Depreciation – intangible assets
Taxpayers will be allowed to self-assess, for depreciation purposes, the effective life of intangible assets such as patents, registered designs, copyrights and in-house software. This will apply to assets acquired on or after 1 July 2023 (after the temporary full expensing regime has concluded).
Taxpayers will continue to have the option of applying the existing statutory effective life to depreciate these assets.
A similar measure was first proposed in December 2015 but was dropped when the relevant legislation (a 2017 Bill) was before the Senate.
Storm and flood grants exempt
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 (the grants will be non-assessable non-exempt income).
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.
Tax relief for small brewers and distillers
The excise refund cap for small brewers and distillers will increase from $100,000 to $350,000 per year from 1 July 2021.
From that date, 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.
Digital games offset
As part of its Digital Economy Strategy (see below), the Government will provide a refundable digital games tax offset to eligible businesses that spend a minimum of $500,000 on qualifying Australian games expenditure. Games with gambling elements, or that cannot obtain a classification rating, will not be eligible.
The digital games offset will be available from 1 July 2022 to Australian resident companies or foreign resident companies with a permanent establishment in Australia.
Medical and biotechnology incentive
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%. The patent box will apply to income derived from Australian medical and biotechnology patents.
The concession will apply from income years starting on or after 1 July 2022.
The Government will also consult on whether a patent box would be an effective way of supporting the clean energy sector.
Corporate tax residency rules
The Government announced in the 2020–21 Budget that the law would be amended to provide that a company that is incorporated offshore will be treated as an Australian tax resident if it has a "significant economic connection to Australia".
The Government has now announced that it will consult on broadening this amendment to trusts and corporate limited partnerships.
Other measures
Other measures that affect business include:
technical amendments to the Taxation of Financial Arrangements (TOFA) rules, including facilitating access to hedging rules on a portfolio hedging basis, reducing compliance costs and making sure taxpayers are not subject to unrealised taxation on foreign exchange gains and losses unless this is elected – applicable to relevant transactions entered into on or after 1 July 2022;
extending the Junior Minerals Exploration Incentive (JMEI) program for another 4 years to 30 June 2025 (funding of $19.4 million each year);
revising the start date for the corporate collective investment vehicle (CCIV) regime to 1 July 2022. The CCIV is an investment vehicle with a corporate structure that provides flow-through tax treatment;
removing the concessional 10% effective tax rate that applies to income derived by offshore banking units from eligible offshore banking activities – legislation to implement this measure is presently before Parliament;
a temporary levy on offshore petroleum production to recover costs of decommissioning the Laminaria-Corallina oil fields and associated infrastructure. The levy will terminate on 30 June of the year in which all costs associated with the decommissioning have been recovered.
Digital Economy Strategy – tax and other measures
The Government released its Digital Economy Strategy on 6 May, but as part of the 2021-22 Budget. The Strategy is intended to target investments that will underpin improvements in jobs and productivity and make Australia’s economy more resilient. There is a dedicated website at https://digitaleconomy.pmc.gov.au.
Measures announced by the Government include:
spending $12.7 million to provide independent advice to Australian small businesses to help them build their digital capabilities through the Digital Solutions – Australian Small Business Advisory Services program;
spending $15.3 million to enhance the value of electronic invoicing to help businesses reduce costs and increase productivity;
as reported above, providing a refundable digital games tax offset to eligible businesses that spend a minimum of $500,000 on qualifying Australian games expenditure – games with gambling elements, or that cannot obtain a classification rating, will not be eligible;
as reported earlier allowing taxpayers to self-assess the effective life of certain intangible assets from 1 July 2023;
undertaking a review of the venture capital tax concessions to ensure they are achieving their intended objectives;
spending just over $100 million over 6 years improving Australians' digital skills within the education and training ecosystem, as well as creating more immediate learning options for reskilling and upskilling for in-demand jobs;
investing $53.8 million over 4 years to create the National Artificial Intelligence Centre to coordinate Australia's AI expertise and capabilities;
spending $200.1 million to enhance myGov and $301.8 million to enhance the My Health Record system;
delivering Australia's first Data Strategy setting out how the Government will enhance effective, safe and secure data use over the period 2021 to 2025; and
strengthening Australia's data security settings through the development of a National Data Security Action Plan.
Superannuation measures
First Home Super Saver Scheme
As noted above, the maximum amount of voluntary contributions that can be released under the First Home Super Saver Scheme (FHSSS) will be increased from $30,000 to $50,000 (anticipated to start in 2022–23).
Other changes (to apply retrospectively from 1 July 2018) will assist FHSSS applicants who make errors on their FHSSS release applications, for example, by allowing individuals to withdraw or amend their applications prior to receiving a FHSSS amount.
In addition, the ATO will be allowed to return to a super fund any released FHSSS money that has not been paid to the individual. The money will be treated as the fund’s non-assessable non-exempt income and will not count towards the individual’s contribution caps.
SMSFs – residency requirements
The Government will relax residency requirements for self-managed super funds (SMSFs) and small APRA-regulated funds, by extending the central control and management test safe harbour from 2 to 5 years for SMSFs and removing the active member test for both fund types. The measure is anticipated to apply from 1 July 2022.
Legacy retirement products
There will be a 2-year period for individuals to convert a specified range of legacy retirement products, together with any associated reserves, to newer, more flexible products (currently, these products can only be converted into another like product). Products covered 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.
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.
This measure will apply from the first financial year after the enabling legislation receives assent.
Other superannuation measures
Other superannuation measures announced as part of the Budget include:
reducing the eligibility age for the downsizer scheme from 65 to 60 (anticipated to apply from 1 July 2022). This means that Australians aged 60 or over will be able to make an additional non-concessional super contribution of up to $300,000 from the proceeds of the sale of their home;
scrapping the work test for those aged 67 to 74 (anticipated to apply from 1 July 2022). At present, individuals in that age bracket are required to be employed for at least 40 hours in a maximum period of 30 consecutive days in the financial year before they can make super contributions (concessional or non-concessional); and
scrapping the requirement for workers to earn at least $450 a month before their employers are obliged to pay super (anticipated to apply from 1 July 2022).
The Government will not proceed with a measure to extend early release of super to victims of family and domestic violence.
No changes to superannuation guarantee
There had been speculation that the Government might defer the legislated increases in the super guarantee (SG) rate, but that did not happen in the Budget. Accordingly, the SG rate is still due to increase from 9.5% to 10% from 1 July 2021, and by 0.5% per year from 1 July 2022 until it reaches 12% from 1 July 2025.
Note that the SG opt-out income threshold will increase to $275,000 from 1 July 2021 (it is currently $263,157).
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