2021/22 Federal Budget

Josh Frydenberg, the Federal Treasurer said last night “Australians.. are better placed than nearly any other country to meet the economic challenges that lie ahead.”

And it is this view that has enabled the Federal Government to extend a number of tax measures (both for for individuals and for businesses) while also announcing some targeted changes to superannuation, tax residency and employee share schemes.

Budget Highlights for SME’s and Employers

Extension of Temporary Full Expensing

In the 2021 Federal Budget, the Government announced the Temporary Full Expensing (“TFE”) Measures. These measures were initially intended to only apply until 30 June 2022. In last night’s Budget announcements, the Government committed to extending these measures until 30 June 2023.

Apart from the extension of the measures, the TFE rules remain unchanged.

This means businesses with an aggregated turnover of less than $5 billion will be able to deduct the full cost of depreciable assets acquired after 6 October 2020 and first used (or installed, ready for use) by 30 June 2023.

Whilst the extension of the TFE measures will be welcomed by taxpayers, there are still some deficiencies in the rules as they apply to Small Business Entities (“SBE”) (being entities with an aggregated turnover of less than $10 million). When the rules were first introduced, there were concerns about the mandatory application of the full expensing. The rules were amended to allow for an ‘opt-out’ (that is, the TFE could be applied on an asset-by-asset basis). However, the opt-out is currently only available for entities with an aggregated turnover of $50 million or more and therefore is not available to SBEs.

Loss Carry-Back Extension

The Government has announced the extension of the temporary loss carry-back rules for another year to 30 June 2023. The rules were initially announced in the 2020 Federal Budget.

The extension will allow companies with an aggregated turnover of less than $5 billion to carry back losses incurred in the 2020 to 2023 income years, to the 2019 or later income years.

The extension of the Loss Carry-Back rules will be welcomed by company taxpayers. They will be able to ‘unlock’ losses incurred as far out as the 2023 income year, and offset it against prior years that have been profitable.

Removal of Superannuation Guarantee Threshold

The Government has announced that it will remove the Superannuation Guarantee (“SG”) eligibility threshold of $450 per month.

Under the new measure, employers will be liable to pay SG contributions on behalf of employees regardless of how little they earn. The measure will have an impact on employers with part-time or casual employees. Depending on how many part-time or casual employees there are, affected employers may have a significant increase in their SG obligations.

With the SGC contribution rate rising to 10% from 1 July 2021, this will effectively provide a 10% increase in remuneration for those employees earning less than $450 per month provided they were employed on an “exclusive of super” basis.

This will also no doubt be a new source of ATO audit activities (relying on data reported through the Single Touch Payroll (“STP”) system.

The new rules will apply from the first income year, after the legislation receives Royal Assent.

ATO Debt Recovery from Small Businesses

The Government has announced a new measure that will give the Administrative Appeals Tribunal (“AAT”) additional power to pause or modify ATO debt recovery action, where the underlying issues of the disputed debts are under review by the AAT’s Small Business Taxation Division. This means small businesses will not be required to pay the disputed debts until the matters under review by the AAT have been decided.

Debt recovery actions that may be affected include:

• recovery of the underlying debt;
• application of garnishee notices; and
• recovery of related penalties and interest

Under the new measure, small businesses with an aggregated turnover of less than $10 million will be able to apply for a pause or modification of ATO debt recovery actions until the underlying dispute has been decided. The AAT will be required to consider the potential effect on the integrity of the tax system and ensure that applications are in relation to genuine disputes.

This is a welcome news for small businesses. For tax professionals providing tax advocacy services to small businesses, it is often unfair for small businesses having to pay 50% or, occasionally, all of the underlying debt to the ATO or risk recovery action from the ATO whilst there is a genuine dispute with the ATO on the underlying issue.

The new measure will apply from the date the legislation receives Royal Assent.

Employee Share Scheme Amendments

The Government has announced an amendment to the cessation time, taxing points for tax-deferred Employee Share Schemes (“ESS”). Under the current rules, one of the deferred taxing points is the Cessation of employment;

The changes will result in the removal of the cessation of employment taxing point with tax being deferred until the earliest of the remaining taxing points.

The changes will apply to ESS interests issued from the first income year after the date of Royal Assent of the enabling legislation. If the enabling legislation is passed and Royal Assent is received prior to 30 June 2021, the changes will only be applicable to ESS interests issued from 1 July 2021 onwards.

This means that for employees who cease their employment and have had ESS interests issued prior to this date, cessation of employment will still be a relevant taxing point.

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; 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.

These regulatory changes will apply 3 months after Royal Assent of the enabling legislation.

Extension to the Corporate Residency Test

While there is no further development on the proposed change to the corporate tax residency rules, originally announced in the 2020-21 Federal Budget last year. The Government has announced that it will consult on broadening the measure to trusts and corporate limited partnerships. The Government will seek industry’s views as part of the consultation on the original corporate residency amendment. However, there is no timeframe announced yet for the consultation.

The proposed measure will apply from the date the legislation receives Royal Assent. However, taxpayers will also have an option to apply the new law from 15 March 2017 (the withdrawal date of Taxation Ruling TR 2004/15).

Budget Highlights for Individuals

Change to the Individual Tax Residency Test

In one of the big moves in the 2021-22 Federal Budget, the Government has announced an overhaul of the current individual residency rules.

Under the current rules, an individual taxpayer is a resident of Australia for income tax purposes if the taxpayer satisfies one of the following tests:

• the taxpayer is a resident according to its ordinary concepts;
• the taxpayer is domiciled in Australia unless the ATO is satisfied that the individual’s permanent place of abode is overseas;
• the taxpayer is in Australia for 183 days or more unless the ATO is satisfied that the usual place of abode is overseas and the individual does not intend to take up residence in Australia; and
• the taxpayer is a member of certain Commonwealth government superannuation schemes.

The current rules are unnecessarily complex and are ill suited to the modern world where individuals can move more freely to take up new jobs within and out of Australia (at least before the COVID-19 pandemic hit).

The Government has taken up the recommendations made by the Board of Taxation (“BoT”) in its 2019 report titled Reforming individual tax residency rules — a model for modernisation. Under the proposed new rule, an individual taxpayer is a resident of Australia for income tax purposes if the individual is physically present in Australia for 183 days or more in any income year (the primary test). This is a ‘bright-line’ test.

Where the individual fails the primary test, there will be secondary tests that depend on a combination of physical presence and measurable, objective criteria. In particular, the BoT in its report proposed a new four-factor test: the right to reside in Australia, Australian accommodation, Australian family and Australian economic connections. It will be interesting to see how much of the BoT’s recommendations will be adopted into the new legislation by the Government.

What is clear though, is that this new “bright-line” test will ensure more overseas arrivals become an Australian tax resident, which may not always be in their best interests.  How it will apply in a COVID environment of restricted travel, to those that leave Australia and the impact of tie-breaker tests in Australia’s Double Tax Agreements will require some consideration.

The new rules will apply from the first income year after the legislation receives Royal Assent.

Change to Self-Education Expenses

The Government has announced that it will scrap the $250 limit to the self-education expenses. Under the current rules, the first $250 of self-education expenses incurred by individual taxpayers are not deductible. While the first $250 may not be deductible, the rules allow the $250 limit to be offset against other related expenses that are not deductible, such as childcare expenses while attending self-education activities, private travel costs (e.g. home to place of education) and home office occupancy costs.

In our experience, most (if not all) individual taxpayers claiming self-education expenses can get around the $250 limit by applying that limit to non-deductible expenses like travel, however, they had to keep additional records to do so. It is therefore well overdue for the Government to scrap the $250 limit.

Unfortunately, the Government did not extend deductibility of self education expenses to courses unrelated to an individual’s current employment, which would have encouraged employees to up skill.

The new rules will apply from the first income year after the legislation receives Royal Assent.

Super contributions work test

The budget will repeal the superannuation contributions “work test” for those aged 67 to 74 in relation to non-concessional and salary sacrificed contributions. This will allow individuals under the age 75 to make non-concessional contributions or salary sacrificed contributions from 1 July 2022 subject to existing contributions caps.

This measure will also allow individuals under aged 75 to access the bring-forward concessions allowing them to make a lump sum contribution of 3 times the non-concessional contributions cap should they meet the other requirements.

Currently, individuals aged between 67 and 74 are only able to make voluntary contributions, both concessional and non-concessional if they meet the “work test”. The work test requires that an individual must work 40 hours over a 30 day period in the financial year in which contributions are made.

Disappointingly, the “work test” will continue to apply for individuals who wish to make voluntary concessional contributions. Individuals will also still need to meet other restrictions in relation to non-concessional contributions such as the restrictions for members with Total Superannuation Balances of $1.4 million or greater making non concessional contributions.

The relaxing of these restrictions will significantly aid older Australians in growing their superannuation entitlements as they enter retirement.

For example, let’s consider an example of Scott who is 67 and has just retired with a superannuation balance of $800k, and $400k in personal savings. Currently, he would only be able to make a one-off contribution of $100k as a non-concessional contribution, provided he made that contribution in the year he retired and was able to satisfy the work test.

Under these reforms, Scott could make a contribution of $300k from 1 July 2022 by accessing the bring-forward concessions. As he would still be under 75 on 1 July 2025 he could then make a further contribution of $100k and shift the last of his personal savings into superannuation to fund a pension.

Residency requirements for SMSF members

Residency requirements for Self-Managed Superannuation Funds (“SMSF”) and small APRA funds will be relaxed as part of the Budget to make it easier for Australians working overseas temporarily, to retain and continue to contribute to their SMSF to put them in the same position as large APRA Funds.

The residency requirements will be relaxed in the following manner:

• Extension of the central management and control test safe harbour from 2 to 5 years; and
• Removal of the active member test.

The central management and control test, relates to the strategic and high-level decision-making processes and activities that are undertaken by the trustee. This includes formulating and reviewing the fund’s investment strategy and monitoring investments. Currently members who leave Australia for more than 2 years are forced to put someone else (who cannot be paid) in charge of their retirement assets until they return. Extending this period to 5 years will give much greater certainty for members and allow them to continue to operate their SMSF whilst working overseas.

The active member test requires that an SMSF must either have no active members or have active members that are Australian tax residents and who hold at least 50 per cent of either the total market value of the fund’s assets attributable to super interests, or the sum of the amounts that would be payable to active members if they decided to exit the fund. This test often means that it is impossible for individuals working overseas to contribute to their SMSF whilst overseas.

The removal of the active member test will ensure that individuals working overseas are able to still contribute to their SMSF whilst working overseas as they would for large APRA funds.

This measure will take effect from the start of the first financial year, after Royal Assent of the enabling legislation, expected to be 1 July 2022.

Downsizer Super contributions eligibility extended

The downsizer contribution provisions allow individuals on the sale of their primary residence to make a once off non-deductible contribution of up to $300k to their superannuation fund. This contribution must be made from the capital proceeds on the sale of the house and must be made within 90 days of the settlement date). The downsizer contribution can be made irrespective of an individual’s total superannuation balance, ie the restrictions on non-concessional contributions for those with Superannuation balances over $1.6 million ($1.7million from 1 July 2021) do not apply to downsizer contributions.

The budget allows for the minimum age where individuals can access this measure to be reduced from 65 to 60 from 1 July 2022. This will allow more individuals to take advantage of these measures and will be of great benefit for couples who downsize their home where one member is over age 65 and one member under age 65.

Let’s take the example of Paul and Anita who are aged 66 and 61 respectively and sell their large family home for $2 million. Currently only Paul would be able to access the downsizer contribution and contribute $300k to his superannuation account. From 1 July 2022 the sale of their home would mean that both Paul and Anita can contribute $300k ($600k total) into their superannuation accounts.

The changes related to superannuation are a welcome change for older Australians, especially those who choose to retire at a later age and so are wanting to make contributions later in life as they hit retirement. The changes to both the work test and the Downsizer contributions will significantly aid those who cease employment and downsize around the same time especially where they retire at an age of 67 or more.

If we revisit the example of Scott, and we include the fact that Scott is married to Jenny who is 61 and upon Scott retiring, they also sell their family home for $1 million. Scott and Jenny would, under these Budget measures, be able to put significantly greater funds into superannuation, than under current rules.

Currently he would be limited to making only $100k worth of non-concessional contributions to the fund and on the sale of his home, only he would be able to access the downsizer contribution. From 1 July 2022, he would be able to make non-concessional contributions of $400k before turning 75 and both Jenny and he could access the downsizer contribution on the sale of his home for a total of $600k to be contributed between them.

In what now seems to be this Government’s approach to a change in the law, the proposed start date for the new measures above is from the Date of Royal Assent or 1 July after Royal Assent, rather than the historical start date of 7:30pm EST Budget Night.  Whilst the change is certainly more practical, it doesn’t have the same sense of “secrecy” and “surprise” of past Budgets.