As Treasurer Josh Frydenberg took us through the minutiae of the Federal Budget last night, he reinforced his message that this year’s budget focuses on helping the Australian economy to come “soaring back to life” after a year of recession and economic upheaval.
COVID-affected industries such as tourism and the arts saw big cash injections, as did digital technologies and start-ups. We also saw targeted support for homeowners (particularly, first home buyers) and retirees wanting more flexibility around superannuation contributions.
We’ve trawled through the detail and summarised the 2021 Federal Budget measures into the following categories:
- How Will the Federal Budget Impact Aussie Businesses?
- How Will the Federal Budget Impact Individuals?
- How Will the Federal Budget Affect Our Economic Outlook?
How Will the Federal Budget Impact Aussie Businesses?
Let’s start with the basics! From 1 July 2021, the tax rate for small and medium-sized companies will be reduced from 26% to 25% (as scheduled).
Temporary Full Expensing
Eligible businesses with an aggregated turnover under $5 billion will continue to be able to immediately deduct the full cost of eligible depreciating assets, with the scheme extended for a further 12 months until 30 June 2023. The investment incentive, which expanded the previous $20,000 instant asset write-off scheme, was due to expire on 30 June 2022.
Extension of Temporary Loss Carry-Back Scheme
The end date for loss carry-back rules available to corporate entities has also been extended for an additional year to the 2022–23 income year. The 2021 income year will be the first year where corporate taxpayers will receive a financial benefit under these rules (including any benefit that may have arisen from a 2020 year carry-back). This means when eligible companies lodge their 2022-23 tax return, they will be able to offset previously taxed profits from as far back as the 2018-19 income year to receive a tax rebate.
These rules are expected to be of most value to businesses that have been severely impacted by COVID-19. Noting that the benefit from a carry-back is limited by a company’s franking account balance, which is anticipated to be a focus of tax planning for 2021 returns.
Superannuation Guarantee Eligibility
The current $450 per month minimum income threshold, under which employees do not have to be paid the superannuation guarantee by their employer will be removed. This is expected to be enacted by 1 July 2022.
This is a welcome change for equity amongst the casual workforce, but may increase administrative burden in industries with a high use of casual employees (such as hospitality businesses).
Employee Share Schemes
The government will make it easier for businesses (in particular, start-ups struggling to attract or retain staff due to funding and cash flow constraints), to offer employee share schemes (ESS) by removing regulatory requirements:
- where employers do not charge or lend to the employee to whom they offer ESS
- where employers do charge or lend to the employee, streamlining requirements for unlisted companies making employee share scheme offers that are valued at up to $30,000 per employee per year (an increase to the existing threshold of $5,000).
The cessation of employment taxing point for tax-deferred employee share schemes will also be removed.
SME Recovery Loan Scheme
The government will provide participating lenders with a guarantee for 80% of secured or unsecured loans of up to $5 million. Loans can be used by the SME for a broad range of business purposes, including to support investment and refinancing existing loans.
To be eligible, the recipient must have a turnover of up to $250 million and have been either:
- a recipient of the JobKeeper Payment between 4 January 2021 and 28 March 2021, or
- located or operated in a local government area that has been declared a disaster as a result of the March 2021 NSW floods and were negatively economically impacted.
Excise Relief for Small Distillers and Brewers
From 1 July 2021, 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. This will align the benefit available under the excise refund scheme for brewers and distillers with the wine equalisation tax producer rebate. That’s a win for everyone!
Tax Incentives for Digital Technology Investment
Digital Games Tax Offset
Businesses will have access to tax incentives including a 30% digital games tax offset. The strategy aims to boost digital skills and capabilities as well as encourage business investment. The digital games tax offset will be a refundable offset available for a minimum investment of $500,000 in “qualifying Australian games expenditure” which will exclude games with gambling elements. The offset will be available from 1 July 2022 to tax resident companies or those with an Australian permanent establishment.
Self-Assessment of the Effective Lives of Intangible Assets
From 1 July 2023 (after the temporary full-expensing regime has concluded), taxpayers will also be able to self-assess the effective lives of intangible assets, such as patents, registered designs, copyrights and in-house software. These assets must currently be depreciated over an effective life as prescribed under the income tax law or may qualify for the temporary full expensing concession (although this is limited for intangible assets in certain cases). Self-assessment will potentially allow taxpayers to recover the cost of these assets within a shorter period than as permitted under the current rules.
Patent Box – Tax Concessions for Medical and Biotechnology Innovations
From 1 July 2022 the patent box will tax income derived from Australian patents in the medical and biotechnology sectors at a concessional corporate tax rate (17%). This will encourage businesses to undertake their R&D in Australia and keep patents here. The Government will consult closely with industry on the design of the patent box and explore whether expanding the patent box would be an effective way of supporting the clean energy sector.
Other Government Grants & Industry Incentives
$274.6 million will be allocated for the expansion and extension of existing programs to support Australian businesses such as travel agents, zoos and aquariums and events providers that rely on international tourists. It looks like we’ll be tourists in our own backyard for some time yet.
$300 million has been offered in support of the creative industry, including the $125 million Restart Investment to Sustain and Expand grants, which aim to kick-start new productions, festivals and events supporting artists and organisations to get back in business.
The government also committed over $100 million in initiatives to build the digital skills of Australians to meet the needs of the modern Australian workplace. This includes $124.1 million in new funding, including a National Artificial Intelligence Centre led by CSIRO Data 61.
Digital games developers will receive a refundable tax offset of 30%. Small businesses are also being supported to adopt digital technologies through a $12.7 million expansion of the Digital Solutions – Australian Small Business Advisory Service.
$215.4 million will be invested in new dispatchable generators, which will deliver affordable and reliable power to consumers in the nation’s electricity markets. This includes $49.3 million for battery and microgrid projects and $24.9 million to assist new gas generators become hydrogen ready.
A new Global Talent Visa and Temporary Activity Visa will enable individual tax residency to encourage highly skilled individuals to relocate to Australia.
How Will the Federal Budget Impact Individuals?
Tax Cuts for Low and Middle Income Earners
The Low-and-Middle-Income Tax Offset of $1,080 will be extended to the end of the 2022 income year. The maximum offset is available at a taxable income of $48,000 to $90,000; then reduces at a rate of 3 cents per dollar earned from $90,000 to $126,000.
Housing and Home Ownership
Family Home Guarantees
A new program for single parents to buy or build a home with a 2% deposit. Eligibility criteria includes an annual taxable income limit of $125,000 and is subject to satisfying lender approval. The single parent does not need to be a first home buyer, and there will be 10,000 guarantees made available over four years commencing 1 July 2021.
First Home Loan Deposit Scheme (FHLDS)
An additional 10,000 places will become available from 1 July 2021 under the existing program that guarantees 5-15% of an eligible first home-buyers loan. Eligibility is also subject to an annual taxable income limit of $125,000 and a property price threshold (which varies depending on the location of the property).
Home Builder Program
The Home Builder Program will extend the construction commencement requirement from six months to 18 months for all existing applicants.
CGT Reforms for Granny Flats
Another housing affordability measure recently announced was draft legislation regarding granny flats and the CGT consequences. The legislation is targeted towards only formal arrangements with older Australians and people with disabilities.
Reforms to the ‘Work Test’
From 1 July 2022, individuals aged 67 to 74 will no longer be required to meet the work test when making or receiving non-concessional (including under the bring forward rule) or salary sacrificed superannuation contributions subject to existing contribution caps. Access to concessional personal deductible contributions for individuals 67 to 74 will still be subject to meeting the work test (from age 67).
First Home Super Saver Scheme (FHSSS)
First home-buyers will be able to withdraw $50,000 of voluntary savings from their superfunds. This is an increase to the existing limit of $30,000. The restriction of $15,000 of contributions per annum under this program and concessional contribution caps will potentially limit access to the benefits of this program.
Extending Access to the Downsizer Contribution
From 1 July 2022, the minimum age for the downsizer contribution will be lowered from 65 to 60, allowing more Australians nearing retirement to make a post-tax contribution of up to $300,000 per person (or $600,000 per couple) when they sell their family home.
Legacy Product Conversions
Those who are currently “locked” into certain legacy products (such as market-linked, life-expectancy and lifetime pension products) now have the option to transition into more flexible or contemporary retirement products within a 2year period. Those who choose to can fully exit these products by transferring the full capital amount (“commute”) into accumulation phase, take a lump sum withdrawal or commence a new retirement income stream.
SMSF Member Residency
Residency requirements for SMSF and small APRA fund members are being relaxed through extension of the "central control” test from 2 years to 5 years, and removal of the “active member” test.
Security in Retirement
The removal of the $450 per month superannuation threshold will expand the superannuation guarantee, improving coverage and increasing retirement savings.
Social Security: Improving the Pension Loans Scheme (PLS)
The PLS is a voluntary, reverse mortgage-type loan available for older Australians through which they can receive regular fortnightly payments, in addition to the Age Pension, with the payments accruing as debt secured against their property (with interest charged).
From 1 July 2022, a no-negative equity guarantee will mean that borrowers under the PLS, or their estate, will not owe more than the market value of their property.
Immediate access to lump sums under the PLS
- Those on a full-rate Age Pension will be able to access their entire annual PLS amount as a lump sum.
- Those with a part-rate Age Pension will also be able to access a lump sum worth 50% of the full Age Pension and continue to receive the PLS fortnightly payments.
- Those not eligible for the Age Pension (but of Age Pension age) can access a lump sum payment worth up to 50% of a full rate Age Pension.
From July, the childcare subsidy for families with two or more children aged five and under will increase to a maximum of 95% from the current 85%.
Individual Tax Residency
The government will replace the individual tax residency rules with a 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.
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.
There may still be instances whereby an individual is technically a tax resident of more than one country. In such situations, taxpayers will be required to rely upon existing tax treaties where available.
Currently, the first $250 of a prescribed course of education expense is currently not deductible but the government will remove this exclusion in order to encourage self-development and education.
How Will the Federal Budget Affect Our Economic Outlook?
In delivering the Federal Budget, Treasurer Josh Frydenberg declared the Australian economy is bouncing back from the COVID-induced economic downturn faster and stronger. This is evident from the pullback in the government’s deficit forecasts for the 2021 financial year; however, there is a note of caution as the global pandemic is still far from being over.
Except for industries such as public, utilities, health and financial services, most other industries remain at below pre-COVID employment levels, which remains the target of the government with fiscal and monetary stimulus set to remain until headline unemployment falls to 4–4.5% or lower.
The Federal Budget social and economic measures and continued government spending will support in lifting economic activity but this, coupled with global stimulus packages, has led to profound market excesses. We explored our view in detail in our recent Quarterly Investment Update.
It’s important to note that some of these measures are set to pass but not yet legislated. To further discuss any of the above Federal Budget measures and how they may impact you or your business, please get in touch with our Melbourne-based accounting and business advisors using the form below. We work closely with our other BlueRock teams to provide a holistic strategy for entrepreneurs and business owners, so your business and life goals are all carefully considered.