Tax & Super Australia commentary on Federal Budget 2021-22

by John Jeffreys

The Government has decided not to go down the austerity path.  The amount of net debt as a share of GDP is predicted to peak at around 40% about 2025 when it was only at about 18% in 2017.  Rather, the Government has decided to put its foot on the accelerator with the hope that the growth in the economy over a long period of time will help to pay down the debt that has been central to the Government’s response to COVID-19.

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Key tax and superannuation measures

Extending the full expensing of assets for another year

This incentive, which was to end on 30 June 2022 has now been extended to 30 June 2023.  According to information from the Treasury, current investment in machinery and equipment is very strong.  This must be fuelled by low interest rates and the ability of  most businesses to write-off the full cost of asset purchases. 

Businesses should welcome this measure, but it is to be remembered that it is a timing measure.  When assets are sold, the full sale proceeds must be recognised as income if the asset has been fully written off.

Extending the loss carry-back rules

Going hand-in-hand with the extension with regard to the full expensing of assets, is the extension of the ability to carry back losses from the year ending 30 June 2023 as far back as the year ended 30 June 2019.  The Government is to be commended in extending this measure as it means, among other things, that the ability to fully expense assets can have its maximum impact if the purchase of the asset puts a company into tax losses and it has paid tax in one of the earlier relevant years.

It is to be remembered that the ability to carry-back losses is only available to companies.  This means that many small businesses who often operate in non-corporate structures cannot benefit from this concession.

Is it possible that we will see the ability to carry back losses as a permanent feature of our tax system? 

Extension of LMITO

The extension of LMITO for another income year will deliver tax cuts for lower and middle income families.  This is a clear indication that the Government wants to fill taxpayers hands with money so that they will continue to spend.  Also, it may have been politically unpalatable for the Government to be facing the next election with there being a view that the Government had “increased” taxes for individuals.  Once benefits such as LMITO are put in place, it’s not easy to take them away, especially with an election on the horizon.

Changing how residency of individuals is determined

The Government has adopted the recommendations of the Board of Taxation to fundamentally change the way an individual tax resident is to be determined.  The key part of the change is the “bright line” test of whether an individual has been in Australia for more than 183 days.  If yes, the person is a tax resident of Australia.

This, hopefully, will stop a great deal of the uncertainty in determining whether an individual is a resident.  Under the current test, a person is a resident of Australia if they reside in Australia.  You have to read a lot of court decisions to work out what that term means.  Also, if the “resides” test is not applicable, you then have to determine, among other things, whether you intend to take up residence in Australia and whether you have a permanent place of abode outside Australia.  Due to people travelling extensively around the world in modern times (before COVID-19) these issues could be very difficult to determine.

The Board of Taxation’s recommendations will certainly help to make it clearer whether an individual is a resident or not.  Nevertheless, there are still some items of interpretation in those tests.  Also, when Parliament puts those recommendations into legislation, it can often be the case that the words of the legislation do not quite reflect what was intended, creating further interpretative difficulties.

This change is set to come into effect from the first income year after royal assent to the legislation.  I would expect a long and detailed consultation period concerning this proposal and we may not see if come into effect until 1 July 2023, or even later.

Interestingly, the budget papers do not consider that this change in definition will have any impact on the revenue.  This remains to be seen as I think it will be easier to become a resident of Australia.  A resident of Australia is assessed on their world-wide income.

There will probably be some interesting situations that arise for people in the cross over from one residency definition to the new one.  This will particularly be so when on say, 30 June of one year a person is a resident or non-resident and then on the next day they change to be the other type of residency.

I also wonder whether, in conjunction with this change there may be some changes to the Working Holiday Maker (backpacker) legislation.  There is no suggestion in the budget papers that this will be the case.  However, working holiday makers will often be residents under the new definition.  Will this prompt the Government to change, or even abandon the backpacker tax?

Employee share schemes (ESS)

Over many years, there have been various amendments to the ESS rules to try and get them more conducive to retaining and incentivising employees.  While the proposed changes in the budget are OK, they still don’t achieve what I think most companies would really like. 

What they want is an ability to issue shares to an employee at a discount and there be no tax consequences at that time.  Also, it would be useful to provide concessions to companies that don’t require the shares to be offered to 75% of employees with at least 3 years of service.  Owners of companies want to pick certain individuals to provide them with ownership and incentives in the company without adverse tax issues.

Self-education

It is good to see the removal of the curious $250 reduction in the amount that can be deducted in relation to prescribed education courses. 

There is a review being conducted of the ability to claim a tax deduction for self education but there was no information on that in the budget papers.

Superannuation

Super Guarantee Contributions

It seems that the proposed SG contributions will occur as planned.  This means that the SG rate increases to 10% from 1 July 2021 and increases by 0.5% per year thereafter until it reaches 12%.  This will have saved the Government from an advertising campaign led by the industry super funds and unions leading up to an election.

Abolition of the $450 super threshold

This has been promoted by ASFA and, perhaps, others.  It will mean that people on low incomes or doing small amount of employee work will still receive some superannuation contributions for their work.  It is a change that is particularly favourable for women.

The change seems to imply that super contributions must be paid for every $1 of employment income.  This will bring a number of people into the superannuation net and, I suspect, many employers will find the extra administrative burden tiresome.  I wonder whether some threshold level will be set – say $50 so that employers are not engaged in very small scale superannuation contributions with all of the administrative work that goes with that.

Benefits for older people

The reduction in the age in relation to downsizer contributions and the abolition of the work test in relation to people aged 67 to 74 is a good change.  Many people feel they are under-superannuated as they arrive in their 60s and these changes will facilitate these people getting more funds into retirement.

SMSF residency changes

These changes extend the safe harbour period from 2 to 5 years and abolish the active member requirements.  Both of these changes are to be commended, particularly in light of the impact of COVID-19.  The downside of failing the central management and control test is too harsh for funds that always were, essentially, managed and controlled in Australia, even though members may be overseas for a prolonged period.

Missing in action

There are some tax issues that we were hoping to see in the Budget, but on which there was not a word:

  1. It does not appear that the submission made to Treasury to fix the omission of small businesses from the opting out of full expensing of assets has been listened to.  The budget papers state that, apart from the extension of the full expensing of assets until 30 June 2023, there will be no other change to the legislation.  That is disappointing.
  2. There was no mention of the proposed changes to Division 7A.  Are we to assume that these proposed changes are never going to occur?

Full coverage of the Federal Budget 2021-22

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