2021 Federal Budget

Due to the COVID induced delay of the 2020 Budget, the 2021 Budget follows only seven months later.

The main announcements involve new spending to prime the economy, including changes to superannuation and tax relief for small and medium businesses.  However, the cost is high, with the budget deficit for 2020-21 expected to be $214 billion, and total net debt to be almost $1 trillion by June 2024. 

Whilst current low borrowing rates means the annual servicing cost of government debt remains below GFC levels, the market would appear to be anticipating a rise in interest rates by the end of the decade.  For example, ANZ fixed rates for 7 and 10 year residential loans are currently at 7.69%.

Here are the key Budget points (subject to acceptance of Parliament) that may impact strategies for our clients and their families.

Superannuation

• Work Test - From 1 July 2022, Australians will no longer need to meet the work test to be eligible to make non-concessional superannuation contributions and receive salary sacrifice contributions.  Individuals aged 67-74 years will still have to meet the work test to make personal deductible contributions.

  Currently individuals aged between 67-74 years of age are restricted from making certain contributions unless they are working at least 40 hours in a 30 day consecutive period, which is known as the ‘work test’. 

• Downsizer contributions - From 1 July 2022, Australians over 60 years of age will be eligible to make downsizer contributions. Previously the downsizer contribution was limited to Australians over age 65. The other eligibility criteria for the downsizer contribution remain unchanged, i.e. if you have owned your home for at least 10 years, you can make a one off contribution of up to $300,000 into superannuation. The change is designed to free up stock and create movement in the property market.

• SMSF Residency – at present, if members are absent from Australia for 2+ years, the SMSF may lose eligibility for concessional tax treatment. This timeframe will be extended from 2 to 5 years.

• Eligibility Threshold removed – the current minimum monthly income threshold of $450 to determine if an employer needs to pay the superannuation guarantee for workers will be abolished.  This change will benefit part-time workers and women the most be helping to increase their superannuation savings.

Personal Income Tax

• Low and middle income tax offset (LMITO) will be extended for a further year to the 2021-22 income year. The LMITO provides a reduction in tax of up to $1,080 for those earning less than $90,000 and will be received once tax returns have been lodged.

• Education deductions - The Government will remove the current exclusion for the first $250 paid for prescribed courses of education not being deductible.

• Employee Share Schemes (ESS) - ‘cessation of employment’ has been removed as a taxing point under the deferred taxation rules. However, the change will only apply to ESS interests issued to employees in the income years commencing after the amending legislation is passed.  However, there is no change to the following rules:

  • Where the exercise of an option creates a taxing event (which it often does), employees can still be forced to sell shares to fund the resulting taxation liability. A taxation liability should not arise until a share is sold; and

  • In certain circumstances where an option is exercised, the share must be held for 12 months to qualify for the 50% capital gains tax discount. The 12 month period should run from the time the option was granted.

Business

• Asset expensing - The Government has announced a 12 month extension to the temporary full expensing measures until 30 June 2023. Under the current law, eligible businesses with aggregated turnover of less than $5 billion are entitled to an immediate deduction for the cost of depreciating assets purchased after 7:30pm AEDT on 6 October 2020, and first used or installed ready for use by 30 June 2022.

• Loss carry back - The Government has announced an extension to the temporary loss carry-back rules announced in the 2020 Federal Budget. This extension will allow eligible companies to carry back and use tax losses from the 2022-23 income year to offset tax paid on profits from the 2019 and subsequent income years. This refund of tax paid in previous income years when a loss is incurred in a later year is described as a ‘loss carry-back’.

Tax Residency

• In 2019 the Board of Taxation released a report on the reform of the individual tax residency rules with a key recommendation of using ‘physical presence’ in Australia as the primary measure of residency.  A new framework will introduce a primary test where, a person who is physically present in Australia for 183 days or more in an income year, will be an Australian tax resident.

• Those 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 Board of Taxation recommend a day count test together with a new four factor test. The four factors referenced in the Report include:

  • The right to reside in Australia

  • Australian accommodation

  • Australian family

  • Australian economic connections.

Aged Care

• In response to the Royal Commission into Aged Care, $17.7 billion has been committed to a range of services, including 80,000 additional home care packages over the next two years and new investment in digital and face-to-face assistance to help people navigate the aged care system (usually on behalf of elderly parents).

• $652 million over four years will train 13,000 new home care workers and provide additional training to existing workers.

Childcare

• Taking effect from 1 July 2022, the Child Care Subsidy (CCS) rate will increase by 30% for children five years and under. However, these changes only apply to a family’s second and subsequent children, meaning single children families will miss out.

• The $1.7 billion dollars’ worth of funding over five years will abolish the $10,560 annual subsidy cap for high income earners. It is hoped the removal of the subsidy cap for high income families will encourage both parents back into full time work.

Victims of family and domestic violence

• The Government will provide funding from 1 July 2021 for initiatives to reduce and support the victims of Family, Domestic and Sexual Violence (FDSV) against women and children. Further, the Government announced it will not proceed with a measure to extend early release of superannuation (up to $10,000) to victims of family and domestic violence.  The rationale is those escaping domestic violence situations should not have to use their own funds to do so.

Women’s Budget Statement

• $3.4 billion is allocated to programs to help ensure women are safe from violence, economically secure, realise their potential and enjoy good health. The entire Statement on initiatives can be read here: https://budget.gov.au/2021-22/content/womens-statement/index.htm

• Family Home Guarantee - Government to provide support to single parents by allowing them to purchase a home with a 2% deposit. This initiative expected to help 10,000 single parents (predominantly women).

Other

• First Home Super Saver Scheme - The Government will increase the maximum releasable amount of voluntary concessional and non-concessional contributions under the First Home Super Saver Scheme (FHSSS) from $30,000 to $50,000. 

• Tourism – for those itching to travel again, it’s worth noting the Government is not expecting international travel to recommence in any meaningful way until mid-2022.  A $1.2 billion package to support hard-hit domestic businesses was announced.

• Infrastructure - A further $15.2 billion has been committed as part of a $110 billion, 10 year Jobmaker Infrastructure Investment Plan.  Hopefully this spending provides some legacy to future generations given the amount of debt they will be inheriting.

Author: Rick Walker