Federal Budget 2021-22

Summary

From the perspective of a tax nerd, the 2021-22 Federal Budget was underwhelming. In what is the last budget before the next election, it was a responsible budget, and the few tax measures that were included were mostly positive.

If you had been hoping for any meaningful reform, you would have been disappointed. Some of the more notable omissions from the 2021-22 Budget included:

• An update on the changes to Division 7A – is the Government still committed to these changes?
• Deferral of the superannuation guarantee rate increase – the superannuation guarantee rate will increase to 10% as is currently legislation from 1 July 2021.
• Changes to the temporary full expensing regime to allow small business entities to opt out – the budget papers state that, apart from the extension of the full expensing of assets until 30 June 2023, there will be no other changes to the legislation.

In this special edition of the Birchstone Brief, we summarise the key tax measures that were announced in the 2021-22 Budget. We hope you find this a useful reference. Enjoy your weekend!

Tax Measures

• Residency
  • Individual residency – Simplification of the tests
  • Corporate residency – Broadening the amendments to trusts and corporate limited partnerships
  • Superannuation residency – Relaxing rules
• Personal Tax
  • Personal income tax rates – Low and middle income tax offset
  • Self-education expenses – Simplification
• Business Tax
  • Temporary full expensing and loss carry back – Extension
  • Employee Share Schemes (ESS) – ceasing employment no longer a deferred taxing point
  • Patent Box – Introduction of concessional tax rate for Australian medical and biotechnology innovations
  • Digital Games Tax Offset
  • Intangibles – Self-assess effective life
  • Brewers and distillers – Expanded excise refund scheme
• Superannuation
  • Superannuation Guarantee – Removal of $450 threshold
  • Work Test – Abolished (in part)
  • Downsizer Contributions – Extension
• Tax Debts
  • Tax Debts – Increased powers for Administrative Appeals Tribunal to pause ATO debt recovery action
• NFPs
  • NFPs – Introduction of reporting obligations

Residency

Individual residency – Simplification of the tests

The Government has announced the replacement of the current (often litigated) residency tests for individuals. It is proposed that the current rules will be replaced with a two-step model:

• first, a primary test which is a ‘bright line test’ where a person who is physically present in Australia for 183 days or more in any income year will be an Australian tax resident; and
• if the first test is not satisfied, then secondary tests which turn on a combination of physical presence and measurable, objective criteria.

The proposed new framework is intended to simplify the complexities of applying the current residency rules, and is stated to be based on the Board of Taxation’s 2019 Report.

The Board of Taxation Report refers to the ‘Factor Test’ which would apply under the secondary tests. There are four factors (the right to reside in Australia, Australian accommodation, Australian family and Australian economic connections), only two of which would need to be satisfied. The test is stated to be objective, however, the factors are in some ways subjective concepts.

It is likely that more individuals will be treated as tax residents under the secondary tests. The Board’s model is stated to maintain the ‘adhesive residency principle’, where it is harder to cease residency than commence. However, it is a step towards modernizing the current dated residency rules.

The new measures are proposed to be implemented the first income year after the date of Royal Assent of the enabling legislation.

Corporate residency – Broadening the amendments to trusts and corporate limited partnerships

In the 2020/21 Federal Budget, the Government announced amendments to clarify the corporate residency test. It was proposed that a company that is incorporated offshore will be treated as an Australian tax resident if it has a ‘significant economic connection to Australia’. This test will be satisfied where the company’s:

• core commercial activities are undertaken in Australia; and
• the company’s central management and control is in Australia.

We are still waiting on legislation for the new corporate residency test.

As part of this year’s budget, the Government has now announced that it will consult on broadening this amendment to trusts and corporate limited partnerships. Trusts and corporate limited partnerships are subject to their own residency tests (with similar concepts):

• a trust is a resident trust estate if the trustee was a resident at any time during the income year or the central management and control of the trust estate was in Australia at any time during the income year; and
• a corporate limited partnership is a resident if the partnership was formed in Australia or either the partnership carries on business or has its central management and control in Australia.

Superannuation residency – Relaxing rules

Currently, in order for SMSF’s to receive contributions from members, the fund must be an Australian superannuation fund. This will only be the case if:

• the fund is established in Australia or any asset of the fund is situated in Australia;
• the central management and control (CMAC) of the fund is ordinarily in Australia; and
• a certain level of active membership exists.

At present, the central management and control test is satisfied even if the fund is temporarily outside Australia for a period of not more than two years.

The Government announced that it will relax residency requirements for SMSF’s by:

• extending the central control and management test exception from two to five years;  and
• removing the active membership test.

Similar changes will apply to small APRA-regulated funds (SAFs).

These changes are a step in the right direction as they will allow SMSF and SAF members to continue to contribute to their preferred fund whilst temporarily overseas for work or education.

The measure will have effect from the start of the first financial year after Royal Assent of the legislation, which the Government expects to have occurred prior to 1 July 2022.

Personal Tax

Personal income tax rates – Low and middle income tax offset

The low and middle income tax offset (LMITO), which provides for an offset up to $1,080, is being retained for the 2021-22 income year (i.e. an extension of $12 months). The LMITO is not delivered through the PAYG withholding system, so eligible taxpayers will need to wait until they lodge their return to get the benefit of the offset.

There were no changes to the timing of the legislated Stage 3 income tax cuts which take effect from 1 July 2024.

Self-education expenses – Simplification

Individuals claiming self-education expenses will have reduced compliance costs, with the Government announcing the removal of the exclusion of the first $250 of deductions. Currently, the first $250 of a ‘prescribed course of education’ is not deductible, but can be offset against non-deductible expenses.

The first $250 exclusion is a historical quirk and its removal is a sensible amendment which will reduce record keeping and the compliance burden.

Business Tax

Temporary full expensing and loss carry back – Extension

The Government will extend the temporary full expensing measure for 12 months until 30 June 2023. The measure allows eligible businesses to deduct the full cost of eligible depreciable assets of any value acquired on 6 October 2020 and first used or installed ready for use by 20 June 2023.

The Government is also extending the temporary loss carry-back measure for a further 12 months until 30 June 2023. This will allow eligible companies to carry back tax losses from the 2022-23 income year as far back as the 2018-19 income year.

Employee Share Schemes (ESS) – ceasing employment no longer a deferred taxing point

It is proposed that the ‘cessation of employment’ deferred taxing point will be removed, resulting in tax being deferred until the earlier of:

• for shares — when there is no risk of forfeiture and no restrictions on disposal;
• for options —
  • when the option hasn’t been exercised and there is no risk of forfeiting the right and no restrictions on disposal of the right; and
  • when the employee exercises the option and there is no risk of forfeiting the resulting share and no restrictions on disposal; and
• the maximum period of deferral of 15 years.

The change is intended to more closely align the taxing point with an employee being able to realise the value in the ESS interest, thereby having funding to pay the tax liability.

If implemented, the amendment to Division 83A will apply to ESS interests issued from the first income year after assent of the amending legislation.

While welcomed, this change is likely to predominantly benefit employees of listed companies who hold ESS interests. While the proposed change will provide flexibility in the SME space, closely held groups still may prefer to require employees leaving employment to dispose of their ESS interests as a condition of the plan. In these cases, removing ‘cessation of employment’ as a deferred taxing point will be of nominal benefit, if any.  

Regulatory changes are also proposed:

• 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.

The regulatory changes will apply 3 months after assent of the amending legislation.

Patent Box – Introduction of concessional tax rate for Australian medical and biotechnology innovations

Presently, when income is created through a patent there are no concessions associated with that income – that is, it is taxed in the same way as other income is taxed.

In order to align Australia with other countries, whom have a concessional tax regime for patents, the Government has announced it will introduce a ‘patent box’ regime for companies in respect of Australian medical and biotech patents.

Companies that derive income from patents will need to determine the amount of income that relates to each patent. The income that relates to the patent must then be reduced by the percentage of the research and development that produced the patent that did not take place in Australia. The resulting income can then be placed in a patent box.

Income derived from the patent box will be taxed at the rate of 17%. This is a significantly lower rate than which patents are currently taxed (albeit it is higher than the concessional rate provided by most other countries). Currently patent income is taxed at either 30% or 25% for base rate entities (from 1 July 2021).

The 17% tax rate will be applied at the company level of tax and therefore when the funds are distributed through to shareholders there may be top-up tax to be paid if there is a difference between the 17% tax rate and the shareholders personal tax rate.

The patent box concession will apply from 1 July 2022 for patents which were applied for after 11 May 2021.

The Government intends to consult with industry and potentially expand to the patent box to the clean energy sector.

Digital Games Tax Offset

The Government has confirmed that there will be a 30% digital games tax offset of up to $20 million for eligible business that spend at least $500,000 on qualifying Australian games expenditure. The offset will not be available to games that contain gambling elements or cannot obtain a classification rating. The Government will consult with industry in mid-2021 to clarify what is ‘qualifying Australian games expenditure’ for the development of digital games. The offset will be available to resident companies or foreign resident companies with a permanent establishment from 1 July 2022.

Intangibles – Self-assess effective life

The Government has announced that taxpayers will be able to self-assess the effective lives of eligible intangible depreciating assets, including patents, registered designs, copyrights and in-house software. Currently, taxpayers are required to use the effective lives of intangible assets as prescribed in the income tax legislation. This change will align the tax treatment of intangible assets with that of most tangible assets. The change applies to assets acquired from 1 July 2023 onwards.

Brewers and distillers – Expanded excise refund scheme

Small time brewers and distillers are set to receive a major boost, with the available excise refund scheme for alcohol manufacturers being aligned with the wine equalisation tax producer rebate. This means that from 1 July 2021, eligible brewers and distillers can receive a 100% remission (previously 60%) of any excise they pay up to $350,000 (previously $100,000).

Superannuation

Superannuation Guarantee – Removal of $450 threshold

Low-income earners are set to benefit, with the Government announcing the removal of the $450 per month threshold for superannuation guarantee eligibility. Currently, employers do not have to pay the superannuation guarantee for employees who earn less than $450 per month. The change will apply from the first financial year after Royal Assent of the enabling legislation, which is likely to be 1 July 2022.

Work Test – Abolished (in part)

The Government has announced that the superannuation contributions work test will be removed for individuals aged 67-74 making non-concessional or salary sacrifice contributions. The work test will still apply to individuals aged 67-74 making personal deductible contributions. The change will apply from the first financial year after Royal Assent of the enabling legislation, which is likely to be 1 July 2022.

Downsizer Contributions – Extension

The Government has announced that the eligibility age for making downsizer contributions is being reduced from 65 to 60. Downsizer contributions allow individuals to make a one-off, post-tax contribution to superannuation of up to $300,000 from the proceeds of selling their house. The change will apply from the first financial year after Royal Assent of the enabling legislation, which is likely to be 1 July 2022.

Tax Debts

Tax Debts – Increased powers for Administrative Appeals Tribunal to pause ATO debt recovery action

The Government will grant the Administrative Appeals Tribunal (AAT) the power to pause or modify ATO debt recovery action in relation to disputed debts that are being reviewed by the Small Business Taxation Division (SBTD) of the AAT.

The SBTD of the AAT can hear applications for review by ‘small business entities’ (those with aggregated turnover of less than $10 million).

The current details of the measure indicate that 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.” 

The extent of the AAT’s powers is not yet clear, for instance whether the AAT will have the power to stop GIC accruing while a dispute is resolved. We expect that the powers granted to the AAT will mirror those available to the Commissioner under s 255-10 of Schedule 1 of the TAA53 but whether the AAT will be granted further (or unique) powers remains to be seen. 

The measure will take effect from the date of Royal Assent of the enabling legislation and is expected to only apply to applications for review filed after that date.

NFPs

NFPs – Introduction of reporting obligations

Non-charitable not-for-profits (NFPs) self-assess their eligibility for income tax exemption. Currently these self-assessors have no financial reporting obligations to the ATO or ACNC. Sporting and other community organisations.

From 1 July 2023, self-assessors with an active ABN, will have an obligation to submit to the ATO an annual self-review form containing information they used as the basis for self-assessing their eligibility for income tax exemption. The new reporting regime will increase transparency and accordingly, should increase the rigour with which the self-assessment process is applied.

We anticipate the self-review form will require information similar to ACNC reporting, including both qualitative and quantitative factors. We recommend that affected NFPs prepare for the new reporting regime by thoroughly evaluating their eligibility for income tax exemption and if in doubt, seek specialist advice.