Federal Budget 2021-22: what does it mean for you? Commentary from our tax experts

Modernising the individual tax residency rules
Employee share schemes – removing cessation of employment as a taxing point and reducing red tape
LMITO extended for FY2022
Housing affordability measures
Superannuation changes: downsizer contribution age lowered, work test amended and $450 threshold abolished

Modernising the individual tax residency rules

Summary

The tax residency rules for individuals will receive an overhaul. It is proposed that the primary test will now be a ‘bright line’ test, under which 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, to determine whether they will still be an Australian tax resident for that year by reference to a combination of factors including physical presence and measurable, objective criteria.

The new rules will have effect from the first income year after the date of Royal Assent of the enabling legislation.

Observation

Australia’s current tax residency rules are difficult to apply in practice, which creates uncertainty and results in high compliance costs for taxpayers and the Government. Any effort to simplify these rules is welcome.

The new rules appear to have their foundation in the existing tests, but we hope they will be better structured and more easily applied. Some degree of complexity may still exist where the primary test is not satisfied and reliance must be placed on the secondary tests, for which we are still to see the detail.

There was no statement on what these criteria will be, but assuming the Government adopts the 2019 recommendations made by the Board of Taxation, they are likely to be:

• The individual’s right to reside in Australia (so, citizenship or permanent residency visa)
• And any Australian accommodation, family or economic connections

Employee share schemes – removing cessation of employment as a taxing point and reducing red tape

Summary

The Government will remove the ‘cessation of employment’ taxing point for the tax-deferred Employee Share Schemes (ESS) that are available for all companies. This change will apply to ESS interests issued from the first income year after the date of Royal Assent of the enabling legislation.

Employers use ESS to attract, retain and motivate staff by issuing interests – typically shares and options over shares – usually at a discount.

Currently, under a tax-deferred ESS, where certain criteria are met, employees may defer tax until a later tax year (the deferred taxing point). The deferred taxing point is the earliest of a number of events. Often, it is the time when the equity is received – for example, when an option is exercised and shares are issued – and there is no risk that the employee can lose or forfeit the equity and is free to dispose of it.

There may also be an earlier taxing point on cessation of employment. This can mean that an employee has a taxing point on termination of their employment. This will ordinarily mean an unfunded tax liability for that employee, forcing them to sell their shares.

This measure will remove the cessation of employment as an event that is a trigger for taxation.

The Government will also reduce red tape – under the company law regime – 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 (the current concession is limited to $5,000 per employee per year).

Observation

Companies with existing plans (and employees with existing grants) do not need to change their arrangements or revisit them.

However, for years starting after the legislation implementing the changes is given Royal Assent, any grants of options or shares to employees and contractors, from that time, will be subject to the new rules. Companies will need to revisit their plan documents to ensure that any tax advice provided to employees and contractors is still correct.

LMITO extended for FY2022

Summary

The Low and Middle Income Tax Offset (LMITO), a non-refundable tax offset of up to $1,080 per annum for low and middle income taxpayers, will be retained at current rates for the income year ending 30 June 2022. This offset is to be received as a lump sum on assessment after an individual lodges their tax return and the exact amount of the offset varies according to taxpayers’ taxable income.

Observation

The LMITO is a temporary measure intended to be in place until Stage 2 of the Government’s Personal Income Tax Plan was implemented. Stage 2 was brought forward to take effect from 1 July 2020, but the LMITO was retained for the 2021 income year regardless.

This announcement is merely a 12-month extension of the LMITO at current rates, but will be welcomed by low and middle income taxpayers.

Housing affordability measures

Summary

A range of housing affordability measures have been announced, some of which build on existing 2020-21 Federal Budget measures. Funding will be provided over a number of years for the following:

• extending the construction commencement requirement for all existing HomeBuilder applicants from six months to 18 months;
• extending the New Home Guarantee to provide for additional home guarantees, to allow eligible first home buyers to build a new home or purchase a newly constructed home with a deposit of as little as 5%;
• establishing a Family Home Guarantee program to support single parents with dependants to enter (or re-enter) the housing market with a deposit of as little as 2%; and
• increasing the maximum amount of voluntary contributions that can be released under the First Home Super Saver Scheme from $30,000 to $50,000.

Observation

These measures will be welcomed by new home owners that qualify.

We have seen significant media coverage about the delays in global supply chains and recent natural disasters that have led to delays in construction being commenced on new homes, putting HomeBuilder applicants on edge as to whether they will lose the benefit of this grant.

Existing HomeBuilder applicants will have breathed a sigh of relief following the extension of the construction requirement by an additional 12 months.

Superannuation changes: downsizer contribution age lowered, work test amended and $450 threshold abolished

Summary

The minimum age at which a person can make a downsizer contribution to their superannuation fund has been lowered from 65 to 60 years of age. Under this scheme, a home owner or their spouse can make a once-off contribution to their superannuation from proceeds of the sale of their home, capped at $300,000 per person, which will not count toward their non-concessional contribution caps.

The Government will allow individuals aged 67 to 74 years of age to make or receive non-concessional or salary sacrifice superannuation contributions without the need to meet the work test, under which they must work at least 40 hours over a 30-day period in the financial year. They must still meet the work test to make personal deductible contributions.

Currently, employers are not required to pay the superannuation guarantee in respect of employees where they are paid less than $450 (before tax) in a calendar month. This threshold will be abolished.

Observation

The downsizer contribution measure has been introduced against the backdrop of rising concern about housing affordability in Australia. The intention here is to incentivise older Australians to downsize their residence, increasing the stock (and hopefully decreasing the price) of larger family homes.

Extension of temporary full expensing rules
Extension of the temporary loss carry-back rules
Taxation of Financial Arrangements – hedging amendments
Australian digital games tax offset
Self-assessing the effective life of intangible depreciating assets
Patent box – tax concession for Australian medical and biotechnology
CCIV regime to be finalised
Offshore Banking Unit concession to end
Review of venture capital tax incentive programs
Insolvency and restructuring reform

Extension of temporary full expensing rules

Summary

The existing temporary full expensing measure announced as part of the 2020-21 Federal Budget will be extended by 12 months to 30 June 2023.

Businesses with an aggregated annual turnover of up to $5 billion are now able to deduct the full cost of eligible capital assets acquired after 7.30 pm on 6 October 2020 (the 2020-21 Federal Budget night) and, importantly, used or installed ready for use by 30 June 2023.

All other elements of the temporary full expensing rules will remain unchanged. Our detailed article on the 2020-21 Budget announcements, including these rules, can be found here.

Observation

This is a significant announcement, which will be welcomed by many and, in particular, businesses that have the ability to finance capital expenditure.

However, the automatic application of the temporary full expensing measures to some taxpayers is not universally welcome. In particular, the measures can cause issues for companies that require franking credits to pay franked dividends; for example, to manage Division 7A compliance.

Importantly, the eligibility for businesses will be key. The assets must be acquired from 7.30 pm on 6 October 2020 (Budget night), and must be first used or installed ready for use by 30 June 2023.

The question of when a capital asset is used, or installed ready for use, is a factual question and we expect that, as we get closer to the key date of 30 June 2023, substantiation will be key. A business could get caught if, for example, the capital asset has been received and stored by the business, but is not yet fitted for its intended use. The ability to put the capital asset to use, or have it installed ready for use, may be affected by extraneous and unanticipated factors. Proper planning will be necessary to ensure that this requirement is satisfied.

Further, the full expensing will apply in the first year of use, and not the year of purchase. This means that expenditure on a capital asset acquired in the 2021 financial year may be fully deductible in either the 2021, 2022 or 2023 financial years.

Extension of the temporary loss carry-back rules

Summary

The Government will extend the temporary loss carry-back measures announced as part of its 2020-21 Budget to include tax losses in the 2023 income year.

Eligible corporate entities will be able to carry back tax losses incurred in the 2020, 2021, 2022 and 2023 income years to offset income from the 2019 income year onwards.

The measure will be available to eligible corporate entities with an aggregated turnover of less than $5 billion.

Observation

The extension of this measure is a welcome relief for eligible corporate entities, as it effectively represents a potential cash flow benefit to these companies by allowing them to reclaim some of the tax paid in previous years when they were profitable.

This measure provides a refundable tax offset that eligible corporate entities can claim in their 2021, 2022 and 2023 income tax returns. Refundable tax offsets can reduce the amount of tax that eligible corporate entities are liable to pay to zero, which may result in a refundable amount.

However, the refund will be limited so that the amount carried back is not more than the taxed profits of the earlier year and does not generate a franking account deficit.

Claiming the offset is optional, and eligible corporate entities that choose not to carry back losses may be able to carry forward losses to future income years.

This is an important option, as the offset may not be appropriate for eligible corporate entities that need to pay franked dividends (for example, to manage Division 7A compliance).

Our detailed article on the 2020-21 Budget announcements, including these rules, can be found here.

Taxation of Financial Arrangements – hedging amendments

Summary

Technical amendments have been proposed to the Taxation of Financial Arrangements (TOFA) rules in relation to accessing the TOFA hedging rules on a portfolio hedging basis.

These amendments will allow taxpayers to recognise taxation on unrealised foreign exchange gains and losses only where an election is made.

The amendments are expected to take effect for transactions entered into on or after 1 July 2022.

Observation

The amendments to the hedging rules for portfolio managers are welcomed and should facilitate reduced compliance costs and mitigate unintended outcomes.

Australian digital games tax offset

Summary

The Digital Games Tax Offset is expected to provide eligible business that spend a minimum of $500,000 on qualifying Australian games with a 30% refundable tax offset.

The Government intends to engage in consultation with the industry in mid-2021 and plans for the offset to be available from 1 July 2022. Prior to the Budget, the Government has stated that the offset will be available to eligible Australian resident businesses as well as foreign residents with a permanent establishment in Australia.

Observation

For businesses in the video games industry, this incentive is an exciting prospect and forms part of the Government’s broader Digital Economy Strategy.

Australia has a global reputation as a producer of talent, technically and creatively, in the gaming and allied industries. However, Australia suffers from a ‘brain drain’ in this industry, with some of the best and brightest game developers leaving Australia to pursue commercial and employment opportunities overseas.

Scale-wise, the gaming industry internationally is larger than the ‘traditional’ film and television industry by a significant stretch. We think the Government is ‘backing the right horse’ with this proposal. We anticipate that there will be keen interest from the industry on the developments through consultation and in particular the criteria for ‘qualifying’ expenditure and the pathways for businesses to access the incentive.

Self-assessing the effective life of intangible depreciating assets

Summary

As part of the Government’s $1.2 billion Digital Economy Strategy, taxpayers will be able to self-assess the tax effective lives of eligible intangible depreciating assets such as patents, registered designs, copyrights and in-house software.

Taxpayers will continue to have the option of applying the existing statutory effective life to depreciate intangible assets.

This measure will apply to assets acquired from 1 July 2023, when the extended temporary full expensing regime is slated to end.

Observation

Currently, the tax-effective life of intangible assets is set by statute. This measure will allow taxpayers to adopt a more appropriate and flexible useful life.

It is expected that this will encourage investment and hiring in research and development. It will also align the tax treatment of intangible assets with that of most tangible assets for depreciation purposes.

This measure may also impact mergers, acquisition and other deal structures. Purchasers may insist on allocating more purchase price to depreciable intellectual property assets, rather than goodwill or trademarks, on the basis that this will provide larger depreciation deductions in the future on a present value basis.

Conversely, gains on the sale of goodwill and trademarks (as opposed to copyrights, patents, designs and software) are generally taxed as capital gains, and so may be eligible for the 50% CGT discount and/or the small business CGT concessions. This may cause some potential tension between vendors and purchasers.

Patent box – tax concession for Australian medical and biotechnology innovations

Summary

Building on its 2020-21 Budget measures, the Government will introduce a ‘patent box’ regime which will tax corporate income derived from patents at a concessional effective corporate tax rate of 17%.

This measure will apply to income derived from Australian medical and biotechnology patents, and the Government will also consult on whether the measure should be extended to the clean energy sector.

While it has been announced that the concession will apply from income years starting on or after 1 July 2022, the Government will consult with industry before settling the detailed design of the measure.

Observation

From 1 July 2021, the corporate tax rate is 25% for base rate entities with an aggregated turnover of less than $50 million and 30% for all other corporate taxpayers.

It is expected that the reduction of the tax rate applicable to income derived from medical and biotechnology patents will attract investment, and encourage development within Australia.

Presumably, taxpayers will be required to carefully and separately record income derived from eligible patents. Additionally, it remains to be seen what notional deductions, if any, will need to be applied to income derived from eligible patents.

While the announcement is welcomed, it is clearly not structurally agnostic as it appears it will only apply to corporate taxpayers; and not trusts or partnerships, unless their patents are held in a separate corporate vehicle.

CCIV regime to be finalised

Summary

The Government has announced a revised commencement date of 1 July 2022 for the corporate collective investment vehicle (CCIV) regime, the introduction of which had been announced in the 2016-17 Budget.

Observation

The CCIV is a new type of collective investment vehicle; a company structure that has the flow-through benefits of a trust. As a vehicle recognisable to foreign investors, the CCIV was promoted as a way of increasing foreign investment into Australia.

Much work was undertaken by Treasury and the funds management industry during 2017 to develop the regime’s regulatory framework, including the release of an exposure draft outlining the proposed tax regime for CCIVs. Progress then stalled, with Government priorities shifting elsewhere.

The Government’s commitment to finalise the CCIV regime is welcomed. Local fund managers have been eagerly awaiting the implementation of this regime, which will allow them to promote and export their funds management expertise and services overseas.

Ultimately, the promotion of foreign investment into Australia by the regime’s introduction can only benefit the economy at a time when it is needed most.

Offshore Banking Unit concession to end

Summary

The Budget confirms the Treasurer’s announcement of 12 March 2021 that will see the removal of:

• the concessional 10% effective tax rate applying to income derived by Offshore Banking Units (OBUs); and
• from 1 January 2024 –the current exemption from withholding tax that applies to interest and gold fees paid by OBUs on certain offshore borrowings.

The OBU regime will be closed to new entrants effective from 26 October 2018, with existing OBUs accessing the concessional tax rate until the end of their 2023 income year.

Draft legislation with respect to these measures was introduced into Parliament on 17 March 2021.

Observation

The OBU regime was introduced in the late 1980s to attract banking and other financial sector activities to Australia from low-tax jurisdictions in the Asia-Pacific region, such as Singapore and Hong Kong.

However, in October 2018, the OECD raised concerns about Australia’s OBU regime, considering it a harmful preferential tax regime. The Government’s measures aim to address the OECD’s concerns.

The removal of concessions for OBUs is already well underway. However, there continues to be little by way of proposed measures to ensure the industry’s competitiveness is maintained.

Review of venture capital tax incentive programs

Summary

The Government is proposing to undertake a review in 2021 of the venture capital tax incentives.

The scope of the review is expected to include the existing programs in respect of a Venture Capital Limited Partnership, Early Stage Venture Capital Limited Partnership, Australian Venture Capital Fund of Funds and certain direct investments from foreign tax residents.

Observation

The review will provide a great opportunity through the public consultation process to express any issues with the existing programs with a view to recommending enhancements going forward. Further details are expected to be released later this year and consultation will be undertaken in 2021.

Insolvency and restructuring reform

Summary

The Government will continue to examine ways to improve Australia's insolvency laws, including consulting on options to:

• clarify the treatment of trusts with corporate trustees under Australia's insolvency law; and
• improve the process for creditor schemes of arrangement, such as introducing a moratorium on creditor enforcement while schemes are being negotiated.

The Government will also:

• increase the minimum threshold at which creditors can issue a statutory demand on a company from $2,000 to $4,000; and
• commence an independent review of the insolvent trading safe harbour.

Observations

We support the Government proactively looking to improve and reform Australia’s insolvency and restructuring laws.

Increasing the threshold for creditor’s statutory demands from $2,000 to $4,000 is a sensible move. While there are differing views on the appropriate threshold, we think that $4,000 is about right in balancing the ability of creditors to pursue undisputed debts against not having companies put into liquidation over very small debts.

Introducing a moratorium while a creditor’s scheme of arrangement is being negotiated will be helpful. However, schemes will continue to be expensive and cumbersome, and we expect they will still be rarely used and only in very large and complex restructurings.

Exchange of information countries expanded
Continued spending on tax treaties

Exchange of information countries expanded

Summary

The list of jurisdictions which have an effective information sharing agreement with Australia will be updated. Residents of these listed jurisdictions benefit from a concessional Managed Investment Trust (MIT) withholding tax rate of 15% on certain distributions, rather than 30%.

From 1 January 2022, Australia will add Armenia, Cabo Verde, Kenya, Mongolia, Montenegro and Oman to its listed jurisdictions.

Observation

The list of jurisdictions with which Australia has an effective information sharing agreement continues to grow each year. Such agreements are one of many measures that have been introduced to improve tax transparency and protect Australia against offshore tax avoidance and evasion.

Providing a reduced MIT withholding rate to residents of jurisdictions that agree to work with Australia to reduce tax avoidance is a way to encourage more jurisdictions to enter information sharing agreements with Australia. The reduced MIT withholding rate also encourages residents in those jurisdictions to invest in Australia.

Continued spending on tax treaties

Summary

An additional $6 million will be provided for the Australian Taxation Office (ATO) and Treasury to accelerate the program of tax treaty negotiations.

This announcement supports the 2020-21 Federal Budget announcement that Australia would be actively seeking to expand and modernise its tax treaty network.

Observation

Expanding and modernising Australia’s tax treaty network is positive for both for taxpayers and the Government. For individuals and businesses operating cross border, eliminating or eliminating double taxation will minimise the risk of tax leakage and encourage investment in Australia.

Increased powers for the AAT to pause or modify ATO debt recovery action
Not-for-profits - enhancing the transparency of income tax exemptions
Small brewers and distillers to receive additional excise tax relief

Increased powers for the AAT to pause or modify ATO debt recovery action

Summary

The AAT will be given the power to pause or modify ATO debt recovery action in relation to disputed debts that are being reviewed by its Small Business Taxation Division.

The measure will be available to small business entities that apply to the AAT for a pause or modification of debt recovery action. However, the measure will only apply to AAT applications filed after the commencement date of the legislation.

When considering applications, 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 measure will take effect from the date of Royal Assent of the enabling legislation.

Observation

It is clear that this measure is intended to provide an avenue for small businesses to avoid potentially fatal debt recovery action until their dispute has been determined by the AAT. In this regard, it is a welcomed introduction.

However, it is unclear whether the measure will be available where the ultimate litigant is an individual beneficiary of a trust, or shareholder of a company, in a broader small business structure.

It is also unclear whether the measure will be accompanied by an administrative undertaking by the ATO not to pursue debt recovery action until the matter has been determined by the AAT. Unless this is the case, the measure may be too late in the process, as the ATO can (and often will) exercise its debt collection powers prior to a dispute reaching the AAT. For example, the ATO will often begin to exercise its debt recovery powers, such as the issue of garnishee notices, during the objection phase of a dispute.

The measure also appears to prejudice eligible small business taxpayers who decide to appeal objection decisions directly to the Federal Court.

Not-for-profits – enhancing the transparency of income tax exemptions

Summary

Non-charitable not-for-profit (NFP) organisations that rely on a self-assessed income tax exemption will be subjected to more onerous reporting obligations and closer monitoring from 1 July 2023.

Organisations that will be affected by this new reporting regime will include sport organisations, trade unions and employer organisations and some professional and industry related bodies.

Currently, self-assessors are under no obligation to report to the ATO or the Australian Charities and Not-for-Profits Commission (ACNC) on operational or financial matters.

The ATO will be provided with $1.9 million of funding to establish an online portal for self-assessors to submit an annual self-review form. This reporting obligation will only apply to self-assessors that have an ABN and will commence from 1 July 2023.

Observation

The current lack of reporting obligations of self-assessors is in stark contrast to ACNC-registered charities. There is a general obligation on the governing bodies of these self-assessor organisations to monitor and document the basis on which they rely on a self-assessed category of income tax exemption. In our experience, the level of rigour applied to this self-assessment and evaluation process can be quite varied.

We anticipate that this new self-review will require self-assessors to report on qualitative and quantitative factors that support their ongoing eligibility to self-assess for income tax exemption.

This additional reporting requirement may sound like a relatively pedestrian measure that does little more than increase ‘red tape’ for self-assessors (which it no doubt does). However, once the reporting regime is established and underway, we expect that the information gathered and analysed through the reporting regime will allow the ATO to target and challenge the continued eligibility for income tax exemption for some organisations, including through audit, review and ‘show cause’ processes.

The governing bodies of self-assessors should prepare for the new compliance and reporting regime immediately, by evaluating their eligibility for ongoing self-assessed income tax exemption, gathering and testing their qualitative and quantitative data and seeking specialist compliance advice.

Small brewers and distillers to receive additional excise tax relief

Summary

Currently, eligible small brewers and distillers may seek a partial remission and refund of excise tax, which is broadly calculated at 60% of the excise paid, up to an annual cap of $100,000.

It is proposed that eligible small brewers and distillers will be able to seek full remission and refund of excise tax paid by them up to an annual cap of $350,000, effective from 1 July 2021.

The revised scheme will effectively align the excise refund scheme for alcohol manufacturers with the existing Wine Equalisation Tax producer rebate.

Observation

This announcement will provide eligible small brewers and distillers, which have been detrimentally affected by COVID-19, with an increased ‘cash’ benefit (up to $250,000 per financial year) for their growth and investment objectives.