On 11 May 2021, Treasurer Josh Frydenberg delivered the Federal Budget. Seven months on from the pandemic-delayed 2020-21 Budget, the clear message from the Federal Government is that the Australian economy is in a better-than-forecast position (headlined by a cash deficit that is $52.7 billion less than forecast only seven months ago). Nevertheless, this Budget highlights that forecasting in the current environment is a very fluid exercise.
The government’s key motivation in this Budget is to reduce unemployment, with no large-scale austerity measures despite the record budget deficit (and projected deficits) the previous year and an improving economic outlook. A strong economy is the immediate goal, with stabilising and reducing debt a second phase issue.
Ongoing tax relief
In this context, it is no surprise that tax continues to be used as a lever to incentivise investment and spending.
Highlights for business include:
- The extension of the following temporary measures by 12 months:
- Full expensing of the cost of eligible depreciable assets by eligible business with an aggregated annual turnover or total income of less than $5 billion. This extension will be relevant for assets held on or after 7:30pm on 6 October 2020 and first used or installed ready for use by 30 June 2023. All other elements of the temporary full expensing will remain unchanged.
- Loss carry back rules. Eligible companies with an aggregated annual turnover of up to $5 billion will be entitled to carry back tax losses from the 2022-23 income year to offset previously taxed profits as far back as the 2018-19 income year (allowing otherwise profitable companies impacted by the pandemic to access the tax value of losses generated by full expensing deductions sooner).
For more details on the above measures, please refer to our summary of the previous Budget.
- Taxpayers will be allowed to self-assess the effective lives of eligible intangible depreciating assets such as patents, registered designs, copyrights and in-house software acquired from 1 July 2023 (after the temporary full expensing regime has ended).
And for individuals:
- The low and middle income tax offset (LMITO) will be retained for the 2021-22 income year. The LMITO:
- is worth $255 for incomes up to $37,000;
- increases at 7.5 cents per dollar of income between $37,000 and $48,000, to the maximum amount of $1,080;
- is worth $1,080 for taxpayers with taxable income between $48,000 and $90,000; and
- phases out at a rate of 3 cents per dollar above $90,000, reducing to nil at $126,000.
- The Medicare levy low income thresholds for singles, families and seniors and pensioners will be increased from 1 July 2020 to adjust for movements in the Consumer Price Index.
Targeted tax changes
Perhaps acknowledging that the worst of the public health aspects of the pandemic in Australia are (hopefully) behind us, the government also announced or revived a series of targeted tax changes aimed at improving competitiveness or reducing regulatory burden. Highlights include:
- Cessation of employment will no longer be a taxing point under tax deferred employee share schemes (ESS). Under the proposed amendment, tax will arise at the earlier of:
- 15 years from the grant of the ESS interest; and
- in the case of shares – when there is no risk of forfeiture and no restrictions on disposal; or
- in the case of options – when the employee exercises the option and there is no risk of forfeiting the resulting share and no restriction on disposal.
The change is prospective, only applying to ESS interests issued in the first income year after the amendments receive Royal Assent. This measure is likely to be welcomed by Australian employers. The competitiveness (or lack thereof) of Australia’s tax system for share schemes has been noted as having an impact on the ability of Australian businesses to attract and retain talent. Currently, Australia is the only jurisdiction to impose tax on share scheme interests at the time of cessation of employment.
- A ’patent box‘ regime will be introduced under which income derived from Australian medical and biotechnology patents will be taxed at a concessional 17% effective tax rate for income years starting on or after 1 July 2022. Consideration will also be given to extending the patent box regime to the clean energy sector.
- The corporate collective investment vehicle (CCIV) regime, announced in the 2016-17 budget, will now commence from 1 July 2022. The CCIV is intended to provide flow through tax treatment via a vehicle more familiar to overseas investors.
- The Administrative Appeals Tribunal (AAT) will be empowered to pause or modify Australian Taxation Office debt recovery action against small businesses in relation to disputed debts that are being reviewed by the AAT. This measure is intended to potentially relieve eligible taxpayers from having to start paying a disputed debt before the matter has been determined by the AAT. This measure will apply to proceedings commenced from the date the enabling legislation receives Royal Assent.
- The individual tax residency rules will be ’modernised’ based on recommendations made by the Board of Taxation in 2019. The primary test will be a ‘bright line’ test whereby a person physically present in Australia for 183 days or more in any income year will be an Australian tax resident. Those who do not meet the primary test will be subject to secondary tests based on a combination of physical presence and other objective criteria. The measure will take effect from the first income year after the enabling legislation receives Royal Assent. This is a particularly important measure in the current environment as many individuals have adjusted their living and working arrangements over the past year, including unanticipated stays inside and outside of Australia. Additionally, a rise in cross-border remote working might be expected in the longer term. In a post-COVID world, a test of individual tax residency that is clear and objective is likely to be desirable.
- The 10% concessional effective tax rate that applies to Offshore Banking Units (OBUs) will be removed in response to OECD concerns regarding Australia’s preferential tax regime. The OBU regime is to be closed to new entrants with effect from 26 October 2018, while existing OBUs will be able to continue to access the concessional 10% effective tax rate until the end of their 2022-23 income year.
- Additional countries are to be added to the ‘information exchange countries’ list with effect from 1 January 2022 (specifically: Armenia, Cabo Verde, Kenya, Mongolia, Montenegro and Oman). Residents of these jurisdictions are eligible to access the reduced managed investment trust withholding tax rate of 15% on certain distributions.
- Technical amendments to the Taxation of Financial Arrangements (known as TOFA) rules will be made. Noted changes are:
- to facilitate access to hedging rules on a portfolio hedging basis; and
- to ensure that taxpayers are not subject to taxation on unrealised exchange gains and losses unless elected.
These changes are prospective, having effect for relevant transactions entered into on or after 1 July 2022.
- Also, under the banner of the government’s ‘Digital Economy Strategy’, the government has committed to undertake a review into venture capital tax concessions and the existing Venture Capital Limited Partnership (VCLP) and Early Stage Limited Partnership (ESVCLP) regimes, commencing this year.
- In last year’s 2020-21 Budget, the government announced amendments to clarify the corporate tax residency test; the government has now also committed to consult on broadening these amendments to capture trusts and corporate limited partnerships.
The road ahead
The Federal Budget was another big spending affair, looking to further stimulate the recent economic upturn. As has been widely noted, this may also be a pre-election Budget and there is scope for further unannounced measures in the next 12 months.
In summary, this Budget does not attempt to change the corporate tax landscape with sweeping reforms. The above tax measures represent a combination of extensions to pre-existing concessions related to the pandemic, and a series of carefully selected amendments – many of which have been the subject of review and consultation for some time. In this regard, the business tax measures in the Budget are unlikely to surprise many in the business and tax community but most will be welcomed.
This publication is introductory in nature. Its content is current at the date of publication. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice based on your specific circumstances before taking any action relating to matters covered by this publication. Some information may have been obtained from external sources, and we cannot guarantee the accuracy or currency of any such information.