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Federal Budget 2021-22 for Individuals

The Government has decided not to go down the austerity path, which will be a relief for many taxpayers and businesses. 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.

On personal taxation, in an expected announcement, the Government confirmed that it will extend the low and middle income tax offset (LMITO) beyond 2020-21 so that taxpayers will continue to receive the tax offset (between $255 and $1,080) in the 2021-22 income year.

In summary, the major tax-related measures announced in the Budget included:

  • Personal tax rates – no changes were made to personal tax rates, the Government having already brought forward the Stage 2 tax rates to 1 July 2020. The Stage 3 personal income tax cuts remain unchanged and will commence in 2024-25 as already legislated.
  • LMITO retained for 2021-22 – the Government will retain the low and middle income tax offset for the 2021-22 income year. The LMITO provides a reduction in tax of up to $1,080.
  • Temporary full expensing extended – the Government will extend the 2020-21 temporary full expensing measures for 12 months until 30 June 2023. This will allow eligible businesses with aggregated annual turnover or total income of less than $5 billion to deduct the full cost of eligible depreciable assets of any value, acquired from 7:30pm AEDT on 6 October 2020 and first used or installed ready for use by 30 June 2023.
  • Loss carry-back extended – the loss years in respect of which an eligible company (aggregated annual turnover of up to $5 billion) can currently carry back a tax loss (2019-20, 2020-21 and 2021-22) will be extended to include the 2022-23 income year.
  • Individual residency test reformed – the Government will replace the existing tests for the tax residency of individuals with a primary “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.
  • Employee share schemes – the Government will remove the cessation of employment as a taxing point for the tax-deferred employee share schemes.
  • ATO debt recovery – the AAT will be given the power to pause or modify ATO debt recovery action in relation to disputed debts of small businesses.
  • Self-education expenses – $250 threshold to be removed.
Superannuation and related measures

The key superannuation and related measures announced in the Budget include:

  • Superannuation contributions work test – to be repealed from 1 July 2022 for voluntary non-concessional and salary sacrificed contributions for those under age 75. However, the work test will still apply for personal deductible contributions by those aged 67-74.
  • SMSF residency rules – to be relaxed by extending the central management and control test safe harbour from two to five years, and removing the active member test for both SMSFs and small APRA funds.
  • Conversions of legacy income streams – individuals will be permitted to exit certain legacy retirement income stream products (excluding flexi-pensions or lifetime products in APRA-funds or public sector schemes), together with any associated reserves, for a two-year period. Any commuted reserves will not be counted towards an individual’s concessional contribution cap. Instead, they will be taxed as an assessable contribution for the fund.
  • Super Guarantee $450 per month threshold – to be removed from 1 July 2022.
  • Downsizer contributions – eligibility age to be lowered from 65 to 60.
  • First Home Super Scheme – to be extended for withdrawals up to $50,000, plus some technical changes for tax and administration errors in applications.
  • Victims of domestic violence – the Government will not proceed with its previous proposal to extend the early release of super to victims of family and domestic violence.
  • Pension Loans Scheme – will be expanded to allow access up to two lump sums in any 12-month period (up to a total of 50% of the maximum annual Age Pension); together with a Government guarantee that “no negative equity” will apply.

At the same time, the Budget did not contain any change to the legislated Super Guarantee rate increase from 9.5% to 10% for 2021-22.

As previously announced, the Budget confirmed:

  • 30% Digital Games Tax Offset – for eligible businesses that spend a minimum of $500,000 on qualifying Australian games expenditure (excluding gambling) from 1 July 2022.
  • Intangible assets depreciation – option to self-assess effective life for certain intangible assets (eg intellectual property and in-house software).
  • Brewers and distillers – the excise refund cap for small brewers and distillers will increase to $350,000 from 1 July 2021.
  • Venture capital – a review of the venture capital tax concessions will be undertaken in 2021.
  • Child care – increased subsidies from 1 July 2022.
Housing
  • Government to help another 10,000 first-home buyers build a new home with a 5% deposit.
  • Some 10,000 single parents to purchase a home with a 2% deposit.
  • Increasing the amount that can be released under the First Home Super Saver Scheme to $50,000 from $30,000.
  • To allow those aged over 60 to contribute up to $300,000 to their superannuation fund if they downsize their home, freeing up more housing stock for younger families.
Business
  • Budget provides a further $2.1 billion in targeted support for aviation, tourism, arts and international education providers.
  • Tax relief for around 1,000 small brewers and distillers.
  • Double its commitment to the “JobTrainer” fund to help create new apprenticeships and traineeships.
  • Investing $1.2 billion to build digital infrastructure, skills and cyber security.
  • Launching a new “patent box”, under which income earned from new patents developed in Australia will be taxed at a concessional 17% rate. The patent box will apply to the medical and biotech sectors.
Welfare
  • To spend $13.2 billion over four years for National Disability Insurance Scheme.
  • To commit $17.7 billion in new aged care funding.
  • A $2.3 billion commitment to mental health care and suicide prevention.
  • To commit $2 billion to fund preschools.
  • To provide more than $19 billion in funding for universities in 2021-22.   

The Government believes the 2021-22 Budget will consolidate the gains made since the last Budget in October 2020 and put the economy on course for the unemployment rate to fall below 5%. To reach these targets the Government has committed $291 billion (or 14.7% of GDP) in direct economic support for individuals, households and businesses since the onset of COVID-19. Some of the measures mentioned above are fleshed out below.

The amount of the LMITO is $255 for taxpayers with a taxable income of $37,000 or less. Between $37,000 and $48,000, the value of LMITO increases at a rate of 7.5 cents per dollar to the maximum amount of $1,080. Taxpayers with taxable incomes from $48,000 to $90,000 are eligible for the maximum LMITO of $1,080. From $90,001 to $126,000, LMITO phases out at a rate of 3 cents per dollar.

Consistent with current arrangements, the LMITO will be received on assessment after individuals lodge their tax returns for the 2021-22 income year.

Low income tax offset

The low income tax offset (LITO) will also continue to apply for 2021-22 income year. The LITO was intended to replace the former low income and low and middle income tax offsets from 2022-23, but the new LITO was brought forward in the 2020 Budget to apply from the 2020-21 income year.

The maximum amount of the LITO is $700. The LITO will be withdrawn at a rate of 5 cents per dollar between taxable incomes of $37,500 and $45,000 and then at a rate of 1.5 cents per dollar between taxable incomes of $45,000 and $66,667.

Self-education expenses: $250 threshold to be removed

The Government will remove the exclusion of the first $250 of deductions for prescribed courses of education. The first $250 of a prescribed course of education expense is currently not deductible. The measure will have effect from the first income year after the date of assent to the enabling legislation.

Primary 183-day test for individual tax residency

The Government will replace the existing tests for the tax residency of individuals with a primary “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 that depend on a combination of physical presence and measurable, objective criteria.

Medicare levy low-income thresholds for 2020-21

For the 2020-21 income year, the Medicare levy low-income threshold for singles will be increased to $23,226 (up from $22,801 for 2019-20). For couples with no children, the family income threshold will be increased to $39,167 (up from $38,474 for 2019-20). The additional amount of threshold for each dependent child or student will be increased to $3,597 (up from $3,533).

For single seniors and pensioners eligible for the seniors and pensioners tax offset (SAPTO), the Medicare levy low-income threshold will be increased to $36,705 (up from $36,056 for 2019-20). The family threshold for seniors and pensioners will be increased to $51,094 (up from $50,191), plus $3,597 for each dependent child or student.

The increased thresholds will apply to the 2020-21 and later income years.

Child care subsidies to change 1 July 2022

The Budget confirmed that the Government will make an additional $1.7 billion investment in child care. The changes will commence on 1 July 2022 (ie not in the next financial year).

Commencing on 1 July 2022, the Government will:

  • increase the child care subsidies available to families with more than one child aged 5 and under in child care by adding an additional 30 percentage point subsidy for every second and third child (stated to benefit around 250,000 families);
  • remove the $10,560 cap on the Child Care Subsidy (stated to benefit around 18,000 families).

The Treasurer states that, under the Government’s changes, a single parent on $65,500 with two children in five days of long day care who chooses to work a fifth day will be $71 a week better off compared to the current system. He further states that, under these changes, a family earning $110,000 a year will have the subsidy for their second child increase from 72% to 95%, and would be $95 per week better off for 4 days of care.