The federal budget 2021–22 was handed down by the Treasurer, the Hon Josh Frydenberg MP, on 11 May 2021. This article considers the key issues as we wait for the legislative amendments to give effect to the budget measures.
At the time JobKeeper was announced on 30 March 2020, I described the scheme as akin to a pot of boiling water on the stove (representing the economy) where the gas levels cannot be maintained (due to COVID-19 lockdowns). Rather than turn the gas off, it was reduced to a low simmer. This would allow the pot to return to the boil more quickly than if the water was allowed to go stone cold.
It worked … the Australian economy has rebounded faster and stronger than expected, as evidenced by the latest budget numbers. For all its minor design flaws, JobKeeper kept businesses afloat and employees in jobs.
While an eye-watering deficit of $106.6 billion has been forecast for 2021–22, the budget measures have been positively received by many observers, containing plenty of good news for most. This budget was undoubtedly prepared with a forthcoming Federal election in mind (expected to be held no later than 21 May 2022) and against the backdrop of an electorate weary from the COVID-19 pandemic.
As I reflect on the package of key tax and superannuation measures announced this year, it is apparent that some of the measures can be classified into one of the following three categories:
- measures which are long overdue and constitute a ‘clean up’;
- measures which are welcome but could go further; and
- measures which are difficult to fault for their intent or purpose, but which require further consultation.
Letting go of LMITO
Before I do so, I’d like to comment on the highly visible Low and Middle Income tax offset (LMITO), thanks to extensive media coverage. If anyone is thinking the LMITO should be further extended (beyond 2021–22) or retained permanently, remember that it was baked into Stage 2 of the Personal Income Tax Plan. Stage 2 was originally legislated to apply from 1 July 2022 which would have subsumed the limited life LMITO.
However, last year’s budget brought forward Stage 2 by two years and unexpectedly extended the LMITO by 12 months to 2020–21. The LMITO’s life will be further extended to 2021–22, meaning it will endure for what will now be four years, as originally intended in the Personal Income Tax Plan, from 2018–19 to 2021–22.
Importantly, the nexus between the LMITO and the Stage 2 tax cuts has been decoupled. The tax cuts package was designed before COVID-19. The continuation of the LMITO for an additional two years has morphed into an economic stimulus measure. Its proposed removal after 2021–22 will visibly cut into family budgets as its recipients have become accustomed to the offset and come to rely on it. Perhaps the ‘bonus’ two years of the LMITO could have been rebadged (even renamed) by the government as a stimulus measure, as its subsumption by the Stage 2 tax cuts on 1 July 2020 seems to have gone unnoticed by most taxpayers and the media.
Long overdue measures
- The proposed removal of the exclusion of the first $250 of deductions for self-education expenses (not likely before 1 July 2022) is a sensible measure. This annoying rule — a legacy of the concessional deduction of the 1960s, the $250 rebate of the 1970s and the removal of that rebate in the early 1980s — imposes an unnecessary compliance burden on taxpayers.
- The proposed removal of the $450 monthly income threshold for superannuation guarantee purposes (not likely before 1 July 2022) is a sensible and long overdue change, particularly in this digital age of electronic payments and reporting. This measure is expected to benefit 300,000 low income employees, of which 63 per cent are women.
- The proposed removal of the active member test for SMSFs and small APRA funds (not likely before 1 July 2022) is also a long overdue measure. This sensible change will allow those temporarily stranded offshore due to our international border closure to continue to contribute to their own funds without having to set up a separate superannuation account managed by a large fund. The increase in the period under the temporary absence rule for fund trustees from two years to five years is also sensible, particularly for those trustees whose temporary absences overseas have been unexpectedly extended by COVID-19.
Welcome measures that could go further
- The proposed removal of the work test for those aged 67–74 making voluntary superannuation contributions (not likely before 1 July 2022) is a pleasing measure but falls short. The work test will be removed for those making voluntary non-concessional contributions or concessional contributions under a salary sacrifice arrangement but will remain for those aged 67–74 who cannot access salary sacrifice arrangements or earn solely investment income and seek to make personal deductible contributions. At a time when all efforts should be made to encourage superannuation savings, it is curious why this unnecessary restriction on the making of some concessional contributions remains.
- Temporary full expensing and loss carry back are economic stimulus measures from last year’s budget. These will be extended for a further 12 months, to 30 June 2023 and 2022–23 respectively. While this is welcome, the annual extension and/or expansion of the asset write-off mechanism (in one form or another since 12 May 2015), in particular, is inefficient and confusing for taxpayers and practitioners. It is high time the government decides on the appropriate asset and business turnover settings and makes these mechanisms a permanent feature of the law, for once and for all.
- The introduction of a patent box — a concessional corporate tax rate of 17 per cent on income derived from Australian patents in the medical and biotechnology sectors — is an innovative response from the government. There is enormous scope to expand the concept to other industries (noting that the clean energy sector has already been flagged).
Awaiting further detail
- The changes to the corporate tax residency rules — announced in last year’s budget — will now be sensibly extended to include trusts and corporate limited partnerships. However, we await further detail on the new ‘significant economic connection to Australia’ test for companies incorporated outside Australia announced in last year’s budget.
- The introduction of a new individual tax residency ‘bright line test’ should, theoretically, replace the current ‘resides test’ and the three statutory tests. However, the proposed secondary ‘Factor test’ may present new challenges for those who fail the primary ‘bright line test’, particularly when taxpayers try to navigate the ‘Australian economic connections’ factor. It is hoped that the government will look to consult further with the profession before finalising its policy position on the detail of this measure. We need to be careful we are not effectively replacing one set of complex tests with another, without gaining any ground.
Other significant measures
Other notable measures announced in the budget include the following:
- the eligible age for making downsizer superannuation contributions will be reduced from 65 to 60 (not likely before 1 July 2022);
- the maximum releasable amount under the First Home Super Saver Scheme will be increased from $30,000 to $50,000 (not likely before 1 July 2022);
- taxpayers will be allowed to self-assess the effective life of intangible assets rather than being required to use the statutory effective lives set out in s 40-95(7) of the ITAA 1997 (but not until 1 July 2023);
- the cessation of employment will be removed as a taxing point for tax deferred employee share scheme interests; and
- small business entities (aggregated turnover of less than $10 million) will be provided with the ability to apply to the Small Business Taxation Division of the Administrative Appeals Tribunal (AAT) to pause or modify ATO debt recovery action until the underlying dispute is resolved by the AAT, rather than applying through the courts.
The start date of the measures
The government released the budget for 2021–22 on 11 May 2021, yet none of the key tax and superannuation measures commence on 1 July 2021 (noting the continuation of temporary full expensing and loss carry back until 2023). Most of the measures start on the first 1 July following Royal Asset of the enabling legislation. While this acknowledges the reality of the inevitable passage of time between the date of announcement and the date of Royal Assent (allowing time for the measures to be passed by Parliament), it means that, ironically, most of the tax and superannuation measures contained in the federal budget 2021–22 will not commence until 1 July 2022 at the earliest.
This timing places the commencement of these measures beyond the next Federal election. If the measures are enacted before then, any changes could only be effected by further legislative amendment. If any of the measures are still unenacted when the Parliament is dissolved and:
- the Coalition is re-elected — presumably the policies would be retained and any unenacted measures contained in bills lapsing on the dissolution of the Parliament would be reintroduced;
- the Opposition forms government — it would be a matter for the Australian Labor Party to set out their policies and confirm whether the Coalition’s budget measures will be adopted.
As usual, we shall wait and see what transpires.
A final word on tax reform…
The budget did not contain any commitment to a holistic tax reform agenda. We still hope that the government will commit to tax reform to improve the efficiency and equity, and reduce the complexity, of the tax and superannuation system.
The government could take up opportunities set out in The Tax Institute’s pre-budget submission on expediting dispute resolution and dealing with some of the penalty issues raised in our submission, including the draconian 200 per cent penalty imposed under the superannuation guarantee regime for failure to lodge an SG statement.
The Tax Institute
28 May 2021