• Federal Budget 2021

    Individuals

Individuals

Personal Income Tax cuts

The Government continues its Personal Income Tax Plan with the announcement of a number of measures targeted towards low and middle-income earners. This will provide immediate relief to individuals and support economic recovery by boosting consumer spending.

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Personal Income Tax cuts

The Government continues its Personal Income Tax Plan with the announcement of a number of measures targeted towards low and middle-income earners. This will provide immediate relief to individuals and support economic recovery by boosting consumer spending.

Retaining the low and middle income tax offset

The coalition has again extended the low and middle income tax offset (LMITO) for a further year to the 2021-22 income year. The LMITO provides a reduction in tax of up to $1,080 for those earning less than $90,000 and will be received on assessment after individuals lodge their tax return.

Increasing the Medicare levy low-income thresholds

In addition, the Government will also increase the Medicare Levy low-income thresholds. This will apply to singles, families, and seniors and pensioners from 1 July 2020 to account for recent movements in CPI.

The thresholds will increase as follows:

  • Singles - $22,801 to $23,226
  • Families - $38,474 to $39,167
  • Seniors and pensioners - $36,056 to $36,705
  • Family threshold for seniors and pensioners - $50,191 to $51,094

Self-education expense deductions

The Government will also remove the exclusion for the first $250 deduction for prescribed courses of education. The first $250 of expenses relating to prescribed course education is currently not deductible. The measure aims to reduce compliance costs for individuals claiming self-education expenses.

BDO Comment

BDO welcomes the continued support for low and middle-income earners and hopes it will assist families to bounce back from the effects of the COVID-19 pandemic. 

Modernisation of the individual tax residency rules

In 2019 the Board of Taxation released a report on the reform of the individual tax residency rules with a key recommendation of using ‘physical presence’ in Australia as the primary measure of residency. In line with this and other recommendations in the Board of Taxation Report, the Government will replace the individual tax residency rules with a new modernised framework.

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Modernisation of the individual tax residency rules

In 2019 the Board of Taxation released a report on the reform of the individual tax residency rules with a key recommendation of using ‘physical presence’ in Australia as the primary measure of residency. In line with this and other recommendations in the Board of Taxation Report, the Government will replace the individual tax residency rules with a new modernised framework.

The primary test will be a ‘bright-line’ test where, a person who is physically present in Australia for 183 days or more in an income year, will be an Australian tax resident.

Those 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 critera. The Board of Taxation recommend a day count test together with a new four factor test. The four factors referenced in the Report include:

  1. The right to reside in Australia
  2. Australian accommodation
  3. Australian family
  4. Australian economic connections.

BDO Comment

It is important to note that where an individual is both a tax resident of Australia under Australian tax legislation and a tax resident of another country under that country’s domestic tax legislation, the existence of a Double Tax Agreement between the two countries will generally provide a ‘tie breaker’ test. The ‘tie breaker’ test will have application in preference to the Australian domestic tax legislation in determining tax residency. 

What will be interesting, is to see how the secondary test will be drafted. It was the Board’s recommendation that where two of the above four factors were satisfied the individual would be a resident under the four factor test. It may well be that the devil is in the detail in understanding the practical application of the proposed secondary test.

NZ maintains primary taxing right over sporting teams due to COVID-19

The Government has introduced a measure to ensure New Zealand maintains its primary taxing right over members of sporting teams, as well as support staff, who are forced to exceed the 183-day residency test in order to compete in competitions within Australia. The measure will come into effect for both the 2021 and 2022 income tax and fringe benefits tax years.

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NZ maintains primary taxing right over sporting teams due to COVID-19

The Government has introduced a measure to ensure New Zealand maintains its primary taxing right over members of sporting teams, as well as support staff, who are forced to exceed the 183-day residency test in order to compete in competitions within Australia. The measure will come into effect for both the 2021 and 2022 income tax and fringe benefits tax years.

BDO Comment

BDO supports the measure taken by the Government to ensure common sense prevails in light of the abnormal circumstances of COVID-19. Interestingly, it has not been extended to business executives who may also effectively be ‘stranded’ in Australia as a result of the pandemic.

Employee Share Schemes – ‘Cessation of employment’ no longer a taxing point

Employee Share Schemes (ESS) allow employers to attract, retain and motivate their employees by issuing options or shares to them, usually at a discount.

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Employee Share Schemes – ‘Cessation of employment’ no longer a taxing point

Employee Share Schemes (ESS) allow employers to attract, retain and motivate their employees by issuing options or shares to them, usually at a discount.

Currently, under the deferred taxing rules of ESS, an employee may defer tax until a later taxing point being the earliest of:

  • Cessation of employment
  • In relation to shares, when there is no real risk of forfeiture and no restrictions on disposal
  • In relation to options, when the employee exercises the option and there is no real risk of forfeiture and no restrictions on disposal.

The changes to Employee Share Schemes

‘Cessation of employment’ has been removed as a taxing point under the deferred taxation rules. However, the change will only apply to ESS interests issued to employees in the income years commencing after the amending legislation is passed.

Secondly, the cap for qualification into the deferred taxation rules in respect of salary sacrifice arrangements by unlisted companies has been increased from $5,000 to $30,000.

BDO Comment

These changes are welcomed however they do not address the two ­­­material deficiencies of the Employee Share Scheme legislation:

  1. Where the exercise of an option creates a taxing event (which it often does), employees can be forced to sell shares to fund the resulting taxation liability. A taxation liability should not arise until a share is sold
  2. In certain circumstances where an option is exercised, the share must be held for 12 months to qualify for the 50% capital gains tax discount. The 12 month period should run from the time the option was granted.

It remains to be seen as to when, if ever, these deficiencies will be addressed by the Government.

First Home Super Saver Scheme (FHSSS) changes aimed to increase uptake

The Government has continued its commitment to reducing pressure on housing affordability for aspiring first home owners through the First Home Super Saver Scheme (FHSSS). In the latest change to the scheme, the maximum releasable amount of voluntary concessional and non-concessional contributions has been increased from $30,000 to $50,000.

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First Home Super Saver Scheme (FHSSS) changes aimed to increase uptake

The Government has continued its commitment to reducing pressure on housing affordability for aspiring first home owners through the First Home Super Saver Scheme (FHSSS). In the latest change to the scheme, the maximum releasable amount of voluntary concessional and non-concessional contributions has been increased from $30,000 to $50,000.

Voluntary contributions made from 1 July 2017 up to the existing limit of $15,000 per annum will apply towards the total amount able to be released. This increase will apply from the start of the first financial year after Royal Assent, expected to occur by 1 July 2022. The increased cap will ensure the FHSSS continues to help first home buyers raising a deposit more quickly, primarily through the special tax treatment of super and associated investment earnings.

Technical changes

Additionally, to improve the operation of the FHSSS and assist applicants who make errors on the release applications, the Government will make four technical changes to the legislation underpinning the scheme by:

  • Increasing the discretion of the Commissioner of Taxation to amend and revoke FHSSS applications
  • Allowing individuals to withdraw or amend their applications prior to receiving a FHSSS amount, and allow those who withdraw to re-apply for FHSSS releases in the future
  • Allowing the Commissioner of Taxation to return any released FHSSS money to superannuation funds, provided the money has not yet been released to the individual
  • Clarifying the money returned by the Commissioner of Taxation to superannuation funds is treated as funds’ non-assessable, non-exempt income and does not count towards the individual’s contribution caps.

BDO Comment

The increase in the maximum releasable amount brings the FHSSS up to speed with current deposit requirements and the technical changes respond to key issues faced by current users of the FHSSS. However, the complexities surrounding the release mechanism and general process remain.

Further, the additional years required to reach the maximum releasable amount under the FHSSS due to the annual limit and increased uncertainty over the constant changes may not increase the limited (to date) uptake of the FHSSS.

Easing of restrictions around superannuation

Australians can look forward to more opportunities to top up super balances as they approach retirement and beyond.

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Easing of restrictions around Superannuation

Australians can look forward to more opportunities to top up super balances as they approach retirement and beyond.

Has the Work Test really been abolished?

From 1 July 2022 Australians will no longer need to meet the work test to be eligible to make non-concessional superannuation contributions and receive salary sacrifice contributions.

Individuals aged 67-74 years will still have to meet the work test to make personal deductible contributions.

Currently individuals aged between 67-74 years of age are restricted from making certain contributions unless they are working at least 40 hours in a 30 day consecutive period, which is known as the work test. 

Downsizer contributions

From 1 July 2022, Australians over 60 years of age will be eligible to make downsizer contributions. Previously the downsizer contribution was limited to Australians over age 65. The other eligibility criteria for the downsizer contribution remain unchanged.

Originally introduced in the 2018 Budget, people aged 65 and over were allowed to sell their own home if they had owned it for at least ten years and then make a one off contribution of up to $300,000 into superannuation.

The government is proposing to open up the age for eligibility to include those from age 60 in order to free up stock and create movement in the property market.

Self Managed Superannuation Funds (SMSFs) & residency

SMSFs have long been disadvantaged from a tax perspective where SMSF members are absent from Australia for extended periods of time. In this budget the Government proposes to relax the rules such that the SMSF and members now only need to meet two rules to be eligible for concessional tax treatment:

  • The fund must be established in Australia or hold an asset in Australia
  • The members cannot be temporarily absent from Australia for more than five years.

This will enable SMSF members to be absent from Australia for longer than is currently the case, whether for work, education or due to COVID-19. It will also enable overseas members to continue to contribute to their Australian SMSF without penalty within the five year period. This is expected to apply from 1 July 2022.

Legacy pensions

Individuals will be allowed to exit certain Legacy Retirement Products including Market Linked Pensions within a two year window from the first financial year after the date of Royal Assent. 

BDO Comment

The budget announcement included a number of positive changes to superannuation which will not only benefit Australians approaching, or already in retirement, but will also benefit younger home buyers.

While we were hoping for further simplification of superannuation rules around pensions, we welcome any easing of restrictions encouraging Australians to save for their retirement.

BDO supports the removal of the work test but we question if the age limit of 74 is relevant in the current environment where individuals are restricted in the amount they can contribute to superannuation based on their total superannuation balance.

BDO welcomes the relaxation of residency requirements for SMSFs, enabling SMSF members to have similar outcomes to members of large superannuation funds.

Superannuation Guarantee Eligibility Threshold removed

The Government is proposing to remove the $450 per month minimum income threshold which determines whether employees have to be paid the superannuation guarantee by their employer. This will begin from the first financial year after the proposed legislation receives Royal Assent. 

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Superannuation Guarantee Eligibility Threshold removed

The Government is proposing to remove the $450 per month minimum income threshold which determines whether employees have to be paid the superannuation guarantee by their employer. This will begin from the first financial year after the proposed legislation receives Royal Assent. 

The superannuation guarantee refers to the minimum percentage of earnings an employer needs to pay into their employee’s superannuation fund. The superannuation guarantee is currently 9.5%, but will increase on 1 July 2021 to 10%.

Currently, where employees are paid $450 or more (before tax) in a calendar month, superannuation guarantee is payable on those wages. This threshold was introduced to prevent the administrative burden of facilitating the superannuation guarantee for employers with employees in casual employment arrangements.   

This proposed measure will ensure lower income earners are not missing out on the benefit of having superannuation accrue for their retirement. In particular, an estimated 300,000 individuals would currently be eligible to receive these additional superannuation guarantee payments (as per the Retirement Income Review). Unsurprisingly, 63% of those who would be eligible for these payments are women which means, if implemented, this measure is a win for equity in the superannuation system.

BDO Comment

Although removing this threshold represents a huge win for lower income earners and superannuation equity for all, the administrative burden on employers should not be underestimated. Once this measure is implemented, employers will need to ensure they have an appropriate and up-to-date payroll system in place and be able to track and capture any casual working arrangements. The cost of the superannuation guarantee shortfall for unpaid or late superannuation guarantee is very high.

Further, where employers are determining whether they have someone working under a contractor or employee relationship, this added superannuation guarantee burden can become quite contentious. Further simplification of the system remains overdue.