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).
- 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.
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.
- is worth $255 for incomes up to $37,000;
- 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.
- 15 years from the grant of the ESS interest; and
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.
- to facilitate access to hedging rules on a portfolio hedging
basis; and
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.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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