Australian Federal Budget 2021  

The Treasurer, Josh Frydenberg, delivered the Federal Budget for 2021 tonight (11th May). It’s good to know the update of the key tax and superannuation measures for individual tax, business tax and superannuation. 

Individual tax

Low Income Offsets LMITO retained for 2021-22  

The low and middle income tax offset (LMITO) will continue to apply for the 2021-22 income year.  Otherwise, the LMITO was legislated to only apply until the end of the 2020-21 income year, with  the result that low-to-middle income earners would have seen their tax refunds in 2022 cut by  between $255 and $1,080 (for incomes up to $90,000 but phasing out up to $126,000).  

Taxable income (TI) Amount of offset
$0 $37,000 $255
$37,001 – $48,000 $255 + ([TI – 37000] x 7.5%)
$48,001 – $90,000 $1,080
$90,001 – 126,000 $1,080 ([TI  -90,000] x 3%)
$126,001 + N

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.  

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. 

Taxable income (TI) Amount of offset
$0 $37,500 $700
$37,501 – $45,000 $700 – ([TI – $37,500] x 5%)
$45,001 – $66,667 $325 – ([TI – $45,000] x 1.5%)
$66,668 + Nil

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 The LITO will be withdrawn at a rate of 5 cents per dollar  between taxable incomes of $37,500 and $45,000 and then at a rate of 1.5 cents per dollar between  taxable incomes of $45,000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.  

Personal Tax Rates unchanged for 2021-22; Stage 3 start from 2024-25 unchanged  

In the Budget, the Government did not announce any personal tax rates changes, having already  brought forward the Stage 2 tax rates to 1 July 2020 in the October 2020 Budget. The Stage 3 tax  changes commence from 1 July 2024, as previously legislated.  

The 2021-22 tax rates and income thresholds for residents (unchanged from 2020-21) are:

Taxable income ($) Tax payable ($)
0 – 18,200 Nil
18,201 – 45,000 Nil + 19% of excess over 18,200
45,001 – 120,000 5,092 + 32.5% of excess over 45,000
120,001 – 180,000 29,467 + 37% of excess over 120,000
180,001+ 51,667 + 45% of excess over 180,000

The Stage 3 tax changes commence from 1 July 2024, as previously legislated. From 1 July 2024, the  32.5% marginal tax rate will be cut to 30% for one big tax bracket between $45,000 and $200,000.  The 37% tax bracket will be entirely abolished at this time.  

Therefore, from 1 July 2024, there will only be 3 personal income tax rates – 19%, 30% and 45%.  From 1 July 2024, taxpayers earning between $45,000 and $200,000 will face a marginal tax rate of  30%.  

The tax rates and income thresholds from the 2024-25 for residents (as already legislated) are:  

Taxable income ($) Tax payable ($)
0 – 18,200 Nil
18,201 – 45,000 Nil + 19% of excess over 18,200
45,001 – 200,000 5,092 + 30% of excess over 45,000
200,001+ 51,592 + 45% of excess over 200,000

Tax rates and income thresholds 

Rate 2020-21 2021-22 to 2023-24  From 1.7.2024  (unchanged) 
Nil  $0 – $18,200 $0 – $18,200 $0 – $18,200
19% $18,201 – $45,000 $18,201 – $45,000 $18,201 – $45,000
30%   $45,001 – $200,000
32.5% $45,001 – $120,000  $45,001 – $120,000  N/A

  

37% $120,001 –$180,000  $120,001 – $180,000  N/A

  

45% $180,001 + $180,001 + $200,001 +
Low and middle income tax offset (LMITO)  Up to $1,080 Up to $1,080 N/A
Low income tax offset (LITO) Up to $700 Up to $700 Up to $700

Foreign residents tax rates

For 2021-22, the tax rates for foreign residents (unchanged from 2020-21) are:  

$0 – $120,000 – 32.5%;  

$120,001 – $180,000 – 37%;  

$180,001+ – 45%.  

For 2024-25 and later income years, the tax rates for foreign residents are:  

$0 – 200,000 30%;  

$200,001+ – 45%.  

Working holidaymakers  

For 2021-22, the rates of tax for working holiday makers (unchanged from 2020-21) are:  

$0 – $45,000 15%;  

$45,001 – $120,000 – 32.5%;  

$120,001 – $180,000 – 37%;  

$180,001+ – 45%.  

For 2024-25 and later income years, the rates of tax for working holiday makers are:  

$0 – $45,000 – 15%;  

$45,001 – $200,000 – 30%; 

$200,001+ – 45%.  

Self-education expenses: $250 threshold be removed  

The Government will remove the exclusion for the first $250 of deductions for prescribed courses of  education. The first $250 of a prescribed course of education is currently not deductible  

A limitation on deductibility exists under s 82A of ITAA 1936 in respect of deductions that would  otherwise be allowable under s 8-1 if the self-education expenses are necessarily incurred in  connection with a course of education provided by a place of education (eg school, univeraity, college etc)  and undertaken by the taxpayer for the purpose of gaining qualifications for use in the carrying on of  a profession, business or trade or in the course of any employment. In those circumstances,  currently only the excess over $250 may be deductible.  

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.  

The new residency rules are based on recommendations made by the Board of Taxation in its 2019  report Reforming individual tax residency rules a model for modernisation. 

Medicare 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 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.  

Income Tax exemption for ADF personnel deployed to Operation Paladin  

The Australian Government will provide a full income tax exemption for the pay and allowances of  Australian Defence Force (ADF) personnel deployed to Operation Paladin from 1 July 2020.  Operation Paladin is Australia’s contribution to the UN’s Truce Supervision Organisation, with ADF  personnel deployed in Israel, Jordan, Syria, Lebanon and Egypt. 

Business Tax  

Temporary full expensing extended by one year  

The Government will extend the temporary full expensing measure until 30 June 2023. It was  otherwise due to finish on 30 June 2022. Other than the extended date, all other elements of  temporary full expensing will remain unchanged.  

Currently, temporary full expensing allows eligible businesses to deduct the full cost of eligible  depreciating assets. A business qualifies for temporary full expensing if it has an annual aggregated  turnover under $5 billion. Annual aggregated turnover is generally worked out on the same basis as  for small businesses, except the threshold is $5 billion instead of $10 million.  

Loss carry-back extended by one year  

Under the loss carry back measures, an eligible company (aggregated annual turnover of up to $5  billion) could carry back a tax loss for the 2019-20, 2020-21 or 2021-22 income years to offset tax  paid in the 2018-19 or later income years.  

The Government will extend the eligible tax loss years to include the 2022-23 income year. Tax  refunds resulting from loss carry back will be available to companies when they lodge their 2020-21,  2021-22 and 2022-23 tax returns.

Temporary loss carry-back also complements the temporary full expensing measure by allowing  more companies to take advantage of expensing, while it is available.  

Employee share schemes: cessation of employment removed as a taxing point  

The Government will remove the cessation of employment as a taxing point for tax-deferred  employee share schemes. Currently, under a tax-deferred ESS, where certain criteria are met  employees may defer tax until a later tax year (the deferred taxing point). In such cases, the deferred  taxing point is the earliest of:  

  • Cessation of employment;
  • In the case of shares, when there is no risk of forfeiture and no restrictions on disposal; 
  • 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 maximum period of deferral of 15 years.

The change announced in the Budget will result in tax being deferred until the earliest of the  remaining taxing points.  

30% Digital games tax offset from 1 July 2022  

A 30% Digital Games Tax Offset will apply from 1 July 2022 for eligible businesses that spend a  minimum of $500,000 on qualifying Australian games expenditure.  

Games with gambling elements, or that cannot obtain a classification rating, will not be eligible.

Intangible assets depreciation: Option to self-assess effective life  

The income tax law will be amended to allow taxpayers to self-assess the effective life of certain  intangible assets (such as intellectual property and in-house software), rather than being required to  use the effective life currently prescribed in the table in s 40-95(7) of the ITAA 1997. 

This amendment will apply to patents, registered designs, copyrights and in-house software.  Taxpayers will be able to bring deductions forward if they self-assess the assets as having a shorter  effective life to the statutory life.  

The self-assessment of effective lives will apply to eligible assets acquired following the completion  of temporary full expensing, ie to assets acquired from 1 July 2023.  

Tax Exemption for grants made to businesses affected by storm and floods  

The Government will provide an income tax exemption for qualifying grants made to primary  producers and small businesses affected by the storms and floods in Australia.  

Qualifying grants are Category D grants provided under the Disaster Recovery Funding Arrangements  2018, where those grants relate to the storms and floods in Australia that occurred due to rainfall  events between 19 February 2021 and 31 March 2021. These include small business recovery grants  of up to $50,000 and primary producer recovery grants of up to $75,000. The grants will be made  non-assessable non-exempt income for tax purposes.  

Small business to be able to pause ATO debt recovery  

The Government will introduce legislation to allow small businesses to pause or modify ATO debt  recovery action where the debt is being disputed in the AAT.  

Specifically, the changes will allow the Small Business Taxation Division of the AAT to pause or  modify any ATO debt recovery actions such as garnishee notices and the recovery of GIC or related  penalties until the underlying dispute is resolved by the AAT. This measure is intended to provide  an “avenue” for small businesses to ensure they are not required to start paying a disputed debt  until the matter has been determined by the AAT.  

Small business entities (including individuals carrying on a business) with an aggregated turnover of  less than $10 million per year will be eligible to use the option.  

Superannuation  

Superannuation contributions work test to be repealed from 1 July 2022 

The superannuation contributions work test exemption will be repealed for voluntary non – concessional and salary sacrificed contributions for those aged 67 to 74 from 1 July 2022.  

As a result, individuals under age 75 will be allowed to make or receive non-concessional or salary sacrifice contributions from 1 July 2022 without meeting the work test, subject to existing
contribution caps. However, individuals aged 67 to 74 years will still have to meet the work test to make personal deductible contributions.
Currently, individuals aged 67 to 74 years (ie under 75) can only make voluntary contributions (both concessional and non-concessional), or receive contributions from their spouse, if they work at least 40 hours in any 30-day period in the financial year in which the contributions are made.


Super guarantee $450 per month to be repealed


The Superannuation Guarantee $450 per month eligibility threshold will be removed from 1 July 2022. As a result, employers will be required to make quarterly Super Guarantee contributions
on behalf of low-income employees earning less than $450 per month (unless another Super Guarantee exemption applies).


Downsizer contributions eligibility reduced to 60


The minimum eligibility age to make downsizer contributions into superannuation will be lowered to age 60 (down from age 65) from 1 July 2022.
The proposed reduction in the eligibility age will mean that individuals aged 60 or over can make an additional non-concessional contribution of up to $300,000 from the proceeds of selling their home. Either the individual or their spouse must have owned the home for 10 years.
The maximum downsizer contribution is $300,000 per contributor (ie $600,000 for a couple), although the entire contribution must come from the capital proceeds of the sale price. As under the current rules, a downsizer contribution must be made within 90 days after the home changes ownership (generally the date of settlement).


First Home Super Saver Scheme to be extended for withdrawals up to $50,000


The mTaximum amount of voluntary superannuation contributions that can be released under the First Home Super Saver (FHSS) scheme will be increased from $30,000 to $50,000 with effect from the start of the first financial year after Royal Assent of the enabling legislation, expected to be 1 July 2022.
Voluntary contributions made from 1 July 2017 up to the existing limit of $15,000 per year will count towards the total amount able to be released (which includes voluntary concessional and non – concessional contributions).
Currently, the FHSS scheme allows for future voluntary contributions up to $15,000 per year (and $30,000 in total) to be withdrawn for a first home purchase. To be eligible, a person must be 18 years or over, have not used the FHSS scheme before and have never owned real property in Australia. Withdrawals of eligible FHSS contributions (and associated earnings) are taxed at the
individual’s marginal rate less a 30% tax offset.

For your interest, there’s an ABC news commentary that summarised the winners and losers in simple terms.
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