The 2021-22 Federal Budget provides Australia with a roadmap to help guide our country's business and economic recovery as we emerge from the unprecedented COVID-19 impacts of 2020.
The second COVID-19 impacted Federal Budget, was announced by Treasurer Josh Frydenberg on 11 May 2021. It presented stage two of the Government's economic plan for recovery from Australia's first economic recession in almost 30 years. The measures in the Budget were announced in the context of an Australian economy which has already begun to recover from the impacts of COVID-19 faster than all other advanced economies with employment levels now returning to pre-pandemic levels.
The theme of the 2021-22 Budget is a strong recovery of the Australian economy from the COVID-19 recession, with real GDP forecast to grow by 1.25% in 2020-21, by 4.24% in 2021-22 and 2.5% in 2022-23. The unemployment rate is forecast to fall to 4.75% by mid-2023 which would mark the first sustained period of unemployment below 5% since the 2008 Global Financial Crisis (following the cessation of the JobKeeper program in March).
The stronger-than-expected economic recovery is reflected in higher tax receipts than were forecasted, with corporate tax receipts in particular contributing $25 billion more than expected. Across the four years forecasted to 2023-24, taxation receipts are expected to continue to rise by $84.5 billion whilst the underlying cash balance deficit of $161 billion in 2020-21 (as compared with the forecasted $213.7 billion) is forecast to continue to fall over the forward estimates period to a deficit of $57 billion by 2024-25.
The Budget announced a number of significant expenditure measures, the key measures including:
- an additional $15.2 billion over ten years in new commitments to road, rail and community infrastructure projects across Australia which are proposed to support over 30,000 direct and indirect jobs across the lives of the projects. This commitment is in addition to the Government’s $110 billion ten year infrastructure pipeline previously announced.
- a $17.7 billion allocation over five years for the aged care sector to increase access to safe and quality care as well as provide the aged care sector workforce with funds to address skills and staffing shortages.
- a $1.2 billion package for the Digital Economy Strategy as announced earlier this year.
Corporate and international tax measures were focused on job creation and supporting businesses into making investments which will support the economic recovery.
Employee Share Schemes – removing cessation of employment as a taxing point and reducing red tape
In a welcome (and long overdue) move, the Government will remove the taxing point that happens when an employee leaves group employment and keeps tax-deferred shares and options.
These awards are usually taxed when they either vest or are exercised but that assumes the employee still works for the corporate group. An earlier taxable event will happen if the employee leaves the group and keeps the awards – for example, because they are a ‘good’ leaver – even where vesting conditions still have to be satisfied (which will often be the case where the retirement benefit rules in the Corporations Act 2001 apply). This can leave the employee in an unenviable position – having to fund a tax liability without the ability to sell the underlying shares to pay that liability. This artificial taxing point left Australia out of step with other major economies and its removal has long been identified as an easy ‘fix’ to ensure our employee share scheme regime is globally competitive and not a barrier to attracting talent. It also puts the federal tax laws at odds with the state tax laws, the latter don’t recognise termination of employment as a taxing point for payroll tax purposes.
In 2009, the ‘indeterminate right’ rule was introduced into the ESS regime and this helped provide a practical and relatively simple workaround, at least in relation to rights such as options. Allowing the company to settle the exercise of a right with a cash equivalent payment ‘switched off’ the ESS rules, which in turn meant no ‘tax on termination’ and no ‘dry’ tax charge. But if the vesting conditions were then satisfied, and the employee received shares, the rules were switched back on and a retrospective tax liability would arise. The employee would then need to request amended assessments and pay the outstanding tax, together with possible interest charges. So the ‘indeterminate right’ rule was not an elegant solution.
MinterEllison has lobbied numerous governments to have the tax laws amended to remove the ‘tax on termination’, so it is welcome that the first steps are being taken to make that a reality. What is surprising is that the changes (if passed) will only apply to ESS interests issued from the first income year after the amending legislation receives Royal Assent.
Employee share schemes are also subject to a wide range of regulatory requirements. The Budget also flagged the Government’s intention to ‘reduce red tape’ by streamlining the requirements for unlisted companies who charge employees to acquire ESS interests, or who lend money to them for that purpose (under a loan plan, for example). The streamlined requirements – which cover simplified disclosure requirements and exemptions from licensing, anti-hawking and advertising requirements – will apply to offers valued up to $30,000 per employee per year (up from the current $5,000 limit). This is a change that has been expected for some time. In addition, the Government has said that for employers who do not charge or lend to employees to acquire ESS interests, which would be most option plans and many share plans, the disclosure requirements will be removed and the offers will be exempted from licensing, anti-hawking and advertising prohibitions. The regulatory changes will apply three months after the amending legislation receives Royal Assent.
Corporate tax – corporate collective investment vehicle revised start date
To enhance the international competitiveness of the Australian fund management market, it had been previously announced in the 2016-17 Budget that a new form of passive investment vehicle would be introduced, that was an internationally understandable investment vehicle. Following the 2016-17 Budget, in January 2019, the Australian Government released, for public consultation, two draft bills outlining the corporate collective investment vehicle (CCIV) tax and regulatory frameworks.
Broadly, under the proposed tax framework outlined in the January 2019 bill the CCIV regime would have similar tax treatments / benefits as the existing managed investment trust (MIT) and attribution managed investment trust (AMIT) regimes, such as 'flow through’ treatment and concessional withholding tax rates on certain distributions to eligible foreign investors but in a corporate structure. Similarly, it would be expected that the CCIV regime would have similar eligibility requirements to the MIT / AMIT regime, which include, but are not limited to, the entity being widely-held, not closely-held, limited to deriving passive income and an Australian tax resident.
Some 5 years after these measures were originally announced, it has been announced in the 2021-22 Budget that the CCIV regime would be finalised with the revised commencement date of 1 July 2022. It remains to be seen whether the announcement of the finalisation of these measures presents the Government with an opportunity to provide some certainty on the concept of control of trading businesses, which could also apply to existing MITs/AMITs.
No announcement was made as to whether the proposed tax and regulatory frameworks outlined in the two bills released in January 2019 would be amended.
Taxation of Financial Arrangements – hedging and foreign exchange deregulation
Technical amendments will be made to the Taxation of Financial Arrangements legislation to facilitate access to the hedging rules on a portfolio basis. Currently, the hedging rules apply to the gain or loss on each hedging financial arrangement which has been exposing taxpayers to taxation on unrealised positions.
These changes will take effect for relevant transactions entered into on or after 1 July 2022, which may give rise to a high level of complexity in assessing what comprises of the “portfolio” vis–a-vis individual positions.
Temporary loss carry-back extension
A welcome extension of the temporary loss carry-back measure by 12 months was announced.
In last year’s Budget, the Government introduced a measure to allow eligible businesses to carry-back losses to previous income years, in the hope that it would provide cash flow support to previously profitable Australian businesses which incurred tax losses as a result of the economic impact of COVID-19. Corporate tax entities (which include corporate limited partnerships and public trading trusts) with an aggregated turnover of less than $5 billion can apply tax losses against taxed profits in a previous income year.
Once extended, the measure permits tax losses from the 2019-20 to 2022-23 income years to be offset against previously taxed profits made no earlier than the 2018-19 income year.
Temporary full expensing extension
The Government will also extend the temporary full expensing measure announced in the 2020-21 Budget will be extended by a further 12 months to 30 June 2023.
Under the measure, businesses with aggregated annual turnover of less than $5 billion will be able to deduct the full cost of eligible capital assets (i.e. depreciating assets) acquired from 7:30pm AEDT on 6 October 2020 and first used or installed by 30 June 2023.
The proposed full cost expensing deduction will be available in the income year in which the eligible asset starts to be used or has been installed ready for use (consistent with the current instant asset write off provisions). The extension of the period in which the full expensing is available should allow relevant taxpayers additional time to make investments and access the incentive.
International Tax — removing the preferential tax treatment for Offshore Banking Units
Currently, the offshore banking unit (OBU) regime provides for a 10% effective tax rate for income derived from eligible offshore banking activities. Following the concerns raised by the OECD's Forum on Harmful Tax Practices in 2018 the OBU regime was closed to new entrants from 26 October 2018. Existing OBUs can continue to access the concessional 10% rate until the 2022-23 income year.
International Tax — updating the list of exchange of information countries
As has been Government policy to continue to negotiate Tax Information Exchange Agreements, the Government will update the list of jurisdictions that have entered into information sharing agreement with Australia. Residents of listed jurisdictions are eligible to access a concessional 15% Managed Investment Trust (MIT) withholding rate for certain distributions rather than the default 30% withholding rate. The updated list will be effective from 1 January 2022.
The jurisdictions to be added as having an effective exchange of information arrangement with Australia (effective from 1 January 2021) are as follows: Armenia, Cabo Verde, Kenya, Mongolia, Montenegro and Oman.
ATO 'early engagement service' for first time foreign investors
The ATO will introduce a new early engagement service designed to encourage and support new business investments into Australia. This announcement was not contained within the formal Budget papers themselves but in an information statement.
The early engagement service is said to:
- provide 'up front confidence' to investors about how Australian tax laws will apply;
- be 'tailored' to the particular needs of each investor;
- offer 'support' in relation to any or all federal tax obligations; and
- accommodate specific project timeframes, and other time sensitive aspects of a transaction (e.g. FIRB approvals); and
- incorporate access to 'expedited' private rulings and advance pricing arrangements.
The ATO will consult with business and other stakeholders to develop the early engagement service during May and June 2021. It is intended that the service will be available for 'eligible investors' (although it is not explained who these are) from 1 July 2021.
Patent Box – tax concession for Australian medical and biotechnology innovations
In what is a significant policy development, to compliment changes to the R&D concessions made last year, the Government has proposed a new regime designed to encourage innovation in Australia in the medical and biotechnology fields, by offering a competitive tax rate for income derived from Australian owned and developed patents.
Under the proposed patent box tax regime, corporate income derived from Australian medical and biotechnology patents will be taxed at a concessional effective corporate tax rate of 17% (rather than the 30% or 25% rates that otherwise apply to corporate taxpayers from 1 July 2021). The regime will require eligible patents to be developed in Australia, however other details of the regime are yet to be confirmed, with the Government indicating that consultation will be undertaken with industry before settling the details of the patent box regime.
The concession is currently proposed to take effect for income years beginning on or after 1 July 2022.
The Government has also indicated that it will consult on the possibility of introducing a patent box regime for the clean energy sector.
Venture capital rules
The Australian venture capital market is currently supported by tax incentives designed to attract foreign investment and encourage venture capitalists to invest in early-stage Australian companies to drive innovation and additional investment.
The Government will undertake a review of these tax incentives to ensure current arrangements are fit-for-purpose and support genuine early stage Australian start-ups. It is hoped that the review will be able to address a number issues that currently impede the use of Venture Capital Limited Partnerships and Early Stage Venture Capital Limited Partnerships, and harmonise the various venture capital tax incentives into a cohesive regime.
Digital Economy Strategy — self-assessing the effective life of intangible depreciating assets
The treatment of intangible assets is proposed to be amended to bring eligible intangible assets broadly into line with tangible assets. Currently, such intangible assets have their effective life for depreciation purposes prescribed by law.
Under the measures, taxpayers will have the option to be able to self-assess the effective life of the asset. This may be shorter than the statutory effective life, allowing deductions to be brought forward. The intention is to allow tax depreciation in line with the economic benefits provided by the asset, rather than a presumed life based on the life of such intangible assets at law.
Eligible intangible assets include patents, registered designs, copyright, in-house software, licences and telecommunications site access rights. Goodwill remains non depreciable.
The change will begin on 1 July 2023.
Digital games tax offset
The Digital Games Tax Offset will provide a 30% refundable tax offset, capped at $20 million per year, for qualifying Australian digital games expenditure. The offset will be ongoing from 1 July 2022, and the criteria and definition of qualifying will be determined through industry consultation. The offset is intended to encourage a larger share of the $250 billion global gaming industry to establish businesses and develop games in Australia.
Increased powers for the Administrative Appeals Tribunal in relation to small business taxation decisions
Currently, the power to pause or modify ATO debt recovery in relation to disputed debts is only exercisable by Courts. Upon implementation of these changes, small business entities (with an aggregated turnover of less than $10 million per year) that file an application in relation to tax matters before the SBTD of the AAT will be able to apply for a pause or modification of the Commissioner's debt recovery actions (such as garnishee notices and the recovery of general interest charge or related penalties) until the underlying dispute has been decided by the AAT.
Once enacted, this measure will take effect from the date of Royal Assent of the enabling legislation.
Aligning the excise refund scheme for brewers and distillers with the producer rebate for wine producers
The Government has announced further support to small distillers and brewers by aligning the excise refund scheme for alcohol manufacturers with the wine equalisation tax (WET) producer rebate. This measure builds on the 2020-21 MYEFO announcement titled Alcohol Taxation – automatic remission of excise duty for alcohol manufacturers.
Currently, eligible distillers and brewers are able to access a refund of 60% of the excise they pay up to an annual cap of $100,000 (per financial year). The revised scheme, which is designed to support distillers and brewers, will take effect from 1 July 2021. Eligible distillers and brewers will be able to receive a full remission of any excise they pay up to an annual cap of $350,000. This will align the rebate for small distillers and brewers with the producer rebate (and in particular, the rebate cap) that has been available under the WET scheme since 1 July 2018.
Modernising the individual tax residency rules
The Government will replace the individual tax residency rules with a new framework following recommendations in the Board of Taxation’s Report (Report) – ‘Reforming Individual Tax Residency Rules – A Model for Modernisation (2019)’. The purpose of simplifying the individual tax residency rules is to minimise uncertainty and compliance costs for individuals working in Australia and their employers. The primary test will be a simple ‘bright line’ test — a person who is physically present in Australia for 183 days or more in any income year will be treated as an Australian tax resident. The Government has said that 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 framework is to be based on recommendations contained in the Report. The Report proposed the following secondary tests, and it remains to be seen whether each of these tests is ultimately introduced:
- for individuals who were not residents in the preceding income year, a commencing residency individual is a resident of Australia where the individual is present in Australia for 45 days or more in an income year and satisfies two or more 'factors' - see below (Commencing Residency Test);
- for individuals who were residents in the preceding income year, a test comprising three standards applies as follows (Ceasing Residency Test):
- a long-term resident individual ceases residency in Australia for the current income year if they spend:
- less than 45 days in Australia in the current income year; and
- less than 45 days in Australia in each of the two preceding income years. (Long-term Resident Test)
- a short-term resident individual ceases to be a resident if they spend less than 45 days in the current income year and satisfy less than two 'factors'. (Short-term Resident Test)
- an individual will cease residency on the day after departure from Australia if they:
- reside in Australia for the three consecutive income years prior;
- undertake employment overseas that is mandated to be for a period of more than two years at the time employment commences;
- have accommodation available continuously in the place of employment for the duration of their employment; and
- return to Australia for less than 45 days in each income year that they continue their overseas employment after the year in which they depart. (Overseas Employment Rule)
- that the 'factors' referred to in the Commencing Residency Test and Ceasing Residency Test be determined by individuals testing their personal circumstances against four objective, Australia-focused criteria to conclude whether they satisfy any of the four factors:
- The right to reside permanently in Australia (including citizenship and permanent residency);
- Australian accommodation;
- Australian family; and
- Australian economic connections. (Factor Test)
This measure is to take effect from the first financial year after the enabling legislation is passed.
Bringing forward personal tax relief – altered tax brackets
The Government will continue to implement changes to the personal income tax thresholds in accordance with the Personal Income Tax Plan (PITP) which was originally announced as part of the 2018-19 Budget. There will be no changes to the personal income tax brackets for 2021-22.
The effective date of the final stage of the PITP remains unchanged. The current tax brackets are to remain in place until 2023-24. From 1 July 2024, a tax bracket of 30% will apply to taxable income between $41,001 and $200,000. The 37% tax bracket is to be abolished. The top marginal tax rate of 45% (unchanged from the current top marginal tax rate) will apply to taxable income exceeding $200,000.
No adjustments are required for withholding tax rates in payroll systems for 2021-22.
Retaining the low and middle income tax offset for the 2021-22 income year
The Government has announced it will retain the Low and Middle-Income Tax Offset (LMITO) which it introduced in the 2019-20 Budget. The LMITO was due to finish in 2020-21, but will continue for another year.
The LMITO will be worth $255 for a taxpayer with $37,000 of taxable income, and increase at a rate of 7.5 cents in the dollar to a maximum of $1,080 for someone whose taxable income is between $48,001 and $90,000. It will continue to phase out at a rate of 3 cents in the dollar for individuals with taxable incomes above $90,000, falling to zero at a taxable income of $126,000.
Not-for-profits — enhancing the transparency of income tax exemptions
Relevant for not-for-profit entities (NFP), the Government has committed to provide $1.9 million capital funding in 2022-23 to the ATO to build an online system to enhance the transparency of income tax exemptions claimed by NFPs.
From 1 July 2023, the ATO will require income tax exempt NFPs (with an active ABN number) to submit online self-review forms, for each income year, outlining the information used to self-assess their eligibility for the exemption. This measure seeks to ensure that income tax exemptions are only accessed by eligible NFP's although exactly what information will be required (and accepted) remains unclear.
A number of levers of reform were not included in this year’s budget:
- Corporate tax rate: There were no reductions in the corporate tax rate (apart from income derived in the proposed Patent Box) which might indicate that the Government is currently comfortable with the rate setting, as a function of the incentives for deductible expenditure and Australia’s global competitiveness.
- Digital taxation and BEPs 2.0: Whilst globally, there have been unilateral moves to introduce a digital services tax, given recent progress with the BEPS 2.0, the Federal Government has decided to continue its current policy position of awaiting the conclusion of those negotiations.
- CGT Roll-over Relief: The Board of Taxation delivered earlier this year a significant paper outlining options for the reform of the number of CGT roll-over reliefs into a single roll-over regime.
- FBT: The Government did not heed a number of calls for reform of the scope of Fringe Benefits Tax as a tool to encourage expenditure in the economy, with no announced amendments to the current FBT regime.
- GST: Unsurprisingly, there were no announcements for any reform of GST, given the attendant requirement for engagement with the States (and potentially an election in the near term).