The 2021/22 Federal Budget was big on spending with no declared path to surplus. Net debt is forecast to grow to $980.6 billion by 2024-25. While Australia recovers from COVID-19, this Budget is predominantly an extension of the emergency measures – with additional spending on important social reforms.
In this respect, since the onset of COVID-19, the Government has committed $291 billion (or 14.7% of GDP) in direct economic support for individuals, households and businesses. The Budget adds to the Government’s existing infrastructure investment pipeline with a further $15.2 billion of infrastructure commitments.
The economy is recovering faster than initially expected, indicating that JobKeeper and other protective and stimulus measures worked as anticipated, with an added benefit from the high price of iron ore.
Key tax measures include:
- extension of the temporary full expensing of depreciating assets and the loss carry-back rules to 30 June 2021;
- removal of the cessation of employment taxing point in employee share schemes;
- re-focus of the 183-day test as a ‘bright line’ indicator of individual tax residency; and
- a plan to make the corporate collective investment vehicle entity type available for investment by 1 July 2022.
Below is a brief summary of the key measures announced in the Budget.
Temporary Full Expensing
It was announced that a 12-month extension would apply to the current ‘Temporary Full Expensing’ measures until 30 June 2023. This measure provides eligible businesses with an immediate deduction for the full cost of depreciating assets.
In order for a business to be an ‘eligible business’, the following criteria must be satisfied:
- the business seeking to claim the deduction must have less than $5 billion in turnover;
- the assets in question must have been purchased after 7:30pm AEDT on 6 October 2020; and
- the assets must be first used or installed ready for use by 30 June 2022.
The proposed extension requires assets to have been first used or installed ready for use by 30 June 2023 in order for the full deduction to apply.
Temporary Loss Carry Back Measures
It was announced that the temporary loss carry-back rules would be extended for a further 12 months to include the 2022-23 financial year.
This measure allows companies with an aggregated annual turnover of less than $5 billion to ‘carry-back’ tax losses incurred, and offset those losses against taxed profits in a previous year.
Companies that elect not to use the loss carry-back measures will continue to carry forward losses as normal.
It is important to note that the loss carry-back amount must not generate a franking deficit and will also be limited by the level of previously taxed profits.
Employee Share Schemes
Removal of cessation of employment taxing point
The Government intends to remove cessation of employment as a taxing point in employee share schemes (ESS). The taxing point that currently exists when an employee ceases to be employed by the business operating the scheme can create a situation where an ESS participant has a tax obligation but has not yet sold the shares/units that were acquired as part of the scheme (ESS Interests) – and therefore, must fund the tax liability by means other than proceeds derived from the sale of the relevant ESS Interests. The removal of the ‘cessation of employment’ taxing point will bring Australia’s tax rules in line with other generally comparable jurisdictions.
Under the proposed changes, the taxing point can now occur at a time after the participant ceases to be employed by the business operating the ESS to when the shares or units are no longer at ‘real risk of forfeiture’ or genuine sales restrictions (with a maximum deferral period of 15 years after the date that the ESS Interests were acquired).
Simplification of regulatory requirements
Various accompanying measures are intended to simplify the administration requirements associated with an ESS. These include, most notably:
- removal of financial disclosure requirements and exemption of the officer of an ESS Interest from anti-hawking and advertised prohibitions in certain situations; and
- an increase in the value of ESS Interests that can be acquired by participant with simplified financial disclosure requirements (from $5,000 to $30,000 per employee per year).
These simplification measures will eliminate some points of resistance currently faced by unlisted companies and therefore make it easier to implement and effectively administer an ESS. They will also bring the regulatory environment for unlisted companies more closely to the ESS start-up concession, which applies to ESS Interests acquired in start-up companies after 30 June 2015.
Simplification of Individual Tax Residency Test
The Government announced its intention to legislate to replace the current multi-pronged test (involving concepts including ‘domicile’ and ‘permanent place of abode’) with:
- a 183-day ‘bright line’ test (ie number of days physically present in Australia); and
- a simplified secondary test that will involve a combination of physical presence and other measurable objective criteria.
These changes will provide more certainty to Australian domiciled individuals residing in a foreign jurisdiction, foreign domiciled individuals residing in Australia and dual residents seeking to determine whether their ‘worldwide’ income is taxable in Australia – or conversely, whether only Australian-sourced income and gains derived from selling ‘taxable Australian property’ (which includes ‘taxable Australian real property’ or ‘TARP’) are taxable in this jurisdiction.
There were no material changes to the tax policy settings for superannuation. The key changes include:
- removing the $450 per month threshold for superannuation guarantee eligibility;
- repealing the work test for voluntary superannuation contributions. Individuals aged 67 to 74 will be able to make or receive non-concessional or salary sacrificed contributions without meeting the work test, subject to the existing caps;
- reducing the eligibility age from 65 to 60 to make a ‘downsizer contribution’ into superannuation of up to $300,000;
- increasing the maximum released amount of voluntary concessional and non-concessional contributions under the first home super saving scheme from $30,000 to $50,000;
- permitting individuals to exit a specified range of legacy retirement products (including from SMSFs), together with any associated reserves, for a two-year period;
- relaxing the residency requirements for SMSFs and small APRA-regulated funds (SAFs). The key central management and control safe harbour test will be extended from two years to five. The active member test will also be removed. This will allow members to continue to make contributions to the fund while temporarily overseas; and
- introducing technical amendments to the Taxation of Financial Arrangements legislation, which will include facilitating access to hedging rules on a portfolio hedging basis.
Finalisation of Corporate Collective Investment Vehicle Framework
The Government announced that it is in the final stages of implementing the tax and corporate regulatory framework for a new ‘flow through’ investment entity type, the corporate collective investment vehicle (CCIV). The CCIV investment structure will be available for adoption from 1 July 2022.
The tax and regulatory requirements of a CCIV have similarities with an Attribution Managed Investment Trust (AMIT). However, the corporate structure is more familiar to overseas investors compared with a unit trust and, therefore, may be more attractive to investors residing in certain jurisdictions.
Patent Box Regime
The Government has announced a limited patent box tax regime with effect from 1 July 2022.
The purpose of this regime is to encourage innovation and commercialisation in Australia in respect of the medical and biotech industry.
This regime will apply to income derived from Australian owned and developed medical and biotechnology patents. Income derived from eligible patents will be taxed at a concessional rate of 17%.
Eligible businesses entitled to this incentive must have a granted patent in the medical and biotechnology industry that was applied for after 11 May 2021.
Removal of Concessional Tax Treatment of Offshore Banking Units
As a consequence of the Organisation for Economic Cooperation and Development’s (OECD) mandate and activities in the area of identifying preferential tax regimes, the Government will remove the interest withholding tax exemption that currently provides Offshore Banking Units (OBUs) with concessional tax treatment. Prospective new entrants will also be prevented from entering the regime.
JobKeeper, which was relied upon to keep business and jobs going during the initial onset of COVID-19, has now been replaced with more targeted measures such as:
- extending the temporary full expensing of the cost of eligible assets and the loss carry-back rules to 30 June 2023 for eligible taxpayers (as described above);
- introducing a 30% digital games tax offset for eligible businesses that spend a minimum of $500,000 on qualifying Australian games expenditure from 1 July 2022;
- enabling taxpayers to self-assess the effective life to depreciate certain intangible assets such as intellectual property and in-house software;
- increasing the excise refund cap for small brewers and distillers to $350,000 from 1 July 2021; and
- launching a new patent box for the medical and biotech sectors (as described above).
Expanding the List of Effective Exchange of Information (EOI) Jurisdictions
Effective foreign investment tax rates are often driven by whether a foreign investor is a tax resident of a jurisdiction that has an ‘exchange of information’ (EOI) agreement with Australia. Most commonly, tax residents of countries that have an EOI with Australia and who invest in a MIT or AMIT, may access a 15% final tax rate, compared with 30% if no EOI applies.
On 1 January 2022, the list of EOI countries will be expanded to include Armenia, Cabo Verde, Kenya, Mongolia, Montenegro and Oman, joining 50+ other countries already on the list.
Australian Taxation Office (ATO) Debt Recovery Action
In accordance with this measure, the Government will enable small business entities with an aggregated turnover of less than $10 million per year, to apply to the Administrative Appeals Tribunal in order to modify or stay ATO debt recovery action, such as application of garnishee notices and recovery of primary tax debt.
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For further information regarding the above, please contact the authors or any member of our Tax team.
This information and contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.