Federal Budget 2021-22: The Essential Update for Private Businesses and their Owners
On 11 May 2021, Treasurer Josh Frydenberg handed down the 2021-22 Federal Budget. Unsurprisingly, while Australia has emerged from the pandemic relatively unscathed, this year’s Budget aims to stimulate economic growth in a post-COVID world.
In addition to significant investments in infrastructure, aged care, health and the digital economy, the budget contains a raft of tax changes and reforms aimed at driving down unemployment, boosting industry and alleviating tax burdens for individuals and businesses alike.
Read on for our full breakdown of some of the major tax announcements in this year’s Budget for private businesses and their owners.
Improving the Employee Share and Option Plan rules
Under Division 83A of the Income Tax Assessment Act 1997 (Cth), employees who receive shares or options to acquire shares in their employer company are assessed to the extent those shares or options are issued at a discount. The default position is upfront taxation on the amount of the discount when the shares or options are issued. However, in certain circumstances the taxing point can be deferred to a later time.
Under current law, one possible deferred taxing point is the cessation of employment (see subsections 83A-115(5) and 83A-120(5)). The Government has announced that it will remove the cessation of employment as a deferred taxing point (presumably by repealing subsections 83A-115(5) and 83A-120(5)). This means that employees leaving their employment will not be subject to tax on their shares and options at that time.
While the apparent benefit of removing this taxing point is obvious, the practical benefit is less clear. For example, most employee share and option arrangements in the private sector include mandatory forfeiture or buyback conditions upon cessation of employment to ensure that only those staff who remain with the company benefit from the scheme. As a result, the removal of cessation of employment as a deferred taxing point may only practically benefit employees working for publicly listed companies.
Extension of Temporary Full Expensing and Loss Carry Back
The Government will extend the previously announced temporary full expensing and the loss carry-back measures into 2023. Both measures were introduced into legislation following the 2020-21 Federal Budget.
The temporary full expensing measure entitles businesses with an aggregated turnover of under $5 billion to an immediate deduction for ‘eligible capital assets’ acquired from 7.30pm AEDT on 6 October 2020, that are first used or installed by 30 June 2022. Assuming that the proposed changes are legislated, the 30 June 2022 deadline (to use or install the capital asset) will be extended to 30 June 2023.
The loss carry-back measure amended the tax losses regime to temporarily allow eligible corporate entities (with a turnover capped at $5 billion) to use losses that are incurred in the income years 2019-20, 2020-21 or 2020-22 to be retrospectively applied against profits made in the 2018-19 year or later years. If the proposed changes are legislated, the measure will also apply to losses incurred in the 2022-23 income years.
The extensions are estimated to cost a combined value of $20.7 billion by 2024-25. Treasury estimates the extended measures will help boost GDP and create as many as 60,000 jobs by the end of 2022-23.
Reforming the Individual Tax Residency Rules
The Government will replace the current individual tax residency rules (which are complex and antiquated) with a new modernised test featuring a primary ‘bright line’ test and a secondary test that depends on a combination of physical presence and measurable, objective criteria.
Currently, there are four different tests that can make someone an Australian resident for tax purposes. Further, the rules apply differently in practice to ‘inbound persons’ (i.e. persons moving to Australia) and ‘outbound persons’ (i.e. Australian expats).
The Budget acknowledges Australia’s current tax residency rules are difficult to apply in practice, creating uncertainty and resulting in high compliance costs for individuals and their employers. For example, the recent decision of Joubert and FCT  AATA 2645, where a taxpayer was found to be an Australian resident despite only spending 141 days in Australia, demonstrates the uncertainty and complexity associated with the current law on tax residency.
From our involvement in the Board of Taxation consultations, achieving a modern framework that reflects the existing case law (and does not change case law principles) will be a difficult prospect. Sensibly, these changes will only have effect from the first income year after legislation is passed.
Patent Box – Proposed Tax Concessions for Australian Medical and Biotechnology Innovations
From 1 July 2022, corporate income derived from Australian medical and biotechnology patents will be taxed at a concessional effective corporate tax rate of 17 percent.
It is clear from the announcement that the concessional tax treatment is only available to companies operating in the medical and biotechnology field, not other kinds of entities like trusts. This will be an important structuring consideration for research and development in this field and aligns with the R&D Tax Offset (which is also only available to companies).
An interesting question is how this proposed measure will interact with the franking credit rules, and whether companies will be entitled to full franking credits in respect of income taxed at the concessional rate? If the answer is no, then companies with pre-existing franking credits may need to consider how they can prevent the wastage of those credits. Further, shareholders may no longer receive fully franked dividends going forward.
The Government is also considering extending these measures to the clean energy sector and will consult with industry before implementing the new rules.
Small Businesses – Pausing ATO Recovery of Disputed Tax Debts
Small business entities (i.e. entities carrying on a business with turnover of less than $10 million) that appeal an ATO assessment to the Small Business Taxation Division of the Administrative Appeals Tribunal (AAT) will be able to apply for a pause or modification of the Commissioner of Taxation’s debt recovery actions, until the underlying dispute has been decided by the AAT.
This is a welcome relief for small businesses, whose resources typically pale in comparison to the Commissioner’s or larger taxpayers who can afford to ‘pay now, fight later’. Ordinarily, once an assessment is issued (and due and payable), the Commissioner has a wide range of ‘debt collection’ tools available, including garnishee notices, asset freezing orders (Mareva Order), bankruptcy/insolvency proceeds and Departure Prohibition Orders.
However, it is unclear whether a pause on ATO debt recovery by the AAT will affect the accrual of general interest charge. If not, then those charges may balloon significantly while the AAT considers the matter, and a taxpayer who ultimately fails in their appeal may end up in a far worse situation by not paying the tax upfront.
It is expected that relief for eligible small business entities will not be automatic, as the AAT will be required to consider the potential effect on the integrity of the tax system and ensure that applications are in relation to genuine disputes (rather than merely as a ploy to delay payment).
Flexible Super — repealing the ‘work test’ and reducing the eligibility age for downsizer contributions
The Government has introduced some welcome changes to provide more flexibility for contributions to superannuation by older age Australians, with intended effect from 1 July 2022.
The minimum eligibility age to make ‘downsizer contributions’ into superannuation will be reduced from 65 to 60 years of age. The downsizer contribution allows eligible individuals to make a one-off, post-tax contribution to their superannuation of up to $300,000 per person from the proceeds of selling their home.
Further, the Government will repeal the ‘work test’ and allow individuals aged 67 to 74 years (inclusive) to make or receive non-concessional or salary sacrifice superannuation contributions without having to work at least 40 hours over a 30-day period in the relevant financial year.
This is a welcomed change as it will simplify the rules and increase flexibility for older Australians to save for retirement. Whilst unclear from the announcement whether these changes will also apply to contributions under the CGT cap (small business CGT concessions), we expect that these changes would also apply to contributions made under the CGT cap.
Removal of Superannuation Guarantee Threshold
Under current law, employers are not required to make superannuation contributions in respect of employees that earn less than $450 per month from that employer. The Government will remove the current $450 per month minimum income threshold, with expected effect from 1 July 2022.
While not explicitly mentioned, it is expected that this change will also apply to payments to contractors (which in some circumstances may attract superannuation guarantee). Employers should prepare their payroll systems to ensure that affected employees and contractors are paid superannuation to avoid incurring superannuation guarantee charges.
Digital Economy Strategy – Tax Measures
The Budget contains a raft of proposed measures directed towards bolstering Australia’s digital and tech economy.
In order to promote investment in research and development in this space, taxpayers will now be able to self-assess the effective lives of certain intangible depreciating assets (including patents, registered designs, copyrights, and in-house software) acquired from 1 July 2023.
This measure will offer increased flexibility, as taxpayers will have the option to either apply the existing depreciation rules, or self-assess to depreciate eligible assets more rapidly.
In addition, the budget proposes to introduce a 30% refundable tax offset for qualifying Australian digital games expenditure, however the criteria to qualify for the offset are yet to be confirmed and will be determined through industry consultation.
Individuals Claiming Self-Education Expenses – Some, but Little Change
Currently, the first $250 of a prescribed course or education expense is not deductible. The government will remove this $250 exclusion from the first income year after the date of Royal Assent of the enabling legislation.
Unfortunately, this Budget measure does not address the ability of individuals to deduct education and training expenses they incur themselves, where the expense is not related to their current employment. Currently, individuals can only deduct education or training expenses where the expenses have the necessary connection with the individual’s employment and the production of their assessable income (recently evidenced in Khan v Commissioner of Taxation  AATA 367).
While the 2020-21 Budget acknowledged that this system may act as a disincentive for Australians to retrain and reskill to support their future employment and career, unfortunately the 2021-22 Budget does not address this problem.
Not-for-profits — Annual Disclose of Income Tax Exemptions
The Government will provide capital funding to the ATO to build an online system to enhance transparency and the reporting obligations for not-for-profits entities (NFP) claiming income tax exemptions.
Currently, non-charitable NFPs can self-assess their eligibility for income tax exemptions without being required to report to the ATO. From 1 July 2023, the ATO will require income tax exempt NFPs with an active Australian Business Number to submit online annual self-review forms to ensure that only eligible NFPs are accessing income tax exemptions. It is unclear what information will be required in these ‘self-review forms’.
This measure stated intention is to bolster the transparency of NFPs and encourage self-monitoring. In practice, the measure may lead to increased ATO audit activity over income tax exemptions themselves.
Extension of the Low-and-Middle-Income Tax Offset
Lovingly referred to as the ‘lamington’, the low-and-middle-income tax offset (LMITO) has been extended for another year beyond its scheduled end date of 30 June 2021.
The LMITO is a tax rebate of up to $1,080 offered to low-and-middle income earners. Taxpayers with a taxable income of between $48,000 and $90,000 are eligible for the maximum offset of $1,080. Taxpayers with taxable income of between $90,000 and $126,000 are also eligible, on a reducing scale.
As in previous income years, individuals will receive the LMITO once tax returns for the 2021-22 income year are lodged.
What’s Not in the Budget?
While the Budget includes a raft of tax announcements, there were several significant items which were not part of the Budget, despite having been on the agenda for reform for quite some time. These include:
- Division 7A reform (first flagged in the 2016-17 Budget);
- a review of the CGT rollovers, and asset merger roll over relief;
- tax concessions for small business (including the small business CGT concessions and Small Business Restructure Relief);
- the general 50% CGT discount; and
- CGT for foreign beneficiaries of Australian discretionary trusts.
With the focus being on fostering economic recovery following the COVID-19 pandemic, perhaps it is not surprising that this Budget has not attempted to make significant or deep reforms to the tax system.