Australian Government’s 2021-22 Budget
By Rudy Haddad
Head of Practice Management & Technical Advice Delivery, Wealth Market
At 7:30pm (AEDT) on Tuesday 11 May 2021, the Australian Treasurer, Josh Frydenberg,
released the Australian Government’s 2021-22 Budget. In his words, this year’s Budget is meant to ‘Secure the recovery, and set Australians up for the future’.
We’ve put together this report to make sure you don’t miss any of the essential information. It’s worth noting that these proposed Budget measures aren’t law yet – and could change.
Compared with last year’s record deficit of $213.7 billion, the underlying cash deficit for this year is projected to decrease to $161 billion as the economy continues on the path to recovery from the Coronavirus.
Some key proposals are:
- Extend modest income tax cuts for low to middle income earners;
- Increased opportunity for pre-retirees and retirees (including Downsizers) to set up a tax-effective retirement;
- Increased opportunity for retirees to reduce the tax that will eventually be payable by their adult children when those children receive a superannuation death benefit;
- Improve a first home buyer’s ability to tax-effectively save for a deposit using their super fund;
- Improve Service Australia’s (formerly Centrelink’s) Pensioner Loan Scheme, which is a reverse mortgage available for Age Pensioner recipients and self-funded retirees;
- Extend business-related tax deductions on eligible capital expenditure.
With these and other proposed changes, there are plenty of measures from this year’s Budget that may affect you. It’s important to note that many of the measures require months or years of pre-planning, so there’s no better time to seek an expert’s opinion than now.
Measures impacting individuals
Personal Income Tax Cuts
The Low and Middle Income Tax Offset (LMITO) of up to $1,080 applies to individuals earning between $48,000 and $126,000 per annum. This tax offset was due to be removed at the end of this 2020-21 financial year, however the Government has announced it will retain LMITO for the 2021-22 financial year. The LMITO is a non-refundable tax offset that is calculated by the ATO upon submission of the annual tax return.
The table below shows the tax cut at different income levels in 2021-22 if LMITO is retained compared with the scheduled removal of the LMITO:
|Taxable income||Total tax if LMITO removed||Total tax if LMITO retained||Tax savings due to LMITO|
No tax savings for income above $126,000
If you’d like to calculate your tax cut for the 2021-22 financial year, you can do so here.
Superannuation Work Test Removal
From 1 July 2022, it is proposed the work test will no longer be required to be met by individuals aged 67 to 74 for voluntary salary sacrifice and after-tax contributions into their super. This opens up considerable opportunities for pre-retirees and retirees to maximise their tax-exempt retirement income streams. It also opens up significant estate planning opportunities that will help minimise taxes when a lump sum is paid to an adult child.
It’s important to note:
- Annual superannuation contributions caps are still in place, so careful pre-planning with the assistance of a qualified financial adviser is highly recommended;
- Making contributions from age 67 to 74 (inclusive) which you intend to claim a tax deduction for will still require a work test to be met.
Lowering Superannuation Downsizer Contribution Age Limit
Downsizers aged 65 or more are currently able to contribute up to $300,000 in sale proceeds from their home, without meeting a work test. Also, the age 75 cut-off limit that normally applies to making superannuation contributions doesn’t apply to Downsizer contributions.
From 1 July 2022, it is proposed that the qualifying age limit be reduced to age 60.
It’s important to note:
- A 90-day time limit from time of settlement applies to Downsizer contributions, unless granted more time by the ATO.
- A special Downsizer contribution form must be filled out at the time of making the contribution, otherwise the contribution may be trigger excess contributions taxes, or be declined by the super fund.
- A combination of strategies may be deployed that can see an eligible person make many hundreds of thousands of dollars in Downsizer and other contributions, which will set them up with a sizeable tax-exempt income stream in retirement.
First Home Super Saver Scheme (FHSSS) Releasable Amount Increases
The FHSSS allows qualifying individuals to make voluntary superannuation contributions up to $15,000 per financial year. A maximum $30,000 of these voluntary contributions (made on or after 1 July 2017), plus deemed earnings, can then be withdrawn for a deposit on a first home.
From 1 July 2022, it is proposed the maximum releasable voluntary contributions will increase from $30,000 to $50,000. This will help more persons to tax effectively save for a deposit on their first home.
Superannuation Guarantee For Low Income Earners
From 1 July 2022, the current $450 per month minimum income threshold, under which employees do not have to be paid the superannuation guarantee by their employer, will be abolished. This will see many lower income earners, including those juggling multiple low paid jobs, receiving superannuation guarantee contributions.
Improvements To Centrelink’s Pension Loan Scheme (PLS)
The PLS is a reverse mortgage offered by Service Australia, formerly known as Centrelink. It allows a fortnightly loan of up to 150% of the maximum rate of Age Pension (currently this means up to 150% of $12,385 for singles and $18,670 for couples). The PLS helps boost a person’s retirement income by unlocking capital in their real estate assets.
The PLS can be accessed by Age Pension recipients as well as self-funded retirees who have attained Age Pension age but do not receive a social security benefit. Importantly, the total amount of fortnightly Age Pension plus fortnightly loan will be capped at 150% of the maximum rate of Age Pension.
Interest under the PLS is compounded fortnightly at 4.5% p.a. and any debt under the PLS is paid back when the home is sold, or the PLS recipient dies.
From 1 July 2022, there are two proposals being made:
- Introduce a ‘no negative equity’ guarantee for PLS loans, which means the accrued PLS debt cannot exceed the secured property value;
- Allow PLS recipients to access up to two lump sum advances in any 12-month period, up to a total value of 50% of the maximum annual rate of Age Pension. There will be no change to the available cap, which still requires the Age Pension plus loan to be capped at 150% of the maximum rate of Age Pension.
Increased Child Care Subsidy
The proposal is to:
- increase the Child Care Subsidy (CCS) rate by 30% for the second child and subsequent children aged five years and under in care, up to a maximum CCS rate of 95% for these children, commencing on 11 July 2022; and
- remove the CCS annual cap of $10,560 per child, commencing on 1 July 2022.
This will provide greater choice to parents who want to work an extra day or two a week. Removing the annual cap helps support the choices of parents to work the hours they want to work and, in particular, reduces barriers that secondary income earners face when seeking to work more. The current hourly fee caps will continue to apply.
Measures impacting businesses
Extending Temporary Full Expensing Tax Deductions
Businesses with aggregated annual turnover within the relevant threshold will be able to deduct the full cost of eligible capital assets acquired from 7:30pm AEDT on 6 October 2020 and first used or installed by 30 June 2023 (this represents a 12-month extension to the ‘first used or installed by’ deadline of 30 June 2022).
Full expensing in the year of first use will apply to new depreciable assets and the cost of improvements to existing eligible assets for businesses with aggregated annual revenue turnover of less than $5 billion.
Full expensing also applies to second-hand assets for small and medium sized businesses with aggregated annual revenue turnover of less than $50 million.
Extending Temporary Loss Carry-Back
The Government has announced it will extend the temporary loss carry-back measure a further 12 months to allow companies with aggregated annual turnover of less than $5 billion to carry back tax losses from the 2019-20, 2020-21, 2021-22 or 2022-23 financial years to offset previously taxed profits in the 2018-19 or later financial years.
Eligible corporate tax entities can elect to apply tax losses against taxed profit in a previous year, generating a refundable tax offset in the year in which the loss is made. The tax refund will be available on election by eligible companies when they lodge their 2020-21, 2021-22 and 2022-23 tax returns. The tax refund is limited by requiring that the amount carried back is not more than the earlier taxed profit. Other restrictions apply.
Measures impacting self-managed superannuation funds
Self-managed Superannuation Funds (SMSFs) Residency Changes
There are complex rules in place that govern the complying nature of a SMSF, particularly those with trustees or members that live abroad.
Under current rules, SMSF trustees living overseas who intend to return to Australia at some point can be away for a period of up to two years and the SMSF still meet the ‘central management and control’ test. From 1 July 2022, the proposal is to allow a trustee to be away for up to five years and still meet this test.
Further, the ‘active member test’ is proposed to be abolished from 1 July 2022. Under this onerous test, if the SMSF has members that were ‘active’ by making contributions or rollovers into the fund, the complying status of the SMSF could be jeopardised, thereby triggering significant penalty taxes. Abolishing the ‘active member test’ simplifies the rules and ensures that members and trustees who are temporarily overseas can continue to make contributions to their SMSF without jeopardising the fund’s complying status.
We’re ready to help you
Your Wealth Market authorised financial adviser is ready to assist you. As an expert, they are able to decide on a tailored course of action that’s right for you. If you’d like to find out more, please reach out to your financial adviser, or contact us at firstname.lastname@example.org
This update is issued by Wealth Market Pty Ltd ABN 56 128 350 112, AFSL 482898 (Wealth Market) and is current as at 11 May 2021. It does not constitute financial product advice, taxation advice
or advice on social security laws. Before making a decision about a financial product or about taxation and social security related matters, we strongly recommend that you obtain financial product advice, as well as taxation and applicable social security advice, from qualified professional advisers who are able to take into account your circumstances. This update is a guide only and based on Wealth Market’s understanding of the 2021-22 Federal Budget Report and current taxation and (where relevant) social security laws. These laws may change and the proposals mentioned in the 2021-22 Federal Budget Report may not become law. In preparing this update, Wealth Market relied on publicly available information and sources believed to be reliable, however, the information has not been independently verified by Wealth Market. While due care and attention has been exercised in the preparation of this information, Wealth Market gives no representation or warranty (express or implied) as to its accuracy, completeness or reliability. The information presented in this update is not intended to be a complete statement or summary of the matters to which reference is made in this update. To the maximum extent permissible under law, neither Wealth Market nor its related entities, nor any of their directors, employees or agents, accept any liability for any loss or damage in connection with the use of or reliance on all or part of, or any omission inadequacy or inaccuracy in, the information in this update.