2021 Federal Budget Insights

11 min read

The Federal Budget was handed down by the Treasurer, Josh Frydenberg, this evening and a summary of the key Budget tax and superannuation measures are found below.

The key personal tax change was the extension of the Low and Middle Income Tax Offset for another year, to 30 June 2022. This is very welcome. This measure ensures that 10.2 million low and middle income Australians will not see a tax hike of up to $1,080 next year. However, let’s call this what it is and ignore the government spin; this isn’t a tax cut, its simply the deferral of a tax rise. Nobody should be counting the extra dollars in next year’s pay packets because there aren’t any; the tax burden for low and middle income individuals next year is exactly the same as it was this year. So, a cautious welcome but let’s not sell it as a tax cut.

Also welcome are a couple of the business tax measures. The extension of full expensing and the loss carry back have been extended for a further year, to 30 June 2023. However, not every business wants to write off its fixed asset purchases up front. For many small, unincorporated businesses there is simply nothing to celebrate here. For a start, the loss carry-back scheme relates only to companies – sole traders, trusts and partnerships don’t count. And for those businesses that want to retain some taxable profits – perhaps because the owners want to take advantage of the tax-free threshold – the inability to exit the temporary full expensing scheme is a missed opportunity. Big business can opt out (the legislation was amended last December specifically to allow this) but small business can’t. It was an obvious mistake – and the government didn’t do anything to fix it this evening.

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).

Low and middle income tax offset for 2021-22 (unchanged from 2020-21)

  Taxable income (TI)

  Amount of offset

  $0 – $37,000

  $255

  $37,001 - $48,000

  $255 + ([TI – 37,000] × 7.5%)

  $48,001 - $90,000

  $1,080

  $90,001 - 126,000

  $1,080 – ([TI – 90,000] × 3%)

  $126,001 +

  Nil

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 when taxpayers lodge their tax returns for the 2021-22 year.

Personal Tax Rates unchanged for 2021-22

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.

Resident rates and thresholds for 2021-22

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

Tax rates and income thresholds for 2021-22 (unchanged from 2020-21)

Taxable income ($) Amount of offset

Taxable income ($)

Amount of offset

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

Low and middle income tax offset (LMITO)

Up to $1,080    

Low income tax offset (LITO)

Up to $700

Foreign residents
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%.

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%.

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.

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.

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.

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 now 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.

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 those that 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

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.

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

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