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Federal Budget 2021

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Insights From MCA Accountants

Federal Budget 2021

BUDGET SUMMARY

The Government has been clear: the way out of our budget crisis is to create jobs and grow the economy, and the Government has used this to include a focus on women – no doubt politically driven to restore confidence after recent issues. There is no doubt our budget needs repair, and focusing on jobs probably increases the time it will take to start recovery, but (in theory) will be better in the long term. The other option would be to increase taxes (which typically shrinks the economy), and the Government is clear that this isn’t an option for them.

BUDGET POSITION

The budget deficit will be $160bn, which is $50bn less than predicted just 6 months ago thanks to the economy performing better than expected. Deficits will continue as far as they eye can see while the country recovers.

As we said last budget review, the country’s debt will come close to $40,000 PER PERSON. Take out all our children and elderly that cannot work, then the burden on working Australians is massive. Almost as scary is the fact that our debt as a percentage of GDP is lower than pretty much every other developed country.

Paying back this debt will take generations, and we should all expect to play our part.

THE NITTY-GRITTY

There is lots in the budget (like any), but we’ll focus on tax items and other related parts. Click on the below headings to expand each one and read more detail. Most of the below information is also contained in the following official Government Budget fact sheets:

The temporary “Low and Middle Income Tax Offset” which provides $1,080 for those on incomes between $48,000 and $90,000 (and a lower amount for incomes between $37,000 and $126,000) will be extended for another year and will now end on 30 June 2022.

Time will tell how long this offset remains, the Government has gone out of its way to remind us that this is a temporary cut, but as we know it’s much harder to take tax breaks away from people than it is to give them out.

Following the end of the temporary COVID increase to numerous Centrelink payments, a permanent increase of $50 per fortnight has been announced, beginning on 1 April 2021.

This will effect the following payments:

  • JobSeeker;
  • Youth Allowance;
  • Parenting Payment;
  • Austudy;
  • ABSTUDY Living Allowance;
  • Widow Allowance;
  • Partner Allowance;
  • Special Benefit; and
  • Farm Household Allowance.

Other minor changes will occur, such as raising the income-free limit to $150 per fortnight for some of the above payment types – allowing recipients to earn more before their payments are reduced.

The Government will be increasing the child care subsidy for your second (and subsequent) child through childcare by 30% (to a maximum 95% rebated of total fees). This is designed to encourage as many parents to work as possible. Currently the maximum subsidy limit is 85%.

The annual cap of $10,560 will be abolished for families with combined income under $189,390.

These measures take effect from 1 July 2022.

There will be 3 policies geared towards making it easier to buy a home:

  1. The home loan deposit scheme (which sees the Government provide a guarantee to the bank for 15% of the 20% deposit – allowing you to buy with just 5% deposit) is being extended to another 10,000 people;
  2. The home loan deposit scheme is being extended to allow 10,000 single parents to buy a home with just 2% deposit (as opposed to 5% under the above scheme); and
  3. The “home super saver” scheme (that allows you to contribute extra to super and withdraw it later to buy a home) will be extended and the maximum will be increased to $50,000

We also note that the time frame for construction to commence for the HomeBuilder program will be increased from 6 months to 18 months.

The immediate write-off for asset purchases will be available for an additional year, now ending on 30 June 2023.

Businesses with a turnover under $5 billion can deduct the FULL COST of eligible purchases of assets. Businesses with a turnover over $50 million can only use this on new assets (small businesses can use it on new and second hand assets).

We stress that eligible assets exclude things like buildings and other similar assets, and second-hand assets are excluded.

If you remember nothing else, please remember this…

Deductions are generally only helpful if you are making profits (although the loss carry back rules complicate this). If you are paying no tax, then an extra tax deduction will not put any extra money in your pocket. Don’t go and spend $200,000 on a new harvester thinking the Government is paying for 30% of it – because may not actually see a tax benefit this year due to the current economic climate.

We can’t recommend highly enough how important it is to seek advise before purchasing an asset if you are relying on the tax benefits to fund it.

The loss carry back scheme will be available for an additional year, now ending on 30 June 2023.

The loss carry back scheme allows companies to claw back tax paid in prior years (from 2019 onwards) against current year losses (as opposed to needing to wait until the business make a profit in the future).

When claiming self-education expenses, an individual is not able to claim the first $250 unless they have eligible non-deductible self-education expenses. This will be scrapped, increasing some claims but importantly simplifying the process.

Currently employers are not required to contribute into super until a person earns $450 in a month – so many part time and casual workers miss out.

Expected to commence from 1 July 2022 (but noted that it may commence from 1 July 2021 if it passes Parliement prior to that date), this threshold is removed and super needs to be paid on all wages (we note there may be some limited exemptions, notably employees under 18).

We also note that there has been no changes to the planned increase in the superannuation rate (currently 9.5%, rising to 10% on 1 July 2021 and moving to 12% by 1 July 2025).

The “Downsizer” scheme allows retirees to sell their home and put up to $300,000 into superannuation (with no tax implications).

Labelled the downsizer scheme because the goal is for retirees to sell their larger homes, put part of it into super and use the rest to buy a smaller home – it has had reasonable success.

The scheme was previously limited to those 65 and older, this age limit will be decreased to 60. This is expected to apply from 1 July 2022 (though we note 1 July 2021 is possible if passed through Parliament before then).

The Pension Loan Scheme (PLS) allows individuals receiving the age pension to borrow money against the equity in their home. This could also be referred to as a reverse mortgage and is handy for those not wanting to sell their home, but wanting to unlock the equity they have accumulated over their lifetime.

Currently the PLS can be used to increase your regular fortnightly payments, but this will be extended to allow pensioners to access lump sum payments up to 6 month’s worth of pension payments (currently a little over $12,000) – so essentially $24k of pension plus $12k loan.

This loan is typically repaid via the estate when the pensioner passes away, and the Government will introduce a guarantee that the loan repayments will never exceed the value of the house.

You can read more about the PLS at https://www.servicesaustralia.gov.au/individuals/services/centrelink/pension-loans-scheme

Currently, people aged 67 or older are not able to access the “3 year bring forward” rule that allows people to make 3 years worth of non-concessional contributions in one year.

This age limit will be increased to include individuals aged under 75, and the expected start date for this change is 1 July 2022 (though we note 1 July 2021 is possible if passed through Parliament before then).

Currently, people aged between 67 and 74 must be working in order to contribute additional monies into super. This test will be scrapped for non-concessional (i.e. not tax deductible) contributions, allowing older Australians with savings outside of super to get that money into super.

This change is expected to come into effect from 1 July 2022 (though we note 1 July 2021 is possible if passed through Parliament before then).

Some retirees have purchased “legacy” retirement products, such as lifetime pensions that provide very little flexibility for the retiree to access capital for one-off items.

A two-year window will be opened up for retirees to switch out of these legacy products into more flexible options.

Whether you are an Australian resident for tax purposes is important, because as a resident you are taxed on all income earned all over the world, while non-residents are taxed only on income earned in Australia.

The current residency tests are complicated and far too subjective that ends up with individuals needing to spend money on tax advisors and lawyers defending their position should the ATO decide they disagree.

A new simpler test of “were you in Australia for 183 days?” will apply, with a couple of secondary tests (with less subjective criteria) applying for those that fail the primary test.

There are billions being invested to help create jobs and improve our transportation infrastructure

Breweries and Distilleries will essentially get a pass on the first $350,000 of excise tax on the alcohol they produce.

Digital game developers could be eligible for a 30% refundable tax offset on qualifying expenditure.

Currently, expenditure on certain intangible assets (such as copyrights, patents, licenses, in-house software) can be eligible for deductions spread over numerous years – with the time-frame set by Law.

While the concept of claiming those expenses over a number of years will not change, the Government will give businesses the flexibility to self-assess an appropriate time-frame.

Australia has history with world changing inventions – such as Wi-Fi and the bionic ear. To encourage more of these innovations, from 1 july 2022 the Government will tax income from eligible patents at 17% instead of the usual tax rate.

Companies are able to offer shares to staff members at no cost (or at a discount) under what is called an “employee share scheme”. The shares given are tax-deferred, subject to meeting conditions.

Minor changes mean that the point at which tax is payable on these shares will be deferred even further, providing an incentive for start-ups in particular to provide equity to staff to encourage higher retention and business growth.

Currently the Government is covering 50% of the wages (up to $7,000 per quarter) of an eligible apprentice or trainee for a maximum of 12 months. Changes mean that the number of places in the scheme will rise from 10,000 to unlimited, and the subsidy will be available until 31 March 2022.

Where there is a dispute over a tax debt, currently only the Courts can put the ATO’s recovery actions on hold. Changes will mean that instead of needing to go to Court, the Administrative Appeals Tribunal will be able to put ATO collection on hold until the dispute is settled.

The Government will continue its deregulation agenda, cutting red tape and making transacting electronicly easier.

NOT YET LEGISLATED

It is important to note that any announcements made by the Government are not guaranteed to become Law. These announcements need to pass Parliament first, and it’s possible that the Government may need to alter their announced changes in order for them to get through Parliament.

Do not make firm decisions until these have passed Parliament and have become Law.

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