As anticipated for what is, effectively, an election budget, the Treasurer has not announced any significant new announcements that will have much impact on business or individual taxpayers.
The budget does provide substantial support for infrastructure projects and the education and aged care sectors. There are also a number of promises focussed on women, not the least of which being greater support for childcare costs.
However, despite numerous leaks and announcements in recent days, the budget contains largely only tweaks around the edges that will impact upon businesses and individual taxpayers beyond the much anticipated extension of already legislated depreciation and rules and tax offsets. For so much verbage, there is nothing in the way of real change or reform to be seen here. To utilise our titular analogy, for all the noise, there is no ground being made.
Our summary of the major tweaks and extensions for businesses and individual taxpayers are noted below.
Extensions of Existing Concessions
In an effort to remain cautious in a COVID-19 environment and support economic recovery, the Government has extended multiple previously introduced initiatives.
Low and Middle Income Tax Offset
As a sweetener for middle income Australians, the Government has announced that it will retain the Low and Middle Income Tax Offset (LMITO), colloquially dubbed “The Lamington”, for the 2022 year. Taxpayers earning between $48,000 and $90,000 will continue to be eligible for the maximum offset of $1,080. The offset will continue to be available to taxpayers with taxable incomes up to $126,000 with a phasing out rate of 3 cents per dollar.
Losses Carried Back
To assist in continuing to support cash flow for companies and encourage business investment, the Government is proposing an extension to the loss carry-back rules. This extension would allow for companies with an aggregated turnover less than $5 billion to carry back tax losses from the 2022-23 income year to offset taxable profits as far back as the 2018-2019 income year.
This means that income taxes paid in those prior years will be available on lodgement of the 2020-21, 2021-22 and 2022-23 tax returns in the form of a refundable tax offset. The tax refunds will be limited to taxes paid in those prior years.
Companies that do not elect to utilise these concessions can continue to carry forward losses as normal.
Full Expensing of Capital Assets
Pursuant to previous announcements, businesses with aggregated turnovers not exceeding $5 billion can claim an immediate deduction for the full cost of eligible capital assets, of any value, acquired after 6 October 2020 and installed and ready for use by 30 June 2022.
The Budget announces an extension to this immediate deduction for eligible businesses until 30 June 2023 for eligible capital assets first used or installed ready for use by this date.
We expect that passenger cars will continue to be subject to the depreciation limit.
Super Contribution Concessions for the Baby Boomers
The Treasurer has yet again tweaked superannuation laws. This time to permit older Australians to top up their superannuation. These are as follows:
The work test removed for non-concessional super contributions
Individuals aged 67 to 74 years (inclusive) will be able to make voluntary superannuation contributions (either by way of salary sacrifice or non-concessional, personal contributions) without satisfying the work test. The work test that currently applies for such individuals requires them to work at least 40 hours over a 30 day period in the relevant financial year to be able to make voluntary contributions.
Eligibility age for downsizer contributions reduced
The eligibility age to make downsizer post-tax contributions into superannuation has been reduced to 60 (from 65). Downsizing contributions were introduced as part of the 2017-18 Federal Budget to allow older Australians to make a one-off, post-tax contribution up to $300,000 per person into their superannuation fund from the proceeds of selling their home.
These tweaks are anticipated to take effect from the first financial year after Royal Assent of the enabling legislation.
New definitions for Individual Residency
Australia’s long standing individual tax residency rules, which largely date back to the 1930s are proposed to be fundamentally changed, resulting in an objective test based on an individual’s physical presence in Australia and their Australian connections.
The changes will ensure individuals who spend 183 days or more in Australia are tax residents by default, and a secondary test will apply to individuals who are potentially commencing residency and are not in Australia for 183 days in a financial year, this secondary test considers objective factors relating to:
- The individual’s right to reside permanently in Australia;
- Australian accommodation;
- Family ties to Australia; and
- Australian economic interests.
For individuals departing Australia, a slightly different test will be applied (if the 183 day test is not passed) based on whether an individual has been a tax resident of Australia for the past three years. Broadly, the longer an individual has been a tax resident of Australia, the more difficult it is likely to be to sever residency.
While this proposal is likely to significantly decrease compliance burdens, subjectivity and uncertainty in determining residency status for foreigners coming to Australia, it is also likely to result in more Australians remaining tax residents for longer.
As the definitions of residency for corporates and trusts inevitably trace back to the residency of the controlling individual(s), these changes may well have an impact on structures for affected individuals too.
The measures are set to commence following Royal Assent of the enabling legislation, estimated to be from 1 July 2022.
Relaxations for Self-Managed Superannuation Fund (SMSF) Residency
SMSF members who are non-residents of Australia for tax purposes are set to benefit from two key proposals:
- Removing the “active member test”, allowing non-residents to continue to contribute to their SMSF while they are temporarily overseas (ensuring parity with members of large superannuation funds); and
- Increasing the safe-harbour rule to allow “central management and control” of a SMSF to be temporarily outside of Australia for up to 5 years, instead of 2 years.
These measures are also expected to commence from 1 July 2022.
Employee Share Scheme changes
It wouldn’t be a Federal Budget without a change to the laws about Employee Share Schemes (ESS) and superannuation. In an effort to prove his credentials as Treasurer, Mr Frydenberg has announced changes to both of these areas in the 2022 Budget.
The Government is proposing to make two important changes to the ESS legislation.
Granting ESS interests is always a tricky area as a poorly designed scheme has the potential to provide employees with a significant tax bill based upon the value of their interests at a time when they still hold them and, thus, they are without the cash to fund their tax bill. Broadly, where the requirements for a tax deferral concession are met, the individual can defer this taxing point to the year in which they can dispose of the interest, unless they cease employment or 15 years passes, whichever is earlier.
This Budget proposes to remove the triggering of the taxing event should an employee leave the company. The Government’s stated goal is to make it easier to attract talent to our shores, and to align our treatment of ESS interests with foreign countries. This change should make designing ESSs easier in the future.
In addition to this, the Government is proposing to reduce the red tape for ESS plans by removing disclosure requirements and exempting businesses from having to jump through Corporations Act requirements in more instances. In particular, the Government is proposing to increase the value of ESS interests that can be issued in unlisted companies to their employees for consideration, before requiring Corporations Act registrations and disclosures to be made. This limit will be increased from $5,000 to $30,000 per person per annum.
These changes are slated to begin from 1 July from the year following Royal Assent.
Business Ideas, Investment and Intangibles
The Patent Box
The Government will introduce a new “patent box” initiative that will bring about a special corporate tax rate of 17% (rather than 30% or 25% for SMEs) on profits derived from Australian medical and biotechnology patents, in line with similar global tax concessions seen throughout OECD, particularly the European Union. The patent box will apply from 1 July 2022 to patents registered from Budget night onwards.
At this stage, it is proposed that the patent box treatment will only be available for profits derived by companies from Australian owned and developed patents in the medical and biotechnology sector. In addition to this, the Government intends to consult with industry on the possibility of extending the measure to apply to the renewable energy sector.
It is not yet known exactly how the measure will interact with Australia’s imputation system, however we note that there is the potential for the lower corporate tax levied to lead to greater top-up tax payable by shareholders.
Faster depreciation for IP
The Government will also amend the tax legislation to allow businesses to “self-assess” the effective lives of intangible assets acquired from 1 July 2023 (after the end of the temporary full expensing measure).
Previously under the rules for intangible assets, taxpayers were limited to claiming depreciation deductions using the legislated effective lives:
|Type of Asset||Effective Life (Years)|
In an attempt to stoke innovation and capital investment in Australian intellectual property, there is a welcome admission that the statutory effective lives are often not representative of the economic reality of intellectual property, particularly in an age of rapid innovation.
Removing the $450 per month threshold for superannuation guarantee eligibility
An administrative burden has been handed to employers with casual, ad-hoc or low income employees with the removal of the $450 per month de minimis threshold for Superannuation Guarantee (SG) eligibility. Currently, employers are only required to pay super guarantee contributions on behalf of employees if they are:
- 18 years old or over; and
- Paid $450 or more (before tax) in a month.
The Treasurer introduced this change to expand the SG coverage for individuals on lower incomes. However, the lower income earners are generally school leavers who are unlikely to have a superannuation fund or to value their retirement savings greatly. We are concerned that the removal of the $450 per month de minimis threshold will disproportionately increase the administrative burden for employers. In essence, employers will now be required to chase up superannuation fund paperwork from all employees or make inconsequential superannuation payments to a default superannuation funds that may wind up lost or ignored. The threat of large penalties for non-compliance in this space will mean that employers need to ensure their systems and processes are up to scratch here.
This change will take effect from the first financial year after Royal Assent of the enabling legislation.