Personal income tax changes
Retaining the low and middle income tax offset ("LMITO") for the 2022 income year
- The Government has announced that it will retain the LMITO for one more income year, so that it will still be available for the 2022 income year. Under current legislation, the LMITO was due to be removed from 1 July 2021.
- The LMITO is a non-refundable tax offset that provides tax relief for low and middle income taxpayers and is available in addition to the Low Income Tax Offset ("LITO").
- The LMITO is proposed to apply as follows for the 2022 income year:
Proposed LMITO for 2022:
- $37,000 or less up to $255
- $37,001 to $48,000 $255 + 7.5% of excess over $37,000
- $48,001 to $90,000 $1,080
- $90,001 to $126,000 $1,080 – 3% of excess over $90,000
- $126,000 + Nil
- Consistent with current arrangements, the LMITO will be applied to reduce the tax payable by individuals when they lodge their tax returns for the 2022 income year.
Increasing the Medicare levy low income thresholds
- The Government will increase the Medicare levy low income thresholds for singles, families and seniors and pensioners for the 2021 income year as follows:
- The threshold for singles will be increased from $22,801 to $23,226.
- The family threshold will be increased from $38,474 to $39,167
- The threshold for single seniors and pensioners will be increased from $36,056 to $36,705.
- The family threshold for seniors and pensioners will be increased from $50,191 to $51,094.
- For each dependent child or student, the family income thresholds increase by a further $3,597, up from the previous amount of $3,533.
Modernising the individual tax residency rules
- The Government has announced that it will replace the individual tax residency rules with a new, modernised framework.
- The primary test will be a simple "bright line" test – a person who is physically present in Australia for 183 days or more in any income year will be an Australian tax resident.
- Individuals who do not meet the primary test will be subject to secondary tests that depend on a combination of physical presence and measurable, objective criteria.
- 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.
- The new framework is based on recommendations made by the Board of Taxation in its 2019 report to Government, "Reforming individual tax residency rules – a model for modernisation". According to the Government, this new framework will be easier to understand and apply in practice, deliver greater certainty, and lower compliance costs for globally mobile individuals and their employers. This measure will have effect from the first income year after the date of Royal Assent of the enabling legislation.
Reducing compliance costs for individuals claiming self-education expense deductions
- The Government will remove the exclusion of the first $250 of deductions for prescribed courses of education.
- Currently, the first $250 of a prescribed course of education expense is not tax deductible.
- Removing the $250 exclusion is expected to reduce compliance costs for individuals claiming self-education expense deductions.
- This measure will have effect from the first income year after the date of Royal Assent of the enabling legislation.
Changes affecting Business Taxpayers
Temporary full expensing extension
- In the prior year (2020/21) Federal Budget, the Government announced amendments to allow businesses with an aggregated turnover of less than $5 billion to access a new temporary full expensing of eligible depreciating assets until 30 June 022. Temporary full expensing became law when Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Bill 2020 received Royal Assent on 14 October 2020.
- In the 2021/22 Federal Budget, the Government has announced that temporary full expensing will be extended by 12 months to allow eligible businesses with aggregated annual turnover or total income of less than $5 billion to deduct the full cost of eligible depreciable assets or any value, acquired from 7.30pm AEDT on 6 October 2020 and first used or installed ready for use by 30 June 2023. All other elements of temporary full expensing will remain unchanged, including the alternative eligibility test based on total income, which will continue to be available to businesses.
Temporary loss carry-back extension
- In the prior year (2020/21) Federal Budget, the Government announced amendments to introduce a temporary loss carry-back measure. Broadly, this initial measure allowed "corporate tax entities" with an aggregated turnover of less than $5 billion to carry back tax losses made in the 2020, 2021 and/or 2022 income years to claim a refund of tax paid (by way of a tax offset) in relation to the 2019, 2020 and/or 2021 income years. The rules relating to the temporary loss carry-back regime have been enacted and are contained in Division 160 of the ITAA 1997.
- In the 2021/22 Federal Budget, the Government has announced that the loss carry-back measure will be extended to allow eligible companies (ie with aggregated turnover of less than $5 billion) to also carry back (utilise) tax losses from the 2023 income year to offset previously taxed profits as far back as the 2019 income year when they lodge their tax return for the 2023 income year. Consistent with the current law, the tax refund available under this measure is limited by requiring that the amount carried back is not more than the earlier taxed profits and does not generate a franking account deficit. Companies that do not elect to carry back losses under this measure can still carry losses forward as normal.
- The corporate tax rate for SME's will drop to 25% from 1 July 2021 from 26%.
Superannuation Related Changes
Removing the work test for voluntary contributions
- The Government has announced that it will allow individuals aged 67 to 74 years (inclusive) to make or receive non-concessional contributions (including under the bring-forward rule) and salary sacrifice contributions without meeting the work test, subject to existing contribution caps. Individuals aged 67 to 74 years (inclusive) will still have to meet the work test to make personal deductible contributions.
- The measure will have effect from the start of the first income year after Royal Assent of the enabling legislation, which the Government expects to have occurred prior to 1 July 2022. Currently, individuals aged 67 to 74 years (inclusive) can only make voluntary contributions (both concessional and non-concessional) to their superannuation fund, or receive contributions from their spouse, if they satisfy the work test (subject to a limited work test exemption). Generally, to satisfy the work test, an individual must be working for at least 40 hours over a period of not more than 30 consecutive days in the income year the relevant contribution is made.
- Removing the requirement to meet the work test when making non-concessional or salary sacrifice contributions will simplify the rules governing superannuation contributions and will increase flexibility for older Australians to save for their retirement through superannuation.
Reducing the age limit for downsizer contributions
- The Government will reduce the age limit from which downsizer contributions can be made by eligible individuals, from 65 to 60 years of age.
- The measure will have effect from the start of the first income year after Royal Assent of the enabling legislation, which the Government expects to have occurred prior to 1 July 2022. The downsizer contribution allows eligible individuals to make a one-off, after tax contribution to their superannuation fund, of up to $300,000 per person, following the disposal of an eligible dwelling, where certain conditions are satisfied. Under the current requirements, an individual must be at least 65 years of age at the time of making the relevant contribution, for the contribution to qualify as a downsizer contribution.
Removing the $450 per month threshold for superannuation guarantee ("SG") eligibility
- The Government will remove the current $450 per month minimum income threshold, under which employees do not have to be paid SG contributions by their employer.
- The measure will have effect from the start of the first income year after Royal Assent of the enabling legislation, which the Government expects to have occurred prior to 1 July 2022.
Changes to the first home super save ("FHSS") scheme
- The Government has announced that it will make the following changes to the FHSS scheme.
- Increasing the maximum releasable amount to $50,000.
- The Government will increase the maximum releasable amount of voluntary concessional and non-concessional contributions under the FHSS scheme from $30,000 to $50,000 to assist first home buyers in raising a deposit more quickly.
- Voluntary contributions made from 1 July 2017 up to the existing limit of $15,000 per year will count towards the total amount able to be released.
- This change will apply from the start of the first income year after Royal Assent of the enabling legislation, which the Government expects will have occurred by 1 July 2022.
- Under the current FHSS scheme, an eligible individual can apply to have a maximum of $15,000 of their voluntary contributions from any one income year included in their eligible contributions to be released under the FHSS scheme, up to a total of $30,000 contributions across all years, together with an amount of earnings that relate to those contributions.
Important: This is not advice. Clients should not act solely on the basis of the material contained in this Newsletter. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. The Newsletter is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not be made available to any person without our prior approval.
If you would like to discuss any points raised in the above update or other elements relating to the 2021 Federal Budget not mentioned, please feel free to contact your Accountant at PinnacleHPC Pty Ltd.