2021-22 Federal Budget: Big spending and tax measures

On Tuesday, 11 May 2021, Treasurer Josh Frydenberg handed down the 2021-22 Federal Budget, his 3rd Budget.

Mr Frydenberg said the Australian economy has rebounded at its fastest pace on record over the latter half of 2020. Nevertheless, the impact of COVID-19 will see the deficit reach $161bn in 2020-21, improving to $106.6bn in 2021-22, before further improving to $57bn in 2024-25.

The Treasurer noted that the 2020-21 deficit is $52.7bn lower than was expected just over 6 months ago at last year’s Budget in October 2020. JobKeeper has played its role with nearly one million jobs added since May 2020, Mr Frydenberg said. The Government believes the 2021-22 Budget will consolidate these gains and put the economy on course for the unemployment rate to fall below 5%, reaching 4.75% by the June quarter 2023. Real GDP is forecast to grow by 1.25% in 2020-21, rising to 4.25% in 2021-22 and 2.5% in 2022-23.

To reach these targets the Government has committed $291bn (or 14.7% of GDP) in direct economic support for individuals, households and businesses since the onset of COVID-19. The Budget also adds to the Government’s existing infrastructure investment pipeline with a further $15.2bn of infrastructure commitments.

Tax-related Measures

Personal tax rates – no changes were made to personal tax rates, the Government having already brought forward the Stage 2 tax rates to 1 July 2020. The Stage 3 personal income tax cuts remain unchanged and will commence in 2024-25 as already legislated.

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

Taxable income ($)Tax payable ($)
0 – 18,200Nil
18,201 – 45,000Nil + 19% of excess over 18,200
45,001 – 120,0005,092 + 32.5% of excess over 45,000
120,001 – 180,00029,467 + 37% of excess over 120,000
180,001+51,667 + 45% of excess over 180,000

Stage 3: rates and thresholds from 2024-25 onwards

The Stage 3 tax changes commence from 1 July 2024, as previously legislated. From 1 July 2024, the 32.5% marginal tax rate will be cut to 30% for one big tax bracket between $45,000 and $200,000. This will more closely align the middle tax bracket of the personal income tax system with corporate tax rates. The 37% tax bracket will be entirely abolished at this time.

LMITO retained for 2021-22 – the Government will retain the low and middle income tax offset for the 2021-22 income year. The LMITO provides a reduction in tax of up to $1,080.

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.

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

Low Income Tax Offset

The low income tax offset (LITO) will also continue to apply for 2021-22 income year. The LITO was intended to replace the former low income and low and middle income tax offsets from 2022-23, but the new LITO was brought forward in the 2020 Budget to apply from the 2020-21 income year.

The maximum amount of the LITO is $700. The LITO will be withdrawn at a rate of 5 cents per dollar between taxable incomes of $37,500 and $45,000 and then at a rate of 1.5 cents per dollar between taxable incomes of $45,000 and $66,667.Low income tax offset for 2021-22 (unchanged from 2020-21)

Taxable income (TI)Amount of offset
$0 – $37,500$700
$37,501 – $45,000$700 + ([TI – $37,500] × 5%)
$45,001 – $66,667$325 + ([TI – $45,000] × 1.5%)

Temporary full expensing extended – the Government will extend the 2020-21 temporary full expensing measures for 12 months until 30 June 2023. This will allow eligible businesses with aggregated annual turnover or total income of less than $5 billion to deduct the full cost of eligible depreciable assets of any value, acquired from 7:30pm AEDT on 6 October 2020 and first used or installed ready for use by 30 June 2023.

Loss carry-back extended – the loss years in respect of which an eligible company (aggregated annual turnover of up to $5 billion) can currently carry back a tax loss (2019-20, 2020-21 and 2021-22) will be extended to include the 2022-23 income year.

Individual residency test reformed – 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.

Employee share schemes – the Government will remove the cessation of employment as a taxing point for the tax-deferred employee share schemes.

ATO debt recovery – the AAT will be given the power to pause or modify ATO debt recovery action in relation to disputed debts of small businesses.

Self-education expenses – The Government will remove the exclusion of the first $250 of deductions for prescribed courses of education. The first $250 of a prescribed course of education expense is currently not deductible. The measure will have effect from the first income year after the date of assent to the enabling legislation.

Concessional corporate tax rate for medical and biotech patents income – The Government will introduce a so-called “patent box” tax regime which will tax corporate income derived from patents at a concessional effective corporate tax rate of 17%. This measure is estimated to decrease the underlying cash balance by $206.4 million over the forward estimates period. The measure will apply from income years starting on or after 1 July 2022.

Intangible assets depreciation: option to self-assess effective life – The Budget confirmed that the income tax law will be amended to allow taxpayers to self-assess the effective life of certain intangible assets (such as intellectual property and in-house software), rather than being required to use the effective life currently prescribed in the table in s 40-95(7) of the ITAA 1997.

Extended consultation on corporate tax residency rules – The Government announced that it would amend the law to provide that a company that is incorporated offshore will be treated as an Australian tax resident if it has a “significant economic connection to Australia”.

Superannuation and related measures

The key superannuation and related measures announced in the Budget include:

Superannuation contributions work test – to be repealed from 1 July 2022 for voluntary non-concessional and salary sacrificed contributions for those under age 75. However, the work test will still apply for personal deductible contributions by those aged 67-74. The measure will have effect from the start of the first financial year after Royal Assent of the enabling legislation, which the Government expects to have occurred prior to 1 July 2022.

SMSF residency rules – to be relaxed by extending the central management and control test safe harbour from 2 to 5 years, and removing the active member test for both SMSFs and small APRA funds. The measure will have effect from the start of the first financial year after Royal Assent of the enabling legislation, which the Government expects to have occurred prior to 1 July 2022.

Conversions of legacy income streams – individuals will be permitted to exit certain legacy retirement income stream products (excluding flexi-pensions or lifetime products in APRA-funds or public sector schemes), together with any associated reserves, for a 2-year period. Any commuted reserves will not be counted towards an individual’s concessional contribution cap. Instead, they will be taxed as an assessable contribution for the fund.

Super Guarantee $450 per month threshold – to be removed from 1 July 2022. As a result, employers will be required to make quarterly Super Guarantee contributions on behalf of such low-income employees earning less than $450 per month (unless another Super Guarantee exemption applies).

Downsizer contributions – eligibility age to be lowered from 65 to 60. The proposed reduction in the eligibility age will mean that individuals aged 60 or over can make an additional non-concessional contribution of up to $300,000 from the proceeds of selling their home.  Either the individual or their spouse must have owned the home for 10 years.  The measure will have effect from the start of the first financial year after Royal Assent of the enabling legislation, which the Government expects to have occurred prior to 1 July 2022.

First Home Super Scheme – to be extended for withdrawals up to $50,000, plus some technical changes for tax and administration errors in applications. Withdrawals of eligible FHSS contributions (and associated earnings) are taxed at the individual’s marginal rate less a 30% tax offset. Effectively, the scheme provides a 15% tax saving on money channelled via super for a first home purchase. The increase in maximum releasable amount to $50,000 will apply from the start of the first financial year after Royal Assent of the enabling legislation, which the Government expects will have occurred by 1 July 2022.

Victims of domestic violence – the Government will not proceed with its previous proposal to extend the early release of super to victims of family and domestic violence.

Pension Loans Scheme – will be expanded to allow access up to 2 lump sums in any 12-month period (up to a total of 50% of the maximum annual Age Pension); together with a Government guarantee that “No Negative Equity” will apply.

Medicare levy 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.

The increased thresholds will apply to the 2020-21 and later income years. Legislation is required to amend the thresholds and a Bill will be introduced shortly.

The Budget Confirmed

30% Digital Games Tax Offset – for eligible businesses that spend a minimum of $500,000 on qualifying Australian games expenditure (excluding gambling) from 1 July 2022. The Digital Games Tax Offset will be available from 1 July 2022 to Australian resident companies or foreign resident companies with a permanent establishment in Australia.

Intangible assets depreciation – option to self-assess effective life for certain intangible assets (eg intellectual property and in-house software).

Brewers and distillers – the excise refund cap for small brewers and distillers will increase to $350,000 from 1 July 2021.

Venture capital – a review of the venture capital tax concessions will be undertaken in 2021.

Child care – The Budget confirmed that the Government will make an additional $1.7b investment in child care. The changes will commence on 1 July 2022, ie not in the next financial year. This measures was previously announced on 2 May 2021.