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Federal Budget to be handed down next Tuesday 11 May 2021

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The Federal Budget 2021–22 will be handed down by the Treasurer at 7.30 pm AEST on Tuesday 11 May 2021. The Budget documents will be downloadable from the Budget website from that time.

The contents of the Budget will remain a mystery until then but in the meantime the Treasurer has announced some Budget measures and key economic indicators ahead of next Tuesday. Some of these are outlined below.

Last year’s Federal Budget was deferred from the usual second Tuesday of May until Tuesday, 6 October 2020 due to the introduction of various COVID-19 economic stimulus initiatives earlier in the year. This article also sets out the current status of select key measures from the last Budget.

What we can anticipate in the Budget

Tax measures

Digital Economy Strategy measures

On 6 May 2021, the Government announced a $1.2 billion investment in Australia’s digital future through the Digital Economy Strategy. The Strategy targets investment in emerging technologies, building digital skills, encouraging business investment and enhancing Government service delivery.

The Strategy covers the areas of: digital skills; artificial intelligence; enhancing government service delivery; investment incentives; SME digitalisation; emerging aviation technology; data and the digital economy; and cyber security, safety and trust.

The Strategy will take the digital economy spend to around $2 billion over the 2020–21 and 2021–22 Budgets.

The full Strategy and related measures will be released on Budget night. In the meantime, the tax-related investment incentives which have been announced are:

The Digital Games Tax Offset

The Government proposes to introduce a 30 per cent refundable tax offset for eligible businesses that spend a minimum of $500,000 on qualifying Australian games expenditure. 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.

Allowing self-assessment of the effective life of depreciating intangible assets

The Government proposes to amend the income tax law to allow taxpayers to self-assess the effective life of certain intangible assets, rather than being required to use the statutory effective life.

Eligible intangible assets are patents, registered designs, copyrights and in-house software. The proposed amendment aligns the tax treatment of these intangible assets with the treatment of most tangible assets. The amendment is proposed to apply after the temporary full expensing of depreciating assets measure ceases — i.e. from 1 July 2022.

Venture capital tax concessions

The Australian venture capital market is currently supported by tax incentives designed to attract foreign investment and encourage venture capitalists to invest in early-stage Australian companies to drive innovation and additional investment.

The Government will undertake a review of these tax incentives to ensure current arrangements are fit-for-purpose and support genuine early stage Australian start-ups.

The programs in scope for the review include: Venture Capital Limited Partnerships, Early Stage Venture Capital Limited Partnerships, Australian Venture Capital Fund of Funds and Investments made directly by registered foreign residents. Public consultation will be undertaken in 2021.

Key non-tax measures

Some of the main non-tax measures that will be announced in the Budget as part of the Strategy include:

  • over $100 million to support digital work skills;
  • $124.1 million to build capability in Artificial Intelligence;
  • $100.1 million investment to overhaul myGov;
  • $12.7 million to help SMEs build their digital capacity;
  • $15.3 million to drive business update of e-Invoicing;
  • over $50 million to enhance cyber security in government, data centres and future telecommunications networks.

The Excise Refund Scheme

The Treasurer, on 1 May 2021, officially announced $255 million in tax relief for small brewers and distillers.

From 1 July 2021, eligible brewers and distillers will be able to receive a full remission of any excise paid, up to an annual cap of $350,000. Currently, they are entitled to a refund of 60 per cent of the excise paid, up to an annual cap of $100,000. This will align the benefit available under the Excise Refund Scheme for brewers and distillers with the Wine Equalisation Tax Producer Rebate.

Personal taxes

The Treasurer has also confirmed that the Government remains committed to delivering Stage 3 of the Personal Income Tax Plan — the tax cuts which will be brought about by changes to the personal tax thresholds and marginal rates — legislated to commence in 2024–25.

Further, it is widely expected that the Government will extend the temporary low and middle income tax offset (LMITO) — which provides an offset of up to $1,080 for taxpayers with taxable incomes of up to $126,000 — to 2021–22. It is currently available for the 2018–19 to 2020–21 income years. The extension will cost $7 billion.

Query

Will the increase in the minimum superannuation guarantee rate from 9.5 per cent to 10 per cent, to start on 1 July 2021, be delayed?

Childcare package

The other major pre-Budget announcement is a $1.7 billion childcare package. On 2 May 2021, the Treasurer announced changes to the childcare subsidy scheme to encourage greater workforce participation. It is proposed that from July 2022:

  • the level of subsidy received for a second or subsequent child in childcare will increase to a maximum of 95 per cent (currently the maximum is 85 per cent);
  • the annual subsidy cap for families with a combined income above $189,390 — currently $10,560 — will be removed.

Economic predictions

On 29 April 2021, the Treasurer, Josh Frydenberg, delivered a Pre-Budget Economic and Fiscal Strategy Speech, in which he noted some positive signs of economic recovery:

  • the March 2021 unemployment rate at 5.6 per cent is below the 2020–21 MYEFO forecast of 7.5 per cent;
  • capital investment intentions for the next 12 months are at their strongest since 1994;
  • investment in machinery and equipment, like vehicles and harvesters, was up 8.1 per cent in the most recent December quarter data — the largest quarterly increase in nearly seven years.

In his speech the Treasurer confirmed that the Government:

  • aims to drive the unemployment rate down sustainably. Both the RBA and Treasury’s best estimate is that the unemployment rate will need to be below 5 per cent to see inflation and wages accelerate — the last time this happened was between 2006 and 2008;
  • will continue to pursue a range of reforms and investments to boost productivity — measures will be outlined in next week’s Budget in the areas of skills, infrastructure, tax, energy, digital technology and deregulation, amongst others;
  • will not be undertaking ‘sharp pivots towards austerity’ in its Budget;
  • aims to maintain a tax-to-GDP ratio at or below 23.9 per cent.

The Deloitte Access Economics Budget Monitor, released on Monday 3 May 2021, reports the following expectations:

  • 2020–21 revenues may exceed the MYEFO forecast by $21 billion, or 4.2 per cent; 2021–22 revenues may exceed forecasts by $28 billion, or 5.6 per cent.
  • Spending in 2020–21 may be $9.8 billion less than forecasts — mainly because JobKeeper, the Coronavirus Supplement and JobMaker were less costly than expected.
  • Underlying cash deficits will be $167 billion in 2020–21 and $87 billion in 2021–22. These are $31 billion and $22 billion, respectively, better than the Treasury’s forecasts.
  • The fiscal deficit will be $163 billion for 2020–21 and $86 billion for 2021–22.
  • Profit taxes on business will outperform official estimates by $19 billion in 2022–23, and by $6 billion 2023–24.
  • Personal tax receipts are expected to exceed official projections by $7 billion 2022–23 and then by $10 billion in 2023–24.
  • The Stage 3 personal tax cuts — legislated to be implemented in 2024–25 — will leave families paying $20 billion less in 2024–25 than if the 2014–15 tax system had been indexed over time.

 

Status of key 2020–21 Budget announcements

Proposed measure Bringing forward the second stage of the Personal Income Tax Plan by two years to 2020–21
Proposed start date From the 2020–21 income year
Status Legislated — the Treasury Laws Amendment (A Tax Plan For The COVID-19 Economic Recovery) Act 2020 received Royal Assent on 14 October 2020
Proposed measure Temporary full expensing of depreciating assets
Proposed start date Assets acquired from 7.30 pm AEDT on 6 October 2020 and first used or installed by 30 June 2022
Status Legislated — the Treasury Laws Amendment (A Tax Plan For The COVID-19 Economic Recovery) Act 2020 received Royal Assent on 14 October 2020
Proposed measure Exempting granny flat arrangements from CGT
Proposed start date From first income year after Royal Assent
Status Exposure draft legislation — released 16 April 2021
Proposed measure FBT exemptions to support retraining and reskilling
Proposed start date 2 October 2020
Status Exposure draft legislation — released 16 April 2021
Proposed measure Supporting small business — responsible lending and insolvency reform
Proposed start date Generally, from 1 January 2021
Status Legislated — the Corporations Amendment (Corporate Insolvency Reforms) Act 2020 received Royal Assent on 15 December 2020 and the Corporations Amendment (Corporate Insolvency Reforms) Regulations 2020 was registered on 17 December 2020
Proposed measure Increasing the SBE turnover threshold from $10m to $50 — increasing access to a number of small business entity concessions
Proposed start date 1 July 2020, 1 April 2021 and 1 July 2021
Status Legislated — the Treasury Laws Amendment (A Tax Plan For The COVID-19 Economic Recovery) Act 2020 received Royal Assent on 14 October 2020
Proposed measure Clarifying the corporate tax residency test
Proposed start date First income year after Royal Assent
Status No developments since the Budget

The measure is based on the Board of Taxation’s Review of Corporate Tax Residency report (July 2020)

Proposed measure Temporary loss carry-back
Proposed start date Losses incurred in 2019–20

Election first available in 2020–21 tax return

Status Legislated — the Treasury Laws Amendment (A Tax Plan For The COVID-19 Economic Recovery) Act 2020 received Royal Assent on 14 October 2020
Proposed measure Refinement of the research and development tax incentive
Proposed start date Income years starting on or after 1 July 2021
Status Legislated — the Treasury Laws Amendment (A Tax Plan For The COVID-19 Economic Recovery) Act 2020 received Royal Assent on 14 October 2020
Proposed measure Revised start date for targeted amendments to Div 7A
Proposed start date Income years commencing after Royal Assent
Status No developments since the Budget
Proposed measure Superannuation reform — ensuring that superannuation follows employees when they change jobs; empowering members; holding funds to account for underperformance; and increasing accountability and transparency
Proposed start date From 1 July 2021
Status Partially before Parliament — the Treasury Laws Amendment (Your Future, Your Super) Bill 2021 was introduced into the House of Representatives on 17 February 2021
Proposed measure JobMaker hiring credit scheme
Proposed start date 7 October 2020
Status Legislated

The Economic Recovery Package (JobMaker Hiring Credit) Amendment Act 2020 received Royal Assent on 13 November 2020

The Coronavirus Economic Response Package (Payments and Benefits) Amendment Rules (No. 9) 2020 was registered on 4 December 2020

Exposure draft legislation for granny flat CGT exemptions and retraining FBT exemptions

As noted above, two proposed measures in the Federal Budget 2020–21 were:

  • CGT exemptions for granny flat arrangements;
  • FBT exemptions for retraining and reskilling.

The Treasury has recently released exposure draft legislation in relation to these measures and it is anticipated that they will feature in next week’s Budget costings.

These measures will be covered in the upcoming Tax Updates.

Granny flat CGT exemption

The exposure draft of the Treasury laws Amendment (Measures for Consultation) Bill 2021: Exempting granny flat arrangements from CGT proposes to insert new Div 137 into the ITAA 1997 to provide a targeted CGT exemption for the creation, variation or termination of a formal written granny flat arrangement providing accommodation for older Australians or people with disabilities.

The measure is proposed to apply to events that happened on or after the first 1 July to occur after the day of Royal Assent (whether the arrangements to which the events relate were entered into before, on or after that date).

Under the proposed exemption:

  • a CGT event does not happen if an arrangement is entered into that creates or varies a granny flat interest where the below requirements are satisfied;
  • a CGT event does not happen on the termination of an arrangement if a CGT event did not happen when the arrangement was entered into or varied.

The requirements are:

  1. The individual must have reached pension age or who have a disability that means they require assistance for most day-to-day activities for at least 12 months.
  2. An individual owns the dwelling at the time of entering into or varying the arrangement, or agrees to acquire such a dwelling under the arrangement.
  3. Both the individual who is to hold the granny flat interest and the individual who owns, or agrees to acquire, the dwelling, are parties to the arrangement.
  4. The arrangement must be in writing and indicate an intention for the parties to be legally bound by it.
  5. The arrangement is not of a commercial nature.

FBT exemption for retraining and reskilling

The exposure draft of the Treasury Laws Amendment (Measures for a later sitting) Bill 2021: FBT exemption to support retraining and reskilling proposes to insert new s. 58ZE into the FBTA Act to provide an exemption from FBT for employer-provided retraining and reskilling benefits for redundant, or soon to be redundant, employees, where these benefits are not sufficiently connected to their current employment.

The amendments are proposed to apply to benefits provided on or after 2 October 2020 (the date of the original announcement of the measure).

A benefit will be exempt from FBT if all of the following conditions are satisfied (subject to exceptions):

  • the benefit is provided in, or in respect of, the FBT year in respect of education or training undertaken by an employee of an employer (e.g. course fees or textbooks);
  • the employee is redundant;
  • the employer has complied with any obligations under the Fair Work Act 2009 that applies to the redundancy;
  • the education or training is for the primary purpose of enabling the employee to gain or produce salary or wages in respect of any employment to which the education or training relates.

The redundancy concept is broad and may cover for example where the employee is redeployed to another part of the business or to an associated entity. Further, the redundancy test only needs to be satisfied when the benefit is provided and the employer will not lose the exemption if circumstances change (e.g. a restructure occurs) and the employee is not made redundant.