Government Spending prioritised over Deficit Reduction.
The Federal Government has focused on job creation in its 2021/22 Federal Budget and is seeking to reduce the unemployment rate further; the aim is for below 5%. While the Government has not shifted to budget repair, the improving performance of the economy and high iron ore revenues have led to a significant reduction in the forecast FY2020/21 budget deficit ($161 billion versus $213 billion previously expected), with a further forecast step down in the deficit to $107 billion in FY2021/22. That’s still a large number and surpluses are a long way off.
The economic forecasts underpinning the 2021/22 Federal Budget have been revised higher. Real GDP is expected to come in at positive 1.25% in 2021 (this was -1.5% in the October 2020 Federal Budget), with a 4.25% rebound in 2021/22.
As it currently stands, the 2021/22 Federal Budget projects that deficits will gradually decline through the rest of the decade and gross Commonwealth Government debt is expected to peak at 41% of GDP. This level of indebtedness remains low compared to other developed countries.
■ 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 are scheduled to commence in 2024-25 as already legislated.
■ 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.
■ Individual residency test reformed – the Government will replace the existing tests for the tax residency of individuals 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.
Temporary full expensing for Small Businesses
The Government will extend the temporary full expensing measure until 30 June 2023. It was otherwise due to finish on 30 June 2022. Other than the extended date, all other elements of temporary full expensing will remain unchanged. The measure allows eligible businesses to deduct the full cost of eligible depreciating assets.
Assets must be acquired from 7:30 pm AEDT on 6 October 2020 and first used or installed ready for use by 30 June 2023.
In a move to assist families, the Government has announced that it will increase the childcare subsidy for eligible families who have more than one child under five in childcare and also remove the $10,650 on the subsidy.
No change to previously announced Superannuation Guarantee increases
Despite comments from members of the Government advocating no increase in the SG rate, the Budget did not contain any change to the legislated Super Guarantee rate increase from 9.5% to 10% for 2021-22 so this is now expected to apply from July.
The Superannuation Guarantee Rate is scheduled to increase by 0.5% of ordinary time earnings (OTE) each year over the next five years as follows:
|Period||Superannuation Guarantee Rate (% of OTE)|
|1 July 2021 – 30 June 2022||10.00|
|1 July 2022 – 30 June 2023||10.50|
|1 July 2023 – 30 June 2024||11.00|
|1 July 2024 – 30 June 2025||11.50|
|1 July 2025 – 30 June 2026 and thereafter||12.00|
Super Contribution Caps
The only change to contribution caps is due to indexation: the concessional contributions cap for 2020/21 remains at $25,000, increasing to $27,500 from 1 July 2021. The non-concessional contributions cap for 2020/21 remains at $100,000 for those with total super balances of less than $1.6m on 30 June 2020, increasing to $110,000 from 1 July 2021 for those with total super balances of less than $1.7m on 30 June 2021.
There were no changes to the total super balance “thresholds”. For example, the:
- $300,000 limit for qualifying to make a “work test exempt” contribution.
- $500,000 limit for utilising unused concessional contributions cap amounts carried forward from prior years.
- $1.4m, $1.5m and $1.6m thresholds on 30 June 2020 for non-concessional contributions cap amounts under the “bring-forward rules” (changing to $1.48m, $1.59m and $1.7m on 30 June 2021 as a result of indexation of contribution caps only).
Removal of the work test for voluntary Super contributions
The Government has announced the abolition of the work test on non-concessional and salary sacrifice contributions made by individuals between 67 and 74 (inclusive). The current work test will no longer apply to non-concessional contributions and salary sacrifice contributions for individuals under age 75, regardless of their work status, subject to the existing contribution caps. This will help older Australians get more into Super. The new rules are not expected to commence 1 July 2022.
The work test applied up to age 65 for income years up to 2019-2020 and was raised to 67 in the current financial year. The work test meant that a superannuation fund could only accept contributions for individuals employed for at least 40 hours in a 30-day period during the Financial Year, unless they met an exemption.
Importantly, the work test will still apply to personal deductible contributions (which doesn’t make much sense if salary sacrifice contributions are allowed; we’ll see what the legislation says).
Removal of the work test appears to raise the possibility of individuals who don’t as yet need pension income to start a (tax-free) account-based pension and recontribute the minimum payments received, subject to room within their transfer balance cap.
Reducing the eligibility age for downsizer contributions
The Government will reduce the eligibility age to make downsizer contributions into superannuation from 65 to 60 years of age. The downsizer contribution allows individuals to make a one-off, post-tax contribution to their superannuation of up to $300,000 per person from the proceeds of selling their primary residence that was owned for 10 or more year and these contributions do not count towards non-concessional contribution caps.
This measure is expected to commence from 1 July 2022.
There may be Government (Centrelink) age pension implications for some people accessing the Scheme as a primary residence is not assessed for age pension assets test, but superannuation balances generally are. Thus topping up a Super/Pension balance from downsizing the home can reduce age pension eligibility under the assets test.
Removing the $450 per month threshold for superannuation guarantee
The removal of the minimum SG threshold is part of a broader set of measures outlined in the Women’s Budget Statement, though this measure applies to both women and men.
The $450 minimum income SG threshold has had a disproportionate impact on women’s retirement outcomes, as women make up a higher proportion of the part-time or casual workforce that may be impacted by the minimum threshold (around 63% of all those impacted).
Students and other part-time workers will benefit from this change.
- $1.4m, $1.5m, and $1.6m thresholds on 30 June 2020 for non-concessional contributions cap amounts under the “bring-forward rules” (changing to $1.48m, $1.59m and $1.7m on 30 June 2021 as a result of indexation of contribution caps only).
No extension was announced to the current halving of the pension draw-down rates (for account-based pensions, transition to retirement income streams and market linked pensions). Full drawdown rates will return from 1 July 2021.
Changes to the Pension Loan Scheme
The Pension Loan Scheme (PLS) is a reverse mortgage loan arrangement, which allows eligible individuals to access equity from their home and boost their income in retirement. For individuals on the full age pension, the maximum loan amount is 50% of the age pension, while self-funded retirees can access up to 150% the age pension amount. The loan is secured against an individual’s Australian property and the payments are fortnightly.
From 1 July 2022, the Government will look to make 2 changes to the PLS:
- No negative equity guarantee – borrowers or their estate will not owe more than the market value of the secured property; and
- Eligible individuals will be able receive an advance each year of 50% of the maximum yearly age pension amount under the PLS.
Both measures seek to increase the attractiveness of the PLS which, like the reverse mortgage loan market more broadly, has had limited take-up.
Relaxing residency requirements for SMSFs
To qualify as a complying fund and be eligible for concessional tax treatment, all superannuation funds must meet a residency definition, which consists of three tests:
- the fund must either have been established in Australia or any asset of the fund must be situated in Australia, and
- the central management and control of the fund must ordinarily be in Australia, and
- the fund must pass an active member test.
All three of these tests must be met at all times.
The central management and control test requires that the strategic and high-level decision-making of a fund is ordinarily in Australia. If the trustees of a fund (or the directors of the corporate trustee) are physically located overseas when making strategic and high-level decisions, central management & control is – as a matter of fact – being exercised overseas.
Central management and control could, at times, be exercised outside Australia provided that was temporary. What constitutes “temporary” is determined on a case-by-case basis, but the law includes a “two-year safe harbour rule”.
The Government has proposed the relaxation of residency requirements, which would allow members of self-managed superannuation funds (SMSFs) and small APRA-regulated funds (SAFs) to continue to contribute, while the trustee/member is (temporarily) overseas.
Subject to the legislation passing, the central control and management test safe harbour will be extended from 2 to 5 years and the active member test will be removed.
This measure will allow SMSF and small APRA fund members to continue to contribute to their superannuation fund whilst temporarily overseas, ensuring parity with members of large APRA regulated funds. The removal of the active member test means that as long as the fund was established in Australia (or holds an asset in Australia) and the central management ordinarily remains in Australia, an SMSF member can continue to contribute to a fund of their choice.
This newsletter contains general advice. It does not take into account your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.