Federal Budget 2021

Articles Written by Stewart Grieve (Partner), Alison Haines (Partner), Prashanth Kainthaje (Partner), Julian Wan (Special Counsel), Gina Iskander (Associate), Lachlan Smithers (Associate), Georgia Whiteside (Associate)

Rewind to October 2020 and the Treasurer, the Hon. Josh Frydenberg, hands down the 2020/21 Australian Federal Budget. The Government’s primary focus in the budget is on job creation as the key to Australia’s economic recovery from the devastating impact on the economy of recent natural disasters (bushfires, drought, cyclones and floods) and of course the global COVID-19 pandemic. As part of the jobs strategy, the Treasurer announces a number of key taxation stimulus measures, summarised in our Federal Budget 2020 Insights article.

Fast forward 7 months to tonight’s budget, set against the backdrop of the Australian economy’s stronger than expected recovery from the impacts of the natural disasters and global pandemic, and the Government’s intention that the budget will be another “pandemic budget” laying out an economic recovery plan which focuses on job creation as the means to effect budget repair.

Delivering on the sentiments in his pre-budget speech to the Australian Chamber of Commerce and Industry, the Treasurer announced in the budget taxation measures which, in a macro sense, are aimed at driving the unemployment rate lower in order to see inflation and wages accelerate and to boost productivity in order to deliver sustainable higher real wages. The key taxation measures include:

  • the introduction for income years commencing on or after 1 July 2022, of a “patent box tax regime” under which corporate income derived from patents will be taxed at a concessional effective corporate tax rate of 17%;     
  • a measure to enable taxpayers to self-assess the tax effective lives of eligible intangible depreciating assets, such as patents, registered designs, copyrights and in-house software;
  • extension of two tax incentives for eligible businesses contained in the 2020/21 Budget: (1) full income tax expensing of the cost of eligible depreciable assets; and (2) carry back of tax losses;
  • the removal of the cessation of employment taxing point for tax-deferred employee share schemes, and  reform of the individual tax residency rules; and
  • a substantial increase to the excise relief cap for craft brewers and distillers.

Patent Box tax concession

The Government has announced that a patent box tax regime will be introduced for income years starting on or after 1 July 2022 (for granted patents applied for after this announcement), whereby corporate income derived from Australian medical and biotechnology patents will be taxed at a concessional rate of 17%. Currently, Australia taxes income derived from patents at the headline corporate tax rate (30% for large enterprises and 25% for small to medium enterprises from 1 July 2021).  The Government will also consult on whether a patent box would be an effective way of supporting the clean energy sector.

The measure is expected to promote additional investment and hiring in research and development activity in Australia and encourage companies to develop and apply their innovations domestically.

The Government has indicated that it will follow the OECD’s guidelines on patent boxes to ensure Australia’s patent box meets internationally accepted standards and that it will consult with industry on the detailed design of the patent box.

Digital economy strategy

Allowing taxpayers to self-assess the effective life of certain depreciating assets

The Government will allow taxpayers the option to self-assess the tax effective lives of eligible intangible depreciating assets, such as patents, registered designs, copyrights and in-house software in addition to applying the existing statutory effective lives. This aligns the tax treatment of these assets with most other tangible depreciating assets.

The Government hopes that this will encourage investment and hiring in research and development.

This measure will apply to assets acquired from 1 July 2023, after the current temporary full expensing regime has concluded.

Digital games tax offset

The Government will introduce a 30% refundable tax offset for eligible businesses that spend a minimum of A$500,000 on qualifying Australian games expenditure. The offset will be capped at A$20 million per year, and will be introduced from 1 July 2022. The Government will consult with industry in 2021 to develop the criteria and definition of qualifying expenditure but has already stated that the criteria will include that the game must not have gambling elements.

Temporary full expensing extension

The Government will extend the temporary full expensing measures introduced as part of the 2020/21 budget for a further 12 months. This means that businesses with an aggregated annual turnover or total income of less than A$5 billion will be able to deduct the full cost of “eligible capital assets” acquired from 7:30pm AEDT on 6 October 2020 and first used or installed ready for use by 30 June 2023.

The Government says that this extension will encourage businesses to make further investments, including in projects requiring longer planning times, and continue to support economic recovery in 2022-23.

Other than the 12 month extension, all elements of the existing temporary full expensing measures will remain unchanged.

Temporary loss carry-back extension

The Government will also extend the temporary loss carry-back measures introduced as part of the 2020/21 budget for a further 12 months. Corporate tax entities with an aggregated turnover of less than A$5 billion will be able to elect to offset tax losses from the 2019/20 to 2022/23 income years against previously taxed profits in 2018/19 or later income years.

Employee Share Schemes — removing cessation of employment as a taxing point and reducing red tape

Under the current rules, employees can generally defer the point of taxation of an “ESS interest” until the “ESS deferred taxing point”. 

In the case of “rights to acquire shares”, the deferred taxing point is the earlier of:

  • when the options have vested and there is no restriction on immediately disposing of the options and there is no real risk of forfeiture;
  • the cessation of group employment in circumstances where the employee can exercise some or all of the options that have been granted;
  • the 15 year anniversary of the grant of the options; and
  • when the options have been exercised and there is no restriction on the disposal of the shares and there is no real risk of forfeiting the shares acquired on the exercise of the options.

In the case of shares, the deferred taxing point is the earlier of:

  • the cessation of group employment;
  • when there is no real risk of forfeiting the shares and there is no restriction on the disposal of the shares; and
  • the 15 year anniversary of the shares being acquired.

The Government has proposed to remove the cessation of employment as a deferred taxing point for share and option schemes that are taxed on a deferred basis.  The change will apply to ESS interests issued from the first income year after the date of Royal Assent of enabling legislation.

The Government has also stated that it will:

  • be removing regulatory requirements for the granting of ESS interests, where employers do not charge or lend to the employees to whom they offer ESS interests; and
  • where employers do charge or lend, streamline the requirements for unlisted companies making ESS offers that are valued at up to A$30,000 per employee per year.

Updated Individual Tax Residency Rules

The current tax residency rules for individuals will be replaced with a primary 183 day test and, for individuals that do not meet the primary test, a secondary test comprised of physical presence and “measurable, objective criteria”. Under the 183 day test, an individual who is physically present in Australia for 183 days or more in any income year will be an Australian tax resident.  The purpose of updating the individual tax residency rules is to create certainty, simplification and to reduce compliance costs for individuals and their employers.

The updated regime will have effect from the first income year after the date that the enabling legislation receives Royal Assent.

The proposal is based on the Board of Taxation’s recommendations from 2019

Review of corporate residency rules

As part of the 2020/21 budget, the Government had announced that it intended to make amendments to the residency test for foreign incorporated entities (see our Federal Budget 2020 Insights article ).

The Government has now announced that it will consult on broadening the amendments to trusts and corporate limited partnerships.

Tax relief for small brewers and distillers

The Government will increase the support available to small brewers and distillers by aligning the benefit available under the Excise Refund Scheme with the Wine Equalisation Tax Producer Rebate.

Under the new measures, eligible brewers and distillers will be entitled to receive a full remission of any excise that they pay, up to a cap of A$350,000 per financial year. Under the existing rules, eligible brewers and distillers are only able to receive a refund of 60% of the excise they pay, up to a cap of A$100,000 per financial year.

These changes will apply from 1 July 2021.

The Government hopes that these changes will assist the growth of Australia’s craft brewing and distilling industry and reduce inconsistencies in support arrangements for alcohol producers. The increased assistance also provides additional support to small manufacturers who were detrimentally affected by COVID-19.

Personal Income Tax

As part of the 2020/21 budget, the Government had built upon and brought forward the second stage of a seven-year personal income tax plan which was first introduced as part of the 2018/19 budget to lower taxes for individuals. The third stage of the income tax plan (whereby the 37% tax bracket will be removed and the 32.5% tax bracket will be reduced to 30% and applied to taxable incomes of A$45,001 to A$200,000) remains unchanged from the 2018/19 budget and will commence as planned in 2024/25.

The low and middle income tax offset, a non-refundable tax offset for individuals with taxable incomes of up to A$126,000, was due to finish on 30 June 2021, but will now be extended for another year. The offset provides a reduction in tax up to a maximum of A$1,080.

As in previous years, the Medicare levy low-income thresholds will be increased slightly for singles, families, seniors and pensioners from the 2020/21 income year to account for recent movements in the CPI.

Improving the equity of the superannuation guarantee

Currently, employers are not required to pay the superannuation guarantee to employees who earn less than A$450 (before tax) in a calendar month.  The Government has announced that it will remove this minimum income threshold as part of a measure that the Government says will improve equity in the superannuation system. It is proposed that this change will come into effect from the start of the first income year after the enabling legislation has received Royal Assent (which the Government expects to be prior to 1 July 2022).

Corporate collective investment vehicle (CCIV) revised start date 

The Government will finalise the CCIV component of the measure titled Ten Year Enterprise Tax Plan — implementing a new suite of collective investment vehicles announced in the 2016/17 Budget, with a revised commencement date of 1 July 2022.

The CCIV is an investment vehicle in the legal form of a company that is taxed on a tax transparent basis. In broad terms, the tax regime for CCIV will align with the attribution regime for managed investment trusts.  CCIVs will be required to meet similar eligibility criteria as managed investment trusts – including being widely held and engaging in certain types of passive investment activities. CCIVs are not intended to be trading vehicles.

Removal of Preferential Tax Treatment for Offshore Banking Units (OBUs)

The concessional 10% effective tax rate applicable to income derived from eligible offshore banking activities will be removed. The concessional treatment continues to apply to existing OBUs until the end of their 2022/23 financial year.  This regime is being closed to new entrants as of 26 October 2018.

On 17 March 2021, legislation removing the current exemption from withholding tax applicable to interest and gold fees paid by OBUs on particular offshore borrowings was introduced. This will be effective from 1 January 2024.

Administrative Appeals Tribunal (AAT) Increased Powers

The powers of the AAT will be extended to allow small business entities to apply to pause and/or modify ATO debt recovery actions relating to disputed debts that are being reviewed by the Small Business Taxation Division of the AAT.  When considering the application for a pause or modification of debt recovery of a small business claimant, the AAT will be required to consider the potential impact on the integrity of the tax system and ensure that the applications relate to genuine disputes.  The AAT will receive this power from the date that the enabling legislation receives Royal Assent.

Junior Minerals Exploration Incentive (JMEI) extension

The Government will extend the operation of the JMEI by 4 years until 30 June 2025 with an additional A$38.8m over two years (and a further A$38.8m  over two years after that). The JMEI was first introduced in the 2017/18 income year and had been set to cease after the 2020/21 income year.

The JMEI provides a tax incentive for investment in junior mineral exploration companies engaged in greenfield exploration activity. Broadly, under the voluntary scheme, eligible exploration companies are able to convert a portion of their tax losses relating to greenfield exploration expenditure into “exploration credits” which can then be distributed to qualifying new investors as a refundable tax offset or additional franking credits (where the investor is a corporate tax entity).

The Government also announced that it will make amendments to allow unused exploration credits to be redistributed a year earlier than currently allowed.

Hedging and foreign exchange rule changes

The Government has announced that it intends on making a number of technical amendments to the Taxation of Financial Arrangements provisions with effect for relevant transactions entered into on or after 1 July 2022. The proposed amendments are intended to:

  • facilitate access to the hedging rules on a portfolio hedging basis;
  • correct unintended outcomes (so that taxpayers are not unintentionally subject to unrealised taxation on foreign exchange gains and losses); and
  • reduce compliance costs.

Updated list of information exchange countries

With effect from 1 July 2022, the Government will update the list of countries which have entered into effective information sharing agreements with Australia to include 6 new jurisdictions (Armenia, Cabo Verde, Kenya, Mongolia, Montenegro and Oman).  This will enable residents of those additional countries to access the concessional withholding tax rate of 15% (as opposed to the default rate of 30%) on certain distributions from Australian Managed Investment Trusts.

ATO early engagement service for inbound investments

The Government has announced that the ATO will develop a new “early engagement” service for investors into Australia to encourage and support new business investments into Australia. The ATO will consult with businesses and other stakeholders on the design of the service during May and June 2021 with a view to the service becoming available for eligible investors from 1 July 2021.

It is envisaged that the service will include access to expedited private binding rulings and advance pricing agreements where binding advice is desired. The service will also integrate with the tax aspects of the FIRB approval process (where applicable) so that investors will not be required to provide information more than once.

Venture capital tax concessions

The Government will undertake a review of tax incentives offered to the Australian venture capital market to ensure current arrangements are fit-for-purpose.

Research and Development (R&D) Tax Incentive

The Government has asked the Board of Taxation to conduct a review of the R&D tax incentive before the end of 2021.

What’s on the horizon?

The last date for the next federal election for the House of Representatives is around a year away. What can we expect from the Government by way of tax system initiatives in the interim?

What is apparent is that, for the foreseeable future, the Government intends focusing on job creation and economic stimulus as the means to effect budget repair. As such, yet again, the long awaited “root and branch” reform of the Australian tax system will likely be deferred off to another day. Further, any new taxation “initiatives” will likely be in the form of the provision of tax incentives directed at supporting businesses and attracting and retaining investment in Australia. It appears that, in the immediate term, measures to effect budget repair by increasing taxes, limiting tax incentives and removing tax loopholes may not be as much of a focus for the Government.

That is not to say that the ATO’s Tax Avoidance Taskforce will be any less vigilant and active in cracking down on those multinational enterprises, large public and private companies and high wealth individuals who the ATO perceives as not paying their “fair share” of tax. The ATO taskforce was established by the Australian Government in 2016 with initial funding of A$679 million over a four year period. The apparent success of the taskforce (by June 2020, it had reportedly raised additional tax liabilities in the order of A$18.4 billion) meant that in the 2019/20 Federal Budget the Government committed a further A$1 billion to fund the taskforce’s operation to 2022/23. The task force has been generously equipped with the legislative provisions (in particular, various general anti-avoidance measures in Part IVA of the Tax Act) and the funding from the Federal Government to pursue its objective of raising further substantial tax liabilities and it ought to be anticipated that this will be its continued focus.                

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).

Related insights Read more insight

High Court refuses taxpayer special leave to appeal R&D case

On 2 September 2021, the High Court of Australia refused Coal of Queensland Pty Ltd (COQ) leave to appeal the decision of the Full Federal Court in Coal of Queensland Pty Ltd v Innovation and...

More
Treasury consults on Corporate Collective Investment Vehicles

On 27 August 2021, the Department of the Treasury of the Australian Government (Treasury) released a package of documents including exposure draft legislation and exposure draft explanatory...

More
Taxpayer wins in latest AAT R&D decision

The Administrative Appeals Tribunal (AAT) recently held in favour of taxpayer PKWK in a research and development (R&D) dispute against Innovation and Science Australia (ISA).

More