Federal Budget 2021: The Wrap Up

Federal Budget 2021: The Wrap Up 150 150 Hugh Goodfellow

Josh Frydenberg announced that “Australia is coming back”, while Jim Chalmers called it “Another marketing exercise”.  The 2021 Federal Budget is here, and it’s in May instead of October, which is probably a positive sign all in itself.

Get all the wrap up from members inside and outside of the Viridian Community

A brief overview – Clive Bird, Partner, National Tax Leader – KPMG Enterprise

This is a budget squarely aimed at supporting growth in the economy. Productivity gains are intended to address COVID related government debt over the long-term by encouraging business investment and innovation.

There are important stimulus measures such as the extension of Temporary Full Expensing and Tax Loss Carry Back through to 30 June 2023. There is also the extension of the Low and Middle Income Tax Offset until 30 June 2022. Each of these will encourage economic activity and growth.

There are some good measures around innovation enabling taxpayers to self assess the effective life of intangible assets plus a concessional corporate tax rate for patent related income in the medical and biotechnology industries.

Also some good measures around superannuation, including eliminating the work test for salary sacrifice and non concessional contributions for those aged 67 to 74. The age for accessing the downsizing superannuation contribution will also reduce from 65 to 60.

Some other interesting changes include a new tax residency test to improve clarity and some changes to employee share scheme rules.

Fundamentally positive for the economy and financial markets over the medium term – Piers Bolger, Chief Investment Officer Viridian Advisory/Infinity Asset Management

This is the second of the Government’s ‘pandemic budgets’ and it sees the budget cash deficit balloon out to a record A$106.6bn (~5.0% of GDP) in the 2021-22 financial year, with net debt to peak at ~41% of GDP in FY2025.

While the size of the deficit may cause some widening in credit spreads we believe it is both proportionate and appropriate given the ongoing challenges facing the domestic economy and is a reflection of what we are seeing in other countries globally. Australia remains well positioned to many other countries in regard to its net debt position and we see no negative impact to our AAA credit rating from this budget.

There remain many sectors that continue to operate at below capacity and when combined with no increase in net migration, constrained wage growth and the ongoing challenges associated with the pandemic, the approach taken by the Government to provide ongoing fiscal supports is critical in ensuring that the domestic economy can continue to recover and that the growth profile can be as widely felt across all segments of the community.

The desire to further increase spending on infrastructure to improve productivity and supply chain logistics as well as the extension of the middle-income tax offsets, alongside the changes in the residency rule for SMSF alongside other tax offsets and support measure to reduce barriers to work (i.e. via additional child care subsidies and the extension of the Job Trainer Fund) provides a growth opportunity.  Overall, we view this budget and the proposed changes as fundamentally positive for the economy and ultimately financial markets over the medium term.

A budget that seeks to make amends – Pradan Yeluri, Executive Advisor

The Federal Budget addresses criticism of the government around its attitudes towards women and their empowerment. The amendments to Child Care Subsidy, increased opportunities to make spouse contributions, removing the $450 per month threshold for super eligibility & assisting sole parents into the housing market are all measures which are squarely aimed at ‘working mothers’. Further commitments to funding of women’s safety initiatives, women’s health & career pathways for women provide context to the electorate this government is reaching out to. There is no doubt that during the lockdowns and pandemic response it is the same slice of the electorate that bore the brunt of increased unpaid caring duties and in many cases had to opt out of the work force to provide primary care. By reducing the barriers to return to work, there is hope that the second income earner in the family puts the additional bacon on the family table, increasing consumption & demand in time for the next federal election. The budget would like Mum to go back to work.

Improving aged care through funding, education and training – Sharna Meinertz, Executive Advisor

It was heartening that in the budget the government are putting together policy to reach out to and support some of our most vulnerable Australians with:

  •  $557 million placed aside to create culturally safe aged care for Aboriginal and Torres Strait Islanders
  •  $630 placed aside to make aged care available to the homeless, those at risk of homelessness and for those living in rural, regional and remote areas of Australia
  •  $65 million to assist more than 75,000 older people from culturally and linguistically diverse backgrounds.

Training and education 

Funds to help train more staff in aged care and to raise awareness of the type of employment opportunities available in aged care in Australia. This is really important as traditionally it has been our migrant workforce that has worked in this area and with the borders shut many Aged Care residential homes are finding it hard to find employees.

Other highlights including more money for home care packages, support for informal carers, independent process to advise government on aged care pricing issues and minimum care time standards.

Giving retirees “more control over their money” – Karmel Walker, Executive Advisor

Josh Frydenberg has said it is the Government’s plan to give retirees “more control over their money”.  To achieve this, he has announced the widening of eligibility of the downsizer contribution, to individuals aged 60 years or older (previously 65) to contribute up to $300,000, to their super fund from the proceeds of selling their main residence. In addition, the work test rule for those aged 67-75 will be abolished.  This means that without satisfying any work test those aged under 75 will be able to make salary sacrifice and non- concessional contributions.  The changes are expected to be from 1 July 2022 onwards.

Promoting a “Digital Economy Strategy” – Abigail Barnard, Chief Financial Officer

This budget has seen a push to promote innovation through a “Digital Economy Strategy” in which the government will provide $1.2 billion over six years across a number of initiatives with the aim to “grow Australia’s future as a modern and leading digital economy by 2030”. Further spending was flagged to create a National AI Centre that will support SMEs adopt and use transformative artificial intelligence technologies, while funding for a push towards e-invoicing by businesses across all levels of government which will be sure to get a few finance departments celebrating but cabinet salesmen lamenting the digital surge.

The push for innovation also comes in the form of a ‘patent box’ which will see corporate income derived from Australian patents taxed at an effective tax rate of 17%, this is a clear aim to entice R&D with skilled workers to base the laboratories in Australia through providing access to a more attractive tax rate.

An effort to attract talent to young Australian companies is also being made through changes to the taxing point of employee share schemes (ESS), by removing the automatic taxation of ESS when an employee leaves a company. There has also been a pledge to reduce red tape for businesses, primarily around unlisted companies who do not charge for or lend shares, as they are able to now offer up to $30,000 in shares per employee, up from $5,000. Again, this should have finance departments across Australia relieved that the government has recognised the current regulatory framework around ESSs as “too complex and fragmented”.

Reviews with clients to take on a new dimension – Jason King, Executive Advisor

The Federal Budget is focused on spending big to help Australians rebound from a pandemic that suppressed many of us. With a combination of personal income tax cuts, enhanced superannuation contribution options , significant cashflow opportunities for age pensioners and a huge rework the of aged care sector my immediate thought is our clients absolutely will benefit from our advice.

The ability to create a tax free retirement has become much more achievable after tonight’s announcements. The rules have been eased and reviews with our clients will take on a completely new dimension. Coupled with historically low interest rates the opportunity to live the life you choose awaits you.

Just Give Me the Dot Points…

The Economy and the Deficit

  • Economic growth forecast to be 1.25% in 2020-21, 4.25% in 2021-22, 2.5% in 2022-23.
  • Deficit revised down by $52.7 billion from $213.7 billion to $161 billion, driven by higher employment rates and a higher-than-forecast iron ore price.
  • Net debt expected to peak at $980.6 billion in 2024-25, or 40.9 per cent of GDP. Actually a revision down from last budget.

Superannuation

  • Repeal of the work test: Currently, if you are aged 67 – 74 you must satisfy a work test to be eligible to make super contributions. The work test will no longer apply when making non-concessional super contributions or salary sacrificed contributions, there is also a potential for those in this aged bracket to access the bring forward rule.
  • Downsizer contributions age reduced: The age at which people are eligible to make a downsizer contribution will reduce from 65 to 60, allowing for a contribution of up to $300,000 when selling the family home.
  • Removal of minimum income threshold for super guarantee: The Budget removes the current $450 per month minimum income threshold under which employees do not have Superannuation Guarantee (SG) paid by their employer. The Government says that around 300,000 individuals will receive additional SG payments, 63% of whom are women.

Homeownership

  • First Home Super Saver Scheme (FHSSS): The FHSSS, which was introduced in the 2017/18 Budget, allows people to save money for their first home inside their super. The Government will increase the maximum amount of voluntary contributions that can be released under the FHSSS from $30,000 to $50,000.
  • Family Home Guarantee for single parents: The Government has introduced the Family Home Guarantee as a way of providing a pathway to home ownership to support single parents with dependants. This is regardless of whether they are a first home buyer or a previous owner-occupier.
  • New Home Guarantee (First Home Loan Deposit Scheme): The Government is providing a further 10,000 places under the New Home Guarantee in 2021/22. This is specifically for first home buyers seeking to build a new home or purchase a newly built home with a deposit of as little as 5%.

Tax

Individual 

  • Extension of tax offset: The Low and Middle-Income Tax Offset (LMITO), worth up to $1,080, has been extended for an additional 12 months to cover the 2021/22 financial year. LMITO will be received once individuals lodge their tax return for the 2021/22 financial year.

SME Business 

  • Temporary full expensing: The temporary investment tax incentive announced in last year’s Budget has been extended for a further 12 months until 30 June 2023. SMEs with a turnover up to $5 billion will be able to deduct the full cost of any eligible asset they purchase for their business, including the cost of improvements to existing assets, until 30 June 2023.
  • Temporary loss carry-back provision: Companies are now permitted to carry back tax losses for an extra 12 months.

Aged Care

  •  $17.7 billion over five years for aged care on the back of the Aged Care Royal Commission.
  • 80,000 additional Home Care Packages over the next two years.
  • Introducing a new star rating to allow Aged Care recipients and their families to compare Aged Care providers on performance, quality and safety.
  • Increasing the Government’s Basic Daily Fee supplement by $10 per day per resident.
  • from early 2022, informal carers and older Australians will benefit from increased funding to improve access to respite care and support through the Government’s Carer Gateway.

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