The tax situation


An update on the state of personal and business taxation in the wake of the Federal Budget, by HLB Mann Judd

1/ Personal Tax

Personal tax rates unchanged for 2021–2022

In the Budget, the Government did not announce any personal tax rates changes, having already brought
forward the Stage 2 tax rates to 1 July 2020 in the October 2020 Budget.

The Stage 3 tax changes will commence from 1 July 2024, as previously legislated.

The 2021–2022 tax rates and income thresholds for residents are therefore unchanged from 2020–2021:

  • taxable income up to $18,200 – nil;
  • taxable income of $18,201 to $45,000 – 19% of excess over $18,200;
  • taxable income of $45,001 to $120,000 – $5,092 plus 32.5% of excess over $45,000;
  • taxable income of $120,001 to $180,000 – $29,467 plus 37% of excess over $120,000; and
  • taxable income of more than $180,001 – $51,667 plus 45% of excess over $180,000.

Stage 3: from 2024–2025

The Stage 3 tax changes will 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.

Therefore, from 1 July 2024, there will only be three personal income tax rates: 19%, 30% and 45%. From
1 July 2024, taxpayers earning between $45,000 and $200,000 will face a marginal tax rate of 30%. With
these changes, around 94% of Australian taxpayers are projected to face a marginal tax rate of 30% or
less.

Low income offsets: LMITO and LITO retained for 2021–2022

Low and middle income tax offset

The Government also announced in the Budget that the low and middle income tax offset (LMITO) will
continue to apply for the 2021–2022 income year. The LMITO was otherwise legislated to only apply until the end of the 2020–2021 income year, meaning low-tomiddle income earners would have seen lower tax
refunds in 2022.

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.

Consistent with current arrangements, the LMITO will be received on assessment after individuals lodge
their tax returns for the 2021–22 income year.

Low income tax offset

The low income tax offset (LITO) will also continue to apply for the 2021–2022 income year. The LITO
was intended to replace the former low income and low and middle income tax offsets from 2022–2023,
but the new LITO was brought forward in the 2020 Budget to apply from the 2020–2021 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. 

Self-education expenses: $250 threshold to be removed

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.

Background

A limitation on deductibility exists under s 82A of the Income Tax Assessment Act 1936 (ITAA 1936) regarding deductions that would otherwise be allowable under s 8-1 if the self-education expenses
are necessarily incurred for or in connection with a course of education provided by a place of education
(eg a school, uni, college, etc) and undertaken by the taxpayer for the purpose of gaining qualifications for
use in the carrying on of a profession, business or trade or in the course of any employment.

In those circumstances, currently only the excess over $250 may be deductible.

Primary 183-day test for individual tax residency

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.

People who do not meet the primary test will be subject to secondary tests that depend on a combination of physical presence and measurable, objective criteria.

The new residency rules are based on recommendations made by the Board of Taxation in its 2019 report Reforming individual tax residency rules: a model for modernisation.

Child care subsidies to change 1 July 2022

The Budget confirmed that the Government will make an additional $1.7 billion investment in child care.

The changes will commence on 1 July 2022 (that is, not in the next financial year). This measure was previously announced on 2 May 2021.

Commencing on 1 July 2022, the Government will:

  • increase the child care subsidies available to families with more than one child aged 5 and under
    in child care by adding an additional 30 percentage point subsidy for every second and third child
    (stated to benefit around 250,000 families); and
  • remove the $10,560 cap on the Child Care Subsidy (which the Government expects to benefit around 18,000 families)

2/ Business tax

Temporary full expensing: extended to 30 June 2023

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.

Currently, temporary full expensing allows eligible businesses to deduct the full cost of eligible depreciating assets, as well as the full amount of the second element of cost. A business qualifies
for temporary full expensing if it is a small business (annual aggregated turnover under $10 million) or
has an annual aggregated turnover under $5 billion.

Annual aggregated turnover is generally worked out on the same basis as for small businesses, except that the threshold is $5 billion instead of $10 million.

There is an alternative test, so a corporate tax entity qualifies for temporary full expensing if:

  • its total ordinary and statutory income, other than non-assessable non-exempt income, is less than $5 billion for either the 2018–2019 or the 2019–2020 income year (some additional conditions apply for entities with substituted accounting periods); and 
  • the total cost of certain depreciating assets first held and used, or first installed ready for use, for a
    taxable purpose in the 2016–2017, 2017–2018 and 2018–2019 income years (combined) exceeds $100 million.

If temporary full expensing applies to work out the decline in value of a depreciating asset, no other
method of working out that decline in value applies.

Assets must be 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 by one year

Under the temporary, COVID-driven restoration of the loss carry-back provisions announced in the previous Budget, an eligible company (aggregated annual turnover of up to $5 billion) could carry back a tax loss for the 2019–2020, 2020–2021 or 2021–2022 income years to offset tax paid in the 2018–2019 or
later income years.

The Government has announced it will extend this to include the 2022–2023 income year. Tax refunds
resulting from loss carry-back will be available to companies when they lodge their 2020–2021, 2021–
2022 and now 2022–2023 tax returns.

This is intended to help increase cash flow for businesses in future years and support companies
that were profitable and paying tax but find themselves in a loss position as a result of the COVID-19 pandemic. Temporary loss carry-back also complements the temporary full expensing measure
by allowing more companies to take advantage of expensing, while it is available.

Employee share schemes: cessation of employment removed as a taxing point

The Government will remove the cessation of employment as a taxing point for tax-deferred
employee share schemes (ESSs). There are also other changes designed to cut “red tape” for certain
employers.

Cessation of employment change

Currently, under a tax-deferred ESS and where certain criteria are met, employees may defer tax until a later tax year (the deferred taxing point). In such cases, the deferred taxing point is the earliest of:

  • cessation of employment;
  • in the case of shares, when there is no risk of forfeiture and no restrictions on disposal;
  • in the case of options, when the employee exercises the option and there is no risk of forfeiting the resulting share and no restriction on disposal; and
  • the maximum period of deferral of 15 years.

The change announced in the latest Budget will result in tax being deferred until the earliest of the
remaining taxing points.

Other regulatory changes

The Government will also:

  • remove disclosure requirements and exempt an offer from the licensing, anti-hawking and advertising prohibitions for ESS where employers do not charge or lend to the employees to whom
    they offer the ESS; and
  • increase the value of shares that can be issued to an employee utilising the simplified disclosure
    requirements (and exemptions from licensing, anti-hawking and advertising requirements) from $5,000 to $30,000 per employee per year (leaving unchanged the absence of such a value cap for listed companies) – this will apply to employers who do charge or lend for issuing employees shares in an unlisted company.

HLB Mann Judd is a leading mid-sized chartered accounting group. The Australasian Association consists of 9 member firms and 3 representative firms. It represents a group of specialists providing business advice and services to a wide range of business organisations and private clients.

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