Just over half a year since the 2020-21 budget was announced (deferred due to COVID), Josh Frydenberg on Tuesday evening delivered his third Federal Budget. The focus this time around was firmly on the transition of the Australian economy from being driven by crisis support to a longer term organic and sustainable growth model.
This Budget tried to balance social demands and increasing support for Australians while building upon the momentum from the early stages of our economic recovery. While there was a clear focus on supporting jobs and assisting businesses, also included were more meaningful commitments to health, aged care, families and childcare, as well as changes to unemployment and other social services.
Interestingly, this Budget's forecasts assume a falling iron ore price to US$55 per tonne by the end of March 2022 (from their current price of about US$218 per tonne) and that international travel will remain low through to mid-2022. The Government has also revised its forecast for the job market with an unemployment rate of 4.75% by 2022/23 (from 5.6% currently), reflecting a better than expected recovery profile and partly driven by reduced population growth.
Personal Income Tax - Offsets, Residency and Executive Share Schemes
One of the more immediate benefits from this budget for many Australians will be the retention of the Low and Middle Income Tax Offset (LMITO) for this financial year. The LMITO provides a tax offset of up to $1,080 for individuals with taxable income greater than $37,000 and less than $126,000. This temporary offset was originally intended to cease at the end of the 2020 financial year.
Also relevant were the proposed changes to the taxing point for certain employee share scheme incentives. The removal of the 'Cessation of Employment' taxing point will mean that the actual taxing point for some employee incentives could be deferred further until another taxing point condition is satisfied e.g. exercising an option, or vesting of a performance-linked incentive.
The Budget also announced a simplified approach to determining tax residency, implementing a 183 day primary test.
This Budget contained some proposed meaningful changes to existing superannuation rules. The most relevant of which were:
The Work Test - The removal of the 'Work Test' for individuals aged up to 74 (inclusive) when making non-concessional contributions (NCC), including the ability to use the bring-forward provisions. This could potentially allow an individual to make up to a $330,000 NCC in the same year, up to age 75 and without the need to be working. For some clients this could allow significant amounts of capital held outside of superannuation to be transitioned into this tax effective environment.
All other restrictions remain, including the Total Super Balance (TSB) cap (increasing to $1.7 million from 1 July 2021). Unfortunately, individuals making personal deductible contributions (concessional contributions) must still meet the work test if 67 or older.
Downsizer Contributions - Reducing the eligible age to make a 'Downsizer Contribution' from 65 to 60. All other requirements of this scheme remain in place. This could create the opportunity for anyone selling their home from age 60 to transition further capital (up to $600,000 for a couple) into superannuation beyond what would normally be possible when subject to the TSB rules and Non-Concessional Contribution caps.
Other notable proposals include the announced opportunity for members to transition 'legacy' superannuation products, changes to the residency requirements for SMSF's and small APRA funds, the removal of minimum income thresholds for employer superannuation guarantee contributions, as well as increasing the First Home Super Saver Scheme.
The Government is looking to extend measures previously announced in the 2020-21 Budget for a further 12 months to support capital investment by business. Proposed is the extension of both the 'Full Expensing' rules around business deductions and the 'Loss Carry-Back' rules allowing COVID related losses to offset prior year profits.
Social Security & Aged Care
The Government has announced an increase of $50 per fortnight for recipients of some unemployment, education, parenting and certain family benefit payments. In addition, the 'income-free area' or amount recipients can earn before their payment is reduced for certain working-age payments will also increase.
The Budget saw increased spending on improving the quality and safety of residential aged care services in response to the recent Royal Commission into Aged Care. Furthermore, the Government will provide an additional 80,000 home care packages over the next two financial years (2022 and 2023), representing an increase of about 40% on the current total provision.
We await further detail on some of these announcements and acknowledge that we must first see these proposals legislated. As always, at Redwood we will be reviewing strategies for all clients in light of the announced changes and looking for potential opportunities. If you have any further questions please reach out to your advisers.