With the Australian economy having weathered the last 14 months incredibly well notwithstanding continued global economic, political and public health uncertainty, Budget 2021 is seeking to manage an increasingly complex dichotomy: how does Australia enhance our reputation as a country which is "innovation friendly", focused on business prosperity, and welcoming to global human capital, while at the same time keeping our international borders closed for the foreseeable future?
In this Budget, the Government is looking to send a message that it is capable of managing this dichotomy effectively through a series of tax measures designed to:
- demonstrate a commitment to knowledge and innovation, particularly in the medical and biotech spheres;
- incentivise business to spend money on capital expenditure, through a continuation of previous concessions; and
- make Australia an attractive place to work and invest, so it can attract the best global talent, and retain the best local talent, once conditions permit a relaxation of border restrictions;
In our 2021 Budget Alert, our tax experts at Clayton Utz consider the key tax-related measures.
Digital and knowledge economy and R&D
New option to self-assess the effective life of intangible depreciating assets
Businesses will have the option of self-assessing the tax-effective life of eligible intangible depreciating assets acquired from 1 July 2023, bringing the tax treatment of such assets into alignment with most tangible depreciating assets.
Eligible intangible assets will include patents, registered designs, copyrights, and in-house software.
By no longer requiring the use of statutory effective lives for such intangible depreciating assets, the Government aims to encourage business investment and hiring in research and development, as part of its Digital Economy Strategy to assist in the nation's economic recovery from COVID-19.
New Patent Box tax concession
For quite some time, patent box schemes offering corporate tax incentives to businesses have been implemented around the world to encourage business R&D and retention of intellectual property in the respective jurisdiction. The Government has now announced the introduction of a patent box tax regime specifically for medical and biotechnology patents, with a possible expansion for the clean energy sector.
The Australia patent box is proposed to provide a concessional effective corporate tax rate of 17% on income derived from Australian-owned and -developed medical and biotechnology patents applied for and granted after the 2021 Budget announcement. Ordinarily, profits generated by patents are taxed at the headline corporate tax rate (30% for large businesses, and 25% for small to medium enterprises from 1 July 2021).
Whether this measure is sufficiently competitive to encourage additional investment in research and development in Australia, and application of those innovations in Australia, remains to be seen and will be closely watched.
We would expect that a consultation paper on the patent box regime will be released shortly to consider its detailed design and whether it might be an effective way of supporting the clean energy sector.
Australian business measures
Extension of temporary COVID-19 measures related to full expensing and loss carry back
The Government is extending two key measures introduced in last year's budget which is intended to support economic recovery and business investment.
Specifically, for eligible businesses with aggregated annual turnover or total income of less than $5 billion, the Government will be extending the:
- temporary full expensing measure which provides an outright deduction for the cost of certain depreciable assets until 30 June 2023; and
- the temporary loss carry back rules to allow eligible companies to carry back tax losses from the 2022-23 income year and offset previously taxed profits as far back as the 2018-19 income year.
Small business to pause debt recovery action
Small and medium businesses with an aggregated turnover of less than $10 million per year will be allowed to apply to the Administrative Appeals Tribunal (AAT) to pause or modify ATO debt recovery actions in respect of disputed debts that are being reviewed by the Small Business Taxation Division of the AAT. Applications to pause or modify debt recovery actions must be in relation to genuine disputes.
At present the ATO can pursue debt recovery actions for disputed tax amounts while businesses are challenging the tax amounts assessed, with taxpayers only having limited grounds to challenge the ATO’s debt recovery actions in the courts, which can be costly and time-consuming.
These new powers for the AAT will be available in proceedings commenced on or after the date of Royal Assent of the legislation.
While this development will be positive for small to medium businesses with genuinely disputed tax debts, it is not clear whether all possible ATO debt recovery actions will be covered by the policy changes, and we would expect to see consultation with professional bodies on the draft legislation in due course.
Australia as an international business centre
CCIVs, Information Exchange Countries and OBUs
The Australian Government has continued the focus on trying to enhance Australia as an investment jurisdiction, seeking to modernize the taxation regime consistent with our trading partners.
The Budget announced that the CCIV (corporate collective investment vehicle) measures would definitely be starting 1 July 2022. These measures, announced back in 2016, effectively apply the reduced managed investment trust withholding tax (15%) to other vehicles, initially to companies. This will be extended to limited partnerships in due course. Consultation on these measures was still ongoing prior to being delayed as a result of COVID-19 and the delayed start date must be, in part, to allow those issues to be ironed out.
In addition, the list of eligible countries under the managed investment trust regime continues to be extended with an additional six countries listed being Armenia, Cabo Verde, Kenya, Mongolia, Montenegro and Oman.
Finally, the offshore banking unit regime that has long been criticised by the OECD will be formally phased out from 2022/23, and will be replaced by a regime that will be designed in conjunction with consultation with industry. This major reform was announced earlier this year and the legislation is currently before Parliament.
Residency (personal, but where's corporate?)
The Government has also signalled an intention to modernise the individual tax residence rules. It appears that the Government will model the new rules on the recommendations included in the Board of Taxation 2019 report "Reforming individual tax residency rules — a model for modernisation" and will introduce a new "bright line" test.
Under that approach, a person who is physically present in Australia for 183 days or more in any income year will be an Australian tax resident. Secondary tests will be applied to persons that do not otherwise meet the 'bright line' test. The Budget Papers do not provide detail as to the content of these secondary tests, but based on the recommendations of the Board in its report, they are likely to deploy more objective criteria such as, for persons commencing residence:
- whether the individual has a right to reside permanently in Australia;
- whether they possess any Australian accommodation;
- whether they have family in Australia; and
- whether they have Australian economic interests.
The intent behind these reforms is to make the individual residency rules "easier to understand and apply in practice, deliver greater certainty, and lower compliance costs for globally mobile individuals and their employers".
The current budget makes no mention of any reforms to corporate tax residency rules. This is notable as there has been no legislative reform to reverse or otherwise reform the outcome in the Bywater Investments decision despite announcements in last year's Budget that they would implement changes to clarify the corporate residency test for companies incorporated offshore.
Amendments to the Employee Share Scheme provisions
To help Australian companies attract and retain talent, the Australian Government has announced it will remove the cessation of employment as a taxing point for tax-deferred Employee Share Schemes (ESS). This will bring the Australian regime into line with international norms.
Under the employee share scheme provisions, employee share and rights schemes which qualify for tax deferral allow employees to defer the taxation on any discount received until a later income year.
A practical problem with cessation of employment as a taxing point is that employees may not have the ability to sell any underlying shares to fund the resulting tax liability, say because vesting requirements have not been met, and may not be met until years after the cessation of employment. This liquidity issue makes ESS unattractive to some companies.
By removing the cessation of employment as a taxing point, taxation will be deferred until the earliest of the remaining taxing points:
- in the case of shares, where there is no risk of forfeiture and no restrictions on disposal;
- in the case of rights, when the employee exercises the rights and there is no risk of forfeiting the resulting share and no restrictions on disposal; and
- the maximum period of deferral of 15 year.
This change will apply to ESS interests issued on or after the 1 July following Royal Assent.
The Australian Government will also make regulatory improvements to the ESS regime to:
- remove disclosure requirements under the Corporations Act;
- exempt an offer from licensing, anti-hawking and advertising prohibitions under the Corporations Act 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 employees with simplified disclosure requirements under a current ASIC Class Order from $5,000 to $30,000 per employee per year, where employers do charge or lend for issuing employee shares in an unlisted company.
The regulatory changes will apply three months after Royal Assent of the enabling legislation.
Both measures are being implemented following the release of a Treasury Consultation Paper in April 2019 and an Inquiry into the Tax Treatment of Employee Share Schemes which commenced in May 2020.
Removing the $450 per month threshold for superannuation guarantee eligibility
The Government will remove the current $450 per month minimum income threshold under which employers do not have to pay superannuation guarantee (SG) contributions for employees.
Currently employers are required to pay SG contributions for employees who are aged over 18 when their earnings are greater than $450 in a calendar month. For employees under 18, employers only need to pay superannuation for weeks where the employees also work for more than 30 hours.
The measure will have effect from the start of the first financial year after Royal Assent of the enabling legislation, which the Government expects to have occurred prior to 1 July 2022.
While the Government expects that approximately 300,000 individuals would receive additional SG payments each month as a result of the change, this measure may increase the administrative burden for employers in relation to contractors under the extended definition of “employee” for the purpose of SG contributions.
Superannuation changes to assist older Australians and homeowners
A raft of other superannuation changes were also announced to assist retirees and homeowners and which are set to take effect from the start of the first financial year after Royal Assent of the enabling legislation. The work test that applies to non-concessional or salary sacrificed superannuation contributions by those aged between 67 and 74 will be abolished to improve flexibility for older Australians. The Government will also increase the maximum releasable amount of voluntary concessional and non-concessional contributions under the First Home Super Saver Scheme from $30,000 to $50,000, which may be seen by some to be a litmus test for the Government's controversial policy of allowing people to use superannuation to help buy a house.