Treasurer Frydenberg handed down the federal budget last night and to be honest, there’s not a lot in it for individuals and investors. However, there are some real positives for small business, first home buyers and retirees. This blog provides a summary of the initiatives announced on 11 May 2021.
First home buyers’ to be able to access more super for a deposit
The First Home Super Saver (FHSS) scheme was introduced four years ago to help first home buyers save a deposit. In summary savers can make tax-deductible voluntary contributions into super of up to $15,000 per year. These contributions are usually taxed at a flat rate of 15%, which means it reduces their income tax liabilities. They can then access these savings (plus investment earnings) in the future and contribute the monies towards the purchase of a first home. Previously, the maximum a saver could access from super was capped at $30,000. However, this has been increased to $50,000 in this year’s budget.
Savers cannot withdraw compulsory employer contributions i.e. the 9.5% (to increase to 10% after 1 July 2021) their employer contributes on their behalf. These contributions are still preserved inside super, which is good.
The benefit of this is it makes it easier to save after-tax dollars. For example, someone earning $135,000 p.a. pre-tax would pay a marginal tax rate of 39% on the last $14,000 of pre-tax income – or $5,460 – allowing them to save only $8,540 after-tax ($14,000 – $5,460). However, if they salary sacrificed that $14,000 into super, their super fund would only pay $2,100 of tax, allowing them to save $11,900 after-tax. In this example, this person has increased their savings by almost 40% due to the tax savings.
People earning greater than $120,000 p.a. could enjoy the highest tax savings.
Expend the home loan guarantee scheme
The First Home Loan Deposit Scheme (FHLDS) allows borrowers to borrow more than 80% of a property’s value whilst avoiding the cost of mortgage insurance, because the government guarantees part of the loan. Places under this scheme are very limited. However, the government will make available another 10,000 places. Plus a further 10,000 places over the next four years to eligible single parents with dependants.
If you earn less than $120,000 – extension of low to middle income tax offset
If you earn less than $120,000 you may be entitled to a tax offset of up to $1,080 (progressively scaled back if you earn between $90,000 and $120,000) – see here. This offset was introduced 3 years ago but has been extended to apply in the 2021/22 tax year.
Increase to the Child Care Subsidy (CCS)
From 1 July 2021, the government will move the CCS cap of $10,560 per child. And commencing on 11 July 2022, the government will increase the childcare subsidy for parents with two or more children under the age of five by 30%, up to a maximum CCS rate of 95% for these children.
Company tax rate cut
The company tax rate will reduce from 26% for ‘base rate’ entities (revenue less than $50 million p.a.) to 25% after 1 July 2021. As such, if you operate a business in a company, it is advisable to bring forward as many expenses as possible into this financial year.
For business: loss carry-back and temporary full expensing
The government will extend the loss carry back and temporary full expensing by an additional year.
The loss carry back will allow eligible companies to carry-back tax losses from the 2022/23 tax year (or prior) to offset previously taxed profits as far back as the 2018-19 income year.
The temporary full expensing allows businesses to claim a full tax deduction for the purchase of depreciable assets up until 30 June 2023.
Simplify tax residency rules
Determining tax residency can be a challenging task as there are a number of tests to apply and considerations to take into account, which are embedded in case law. This creates a high level of uncertainty and we have often needed to obtain a private ruling from the ATO on behalf of our clients. The government has announced that it will re-write the residency rules to provide more certainty.
Removal of the super contribution work test for people aged between 67 and 74
Previously, people aged over 67 needed to meet the work test to be able to make contributions into super. The work test requires the super member to have completed 40 hours of paid employment within any 30 day period. The government will remove this work test. This could be advantageous to retirees that have less than $1.7 million in super and investments or cash in their personal name. It could be a great opportunity to move wealth inside super which is a zero tax environment.
Downsizer contribution is available from age 60
Previously, anyone over the age of 65 who sold their home and met certain other conditions, could contribute up to $300,000 (per individual) into super. This minimum age will be reduced to 60.
Is this a good budget?
Overall, the initiatives aimed at easing housing affordability for first home buyers will have little to no impact. What’s required is a massive infrastructure spend to reduce travel times to regional centres and ensure they provide attractive employment opportunities and recreational facilities.
The incentives to business such as the reduction on the corporate tax rate, loss carry-back and expense write off should provide substantial economic benefit and aid the economic recovery. These are good initiatives in my view.
The government should provide more support for childcare expenses as they can be crippling and impair productivity (because the cost prohibits parents returning to work). People often balk at the cost of top-tier private school fees but childcare can cost just as much. It is difficult to afford, even for higher income earners. I think more must be done.
And I like the incentive available to older Australians to contribute into super. This cohort wouldn’t have benefited from compulsory super for as long as younger Australians (as it was introduced in 1992).
