Federal Budget 2021
With the Federal Budget being released last night we have prepared this update to provide you with the highlights. This budget (a continuation from the October one last year) had a continued focus on spending and economic recovery from the “pandemic”.
This is the third Federal Budget of Treasurer Josh Frydenberg who in October last year was announcing one of the largest deficit budgets since World War II. This revised number is still a deficit position however based on better than expected employment and stronger than expected recovery with our trade partners (and stronger Iron Ore Prices) the deficit is only expected to be $161 billion (down from the $213.7 billion stated in October 2020 with the delayed budget of last year).
The Federal Government has continued its play from the Keynesian Book of Economics. Theories written during and after the Great Depression (written by John Maynard Keynes for those who want to read up further) and modernised as economies and markets have moved. The theory being (in very rough terms) that if we spend money and lower taxes, this will help to keep the economy moving and assist in returning to ‘growth’.
As we have commented before surpluses and deficits shouldn’t be seen as ‘good’ or ‘bad’ at the Federal Budget Level. There are no new changes to tax rates (which were all put in place post the October Budget for 2020). There have been new announcement of spending in Aged Care, Childcare and the Digital Economy. As well as the continuation of the Infrastructure spending plans and some extended small business and low income earner tax benefits.
- The Government brought forward ‘stage 2’ of its already planned and legislated tax cuts which were due to commence from 2022. From 1 July 2020 the tax rates of 32.5% will apply to incomes up to $120,000 (previously $90,000 threshold);
- Proposed changes from 2024 will remain with marginal tax rates to reduce the 32.5 percent tax rate down to 30 percent and removal of the 37 percent tax rate so all income earners under $200,000 would pay no more than 30 cents in the dollar;
- Changes to the Low Income Tax Offset (LITO) and Low and Middle Income Tax Offset (LMITO) Thresholds have been announced which increases the effect tax free threshold to $23,226. The Low and Middle Income Tax Offset will continue for a further 12 month period to cover the upcoming financial year and will now stop 1 July 2022;
- Changes to the Medicare Levy
- The threshold for singles has increased from $22,801 to $23,226.
- The family threshold has increased from $38,474 to $39,167.
- For single seniors and pensioners, the threshold has increased from $36,056 to $36,705.
- The family threshold for seniors and pensioners has increased from $50,191 to $51,094.
- For each dependent child or student, the family income thresholds increase by a further
$3,597, instead of the previous amount of $3,533.;
- Extension of the First Home Deposit Scheme (FHLDS) with another 10000 loans being offered the extension of the FHLDS will apply to first home buyers who buy a newly constructed home or who build a new home. The FHLDS allows first home buyers/builders to borrow more than the standard 80% of the property’s value with only a 5% deposit, with the balance (15%) being underwritten by a government agency in the event of loan default and shortfall. The FHLDS allows eligible first home buyers to borrow more without paying the premium for Lender’s Mortgage Insurance which would otherwise apply in such situations.
Application for a place in the scheme is made by participating lenders on behalf of the borrowers when the borrowers make their loan application.
Further information on the FHLDS can be found on the government website;
- A New Family Home Guarantee Scheme has been announced – the Government will establish a program similar to the FHLDS above to allow eligible single parents with dependants to enter or re-enter the housing market with a deposit as little as 2%. The scheme will have 10,000 places and be available from 2021-22;
- First Home Deposit Scheme (via Superannuation contributions) – The Government will increase the maximum amount of voluntary concessional and non-concessional contributions releasable from FHSSS accounts from $30,000 to $50,000 from 1 July 2022. This means all voluntary contributions made from 1 July 2017 up to the existing limit of $15,000 per year will count towards the total amount able to be released. The Government has also announced some minor amendments to the administration of the FHSSS to provide additional flexibility to the recipient and the ATO to make amendments to their application and withdrawal amount allowing an increase or decrease of the applied amount prior to a payment being made with no penalty to the recipient.;
- The Child Care Subsidy is a percentage-based subsidy based on family income that assists with the cost of child care. The Government proposes to provide a higher level of Child Care Subsidy to families with more than one child under age 6 in child care. The level of subsidy will increase by an extra 30% to a maximum subsidy of 95% for the second and subsequent children. For example, currently a family may receive a 50% subsidy on child care costs for each child if family income is between $174,390 and $253,680. Under the proposal, the family would receive a CCS of 50% of costs for their first child and 80% for their second and subsequent children. The annual CCS cap of $10,560 for families earning between $189,390 and $353,660 will also be removed.
- Simplification of Self Education Expenses – (Effective from the income year after Royal Assent)
Currently, tax deductions for Category-A self-education expenses must generally be reduced by $250. The Government has proposed removing this $250 reduction amount to effectively allow individuals to claim a tax deduction for all Category-A self-education expenses.
Category-A expenses include tuition fees, textbooks, stationary, student union fees, student services and amenities fees, public transport fares, car expenses worked out using the ‘logbook’ method (other than the decline in value of a car), running expenses for a room set aside specifically for study.
- As part of already legislated contribution limits we will see the first indexation of the thresholds occur from 1 July 2021. This will increase the Total Super Balance and Transfer Balance Cap to $1,700,000. This will also see the Concessional Contribution limit increase to $27,500 (think Employer contributions and Salary Sacrifice) and Non-Concessional limit to $110,000 (all the after tax contributions);
- Last years announcements to increase the contribution age to align to Centrelink Age Pension Age (without the work test) have started from 1 July 2020 so those up to 67 can make contributions to super within the prescribed limits however we are still waiting for changes to the bring forward provision for Non-Concessional Amounts which is still waiting in parliament
- Repealing of the Work Test for Non-Concessional Contributions and Salary Sacrificed Contributions for people aged 67 – 74. The Government has announced it will allow individuals aged 67 to 74 to make or receive non-concessional (including under the bring-forward rule) or salary sacrifice superannuation contributions without meeting the work test, subject to existing contribution caps. However, individuals aged 67 to 74 years wanting to make personal deductible contributions will still have to meet the existing work test.
This measure is proposed to have effect from the start of the first financial year after the enabling legislation receives Royal Assent. The Government stated it expects this to occur prior to 1 July 2022;
- The Government is proposing to relax the residency requirements for self-managed superannuation funds (SMSFs) and small APRA-regulated funds (SAFs) by: • Extending the central management and control test safe harbour from two to five years for SMSFs, and Removing the active member test for both SMSFs and SAFs. These measures would provide SMSF and SAF members with greater flexibility to retain, and continue to contribute to, their existing fund while being temporarily overseas;
- Extension of Downsizer Contribution eligibility. Currently, downsizer contributions to super can only be made by individuals age 65 or older. The Government is proposing to lower this age from 65 to age 60. All other eligibility criteria for downsizer contributions remains unchanged.
It should be remembered that downsizer contributions do not count toward an individual’s non-concessional contribution (NCC) cap. Individuals under age 65 may also be able to trigger a 3-year bring-forward NCC cap subject to their Total Superannuation Balance. This could potentially result in super contributions of up to $630,000 being made by an individual when combining their NCC cap and a downsizer contribution (where eligible to do so);
- The Government has announced that they will be increasing the flexibility of the Pension Loans Scheme (PLS) by allowing participants to access up to two lump sum advances in any 12 month period up to a total value of 50 per cent of the maximum annual rate of the aged pension. Based on current Age Pension rates, the total PLS is around $12,385 per year for singles, while couples combined could receive around $18,670. The Government will also introduce a No Negative Equity Guarantee meaning that the Government will not claim back more than the sale price of the house used to guarantee the payment when it is sold. To raise awareness of the Pension Loan Scheme, the Government will also spend 21 million on advertising and raising awareness of the scheme.
- Release of additional 80,000 home care packages, to allow further choice around care needs at home rather than in institutional settings. Effective 1 July 2021
To support senior Australians to remain at home, the Government is funding an additional 80,000 Home Care packages:
• 40,000 released in 2021-22
• 40,000 released in 2022-23
Additional respite care services will be provided to assist carers and enhanced support services will be provided to assist senior Australians to navigate the aged care system.
- Extended Instant Asset Write Off – The Temporary Full Expense of Capital Assets rather than having to depreciate over time. For entities with turnover up to $5 Billion a claim of $150,000 for new capital items can be claimed. This has been extended for a further 12 month period and is expected to end 30 June 2022;
- Extended Temporary Loss Carry Back – for entities under $5Billion turnover, any losses generated in 2019-20, 2020-21 and 2021-22 and now 2022-23 income years can be offset against prior profits in 2018-19 income year or later. Corporate tax entities with an aggregated turnover of less than $5 billion can apply tax losses against taxed profits in a previous year, generating a refundable tax offset in the year in which the loss is made. The tax refund will be available on election by eligible businesses when they lodge their tax returns.
Scott Malcolm has been awarded the internationally recognised Certified Financial Planner designation from the Financial Planning Association of Australia and is Director of Money Mechanics. Money Mechanics is a fee for service financial advice firm who partner with clients in Melbourne, Canberra, Newcastle and Sydney to achieve their life and wealth outcomes. Money Mechanics Pty Ltd (ABN 64 136 066 272) is a Corporate Authorised Representative (No. 336429) of Infocus Securities Australia Pty Ltd (ABN 47 097 797 049) AFSL and Australian Credit Licence No. 236523
The information provided on this article is of a general nature only. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information you should consider its appropriateness having regard to your own objectives, financial situation and needs.