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Federal Budget 2021 Insights: Individuals and superannuation

Many individuals will also directly benefit from the 2021-22 Federal Budget with reduced taxes for low and middle income earners, support for child care, greater access to voluntary superannuation contributions under the Government’s First Home Super Saver Scheme and also changes to encourage retirees to contribute more to superannuation. Refer also to changes affecting individual residency and employee share schemes under Attracting and retaining global business and talent.

Personal income tax rates and thresholds

This year, the Government has not announced any change to personal income tax rates or thresholds. The current personal income tax rates and thresholds remain unchanged until the commencement of the currently legislated Stage 3 of the Personal Income Tax Plan which is due to commence from 1 July 2024.

The following table summarises the tax rates and thresholds applicable to a tax resident individual.

Table 1: Income tax rates for Australian tax residents

  Thresholds for tax years ended
30 June 2021 to 30 June 2024
Thresholds from 1 July 2024

Rate
(%)

Income range
($)

Income range
($)

Tax free

0 - 18,200

0 - 18,200

19

18,201 - 45,000

18,201 - 45,000

30

N/A

45,001 - 200,000

32.5

45,001 - 120,000

N/A

37

120,001 - 180,000

N/A

45

> 180,000

> 200,000

However, low and middle income earners will be able to access the Low and Middle Income Tax Offset (LMITO). The 2021-22 Budget has extended the LMITO for one more year until 30 June 2022, which will operate to ensure that low and middle income earners can continue to secure a tax cash boost for the year ahead.

This benefit ranges from $255 for taxpayers earning less than $37,000 and up to $1,080 for workers earning between $48,000 and $90,000. The tax offset then phases out for taxpayers earning up to $126,000.

Table 2: Low and Middle Income Tax Offset (LMITO) for Australian tax residents

Taxable Income ($)

Amount of the LMITO for the tax year ended 30 June 2022 ($)

37,000 or less

255

37,001 to 48,000

255 plus 7.5 per cent of excess over 37,000

48,001 to 90,000

1,080

90,001 to 126,000 

1,080 less 3.0 per cent of excess over 90,000

The LMITO comes in addition to the Low Income Tax Offset (LITO) for taxpayers earning less than $66,667.

Table 3: Low Income Tax Offset (LITO) for Australian tax residents

Taxable Income ($)

Amount of the LITO for tax year ended 30 June 2022 ($)

37,500 or less 

700

37,501 to 45,000 

700 less 5 per cent of excess over 37,500

45,001 to 66,667 

325 less 1.5 per cent of excess over 45,000

More deductions allowed for self-education expenses

Individual taxpayers are entitled to claim a tax deduction for self-education expenses. However, under the current rules for certain expenses (e.g. tuition fees, textbooks, stationery, etc.), the first $250 are not tax deductible. In this Budget, the Government has announced that it will remove this exclusion effective from 1 July following the enactment of enabling legislation. This means that if legislation is enacted before 30 June 2021, all self-education expenses relating to a prescribed course of education would be deductible in the 2021-22 tax year.

Enhanced childcare support

The Government will support families by making an additional $1.7 billion investment in child care as part of the 2021-22 Budget.

Although no longer administered through the income tax system, the Government announced that it will increase the Child Care Subsidy (CCS) available to families with more than one child aged five and under in care, by 30 per cent to a maximum subsidy of 95 per cent of fees paid for their second and subsequent children commencing in July 2022.

The Government will also remove the CSS annual cap of $10,560 per child per year commencing on 1 July 2022.

This additional support should assist in removing some of the financial barriers for parents to return to the workforce or increase their hours.

Medicare levy low-income thresholds

The Medicare levy low-income thresholds for singles, families, seniors and pensioners will increase from the 2020-21 income tax year as follows:

  • Individuals $23,226 (increased from $22,801)
  • Families $39,167 (increased from $38,474), with an additional $3,597 for each dependent child or student (increased from $3,533)
  • Single seniors and pensioners $36,705 (increased from $36,056), and
  • The family threshold for seniors and pensioners will be increased to $51,094 (increased from $50,191) plus $3,597 for each dependent child or student (increased from $3,533).

Removing the $450 per month threshold for superannuation guarantee eligibility

Effective 1 July 2022, the Government will remove the existing $450 per month minimum salary or wages threshold that resulted in low income employees not receiving any superannuation guarantee support. This change will simplify the rules for employers and add some further fairness into our superannuation system.

No changes to increase in superannuation guarantee percentage

Despite increasing pressure from some businesses and the media to again pause the superannuation guarantee (SG) rate, no changes were announced to the SG rate in the Budget. Consequently, from 1 July 2021, the prescribed SG rate will increase to ten per cent (from the current rate of 9.5 per cent).

This increase will require employers to contribute an additional half per cent to meet their SG obligations for the financial year ended 30 June 2022.

Whether this constitutes an additional employer funding requirement or is funded from existing remuneration costs will depend on whether employers operate a ‘salary plus superannuation’ arrangement (incremental additional superannuation cost) or a ‘total employment cost’ arrangement (funds the superannuation increment by way of a reduction to existing salary entitlements).

The minimum SG rate is currently legislated to gradually rise to 12 per cent over the next five years as set out in the table.

Table 4: Superannuation guarantee percentages

Year

Charge percentage

Year starting 1 July 2020

9.50

Year starting 1 July 2021

10.00

Year starting 1 July 2022

10.50

Year starting 1 July 2023

11.00

Year starting 1 July 2024

11.50

Years starting on or after 1 July 2025

12.00

Employers should start planning how this SG increase will be implemented and communicated to employees. For a discussion of some of the issues to consider refer to our previous Tax Insight.

Expanding access to First Home Super Saver Scheme

The First Home Super Saver Scheme (FHSSS), which has applied since 1 July 2017, will be expanded to increase the maximum amount of voluntary contributions that can be released under the scheme from $30,000 to $50,000. Under the FHSSS, first home savers who make voluntary concessional and/or non-concessional contributions up to $15,000 per year into the superannuation system are able to concessionaly withdraw those contributions (up to certain limits) and an amount of associated earnings for the purposes of purchasing their first home.

The increase will apply from the start of the first financial year after Royal Assent (expected to be 1 July 2022). The Government will also make four minor technical changes to the legislation underpinning the FHSSS, which will apply retrospectively from 1 July 2018.

This measure is part of the Federal Government’s policy to improve opportunities for home ownership and applies in conjunction with the existing HomeBuilder program and a new Family Home Guarantee scheme to be established to provide 10,000 Government-supported guarantees over four years to single parents with dependants to enable them to purchase a home with a deposit of as little as two per cent. The existing New Home Guarantee, which allows first home buyers seeking to build a new home or purchase a newly built home to do so with a deposit of as little as five per cent is extended for a second year with an additional 10,000 places offered in 2021-22.

Expanding access to superannuation downsizer scheme

Since 1 July 2018, the Government’s superannuation “downsizer” measures have allowed an individual aged 65 years or over to make a non-concessional contribution of up to $300,000 from the proceeds of selling their principal residence owned for the past 10 or more years. These contributions are in addition to those currently permitted under existing rules and caps.

Under the proposed changes, the eligibility age will be lowered to the pre-retirement age of 60 and above. Other rules governing the scheme will remain unchanged. This includes the house having to be owned for at least 10 years. It is understood that since 1 July 2018, about 22,000 people have used the scheme, of which around 55 per cent were women.

This measure will apply from the start of the first financial year after Royal Assent of the enabling legislation (expected to be 1 July 2022).

Retirees able to contribute more to super

The 2021-22 Budget announces changes that will allow retirees to be able to make more contributions to their superannuation by abolishing the work test that applies to certain contributions from the start of the financial year after Royal Assent of the enabling legislation (expected to be 1 July 2022). These changes are intended to remove the complexities that have limited the ability of retirees to top up their superannuation and acted as a disincentive to pursue flexible work.

Currently, the superannuation law prevents super contributions being able to be made by individuals who are 67 years or older unless they meet a work test or work test exemption (subject to limited exemptions). The work test requires a person to be gainfully employed for at least 40 hours in a consecutive 30-day period during the financial year before concessional or non-concessional contributions can be made.

Under the proposed changes, retirees aged between 67 and 74 years can top up their superannuation by making non-concessional contributions (including under the bring-forward rules) or under salary sacrifice arrangements subject to the existing cap rules. However, retirees will still need to pass the work test to make personal deductible contributions.

It is important to note that the legislation to allow members aged 65 or 66 years to make non-concessional contributions utilising the bring-forward rules has still not passed but is likely to be imminent. This does leave retirees in this two-year age bracket in limbo in relation to topping up their non-concessional contributions.

Legacy pensions held in SMSFs

For a number of years the self-managed super fund (SMSF) sector has been asking the Federal Government to allow SMSF members with legacy pensions such as market-linked, life-expectancy and lifetime products to be able to convert to contemporary pensions, such as the Account-based pension product which came into effect from 1 July 2007. Most of these pensions were purchased under the old reasonable benefit limit (RBL) rules that restricted the amount of benefits that could be received by a member at tax concessional rates. These RBL rules were abolished as at 30 June 2007, however most legacy pensions that still existed from 1 July 2007 were non-commutable and created significant tax cost when allocating excess reserves to members. This Budget announces that the Government will allow individuals to exit these products, together with any associated reserves, for a two-year period with effect from the first financial year after Royal Assent of amending legislation.

It is important to note that if a new pension product is purchased from commuted legacy pensions, it will not be grandfathered for social security purposes and tax treatment. It also appears that there will remain some tax cost on allocation of reserves as the payment to the member will be taxed as an assessable contribution, which means that it will likely be taxed at 15 per cent.

This new measure will not apply to flexi-pension products or a lifetime product in a large APRA-regulated or public sector defined benefit scheme.

Relaxation of the residency requirements for SMSFs

Many Australians spend a period of time working or studying outside Australia. This created complexity if they were members of an SMSF as the residency requirements were very restrictive and meant that if the SMSF was deemed a non-resident fund, it would suddenly be taxed as a non-complying fund with assets being taxed at a punitive rate of 47 per cent.

The Government has decided to relax these residency requirements for both SMSFs and small APRA-Regulated Funds (SAFs) by extending the central control and management test safe harbour from two to five years for SMSFs and removing the active member test for both SMSFs and SAFs. By removing the active member test, this will allow members in these funds to continue to contribute to their superannuation fund whilst temporarily overseas. This provides them with the flexibility to maintain these types of funds whilst overseas and provides parity with members of large APRA-regulated funds.

No early release of super for victims of family and domestic violence

The Government has announced that it is no longer proceeding with the measure to extend early release of superannuation to victims of family and domestic violence. This measure is no longer required given the Women's Safety measures announced in the Budget.

Super contribution limits for year ending 30 June 2022

From 1 July 2021, the superannuation contribution caps will be indexed to the amounts in the table below.

Concessional contributions

Non-concessional contributions

$27,500 per annum

$110,000 per annum

Unused carry-forward concessional contributions - available for individuals with a total superannuation balance of less than $500,000 at the previous 30 June

Bring forward non-concessional contributions - available for individuals aged under 65 up to a maximum of $330,000 depending on the individual’s total superannuation balance at the previous 30 June

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Naree Brooks

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