Australian Federal Budget 2021-2022

Overview

Australia’s COVID-19 ‘comeback’ 2021-22 Federal Budget (Budget) was delivered by the Australian Treasurer, the Hon Josh Frydenberg, on 11 May 2021 and provides, amongst other things, several important business tax and related initiatives.

These initiatives include:

• Introducing a new ‘patent box tax regime’ (with a concessional effective corporate tax rate of 17%) to encourage innovation with respect to developing Australian medical and biotechnology patents, and possibly for the clean energy sector, from 1 July 2022;
• Allowing taxpayers to self-assess the effective lives and thus accelerate depreciation of various intangible assets including patents, registered designs, copyright and in-house software acquired from 1 July 2023;
• Extending the temporary full expensing regime (instant asset write-off) and the temporary loss carry-back measures for another year;
• Expanding the list of Exchange of Information countries to include an additional six countries that are eligible for concessional (15%) Managed Investment Trust withholding tax;
• Finalising the implementation of the Corporate Collective Investment Vehicle regime, to be operative from 1 July 2022;
• Removing the Offshore Banking Unit concession;
• Imposing a temporary levy on offshore petroleum production;
• Introducing a ‘bright line’ test for individual tax residency; and
• Amendments to the deferred taxation provisions under the employee share scheme rules.

Tech-related tax measures within Australia’s Digital Economy Strategy

The Budget includes Australia’s Digital Economy Strategy, with specific measures intended to make Australia “a leading digital economy and society by 2030”. 

In addition to incentivising measures on Artificial Intelligence, Data Analytics and Blockchain technology, the Budget also includes tax measures designed to incentivise investments and activity in technology-related businesses.  These tax measures are:

• The ability to self-assess the effective lives of eligible intangible depreciating assets acquired from 1 July 2023 (after the temporary full expensing regime (instant asset write-off) – referred to below – has concluded).Currently, statutory effective lives must be used to work out the deductible tax depreciation on intellectual property (IP) or similar assets such as patents (20 years), registered designs (15 years), copyrights (up to 25 years) and in-house software (5 years).

DLA Piper comment:  IP valuation and tax treatment are topical tax issues in Australia’s recent tax landscape.  The ability to self-assess tax effective lives of IP and similar assets provides flexibility for digital businesses and other businesses, whose IP assets are integral to their supply chain and business models.  The flexibility is limited to newly acquired IP assets, and would not be available to existing IP assets. It may however be an important factor in takeovers and acquisitions of IP-rich targets.  Businesses would be expected to justify any self-assess with sufficient documentation, which may be scrutinised by the Australian Taxation Office as part of its recent focuses on IP development, exploitation and migrations.

• The introduction of a patent box regime in Australia, providing a concessional effective tax rate of 17% (compared to up to 30% as the general corporate tax rate) for corporate income derived from medical and biotechnology patents (Australian owned and developed), applicable from income years starting on or after 1 July 2022.

DLA Piper comment:  Australia’s first patent box regime is welcome and may bring Australia more in line with other modern jurisdictions competing for IP development activities (such as the UK, with its 10% tax patent box).  Importantly, the patent box regime is limited to medical and biotechnology patents.  Whilst this measure incentivises activities and investments in those sectors, other sectors would remain reliant on other tax concessions, such as Australia’s R&D tax incentives of up to 43.5% in tax offsets.  It remains to be seen whether the patent box regime could be extended to other sectors. The Government has said it will consult on the design of the regime, and will consider extending it to “green” technology.  The Budget Papers suggest the cost to revenue will be A$200m in the next four years.

• The introduction of a 30% refundable digital games tax offset for eligible businesses that spend a minimum of A$500,000 on qualifying Australian games expenditure, available from 1 July 2022 to Australian resident companies or foreign resident companies with a permanent establishment in Australia.  Expenditure eligibility requirements are subject to industry consultation expected in mid-2021.  Games with gambling elements or that cannot obtain a classification rating will not be eligible.

DLA Piper comment:  With the global gaming sector being one of the fastest uptrends in recent times, Australia’s digital games tax offset should provide a timely incentive for Australia to attract digital talent and games development activities.  The offset is welcome and should further bolster Australia’s modernisation strategy.  The initiative will align digital game development incentives with those for other screen content.”

• The Australian Government also announced on 6 May 2021 that it will be undertaking a review of the tax incentives for venture capital investments as part of the broader Digital Economy Strategy, in order to confirm that the current regime is fit-for-purpose.

DLA Piper comment:  Venture capital industry participants should closely monitor any proposed amendments to the venture capital taxation regime and use the review as an opportunity to make submissions to address any shortcomings in the current regime.

Instant asset write-off extension

The Government has extended the instant asset write off in this year’s Budget to allow eligible businesses with aggregated annual turnover of less than A$5 billion with eligible depreciable assets acquired from 7.30pm AEDT on 6 October 2020 and first used or installed by 30 June 2023, to claim an immediate tax deduction for its full cost.

The 12-month extension will provide eligible businesses with additional time to access the incentive  introduced in the 2020-21 Federal Budget. This is expected to encourage businesses to make further investments, including in projects requiring longer planning times, and continue to support economic recovery in 2022-23.

All other elements of temporary full expensing will remain unchanged, including the alternative eligibility test based on total income, which will continue to be available to businesses. From 1 July 2023, normal depreciation arrangements will apply.

Temporary loss carry-back measures extension

The Government has also extended the temporary loss carry-back measures in this year’s Budget. Broadly, under the extension, eligible companies will be allowed to carry back tax losses from the 2022-23 income year to offset previously taxed profits in the 2018-19 or later income years.

These measures are targeted at corporate tax entities with an aggregated turnover of less than A$5 billion. These entities can apply tax losses from the relevant income years against taxed profits in a previous year, generating a refundable tax offset in the year in which the loss is made. Importantly, there is a limit to the tax refund available under this initiative, by the imposition of a requirement that the amount carried back is not more than the earlier taxed profits and that the carry back does not generate a franking account deficit.

Eligible companies will be able to access the tax refunds on election when they lodge their 2022-23 corporate tax returns. Companies that do not elect to carry back losses under this measure can still carry losses forward as normal.

International Tax measures

Update to the list of Exchange of Information jurisdictions

Managed Investment Trusts (MITs) are a very common Australian vehicle used by foreign investors to invest in, principally, passive assets such as Australian commercial real estate.

One key feature of such investment structures is that distributions made by the Australian MIT to investors can be subject to a reduced rate of withholding tax of 15% (down from the default rate of 30%) when the investor is a resident in a jurisdiction which is listed as having an “effective” information sharing agreement with Australia.

The list of eligible jurisdictions is to be expanded to add Armenia, Cabo Verde, Kenya, Mongolia, Montenegro and Oman to the information exchange countries list. 

These changes will be effective from 1 January 2022.

CCIV implementation

The Government has announced that it will finalise the implementation of the corporate collective investment vehicle (CCIV) regime, which was first announced in the 2016-17 Federal Budget, with an updated commencement date of 1 July 2022.  The last draft legislation for these measures was released in 2019 so this announcement provides a welcome update to the CCIV regime.

A key policy objective of the CCIV regime is to introduce an internationally recognisable investment vehicle structure to increase the competitiveness of Australia’s managed fund industry.  Currently, the most common vehicle used in Australia for funds investments is a unit trust, which is not commonly used in other countries.

As such, the CCIV is proposed to be a corporate investment vehicle that provides flow-through tax treatment, which is internationally recognised and readily marketed to foreign investors, including through the Asia Region Funds Passport.

Based on previous announcements and draft legislation, a complying CCIV will have access to an attribution or “flow through” model of taxation, generally aligned with the attribution managed investment trust (AMIT) tax regime.  In addition to flow-through tax treatment, this should also entail deemed capital account treatment (under an election), and certain eligible non-resident investors will be taxed at concessional rates (generally 15%) on attributed income, subject to Australia's withholding tax provisions.

These concessions are primarily directed at passive-type investments by a sufficiently widely held corporation.

OBU concession removal

Following the announcement by the Treasurer, the Hon. Josh Frydenberg MP, of the removal of the Offshore Banking Unit (OBU) concessional tax regime’s 10% tax rate and/or interest withholding tax exemption on 12 March 2021, the Government has confirmed the OBU regime’s removal and stated that it will consult on alternative measures to support the competitiveness of the financial industry to ensure these activities remain in Australia.

The OECD in 2018 identified the OBU concession to be a ‘harmful preferential tax regime’ and Australia undertook to remove or limit the concession, subject to a two year grandfathering provision for existing OBUs.

Eligible offshore banking activities include, amongst other things, financial intermediation between foreign residents or the provision of financial services to foreign residents in respect of transactions occurring outside Australia.

Review of the corporate tax residency rules

Further to the amendments to the corporate tax residency rules announced in the 2020-21 Federal Budget last year, the Government has announced that it will consult on broadening the amendments in relation to trusts and corporate limited partnerships.

No amendments to the IMR regime

Expected amendments to the Investment Management Regime (IMR) regime to address certain outstanding issues and complexities, which were first announced in 2017, were not included in the Budget announcements, but are expected to be implemented shortly.

Simplification of individual residency tests

Currently, the individual residency tests have a number of separate tests to determine if an individual is a resident of Australia for tax purposes.  As a result, the ability to determine individual residency is somewhat difficult if certain tests are not satisfied, but others are.

Recognising the difficulties that employees have had, and the fact that the labour market is becoming more mobile than ever before (and possibly in anticipating a post-COVID-19 opening up of borders), the Government is looking to replace the current individual tax residency rules with a revised framework.  The Budget indicates that the primary test will be a ‘bright line’ test, whereby a person who is physically present in Australia for 183 days or more in any income year will be an Australian tax resident. Where the primary test is not met, secondary tests will be applied which will focus on a combination of physical presence and measurable, objective criteria. Depending on the nature of the secondary tests, we hope that the revised approach does actually reduce the uncertainty and complexity for individuals.

The new framework is based on recommendations made by the Board of Taxation to the Government and therefore should be easier to understand and apply, and lower compliance costs.

Employee Share Schemes – technical improvements to deferred taxation

The 2015 amendments to the employee share scheme (ESS) rules corrected a number of technical issues and problems with the rules as they operated previously.  Generally the ESS rules tax individuals when they receive the shares/options, or allow a deferral of tax to a certain point under specific circumstances.  One aspect of the old rules (pre-2015 rules) that remained post-2015 was that where tax was deferred, the cessation of employment was a trigger point for the application of tax.  That is, the cessation applied until the employee ceased their employment and the employee was taxed at the time (and on the value of the equities) when the employee’s employment ceased.  This caused a number of issues of concern for companies when setting up plans for employees, and for employers as well.  In particular, this cessation point was largely inconsistent with the operation of employee share plan tax rules globally, and therefore, it created an inability to implement consistent employee share plans and consistent treatments as between employees in Australia, and for example, the United States.  In extreme circumstances, this difference required separate plans to be written for a company’s global workforce, and their Australian employees (increasing cost and complexity for companies).   

The deletion of this cessation point is a welcome change to the ESS rules, which should enable consistency as between plans applicable to (and tax treatment for) employees of a global organisation in different jurisdictions.

The proposed amendments will also clarify and simplify the regulatory requirements where amounts are not lent to employees to participate, and where amounts lent to participate are under A$30,000 per annum.

Overall, the changes are designed to further improve the ability for Australian companies to recruit and retain talented employees.

Temporary Levy on Offshore Petroleum Production

The Government will impose a temporary levy on offshore petroleum production in order to recover the costs of decommissioning the Laminaria – Corallina Oil Fields and associated infrastructure.  The levy will continue until these decommissioning costs are fully recovered.  Further details will be provided following consultation with industry.

Superannuation related changes

The Government has introduced a range of superannuation related measures impacting principally first home owners and retirees. These measures will have effect from the first financial year after Royal Assent of the enabling legislation which is expected to occur prior to 1 July 2022.

First Home Super Saver Scheme

The Government will increase the maximum amount released under the First Home Super Saver Scheme (FHSSS) from A$30,000 to A$50,000. The FHSSS was intended to reduce pressure on housing affordability and allows first home buyers to accumulate wealth within their superfund which is taxed concessionally at 15% to fund the purchase of a property.

Downsizer contributions

Also introduced in the 2017-18 Federal Budget was the Downsizing contributions superannuation measure. This measure allowed individuals aged 65 years or older who meet the eligibility requirements, to sell their family home and make a once-off contribution up to A$300,000 of those proceeds into their superannuation fund.

The Government has now reduced the eligibility age to make downsizer contributions into superannuation from 65 to 60 years of age.

Repeal of the work test for voluntary superannuation contributions

The Work Test requires that individuals aged 67 to 74 years can only make voluntary contributions (both concessional and non-concessional) to their superannuation, or receive contributions from their spouse, if they are working at least 40 hours over a 30 day period in the financial year.

The Government will repeal the Work Test to allow retirees to make more contributions to their super if they so wish.

Removal of the A$450 per month threshold for superannuation guarantee liability

Currently, employees must earn at least A$450 (before tax) a month before superannuation is paid to them and that amount earned must be derived from a single employer.  The Government will now remove this A$450 threshold so that employee on lower incomes will be covered by the superannuation guarantee.

TOFA related changes

Technical changes will be made to the Taxation of Financial Arrangements (TOFA) legislation specifically to the hedging rules. The Budget Paper does not specify what those rules encapsulate but the amendments will be targeted to reduce compliance costs and correct unintended outcomes relating to unrealised taxation on foreign exchange gains and losses. This measure will have effect from the first financial year after Royal Assent of the enabling legislation which is expected to occur prior to 1 July 2022.