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Federal Budget 2021 – Financial Planning for Individuals

Article By Adam Hurwood | | Accounting & Tax, Financial Planning

In Josh Frydenberg’s third Federal Budget, individuals will benefit through personal income tax cuts and changes to tax residency rules.

Alterations to employee share schemes and the first home super saver scheme have also been made. The opportunities of Australians moving toward retirement will be increased by the easing of restrictions around superannuation. A review of the specifics of these changes can be found below.

Personal Income Tax Cuts

To assist families in recovering from COVID-19 the Government is introducing measures targeted toward low and middle-income earners. This will provide immediate relief to individuals and support a healthier economy by boosting consumer spending.

The low and middle income tax offset has been extended for a further year to the 2021-22 income year providing a $1,080 tax reduction for those earning less than $90,000. This will be received on assessment after individuals lodge their tax return.

Additionally, from July 1 2020 the Medicare Levy low-income thresholds have been increased. Applying to singles, families, and seniors and pensioners to account for recent changes in CPI. Singles will increase from $22,801 to $23,226. Families from $36,056 to $36,705. Seniors and pensioners from $36,056 to $36,705. The Family threshold for seniors and pensioners will increase from $50,191 to $51,094.

The Government is also removing the exclusion for the first $250 deduction for prescribed courses of education which is currently not deductible. This aims to reduce compliance costs for individuals claiming self-education expenses.

Easing of restrictions around superannuation

Opportunities to top up super balances are being boosted for Australians as they approach retirement and beyond. This means changes to the work test, changes to the eligibility of downsizer contributions, better opportunities for self-managed superannuation funds (SMSF’S) and the rules around Legacy Retirement products have been changed. These are some big wins for Australians moving toward retirement.

From 1 July 2022 Australians will no longer have to meet the work test to be eligible to make non-concessional superannuation contributions and receive salary sacrifice contributions. Currently individuals aged between 67-74 years of age are restricted from making certain contributions unless they are working at least 40 hours in a 30 day consecutive period, which is known as the work test.

After 1 July 2022, Australians over 60 will be eligible to make downsizer contributions of up to $300,000 each when they sell their home. Previously the downsizer contribution was limited to Australians over age 65. The aim behind this is to free up stock and create movement in the property market.

Changes to SMSFS and residency will enable SMSF members to be absent from Australia for longer than is currently the case, whether for work, education or due to COVID-19. It will also enable overseas members to continue to contribute to their Australian SMSF without penalty within the five year period. This is expected to apply from 1 July 2022.

Individuals will be allowed to exit certain Legacy Retirement Products including Market Linked Pensions within a two year window from the first financial year after the date of Royal Assent.

Modernization of the individuals tax residency rules

The Government is making changes to tax-residency in line with the 2019 Board of Taxation reform recommendations. A person who is physically present in Australia for 183 days or more in an income year, will be an Australian tax resident. Those who do not meet this primary requirement will be subject to secondary tests of physical presence and measurable objective criteria.

Employee Share Schemes – ‘Cessation of employment’ no longer a taxing point

Employee Share Schemes (ESS) allow employers to issue options or shares or shares to employees, usually at a discount with the aim of attracting and motivating employees.

‘Cessation of employment’ has been removed as a taxing point under the deferred taxation rules. This change will only apply to ESS interests issued to employees in the income years commencing after the amending legislation is passed.

Currently, an employee may defer tax until a later taxing point being the earliest of: Cessation of employment, when there is no real risk of forfeiture and no restrictions on disposal (in relation to shares) and when the employee exercises the option and there is no real risk of forfeiture and no restrictions on disposal (relating to options).

First Home Super Saver Scheme (FHSSS) changes aimed to increase uptake

Continued changes to the First Home Super Saver Scheme (FHSSS) specify a maximum releasable amount of voluntary concessional and non-concessional contributions being increased from $30,000 to $50,000. Voluntary contributions made from 1 July 2017 up to the existing limit of $15,000 per annum will apply towards the total amount able to be released. The increase is expected to occur by 1 July 2022. The increased cap will help first home buyers raising a deposit to do so more quickly, through the special tax treatment of super and associated investment earnings. This brings the FHSSS up to speed with current deposit requirements as house prices increase.

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