The 2021 Federal Budget has sought to support the continued growth of the Australian economy by extending the existing COVID-19 tax concessions offered in the last Budget, and attracting new investment in Australian-based innovation activities with specific tax concessions.

Here we highlight some of the key tax measures affecting Australian businesses, which include:

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The temporary full expensing measures that allow businesses with aggregated turnover under $5 billion to fully deduct the cost of eligible depreciating assets regardless of cost will be extended for a further 12 months from 30 June 2022 until 30 June 2023. From 1 July 2023 the normal depreciating rules apply.

The loss carry back measures that allow companies with aggregated turnover of less than $5 billion will be extended to allow eligible companies to carry back losses from the 2022-23 income year and offset against prior year taxable profits going as far back as to the 2018-19 income year subject to the level of franking credits available.

Similar to earlier announcements, it is understood the Government will allow the use of the temporary full expensing measures to generate tax losses and which can then take advantage of the loss carry back measures.

This is a significant measure which will require Australian businesses to reassess their capex plans, particularly for long-lead time investments.

In an effort to capture a greater share of the $250 billion global games development market, a new refundable tax offset for the Australian digital games industry, the Digital Games Tax Offset (DGTO) has been announced that will provide eligible game developers with a 30 per cent refundable tax offset for qualifying Australian games expenditure. The DGTO will commence from 1 July 2022.

While the precise details are yet to be announced, it would be expected that the DGTO would operate in a fashion similar to that of the Research & Development Tax Incentive, where eligible entities can receive a tax offset on R&D expenditure.

Australian resident companies and foreign resident companies with a permanent establishment in Australia will be eligible for the incentive.

Although the eligibility criteria and the definition of qualifying Australian games expenditure is yet to be formalised and will be developed through stakeholder consultation over the next 12 months, it has been announced that an eligible game must not have gambling elements and that a minimum of $500,000 qualifying expenditure must be made on a qualifying game. The maximum DGTO an eligible developer will be able to claim in each year will be capped at $20 million.

This has the potential to make Australia a global centre of digital game development where the DGTO can substantially reduce the real cost of development. The R&D Tax Incentive has had a similar impact on the Australia biotech and medtech sector which has seen hundreds of foreign owned and controlled entities establish a presence in Australia through which they undertake clinical R&D and claim the R&D Tax Incentive.

As a result of the DGTO one could expect significant new investment in technical development support services such as production studios as well as education/training infrastructure to provide a skilled workforce to underpin the expected rapid expansion of the sector.

Commencing on 1 July 1 2022, a new Patent Box Tax Incentive will be introduced delivering a concessional 17 per cent tax rate on income generated from new patents that have been developed in Australia.

For years AusBiotech, the peak body supporting the biotechnology sector in Australia, has been strongly advocating for a Patent Box incentive to encourage the Australian retention of intellectual property (IP) developed and supported in Australia through the commercialisation stage. The policy objective being that Australia retains the resulting high value jobs, manufacturing output, export revenue and other economic benefits instead of losing them offshore.

Although the structure of the proposed Australian Patent Box will be developed through industry consultation prior to its launch on 1 July 1 2022, the principle is that income earned from new patents that have been developed in Australia will be taxed at a concessional rate of 17 per cent.

Importantly, only granted patents, which were applied for after the Budget announcement, will be eligible for support through Patent Box. Given the time taken (two to four years) to secure a granted patent from application, any tangible benefits from the program are unlikely to be realised for several years. Nevertheless, in time the Patent Box will almost certainly increase the patent lodgement activity in Australia, which is low by international standards.

In a practical example, an Australian biotech that generates $100 million in net income from selling a product covered by an Australian patent, where 75 per cent of the knowhow related to the patent was developed in Australia, will be able to include $75 million of its net income in its Patent Box to be taxed at 17 per cent, with the balance of $25 million taxed at 30 per cent resulting in an overall tax saving of $9.75 million.

The Patent Box has the potential to enhance Australia’s sovereign capability and protection in the critical medtech and biotech sector.

The Patent Box will initially apply only to the medical and biotech sectors with consultation planned to consider expansion of the program into the clean energy sector.

The Patent Box has the potential for Australia to further enhance its already strong competitive advantage as a destination for clinical R&D investments from non-Australian clinical stage companies that establish Australian operations and retain IP in Australia.

From 1 July 2023, taxpayers will be able to self-assess the effective life of eligible intangible depreciating assets.

This measure means there will be opportunity to potentially depreciate eligible intangible depreciating assets at a much faster rate than under existing fixed statutory rates. This change recognises the fact that the economic value of many intangibles can quickly become out of date in a rapidly developing technological environment.

Bright Line Residency Test for individuals

To deliver more certainty and lower compliance costs for globally mobile individuals, the Government is to simplify the residency test for individuals by introducing a ‘bright line’ test. This will comprise a primary test and a secondary test.

Under the primary test, an individual will be considered an Australian tax resident if the individual is physically present in Australia for 183 days or more. If the primary test is not met, a combination of physical presence and other measurable objective criteria is to be used.

The date of effect of these rules will be from the first income year after the date of Royal Assent of the enabling legislation.

Concessional changes to employee share schemes

Changes of note to the employee share scheme rules can be summarised as follows:

  • The deferred taxing point has been removed for employees that cease employment. This means that cessation of employment will no longer, of itself, trigger a tax liability under the employee share scheme rules.
  • Removing certain regulatory red tape where employers do not charge or lend to employees who participate in employee share schemes, including simplifying disclosure requirements and reporting exemptions for making share scheme offers in unlisted companies that are valued up to $30,000 per employee per year.

Removal of $450 exemption for Superannuation Guarantee

The $450 per month minimum income threshold, under which employees do not have to be paid the superannuation guarantee by their employer, is slated for removal.

The measure will have effect from the start of the first financial year after Royal Assent of the enabling legislation, which is expected to be from 1 July 2022.

The Government has announced Category D grants provided under the Disaster Recovery Funding Arrangements 2018 will be exempt from tax when made to primary producers and small business. The grants must have been provided in relation to storms and flood events that occurred in Australia between 19 February 2021 and 31 March 2021.

Concessions provided to small brewers and distillers are going to be increased to bring them in line with those provided to wine producers. From 1 July 2021, eligible brewers and distillers will be able to receive a full remission (up from 60 per cent) of any excise they pay, up to a cap of $350,000 (increased from $100,000) per financial year.

From 5 October 2020 to 31 March 2022, businesses of any size can claim the Boosting Apprenticeship Commencements wage subsidy. This program will be expanded further by the removal of the cap on the number of eligible places and the increasing the duration of the subsidy. Eligible businesses will be reimbursed up to 50 per cent of an apprentice or trainee’s wages, capped at $7,000 per quarter, for 12 months from the date an apprentice or trainee commences with their employer (a total subsidy of $28,000).

The Government has provided funding for the creation of an online system for Not For Profit (NFP) organisations to self-assess their status online via an annual form. The reporting system will be used to capture information which would be used in the self-assessment of the eligibility of NFP’s to maintain their income tax exempt status. This system is to be implemented by the ATO in the 2022-23 year.

The private company loan rule changes have continually been deferred over the past few years with no resolution. It was disappointing to note that the Budget did not make any further announcements in relation to these measures.

ATO support for first time foreign investors

With effect from 1 July 2021, eligible first time foreign investors will be able to obtain tailored ATO support to meet Australian tax law obligations and this is to be streamlined with the FIRB approval process to avoid duplication of information that may already be provided between the Government departments.

A consultation process is to be undertaken by the ATO with stakeholders on the development of the early engagement service.

Corporate tax residency changes extended to trusts and certain partnerships

The proposed changes to deem foreign incorporated companies as tax resident based on a significant economic connection to Australia test is announced in the last Budget is to be extended to trusts and corporate limited partnerships. These changes will form part of the Government’s consultation process before proposed legislation is released.

Collective investment vehicles

Earlier announcements regarding the use of Collective Investment Vehicles (CIVs) which has the benefit of both being a corporate structure with flow through tax treatment is to commence from 1 July 2022. These measures are aimed at increasing the attractiveness of investing in Australia via these structures for foreign investors.

Information exchange countries expanded

The list of countries from which investors are able to access the reduced MIT withholding rate of 15 per cent in managed investment trusts has been expanded.

Taxation of financial arrangements and hedging

Certain technical amendments will be made to the Taxation of Financial Arrangements (TOFA) rules in relation to hedging transactions which are to take effect for relevant transactions entered into on or after 1 July 2022.

Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.

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