Written by Andrew Clements and Deniz Ektem
The Government has retained the low and middle income tax offset. An increase to the Medicare Levy for low-income thresholds for singles, families, singles, families, seniors and pensioners has also been announced, as have other measures relating to individual tax residency (see section 2).
Retaining the low and middle income tax offset for the 2021‑22 income year
The Government will retain the low and middle income tax offset (LMITO) for the 2021‑22 income year, providing further targeted tax relief for low‑ and middle‑income earners.
The LMITO provides a reduction in tax of up to $1,080. Taxpayers with a taxable income of $37,000 or less will benefit by up to $255 in reduced tax. Between taxable incomes of $37,000 and $48,000, the value of the offset increases at a rate of 7.5 cents per dollar to the maximum offset of $1,080. Taxpayers with taxable incomes between $48,000 and $90,000 are eligible for the maximum offset of $1,080. For taxable incomes of $90,000 to $126,000, the offset phases out at a rate of 3 cents per dollar. Consistent with current arrangements, the LMITO will be received on assessment after individuals lodge their tax returns for the 2021‑22 income year.
First Home Super Saver Scheme
Increasing the maximum releasable amount to $50,000
As noted in section 10, the Government will increase the maximum releasable amount of voluntary concessional and non‑concessional contributions under the First Home Super Saver Scheme (FHSSS) from $30,000 to $50,000.
The Government will make four technical changes to the legislation underpinning the FHSSS to improve its operation as well as the experience of first home buyers using the scheme. These changes assist FHSSS applicants who make errors on their FHSSS release applications by:
- increasing the discretion of the Commissioner of Taxation to amend and revoke FHSSS applications
- allowing individuals to withdraw or amend their applications prior to them receiving a FHSSS amount, and allow those who withdraw to re‑apply for FHSSS releases in the future
- allowing the Commissioner of Taxation to return any released FHSSS money to superannuation funds, provided that the money has not yet been released to the individual
- clarifying that the money returned by the Commissioner of Taxation to superannuation funds is treated as funds' non‑assessable non‑exempt income and does not count towards the individual's contribution caps.
Medicare levy
The Government will increase the Medicare levy low‑income thresholds for singles, families, and seniors and pensioners from 1 July 2020 to take account of recent movements in the consumer price index so that low‑income taxpayers generally continue to be exempt from paying the Medicare levy.
The changes to the Medicare Levy will operate as follows:
- The threshold for singles will be increased from $22,801 to $23,226;
- The family threshold will be increased from $38,474 to $39,167;
- For single seniors and pensioners, the threshold will be increased from $36,056 to $36,705;
- The family threshold for seniors and pensioners will be 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.
Exemption for pay and allowances for Operation Paladin
The Government will provide a full income tax exemption for the pay and allowances of Australian Defence Force (ADF) personnel deployed to Operation Paladin from 1 July 2020.
Operation Paladin is Australia's contribution to the United Nations Truce Supervision Organisation, with ADF personnel deployed in Israel, Jordan, Syria, Lebanon and Egypt.
This measure ensures that personnel are subject to consistent tax treatment regardless of the operational area of Operation Paladin to which they are deployed.
Employee share scheme tax reform
The Government has announced the removal of the taxing point on the cessation of employment for Employee Share Schemes and other changes in relation to corporate regulation of offers of Employee Share Schemes.
Removal of taxing point on cessation of employment
The Government will remove the cessation of employment taxing point for the tax‑deferred Employee Share Schemes (ESS) that are available for all companies. The taxing point on cessation of employment has been a major focus and area of concern for those involved in employee ownership for many years. This change will apply to ESS interests (both shares and rights) issued after the commencement date. Importantly the commencement date is not until the 1 July following Royal Assent to the enabling legislation. If the enabling legislation does not receive Royal Assent prior to 1 July 2021 it will mean the measure would not commence until 1 July 2022 at the earliest.
Employers use ESS to attract, retain and motivate staff by issuing interests such as shares, rights (including options) or other financial products to their employees, usually at a discount.
Currently, under a tax‑deferred ESS, where certain criteria are met employees may defer tax until a later tax year (the deferred taxing point). The deferred taxing point is the earliest of:
- cessation of employment
- in the case of shares, when there is no risk of forfeiture and no restrictions on disposal
- in the case of options, when the employee exercises the option and there is no risk of forfeiting the resulting share and no restriction on disposal
- the maximum period of deferral of 15 years.
Takeaway:
This change will result in tax being deferred until the earliest of the remaining taxing points. Traditionally, share plans rather than rights plans have been structured to include a release date, when there is risk of forfeiture and restrictions on disposal at cessation of employment. This change will mean that the share plans structured will need to change. A key issue which will need to be resolved is the extent to which an effective restriction to allow for continuing deferral will exist where employees have flexibility as to when they can access shares.
Reform of corporate regulation of offers of ESS interests
The Government will remove regulatory requirements for ESS:
- where employers do not charge or lend to the employees to whom they offer ESS. This appears directed at both listed and unlisted companies.
- where employers do charge or lend, a streamlined requirement for disclosure is required. For unlisted companies the exclusion is for ESS offers that are valued at up to $30,000 per employee per year. There is no equivalent limit for listed companies.
These changes are to apply 3 months after Royal Assent of the enabling legislation.
Takeaways:
The existing ASIC relief in relation to unlisted companies making ESS offers is of limited benefit. It is provided in ASIC Class Order (CO 14/1001).
It appears the new restrictions will apply through specific legislation to accommodate offers to employees in both listed and unlisted companies.
A critical issue is the new restrictions are to be elected through specific legislation is the extent to which the new restrictions reflect the existing forms of exemption provided to both listed and listed companies through ASIC class orders. This issue will require careful consideration so as not to create additional complexity in offering ESS interests.
The benefit of this measure will be very heavily dependent on the form of the exclusions which will apply. Importantly, ASIC has generally taken a very broad view of what constitutes consideration for the purposes of the ESS offerings.
Offers which are treated as being for no consideration for tax purposes are commonly regarded as being provided for consideration for the purposes of the corporations law and accordingly regulated by the disclosure requirements.
Reform agenda:
The reforms to employee ownership rules are very welcome, particularly those dealing with the taxation of ESS interests on the cessation of employment. The changes to corporate regulation also have the potential to simplify the administration of offers of ESS interests.
There continue to be a number of aspects of the regulation of employee ownership which create complexity which would benefit from further reform.
A particular area of interest in the Australian market at present is the potential for the introduction of an "employee ownership trust" in a similar form to that which has been used for some time in the United Kingdom and is being introduced in Canada.
We believe that there are aspects of the current tax rules which could be amended to improve the opportunity to facilitate employee ownership trusts in Australia.
We will continue to seek to be actively involved in the reform process.
