Budget 2021-22

What a difference a year makes! Last May, the government didn’t even hand down the budget as the whole economy was shut down, businesses were closed and we were all stuck at home staring down the barrel of economic calamity. When the 2020-21 budget was finally released in October 2020, the final figure was a record deficit of $213.7 billion.  

As we all know, Australia has come through the COVID crisis so far in quite good shape. Unemployment is a little higher than normal though nowhere near the 15% predicted, people are out spending, and businesses are making money. Some sectors of the economy are booming. This has resulted in far more tax collected and far less spent on welfare than planned. The government deficit for 2021 was only $161.0 billion.
 

These far better than expected numbers, coupled with an upcoming election have given the treasurer free reign to spend, spend, spend… and he hasn’t been shy. The words ‘budget surplus’ are not even in the lexicon anymore.  

Generally, there are winners and losers in any budget, though the list of winners far exceeds the list of losers in this budget. In fact, it is hard to find many losers at all this time around. 

One obscure group who may be unhappy are chicken farmers who will have to pay a 1.1cent levy for each laying chicken.   The funds raised will be used to reimburse the Government for costs paid on behalf of the egg industry in relation to three emergency responses to avian influenza in Victoria in 2020. There is a strong argument however that we are all losers from this budget long term as the government racks up large and seemingly unending deficits which we must all pay back eventually. At some point, all our chickens will have to come home to roost.  

Whilst there are big numbers and lots of spending, there are very few permanent or structural changes to our tax and/or financial systems within this budget. There are a few tweaks and changes which we will detail below, though certainly no big reforms.  

Overall, this is an election budget on steroids with billions for everyone and nothing big and scary which will alienate large groups or scare the electorate.  

It is hard to know how best to summarise this budget given the lack of key initiatives, though lots of individual items. We have broken our analysis down therefore into three key areas – a high level review of the big overall numbers, a summary of actual tax changes, and then a list of the key spending measures.  

Rather than write everything myself this year, I have also enlisted some help from James and Chris who will provide some insight from a Financial Planning and Lending perspective.  

We hope you enjoy and benefit from our analysis.

The big important numbers 

Total cash receipts for 2021-22 - $482.1 billion or 22.6% of GDP 

Total cash payments for 2021-22 - $588.7 billion or 27.6% of GDP 

Budget Deficit 2021-22 - $106.6 billion or (5.0%) of GDP 

Economic growth (real GDP) – 4.25% in 2021-22 (1.25% for 2020-21) 

Unemployment – 5.0% in 2021-22 (5.5% in 2020-21) 

Inflation – 1.75% in 2021-22 (3.5% 2020-21) 

Depreciation is no longer a thing 

In the last budget, the government allowed the full expensing of equipment purchases for all businesses with a turnover of less than $5billion per year. This was an incredibly successful measure and clever accounting by the government.  

Large numbers of businesses took advantage and purchased new equipment, which provided a huge economic stimulus. Car dealers, farm machinery sellers and other sectors selling business equipment have had a bumper year. This scheme was due to expire on 30 June 2022 though has now been extended to 30 June 2023.  

What most commentators seem to forget however, is that businesses could always claim the cost of equipment via depreciation, the deduction is now just a lot more front loaded. The government is not giving businesses something for nothing, they are just being very clever with the timing.  

AAT powers regarding small business tax debts 

One item which made the treasurer’s speech was the increased powers of the Administrative Appeals Tribunal (AAT) to allow it to pause or modify ATO debt recovery action in related to disputed tax debts. Personally, I don’t see this as a big ticket item, or certainly not as much as the Treasurer made it out to be. The ATO already offers a very fair and pragmatic system for dealing with tax debts, and this measure is a little obscure. I think he was clutching at straws a little to find small business measures to announce as, apart from the couple above, there aren’t a lot in this budget.  

Removing minimum $450 per month threshold for super guarantee contributions 

Currently, employers are required to make superannuation contributions only for those employees who earn more than $450 per month. This prevents employers making super contributions for very part time workers.

From 1 July 2022 onward, this threshold will be removed. This measure is being introduced under the guise of ‘assisting women’ (a group the Morrison government has not been too popular with in 2020). I think this measure though is fiddly and unnecessary, and will only place an additional burden on business owners. 

There is little doubt that our superannuation system is prejudiced against women at a mathematical level. When women exit the workforce or reduce their hours when having children, the compound impact on their super balance at retirement is stark. The government could have found a lot more effective ways to close this inequity than this rather trivial measure.

LMITO
 

The Low and Middle Income Tax Offset (LMITO) is a slightly confusing tax break afforded to those earning between $37,000 per year and $126,000 per year. The maximum rebate was $1,080 and applied in the 2019 and 2020 tax returns and was already due to apply to the upcoming 2021 tax return. The government have extended this rebate to apply also to the 2022 tax return. You don’t need to do anything to claim this rebate, it will be applied automatically when you complete your tax return.  

Distillers and brewers 

Currently, small wine producers get a much bigger tax rebate than brewers or distillers. This gross inequity has been rectified and small brewers and distillers will now receive the same rebate as their grape fermenting peers.  

Downsizer

Currently, people over 65 who sell their main residence can contribute $300k each into superannuation. This original measure from several years ago was designed to encourage ‘empty nesters’ to downsize their property and free up larger homes. The age limit has now reduced from 65 to 60.  

Clever Accounting

Governments love ‘announceables’ with big numbers attached. Journalists also like splashing these big numbers in headlines. No one though seems to care much about the time period uttered straight after the big number.  

Consider the following.  Which do you think sounds more impressive in a headline? 

$13 billion! over the budget period 

$50 billion! over the forward estimates  

$100 billion! over 10 years 
 

$100 billion is a great announceable and a real headline grabber, though is actually the smallest of the three numbers when you measure it properly.  

$13 billion over the budget period = $13 billion per year 

$50 billion over the forward estimates = $12.5 billion per year 

$100 billion over 10 years = $10 billion per year 

Modern budget papers are rife with this clever accounting, though this budget takes things to a new level. There is spending announced over a single year, two years, three years, four years, five years, six years, and of course, some over 10 years.

To help compare ‘apples with apples’, we have broken down each spending measure to a single year cost from it's announced amount. Of course, not all measures will be spent uniformly each year, though this summary will attempt to remove some of the ‘creative accounting’.   

This table therefore lists the Government initiative, the amount of spending announced, and the single-year conversion. It is quite a list…  

A Financial Planner's Perspective

From a financial planning perspective I found this budget a little light. There is some significant spending on area’s of weakness for the government to help improve their ratings leading into an election i.e. women and aged care. Some temporary measures to help businesses and low to middle income earners save some tax. Also infrastructure spending seemed to grab some headlines however the amount of spending is in line with previous budget announcements. 
 
 
However there were some noteworthy changes which may impact some clients:
 
Superannuation

• Removing the work-test for people aged 67-74 in respect to salary sacrifice and non-concessional contributions (NCCs). Removing the requirement to meet the work test when making non-concessional or salary sacrifice contributions will simplify the rules governing superannuation contributions and will increase flexibility for older Australians to save for their retirement through superannuation.
• Expanding eligibility to utilise the NCC bring-forward rule to people aged 67-74. Again allowing older Australians to access the tax advantages within super.
• Reducing the eligibility age for downsizer contributions from 65 to 60. It should be remembered that downsizer contributions do not count toward an individual’s non-concessional contribution (NCC) cap. Individuals under age 65 may also be able to trigger the 3-year bring-forward NCC cap subject to their Total Superannuation Balance. This could potentially result in super contributions of up to $630,000 being made by an individual when combining their NCC cap and a downsizer contribution (where eligible to do so)
• Extending the first home super saver scheme (FHSSS). The Government has announced that the cap on withdrawals of voluntary contributions from the FHSSS will be increased to a maximum of $50,000 plus earnings per eligible person. Withdrawals are currently capped at a maximum of $30,000 plus earnings per person. This is a significant change and will be a strategy that I will encourage first home buyers to take advantage of.

A Lender's Perspective

This years budget has seen support for single parents looking to enter the property market but have found it difficult to save a deposit that will meet lenders requirements, typically (as a minimum) 5-10% of the purchase plus stamp duty which is between 3-5% of the purchase price.

The government is offering 10,000 places for single parents to purchase a home with a 2% deposit, I’d imagine this will be run in line with the first home loan deposit scheme which allows first home owners to purchase with a deposit of 5% and no LMI (Lenders Mortgage Insurance). This scheme has been running for 18 months and has been largely successful. In both scheme’s the government will guarantee 18% of the lend, the applicant 2% and the lender will take the risk on the other 80% which is standard lending practice. 
 

For example:-

Purchase Price: $400,000

2% Deposit: $8,000

Loan from Bank: $392,000

Of that $392,000, $72,000 is guaranteed by the government and $320,000 is at the lenders risk. If the borrower doesn’t repay and the property is sold/foreclosed and there is a shortfall i.e. the loan isn’t repaid from the sale then the government will pay the lender the shortfall up to the guaranteed limit, in this case $72,000.

At face value this appears to be a great scheme, easy to implement and targeting single parents that struggle to get ahead. The issue for me is how many single parents can afford loan repayments of $500K-$900K, especially when banks need to service that debt at 5%+ even though interest rates are sub 3%. Property prices have been based around dual incomes for over two decades and whilst a helping hand on the deposit will assist many single parents onto the property ladder, with property prices so high there are going to be many that simply cannot meet lenders borrowing capacity requirements.