10 May 2023

It is only a little more than six months since the Treasurer, Dr. Jim Chalmers, delivered his first budget. That budget seemed to play it safe but was generally well received. Building off that, the aim of Federal Budget 2023 was to provide responsible cost of living relief, to repair the budget, and to build a stronger economy.

Announcing a budget surplus of $4.2 billion for 2022-23, Dr. Chalmers’ second budget contained the first surplus for 15 years. Whilst the budget is expected to return to deficit in 2023-24, the deficits over the forward years are expected to be lower compared to recent budgets. Significantly a $125.9 billion improvement is projected over five years.

The budget deficit in 2023-24 is in line with the expected reduction in economic growth to 1.5% in 2023-24 recovering to 2.5% in 2024-25. Unemployment however is expected to remain low by historical standards at 4.25% in 2023-24 and 4.5% in 2024-25.

Dr. Chalmers pointed to inflation as the primary challenge stating, “In all our decisions, we strike a considered, methodical balance. Between spending restraint to keep the pressure off inflation, while doing what we can to help people struggling to make ends meet.” Importantly, the government has predicted that inflation will fall from 6% in 2022-23 to 3.25% in 2023-24 and return to the RBA target band in 2024-25.

Striking the right balance

The budget position is underpinned by tax collection upgrades which will improve the underlying cash balance by $114.2 billion in the five years from 2022-23 to 2026-27. Whilst this is a windfall gain to the government, the Treasurer argues that the government has shown fiscal discipline by returning 87% of the upgrades to the budget. The question is whether this is the right balance, or whether the additional spending in the budget will contribute to inflation? The related question is will this keep interests rates higher for longer?

The Treasurer disputes that the additional spending is inflationary and points to the worthiness of the cost-of-living initiatives that include:

• Partnering with state and territory governments to deliver electricity bill relief to eligible households and small businesses.

• Helping 170,000 households save on energy bills by financing energy saving home upgrades.

• Reducing out-of-pocket health costs by tripling the bulk billing incentive to GP.

• More bulk billing Urgent Care Clinics.

• Cutting the cost of medicine by up to half for at least 6 million Australians.

• Doubling the regional pharmacy maintenance allowance.

• Supporting 57,000 single parents by expanding eligibility for the Single Parenting Payment.

• Increasing the base rate of JobSeeker, Austudy and Youth Allowance.

• Lowering the age threshold for higher JobSeeker payment for older beneficiaries from 60 to 55 years.

• Increasing Commonwealth Rent Assistance for 1.1 million households.

• Tax breaks to encourage more investment in build-to-rent projects.

• Funding a 15 per cent pay rise for aged care workers.

• Supporting a pay rise for low-paid workers.

Treasury describes this budget as providing responsible and targeted cost-of-living relief for those that need it most, investing in key drivers of sustainable growth and sustainably funding the services that Australians rely on; not surprisingly this echoes the aims of the previous budget.

New revenue measures

New revenue measures announced in the federal budget were described by Dr. Chalmers as modest but meaningful. These include:

• Amending the Petroleum Resource Rent Tax (PRRT) in response to Treasury’s Review of the PRRT Gas Transfer Pricing (GTP) arrangements, by introducing a cap on the use of deductions to offset assessable PRRT income of liquefied natural gas (LNG) producers under the PRRT. The cap will bring forward PRRT receipts from LNG projects which are yet to pay PRRT and ensure a greater return to taxpayers from the offshore LNG industry.

• For large multinational enterprises with annual global revenue of EUR750 million (approximately $1.2 billion) or more, implement key aspects of the OECD/G20 Two-Pillar Solution to address the tax challenges arising from digitalisation of the economy:

  • A 15 per cent global minimum tax with the Income Inclusion Rule applying to income years starting on or after 1 January 2024 and the Undertaxed Profits Rule applying to income years starting on or after 1 January 2025.

  • A 15 per cent domestic minimum tax applying to income years starting on or after 1 January 2024.

• Increasing tobacco excise and excise-equivalent customs duty by five per cent per year for three years from 1 September 2023 to encourage smokers to quit, in addition to ordinary indexation.

• Reduce the tax concessions available to individuals with a total superannuation balance exceeding $3 million, from 1 July 2025. It will bring the headline tax rate to 30 per cent, up from 15 per cent, for earnings corresponding to the proportion of an individual’s total superannuation balance that is greater than $3 million.

• Provide additional funding to the ATO for a four-year extension to the GST Compliance Program and a two-year extension to the Personal Income Tax Compliance Program, expected to increase receipts by over $4 billion in those periods. Funding will also be provided to the ATO to implement enhanced unpaid superannuation recovery targets and engage more effectively with businesses to address the growth of tax and superannuation liabilities.

Interestingly, these revenue measures fall upon a relatively narrow taxpayer base.

Tax incentives

The Budget contained several incentives to be provided through the tax system that involve budget spending (or defer receipts). These include:

• Temporarily increasing the instant asset write-off threshold to $20,000 for small businesses, from 1 July 2023 until 30 June 2024, to improve cash flow and reduce compliance costs for small businesses.

• Introduction of a Small Business Energy Incentive to support small and medium businesses to save on energy bills.

• For eligible new build-to-rent projects where construction commences after 7:30 PM (AEST) on 9 May 2023 (Budget night), the Government will:

  • increase the rate for the capital works tax deduction (depreciation) to four per cent per year; and

  • reduce the final withholding tax rate on eligible fund payments from managed investment trust (MIT) investments from 30 per cent to 15 per cent.

• Extend the clean building managed investment trust (MIT) withholding tax concession to data centres and warehouses.

• Amend the non-arm’s length income (NALI) provisions which apply to expenditure incurred by superannuation funds by:

  • limiting income of self-managed superannuation funds and small Australian Prudential Regulation Authority (APRA) regulated funds that are taxable as NALI to twice the level of a general expense. Additionally, fund income taxable as NALI will exclude contributions;

  • exempting large APRA regulated funds from the NALI provisions for both general and specific expenses of the fund; and

  • exempting expenditure that occurred prior to the 2018-19 income year.

• Amend the start date of the 2016–17 MYEFO measure: Tax integrity – franked distributions funded by capital raisings from 19 December 2016 to 15 September 2022.

• Set the GDP adjustment factor for pay as you go (PAYG) and GST instalments at six per cent for the 2023–24 income year, a reduction from 12 per cent under the statutory formula. The six per cent GDP adjustment rate will apply to small businesses and individuals who are eligible to use the relevant instalment methods (up to $10 million aggregated annual turnover for GST instalments and $50 million annual aggregate turnover for PAYG instalments).

The policy intent of the measures vary but include addressing some tax settings that might be considered onerous (the franking credit measures and the NALI measures), expanding and introducing certain policy objectives (the clean buildings and build to rent incentives), and providing some targeted relief to small business (introducing some modest concessions).

Additional announcements

Finally, some other announcements worthy of note:

• From 1 July 2026, employers will be required to pay their employees’ Superannuation Guarantee entitlements on the same day that they pay salary and wages.

• No changes were announced to the stage three personal income tax cuts, as expected.

• A lodgement penalty amnesty program for small businesses with aggregate turnover of less than $10 million to encourage them to re-engage with the tax system. The amnesty will remit failure-to-lodge penalties for outstanding tax statements lodged in the period from 1 June 2023 to 31 December 2023 that were originally due during the period from 1 December 2019 to 29 February 2022.

• Extending the general anti avoidance provisions (Part IVA) from 1 July 2024 (irrespective of when scheme commences) to schemes that:

  • Reduce tax paid in Australia by accessing a lower withholding tax rate on income paid to foreign residents; and

  • Achieve an Australian income tax benefit, even where the dominant purpose was to reduce foreign income tax.

• The Government will not proceed with three separate patent box measures announced by the former Government in the 2021–22 and 2022–23 Budgets.

Check out the full coverage from the Federal Budget 2023/24 here.

The views and opinions expressed in this article are those of the author/s and do not necessarily reflect the thought or position of Findex Group Limited.