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Tax & AccountingLegalFinanceComplianceOctober 25, 2022

Wolters Kluwer CCH Analysis: Labor Government 2022-23 Australia Federal Budget Announcement

The Federal Treasurer, Dr Jim Chalmers, handed down the Labor government’s first Federal Budget at 7:30 pm (AEDT) on 25 October 2022.

Despite an uncertain global economic environment, the Treasurer has lauded Australia’s low unemployment and strong export prices as reason for a 3.5% growth in the current financial year, slowing to 1.5% in 2023–24. The Budget projects a deficit of $36.9 billion, lower than the forecast earlier this year of $78 billion.

Described as a sensible Budget for the current conditions, it contains various cost-of-living relief measures including cheaper child care, expanding paid parental leave, and encouraging downsizing to free up housing stock. Key tax measures are targeted at multinationals, particularly changes to the thin capitalisation rules, and changes to deduction rules for intangibles.

Importantly, no amendments have been proposed to the already legislated Stage-3 individual tax rate cuts. Additional funding for a range of tax administration and compliance programs has also been announced. Finally, the fate of a suite of announced but unenacted tax measures, including a few that have been around for at least 10 years, has been confirmed.

The full Budget papers are available at budget.gov.au and the Treasury ministers’ media releases are available at ministers.treasury.gov.au.

Key messages

In his Budget Speech Treasurer Jim Chalmers said, “this is a responsible Budget that is right for the times and readies us for the future.

“It delivers on the priorities of the Australian people, and it repays their faith in a new government.

“It provides cost of living relief which is responsible, not reckless – to make life easier for Australians, without adding to inflation.

“It targets investments in a stronger, more resilient, more modern economy.

“And it begins the hard yards of Budget repair.

“It delivers on our commitments:

  • Cheaper child care, and more Paid Parental Leave.
  • Better access to health care, cheaper medicines, and a better standard of aged care.
  • Fee-free TAFE and more university places.
  • Cheaper and cleaner energy.
  • More affordable housing, and a future made in Australia.”

He said, “This Budget does more than end a wasted decade –

“It begins to put things right.”

Budget outcome

The Budget shows the forecast Budget deficit (the Government’s underlying cash balance) for 2022-23 has improved by $41 billion since the pre-election, March Budget, producing a forecast Budget deficit of $36.8 billion, compared to $78 billion in March.

Economic growth

The Budget Papers say Australia’s economic growth is expected to slow from 3¼ percent in 2022–23, to 1½ percent in 2023–24, a downgrade of ½ of a percentage point from the July Ministerial Statement and 1 percentage point from the Pre-election fiscal outlook.

Employment and unemployment

Employment growth is forecast to slow over the next 2 years as economic growth slows. Employment growth is still forecast to remain positive, at ¾ percent in 2023–24.

Floods

In his Budget Speech Treasurer Jim Chalmers said, “$3 billion has been provisioned as a response to recent floods. We will fund Disaster Relief Australia to help deploy more than 5,000 extra volunteers when future disasters strike.”

Cost of living

The Budget does not contain the specific cost of living measures. However, it lists as “Cost of living relief” which the Budget provides, a number of previously announced Government programs that have been funded in the Budget, including its expanded child care program and expanded Paid Parental Leave scheme.

Small business

In his Budget Speech Treasurer Jim Chalmers said the Government was “Supporting small business with new energy efficiency grants, and extending tailored mental health and financial counselling programs.”

Tax collections

The Budget forecasts that tightening up on a number of tax measures will net the Government $4.1 billion over four years. These include:

  • Tax Avoidance Taskforce ($1.7 billion over four years).
  • Shadow Economy Program ($1.4 billion).
  • Multinational Tax ($715 million).
  • Changes to off-market share buy-back rules ($550 million).
  • Reversing the measure allowing taxpayers to self-assess the effective life of intangible depreciating assets ($550 million).

Aged care

The Government’s Aged Care package is one of the most expensive expenditure items in the Budget, costing $183 million in 2023-24 and $2.5 billion over the Forward Estimates and a further $540 million for aged care reforms; followed by the funding of the previous Government’s spending commitments at $259 million and $1.6 billion.

The Budget’s key initiatives

As widely expected, the Budget’s key initiatives are the Labor Government’s major spending promises from the May election: expanded child care, increased funding for aged care, and savings from the scrapping and proceeding with some of the Morrison Government’s spending priorities where the previous Government had not committed funds.

(The Budget also contains a series of major savings where the Albanese Government will not proceed with projects – especially but not only – infrastructure projects announced by the Morrison Government, where funding had not been committed by the previous Government.

The Budget Papers show the largest of the Government’s initiatives is its expansion of child care, costing $1.35 billion in 2023-24 and $4.69 billion over the four-year forward estimates (2022-23 to 2026-26).

Next most expensive is the Government’s Aged Care package, costing $183 million in 2023-24 and $2.5 billion over the Forward Estimates and a further $540 million for aged care reforms; followed by the funding of the previous Government’s spending commitments at $259 million and $1.6 billion.

Other major new spending includes Foreign Aid ($1.4 billion over four years), Fee-Free TAFE and Technology Fund ($852 million), and a range of COVID-related expenditures ($2.2 billion.)

Budget outcome

The Budget shows the forecast Budget deficit (the Government’s underlying cash balance) for 2022-23 has improved by $41 billion since the pre-election, March Budget, producing a forecast Budget deficit of $36.8 billion, compared to $78 billion in March.

The changes are mostly a result of higher government revenue from the effect of higher inflation on tax revenue and higher commodity prices. Despite some savings from the scrapping of the previous Government’s programs, spending is actually forecast to be $15 billion higher than forecast in March.

The Budget papers said, “This Budget begins the difficult task of repairing the budget and ensures fiscal policy does not add to inflationary pressure. As a first step, the Budget makes significant savings by redirecting spending to priorities, unwinding wasteful spending to support budget repair, better-aligning infrastructure investment with market capacity, and improving the fairness and integrity of the tax system.

“The Government has identified $28.5 billion in budget improvements over the 4 years to 2025–26.”

This includes:

  • $22.0 billion in spending reductions or reprioritisations, including $6.5 billion in savings from reprofiling infrastructure
  • $3.7 billion from extending the ATO’s Tax Avoidance
  • $952.8 million through comprehensive action to ensure multinationals

The Budget Papers say, “While this Budget has begun the critical task of budget repair, further work will be required in future budgets to rebuild fiscal buffers and manage growing cost pressures.

“The underlying cash balance has improved by a cumulative $42.7 billion across the 4 years to 2025–26.

“However, in the final 2 years of the forward estimates, the improvement in tax receipts is not large enough to cover the growing spending pressures arising from higher prices, higher interest rates and cost pressures associated with essential services.”

In his Budget Speech Treasurer Jim Chalmers said, “New policies have been largely offset across this year and next – to avoid adding to inflation when price pressures are most acute.

“And nearly all of the tax upgrades over the forward estimates have been returned to the Budget, not spent:

  • 99 per cent returned to the Budget over the next two years.
  • 92 per cent returned to the Budget over the next four years.

Summary of tax, superannuation, and social security highlights

Businesses

  • Electric vehicles under the luxury car tax threshold will be exempt from fringe benefits tax and import tariffs.
  • A number of Victorian and ACT based business grants relating to the COVID-19 pandemic will be non-assessable non-exempt income for tax purposes.
  • Grants will be provided to small and medium-sized businesses to fund energy efficient equipment upgrades.
  • The tax treatment for off-market share buy-backs undertaken by listed public companies will be aligned with the treatment of on-market share buy-backs.
  • The 2021–22 Budget measure to allow taxpayers to self-assess the effective life of intangible depreciating assets will not proceed.
  • Heavy Vehicle Road User Charge rate increased from 26.4 to 27.2 cents per litre of diesel fuel, effective from 29 September 2022.
  • Australia has signed a new tax treaty with Iceland.
  • Additional tariffs on goods imported from Russia and Belarus have been extended by a further 12 months, to 24 October 2023.
  • Ukraine goods are exempted from import duties for a period of 12 months from 4 July 2022.
  • Technical amendments to the taxation of financial arrangements (TOFA) rules proposed in the 2021–22 Budget will be deferred.
  • Amendments to simplify the taxation of financial arrangements (TOFA) rules proposed in the 2016–17 Budget will not proceed.
  • The proposed measure from the 2018–19 Budget to impose a limit of $10,000 for cash payments will not proceed.
  • Proposed changes in the 2016–17 Budget to amend the taxation of asset-backed financing arrangements will not proceed.
  • The new tax and regulatory regime for limited partnership collective investment vehicles proposed in the 2016–17 Budget will not proceed.
  • The Pacific Australia Labour Mobility (PALM) scheme will be expanded and enhanced.

Individuals

  • The amount pensioners can earn in 2022–23 will increase by $4,000 before their pension is reduced, supporting pensioners who want to work or work more hours to do so without losing their pension.
  • To incentivise pensioners to downsize their homes, the assets test exemption for principal home sale proceeds will be extended and the income test changed.
  • The income threshold for the Commonwealth Seniors Health Card will be increased from $61,284 to $90,000 for singles and from $98,054 to $144,000 (combined) for couples.
  • The Paid Parental Leave Scheme will be amended so that either parent is able to claim the payment from 1 July 2023. The scheme will also be expanded by 2 additional weeks a year from 1 July 2024 until it reaches 26 weeks from 1 July 2026.
  • The maximum Child Care Subsidy (CCS) rate and the CCS rate for all families earning less than $530,000 in household income will be increased.
  • The current higher Child Care Subsidy (CCS) rates for families with multiple children aged 5 or under in child care will be maintained.
  • Legislation will be introduced to clarify that digital currency (or crypto currencies) will not be treated as foreign currency for income tax purposes.

Superannuation

  • Eligibility to make a downsizer contribution to superannuation will be expanded by reducing the minimum age from 60 to 55 years.
  • The 2021–22 Budget measure that proposed relaxing residency requirements for SMSFs and small APRA-regulated funds (SAFs) from 1 July 2022, has been deferred.
  • The 2018–19 Budget measure that proposed changing the annual audit requirement for certain self-managed superannuation funds (SMSFs) will not proceed.
  • A requirement for retirement income product providers to report standardised metrics in product disclosure statements, originally announced in the 2018–19 Budget, will not proceed.

Multinationals

  • Thin capitalisation rules for non-ADIs will be amended from 1 July 2023, with tests relating to ratios replaced by earnings-based tests.
  • Significant global entities will be denied a tax deduction for payments to related parties in relation to intangibles held in low- or no-tax jurisdictions.
  • Significant global entities and public companies will have additional reporting requirements for income years commencing from 1 July 2023.
  • Proposed amendments to the debt/equity tax rules mentioned in the 2013–14 MYEFO will not proceed.

Tax administration

  • Penalty unit increase to $275 from 1 January 2023.
  • Personal Income Taxation Compliance Program extended a further 2 years to 30 June 2025.
  • Shadow economy compliance program extended to 30 June 2026.
  • The ATO tax avoidance taskforce will receive additional funding and is being extended to 30 June 2026.
  • Financial penalties for breaches of foreign investment compliance to double from 1 January 2023.
  • Access to refunds of indirect tax, including GST, fuel and alcohol taxes, under the Indirect Tax Concession Scheme has been expanded to the diplomatic and consular representations of Bhutan.
  • The proposed extension of reportable transactions relating to the sharing economy deferred by 12 months to 1 July 2024.

Tax agents

  • Funding to be given to the Tax Practitioners Board to increase compliance investigations.
  • Additional funding will be provided to support the delivery of government priorities in the Treasury portfolio.

Not-for-profit

  • Deductible gift recipients list to be updated.
  • The 2021–22 MYEFO measure to establish a deductible gift recipient category for providers of pastoral care will not proceed.

Complimentary webinar for more in-depth Budget analysis

On Monday, 31 October at 11 am AEDT join Wolters Kluwer and Gilbert & Tobin for a complimentary webinar to understand the Budget’s practical implications for individuals, small businesses, and Corporate Australia.

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