BlueRock’s 22-23 Federal (mini) Budget Wrap-Up

Was that a federal budget or a mid-year fiscal review? With all the usual fanfare and ceremony, Treasurer Jim Chalmers handed down the Labor Government’s first federal budget, and as we expected, it was a bit light-on.

The themes running through the budget are fiscal responsibility and budget repair, cost of living relief and investments to strengthen Australia’s workforce. As expected, the budget also extends various ATO compliance programs, further strengthening the focus on compliance and collection.

We’re calling it a mini budget, and instead of wrapping it up in our usual jumbo burrito sized review, we’ll give you a street style taco sized update on what this budget means for Aussie businesses, industries, taxpayers and investors. Let’s go.

What The Federal Budget Means For Aussie Businesses

If nothing else, this budget highlights the increasing importance of managing tax risk as the ATO ramps up compliance action. Aside from that, there were some interesting announcements that business owners need to be across.

Depreciation – Reversal Of Self-Assessment Option For The Effective Life Of Intangible Depreciating Assets

The Government will not proceed with the previously announced measure in the 2021-2022 Budget to allow taxpayers to self-assess the effective life of intangible depreciating assets (e.g. patents, copyright, in-house software).

Effective lives of intangible depreciating assets will therefore continue to be determined based on effective life set out in the legislation (which may be longer than the actual effective life of such assets).

Deferred Start Dates For Sharing Economy Taxable Payments Annual Reporting (TPAR)

The proposed start dates for the sharing economy taxable payments annual reporting will be deferred from:

• 1 July 2022 to 1 July 2023 for transactions relating to the supply of ride sharing and short-term accommodation, and
• 1 July 2023 to 1 July 2024 for all other reportable transactions (including but not limited to asset sharing, food delivery and tasking-based services).

Electric Cars (EVs)

A Bill containing Fringe Benefits Tax exemption for electric cars is already before Parliament (second reading in the Senate was moved on 8 Sep 2022). The Budget confirms the proposed changes summarised below:

• Eligible EVs will be exempted from the FBT and 5% import tariff.
• For an EV valued at about $50,000, the FBT exemption would save an employer up to $9,000 a year.
• For an employee using a salary sacrifice arrangement, their savings would be up to $4,700 a year.
• Removing the custom duties will save the purchaser up to an additional $2,500.
• From 1 July 2022, the measure will exempt battery, hydrogen fuel cell and plug-in hybrid electric cars from FBT and import tariffs if they have a first retail price below the luxury car tax threshold for fuel-efficient cars. The car must not have been held or used before 1 July 2022.
• Employers will need to include exempt EV fringe benefits in an employee’s reportable fringe benefits amount.

Extending ATO Compliance Programs

With the focus on compliance strengthening, the Government will beef up the ATO’s compliance programs with funding increased by $200 million.

Victorian Business Grants To Be Given Non-Assessable Non-Exempt Income Status

In good news for grant recipients, the Government has announced a number of Victorian and ACT business grants to be non-assessable non-exempt income for tax purposes. This is in addition to several other state-based business grants that have been given non-assessable non-exempt status since the beginning of the COVID-19 pandemic. We’ve listed the grants below.

VIC

• Business Costs Assistance Program Round 2 – Top up
• Business Costs Assistance Program Round 3
• Business Costs Assistance Program Round 4
• Business Costs Assistance Program 4 – Construction
• Business Costs Assistance Program Round 5
• Commercial Landlord Hardship Fund 3
• Impacted Public Events Support Program Round 2
• Licensed Hospitality Venue Fund 2021 – July extension
• Licensed Hospitality Venue Fund 2021 – Top up payments
• Live Performance Support Program (Presenters) Round 2
• Live Performance Support Program (Suppliers) Round 2

ACT

• HOMEFRONT 3
• Small Business Hardship Scheme

Improving The Integrity Of Off-Market Share Buy-Backs Undertaken By Public Companies

The Government is proposing to align the tax treatment of off-market share buy-backs undertaken by listed public companies with the treatment of on-market share buy-backs.

Under the current tax treatment for an off-market buy-back, the difference between the purchase price and the part of the purchase price in respect of the buy-back which is debited against the company's share capital account is taken to be a dividend. Franking credits may be available with respect to such a dividend. In the case of an on-market buy-back, no part of the buy-back price is treated as a dividend and the total amount received by the shareholder is treated as consideration for the share sale. This measure applied with immediate effect.

Looking at What’s Not in the Federal Budget

There are a number of omissions from the budget which probably tell us more than what’s actually in the budget. For example, the Government has not clarified whether they will proceed with the following measures announced by the Morrison Government:

• Division 7A reform
• Review of CGT rollover and demerger relief
• CGT concessions for small business

Notably, the Budget also made no comment on the following measures which are soon due to expire thus suggesting that they may not be extended:

• Loss carry back rules (due to expire on 30 June 2023)
• Temporary full expensing measures (due to expire 30 June 2023)

As we'd predicted, the Government made very few announcements in respect of tax measures, with the focus instead on compliance action. If nothing else, this Budget highlights the increasing importance of managing tax risk as we find more and more of our clients selected for review by the ATO.

Interestingly, our tax advisory experts cannot remember a federal budget that didn't have a single mention of Division 7A or the taxation of trusts. The budget didn't even clarify the Government's position on the previous Government's proposed changes to Division 7A (despite going to great lengths to clarify the status of most other announced measures!).

Other interesting omissions from the budget include the temporary full expensing rules (due to expire on 30 June 2023) and the loss carry-back rules (due to expire on 30 June 2023).

Get in touch if you’d like to discuss any of the above tax measures with our Tax Advisory team.

What This Federal Budget Means For Individuals

With inflation soaring and the cost-of-living starting to bite for many Australians, the Government announced a 5 point plan for ‘responsible and targeted cost-of-living relief. It includes more affordable childcare, cutting the cost of medicines, expanding paid parental leave, building affordable housing and getting wages moving. There’s also those controversial stage 3 tax cuts… Let’s look at the deets.

Stage 3 Tax Cuts

As expected, the Government confirmed the Stage 3 tax cuts that come into effect from 1 July 2024.

Current tax brackets

Tax brackets under stage 3

Low-And-Middle-Income Tax Offset Not Extended

When a current measure isn’t mentioned, the suggestion is that it will not be extended. It appears the low-and-middle-income tax offset, which expired on 30 June 2022, won’t be coming back.

Cheaper Childcare

From 1 July 2023, Child Care Subsidy rates will lift from 85% to 90% for families earning less than $80,000. Subsidy rates will then taper down 1% for each additional $5,000 in income until it reaches 0% for families earning $530,000.

Families will continue to receive existing higher subsidy rates for their second and subsequent children aged five and under in care, up to 95%.

Paid Parental Leave Scheme – 26 Weeks Paid Leave

From 1 July 2023, either parent will be able to claim the Paid Parental Leave Scheme. Both birth parents and non-birth parents will be allowed to receive the payment if they meet the eligibility criteria. Parents will also be able to claim weeks of the payment concurrently so they can take leave at the same time. The expanded Paid Parental Leave scheme will transition from a total of 20 weeks leave in July 2023 up to a total of 26 weeks leave by July 2026.

An additional two weeks will be added each year from July 2024 to July 2026. Eligibility will be expanded through the introduction of a $350,000 family income test, which families can be assessed under if they do not meet the individual income test. For two parent families, a portion of this leave will be reserved for each parent to encourage families to share caring responsibilities.

Help for Homes

The Government has proposed a number of measures to assist Australians purchasing a home, benefiting veterans, regional home buyers and low to middle income earners. They also announced a ‘Housing Accord’ that will build one million new homes over five years from 2024.

Most of the money is supposed to come from the private sector, with governments at state, federal and local level making it easier for investors by expediting their zoning, planning and land release processes. So the real winner from this policy could be developers and the construction industry.

New Energy Apprenticeships and New Energy Skills Programs

In a boost for businesses struggling with skills shortages, this program will help apprentices acquire necessary skills by developing a new mentoring program and providing up to $10,000 for each apprentice in a clean energy role. It starts from July 1 2023.

Pensioners

Age and veterans pensioners will be given a once off credit of $4,000 to their Work Bonus income bank. This means they can earn up to $11,800 (instead of $7,800) before their pension is reduced. Also, 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.

Crypto and Digital Currency

The Government will introduce legislation to clarify that digital currencies (such as Bitcoin) continue to be excluded from the Australian income tax treatment of foreign currency. This maintains the current tax treatment of digital currencies, including the capital gains tax treatment where they are held as an investment. This measure removes uncertainty following the decision of the Government of El Salvador to adopt Bitcoin as legal tender and will be backdated to income years that include 1 July 2021.

Reforming Tax Residency Rules For Individuals

The former Government’s proposed reform of tax residency rules for individuals hasn’t been contemplated in the new Government’s Budget.

Extending ATO Personal Income Taxation Compliance Program

With the focus on compliance strengthening, the Government will extend the Personal Income Taxation Compliance Program for 2 years from 1 July 2023. This program focuses on key areas of non-compliance including overclaiming of deductions and incorrect reporting of income. This is expected to lead to increased and earlier engagement by the ATO with taxpayers and agents.

What The Federal Budget Says About New Grant Funding

Here are some key points to know about grants and incentives announced in the budget. Get in touch with our amazing grants consultants to learn more.

Government Grants

The Government will redirect $506.4 million of funding measures of the previous Government, most notably reversing, or not proceeding with uncommitted funding from the Modern Manufacturing Strategy and the Entrepreneurs’ Program.

The savings will be re-directed into the establishment of the National Reconstruction Fund along with other programs that support the Government's priorities across 7 industry sectors.

They’ll also invest in several grant opportunities across an array of sectors from women in business, First Nations, community infrastructure and energy efficiency. These programs are funded by savings from the Government Spending Audit, as well as the redirection of funding components from other Morrison Government funding.

Key grant funding opportunities will be rolled out through the following programs:

• An additional $5.8 million over 5 years invested into the Women in STEM and Entrepreneurships Grants
• $13.9 million over 5 years for a new First Action Plan Priorities Fund
• $229.7 million over 2 years for The Strengthening Medicare General Practice (GP) Grants Program
• $62.6 million over 3 years for the Energy Efficiency Grants for Small and Medium Sized Enterprises
• $86.2 million over 5 years towards the A Better Plan for Forestry and Forest Products
• $45.0 million over 4 years for the Diesel Exhaust Fluid Market Security
• $270.8 million over two years towards the Schools Upgrade Fund

• $1.0 billion over 3 years for the Growing Regions Program and regional Precincts and Partnerships Program
• $18.2 million over 4 years to establish a Community Language Schools Grants program to support more young Australians to learn a second language.

First Nations grants include:

• $4.4 million in 2022–23 to provide additional urgent mental health support
• $300,000 in 2022–23 for grants to community organisations for a medical consulting room, play areas and gym equipment to improve the health and wellbeing of First Nations peoples.

Budget Summary for Investors, SMSF Trustees and The Broader Economic Outlook

Investment & Economic Outlook

This Budget marks Labor’s first in almost a decade and its narrative has appeared to focus on a “reset” of Australia’s fiscal strategy in light of the pandemic-induced recession and a volatile global landscape. More importantly, the government has to walk the line between relieving the cost of living and managing inflationary pressures, which is a tough act. 

Despite the headwinds, it’s pleasing to see generally optimistic budget forecasts. Based on figures handed down by the Treasurer it is expected that inflation will now peak at 5.75% (up from earlier estimates of 3%) by the end of 2022, before easing gradually over the next 2 years. Acceleration in wage growth in anticipated to rise from 2.6% to 3.75% by June 2023 and the unemployment rate to stay low (relative to historical standards) at 4.5% by 2024.  

Should inflation prove higher or stickier than anticipated, the budget may remain in deficit for longer. Additionally, if the RBA is forced to lift rates higher than expected in order to combat this sticky inflation, this may have a direct impact on consumer expenditure patterns. One would anticipate that this would have the most impact on the consumer discretionary sector of the market.

In regard to direct impact regarding investment, there are few this year. Traditionally, budget measures have proven to only have a mild and short-term impact on markets and we expect the same to occur here. Expansion to major construction projects nationally could benefit businesses aligned to the sector, such as Mirvac, Stockland, Boral, Brickworks, Reece etc.

It remains that global forces regarding interest rates, inflation, geopolitical uncertainty and war remain front of mind for investors and are likely to outweigh anything we have seen in the Australian budget.

Although no direct measures on investments were announced, fiscal strategies do indirectly impact the Australian dollar and equity markets over the medium to long term. Subscribe to our Market Update to receive a breakdown from our investment experts on what it all means for investors.

Superannuation

To help older Australians who want to downsize, the Government will extend the exemption of home sale proceeds from pension asset testing by 12 months and is expanding access to make downsizer contributions to superannuation for people aged 55 to 59.

Self-Managed Super Funds

A measure from the 2021-22 Budget that proposed relaxing the residency requirements for SMSFs from 1 July 2022 will be delayed to the income year commencing on or after the date of Royal Assent of the enabling legislation. The measure, if implemented, would extend the safe harbour for the central control and management test from two to five years for SMSFs, and remove the active member test.

The active member test was always disproportionately unfair to SMSFs, versus APRA funds, as it required at least 50 per cent of all active (contributing) members to be resident members. The SMSF industry has long pushed for the residency rules for SMSFs to be simplified.

SMSF Audits 3 Year Cycle Proposal

The Government has also ruled out implementing a proposal by the Morrison Government to introduce a three year audit cycle for SMSFs with a clean compliance record.

Non-Arm's Length Rules For Smsfs

The Morrison Government’s proposed changes to improve the operation of the non-arm's length rules for SMSFs has also not been contemplated in the 22-23 budget.

If you’d like to discuss your SMSF or explore setting one up, get in touch with our SMSF team .

Talk To BlueRock’s Expert Advisors About How The Budget Impacts You and Your Business

If you would like to discuss any of the above federal budget 22-23 topics or wish to talk through your plans for the upcoming year, please get in touch with the BlueRock team . Our multidisciplinary approach to business and wealth growth allows us to take into account all these measures in the context of your broader strategic and personal goals.