Insights | 09 May 2023

Federal Budget 2023 – Beige is the new black… Chalmers takes it slow

Labor’s 2023 Federal Budget produced no surprises. Indeed, apart from some overdue improvements to Medicare funding, some would say that it produced nothing much at all.

If good government is a Government that sits back and doesn’t change things, this may be a great budget.

There are a handful of focused, relatively minor changes that will impact taxpayers in Australia, but no big-ticket items that were not announced before budget night.

Pilot’s summary of the key tax and business announcements follows.

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General Business

The Government announced a handful of changes for the broader business sector, delivering somewhat of a mixed bag of sweets and sours. We have examined some of the key tax related changes below.

Goodbye Patent Box

Another budget, another proposal from the previous Government to say goodbye to. In this case, the current Government has announced it will not proceed with the patent box initiative. This initiative was first announced (but never legislated) in the 2021 Liberal Federal Budget to bring about a special corporate tax rate of 17% on profits derived from Australian medical and biotechnology patents and later expanded to include agricultural and low emission technology sections.

Pay Day Superannuation

In a win for employees and to better combat unpaid employee superannuation, the Government has announced an increase to the payment frequency of superannuation to align it with the payment of salary and wages. This proposed change, with a commencement date of 1 July 2026, is expected to have a significant cash flow impact for employers (particularly small businesses) who are currently only obligated to make payments on a quarterly basis.

At this stage, there is no detail available regarding the exact requirements for employers but the three-year head start should allow payroll service providers and superannuation funds with enough time to make the necessary system changes before implementation.

Build-To-Rent Concessions

To encourage and expand Australia’s housing supply, the Government has announced a couple of concessions for build-to-rent property investments. For eligible new build-to-rent projects, where construction commences after 9 May 2023, the Government is proposing to increase the capital works depreciation rate to 4% per year (up from 2.5%). This change will provide investors constructing new rental properties with higher depreciation deductions. The proposed measure applies to build-to-rent projects where the following is satisfied:

The building consists of 50 or more apartments or dwellings made available for rent to the general public;
Dwellings are retained under single ownership for at least 10 years before being able to be sold; and
Landlords must offer a lease term of at least 3 years for each dwelling.

Consultation will be undertaken on implementation which may impact the above criteria.

The Government is also proposing to reduce the withholding tax rate on payments to foreign residents from Managed Investment Trusts (MITs) from 30% to 15%. The withholding rate is already capped at 15% for certain managed fund income, and these rules will bring residential housing income into the mix as well to incentivise housing for renters – albeit with foreign ownership.

Electric Vehicles & FBT Exemption

What the Government giveth, the Government taketh away. In the previous Federal budget, the Government introduced the Fringe Benefits Tax (FBT) exemption for zero or low-emission vehicles, including battery electric vehicles, hydrogen fuel cell electric cars and plug-in hybrids.

From 1 April 2025 onwards, the Government is proposing to remove the FBT exemption for plug-in hybrid electric cars. However, arrangements involving plug-in hybrid electric cars entered into between 1 July 2022 and 31 March 2025 are poised to remain eligible for the FBT exemption. The Government has made no further comments about removing/limiting the FBT exemption for other zero or low-emission vehicles.

Small Business

Small businesses are not big winners this time around, as the Government proposes a much more narrow (and rather lacklustre) range of taxation related concessions for small businesses.

Small Business Spending – But Not Too Much

In Groundhog Day, the Government has gone back to their tried and tested incentives and revived the $20,000 instant asset write-off. The incentive is proposed to return for small business (being those with aggregated annual turnover of less than $10 million), but only for a mere one year (from 1 July 2023 to 30 June 2024).

It seems to have been brought back as a way to ease taxpayers back down to pre-write-off levels, with the Temporary Full Expensing measures set to end on 30 June 2023 (having been around since 6 October 2020). Not quite the limitless write-off we’ve had in recent years, but not quite back to nothing again…is the Groundhog sitting on the fence perhaps?

Efficiency in [Some] Energy Spending

A 20% additional deduction has been proposed for expenditure on depreciating assets that support “electrification and more efficient use of energy”. The new incentive is proposed to apply to energy efficient appliances, equipment and energy storage assets (such as batteries), including eligible upgrades to existing assets. Unfortunately, it appears that electric vehicles, energy generation assets (such as solar panels) and fuel powered assets will be excluded. Therefore, while it appears generous at first glance, it has, perhaps less widespread application as it first seems.

This measure is in many ways similar to the “skills and training” and “technology” investment boosts announced by the previous Government, for which have yet to be legislated. This is clearly part of the Government’s focus on reducing the environmental impact of business and increasing the use of renewables, albeit the limited range in scope seems questionable if that’s what they are really trying to assist.

The bonus deduction will be available for eligible assets first used (or installed ready for use) from 1 July 2023 until 30 June 2024, up to a cap of $100,000 (yielding a maximum $20,000 bonus tax deduction). It is proposed to be available for businesses with aggregated turnover below $50 million.

Saving Time on Compliance?

The Government has announced funding and measures to “lower the tax-related administrative burden for small businesses”. With some $22 million being applied over four years, we would expect some ground-breaking administrative relief! Sadly, the measures leave a lot to be desired…

They cite that they will reduce the use of cheques for income tax refunds – we hear a collective sigh among the handful of taxpayers that still receive cheques.

Tax agents will also be able to lodge Single Touch Payroll forms on behalf of small businesses, although we expect most tax agents are already set up to assist with this in any case.

So in reality, the measures will be less “direct” for small business. Instead, the funding appears to be largely applied to expand the ATO’s internal review processes, as well as educational and advice programs. Indirect funding for longer term compliance saving perhaps – well, time saving from the ATO’s perspective anyway…

PAYG Instalments for Small Businesses

The Government is proposing to cap the uplift factor for Pay As You Go (PAYG) income tax instalments to 6% for the 2023 financial year, instead of the legislated 12% increase. This will apply for businesses with an aggregated turnover of less than $50 million.

While this will have no overall impact on the amount of tax that small businesses pay for the year, it may provide some cash flow support throughout the year.

Superannuation

It wouldn’t be a Federal budget without some changes to the superannuation rules – albeit the major change has already been leaked.

Superannuation Tax Break Changes

As previously announced but now reiterated, the Government is proposing a new controversial tax affecting those with total superannuation balances above $3 million. This proposed reform, to be implemented from 1 July 2025 onwards, is effectively increasing the tax on “earnings” for balances above this threshold to 30% (instead of 15%).

Intriguingly, and perhaps most controversially, the new definition of “earnings” seems to include non-discounted unrealised gains. We will have to wait and see how it will actually be implemented. However, this additional tax on earnings is expected to only impact around 0.5% of individuals with a superannuation account.

For further information about these changes, please refer to our previous article summarising the proposed changes.

The Government has confirmed that this measure does not place a limit on the amount of money an individual can hold in superannuation nor does it change the current contributions rules.

Compliance Activity

Increasing Compliance – Who ordered the audit?

The Budget has a strong focus on strengthening compliance regimes with a view to increasing Government coffers. In keeping with prior years, the ATO’s auditors are providing a good return on investment and the Treasurer is keen to keep the good times rolling. As part of this, the Government will be investing in upgrading their systems across the board to keep up with the ChatGPT bots and simultaneously rake in the coin.

Small Business relief?

As somewhat of a late COVID-19 concession, small businesses with aggregated turnover of less than $10 million will be eligible for a full remission of Failure-to-Lodge penalties applied for any outstanding tax statements lodged between 1 June 2023 and 31 December 2023. This applies for tax statements that were originally due between 1 December 2019 and 29 February 2022 under a new amnesty program. However, this amnesty will not see a reduction in the General Interest Charges that will continue to accrue until the debts are paid.

Further, the amendment period for small business income tax lodgements will be extended to four years from 1 July 2025. This is cited as being designed to allow businesses to revise prior lodgements whilst reducing the compliance burden. However, a look in to the gift horse’s mouth will uncover the ATO’s access to delve deeper themselves into prior year lodgements. They were previously limited to reviews of up to two financial years from the date a return was lodged, however the Government is proposing to allow them to go back another two years under this measure.

GST audits – low hanging fruit

The Government will spend more than half a billion dollars over the forward estimates to allow the ATO to conduct a range of GST compliance activities. The funding will be directed towards data matching and audit activities, and is estimated to increase the Government’s bank balance by $3.8 billion over the next five years. Money for jam (plus 10% for GST)!

Superannuation Guarantee compliance

With additional focus on superannuation in this Budget, the Government have put aside funding for the ATO to improve their data matching capabilities in relation to Superannuation Guarantee (SG) underpayments. With the increasing payment frequency of the SG, and penalties of up to 200% of unpaid super, businesses can be sure to feel the full force of regulators for any non-compliance. A win for the workers, but businesses take note if your super compliance is shaky!

Personal income tax compliance

The focus is not just on businesses though. The Government is throwing more money at the Personal Income Tax Compliance Program for two years from 1 July 2025, and expanding its scope from 1 July 2023. This funding will enable “proactive, preventative and corrective activities”, especially in relation to high-risk areas such as deductions for short-term rental properties. Higher-risk taxpayers can anticipate a ramp up in questioning from the regulator in the years to come – they have their sights set, we have been put on notice.

Anti-avoidance rules

For those playing in the grey areas, the Government are intending to expand the scope of the general anti-avoidance rules for income tax, such that they will specifically apply to schemes that:

Reduce Australian tax payable by foreign residents due to a lower withholding tax rate on income paid to non-residents; and
Achieve an Australian tax benefit, even where the dominant purpose was to reduce foreign income tax.

So, amongst all the audit activity, the Government have added another sledgehammer to their anti-avoidance armaments.

ATO debts

The proposals are not all based around increased audit activities, and taxpayers that are recalcitrant in relation to their tax debt obligations will also feel the ATO heat in due course. The ATO will be provided with funding to enhance “engagement” with taxpayers who have high-value ATO debts (over $100,000), or old debts (more than two years overdue) and are either public/multinational groups with aggregated turnover in excess of $10 million, or private groups controlling more than $5 million of net wealth. The ATO’s floods of debt relief in response to the COVID-19 pandemic have well and truly dried up.

Learn more

If you would like to discuss any of this in more detail, please contact Murray Howlett, Josh Meggs, Kylee Smith or your Pilot Advisor on 07 3023 1300.