Unpacking the federal budget

The pre-election federal budget contained the usual tweaks and an assortment of measures that are unsurprisingly aimed at attracting votes at the upcoming election. The budget also unsurprisingly contained little in the way of significant tax and productivity reforms. This article provides some observations about the key budget measures and what was overlooked. 

Initial reactions

As far as the number of tax and superannuation measures go, it was a modest budget compared with previous budgets. However, the flurry of activity on budget night was no less than prior years as firms, organisations and the professional associations worked tirelessly to disseminate information to the business and general community through various platforms to explain what is known about the announced measures and what they mean for your clients.

It was always going to be challenging for the Treasurer, Josh Frydenberg, to shape this budget: weeks out from the federal election, amid an electorate weary from the COVID-19 pandemic and relentless natural disasters over two years, and against record levels of national debt and annual deficits.

Pre-election budgets can be given less weight by voters due to the possibility of the Opposition forming government at the election. But it is hard to think of a post-budget reaction by the media and the community that has been as indifferent and disinterested as this year’s. Much of the mainstream media had moved on to other top stories on their webpages by the middle of the day after the budget was released. Even the tax profession, which ordinarily shows a keen interest, has seemed a little underwhelmed by the announced measures.

In the main, there was little to offend voters in the budget which contained the expected pre-election sweeteners. But, as has been the case in recent years, many of the tax measures - and the one superannuation measure - are temporary short-term initiatives that provide no structural reform or long-term vision for designing a sustainable tax system. It is apparent to almost everyone that our tax system is creaking under its own weight, yet the budget displayed little willingness for structural change.

I share the frustrations of the Tax Institute’s general manager of tax policy and advocacy, Scott Treatt, when he says: “Significant long-term tax changes had more or less been ruled out in favour of temporary measures.” And this: “Temporary measures don’t solve permanent problems.”

The tweaks and temporary measures may or may not prove to be vote-winners, but they do little to repair the system, and repair is what it badly needs.

In breaking the measures down, they are broadly welcome. A few of the measures can be characterised as effecting permanent change that have the potential to improve efficiency and encourage innovation if designed and implemented well. The remainder are limited life measures.

Key permanent measures

       Expansion of the patent box regime: First announced in the federal budget 2021–22, the patent box regime, which will tax income from certain patents at a concessional corporate tax rate of 17 per cent instead of the usual corporate tax rate (25 or 30 per cent) is a positive move. The proposed expansion beyond Australian medical and biotechnology innovation to the agricultural sector and low-emissions technology innovations is welcome. We look forward to its expansion even further to more technologies and innovations in the future.

       Expanded digital capability: This group of measures proposes to expand the digital capability of taxpayers and government. While it aims to improve efficiency in dealings between taxpayers and the government, it will unquestionably provide greater transparency to the ATO and will aid their data-gathering efforts. This includes the allowing companies to choose to have their PAYG instalments calculated based on current financial performance; allowing businesses to lodge their Taxable Payments Annual Report (TPAR) monthly or quarterly instead of annually in line with their business activity statements; allowing trust tax returns to be lodged electronically; and developing IT infrastructure to allow the ATO to share Single Touch Payroll data with the state and territory revenue offices — this would facilitate the pre-filling of payroll tax returns (subject to the states and territories investing in their own systems and administrative processes to allow this).

       COVID-19 test expenses: The tax deductibility and FBT exemptions for COVID-19 tests purchased for work-related purposes has been given effect by the Treasury Laws Amendment (Cost of Living Support and Other Measures) Act 2022 (budget Act) that was swiftly passed into law on 31 March 2022. However, attention now turns to the ATO to provide meaningful and practical guidance on the application of new section 25-125 of the Income Tax Assessment Act 1997.

       Employee share schemes: Subject to certain rules, the proposed changes to the ESS rules will allow employers to make larger offers in connection with ESS in unlisted companies. Changes will also be made to remove regulatory requirements for offers to independent contractors in certain cases.

Key limited life measures

       Cost of living tax offset: I balk at using this term because this is not a new, separate tax offset and I risk perpetuating the misunderstanding through its use. This measure affords everyone who is eligible for the low and middle income tax offset (LMITO) for the 2021–22 income year an increase in the offset of $420. Against some expectations, the LMITO was not extended into 2022–23, so 2021–22 is the last year this offset is available.

This measure will provide some additional support from 1 July 2022 following lodgment of 2022 tax returns by eligible individuals who have a tax liability for the year. However, these taxpayers will face a so-called “tax hike” in 2022–23 as their tax liabilities are no longer sheltered to the extent of $1,500 by the LMITO. The LMITO reduces tax payable but it is not a refundable tax offset so any excess of the LMITO over a tax liability is not refunded (although the LMITO can increase a refund where tax has been overpaid for the year). It will be important to manage clients’ expectations as they will not see a cash payment of (up to) $1,500 turning up in their bank accounts. The measure is contained in the budget act and is now law.

       Cost of living payment: This one-off payment of $250, to be paid in April 2022, is costing the Government $1.5 billion yet is expected to make little difference to the higher cost-of-living pressures for eligible recipients. Many fared better when receiving the more generous JobKeeper payments or Coronavirus Supplement during the height of the COVID-19 pandemic and they are concerned that this $250 payment will do little to improve their plight. This measure is contained in the budget act and is now law.

       Temporary reduction of the minimum pension drawdown rate: The halving of the minimum pension drawdown rate for 2022–23 will take the temporary reduction measure into its fourth consecutive year. These temporary reductions have been announced in response to the COVID-19 pandemic that has negatively affected superannuation account balances through significant losses in financial markets. While many retirees and pension recipients will welcome this measure, it raises the broader question of whether the standard rate settings in Schedule 7 to the Superannuation Industry (Supervision) Regulations 1994 should be reviewed for long-term suitability. Many pension recipients who have earnings external to superannuation, or do not require much to live on, begrudge the usual minimal pension drawdown rates, claiming the law requires them to withdraw more from superannuation than they need.

       Small business skills and training and digital technology boosts: These are welcome measures, yet a permanent design would encourage investment in training and technology on an ongoing basis. We are yet to see the details of these measures, but the inevitable questions are being asked around what expenditure is eligible and what is excluded. The splitting of the deduction between the base amount in the income year in which it is incurred and the boost amount in a later income year in some cases will bring predictable complexity and confusion when calculating entitlements and completing tax return labels. Importantly for tax advisers, we now await either the return of the Coalition to power to progress this measure through Parliament or for the Opposition if it forms a government to demonstrate support for this measure. Businesses need certainty as soon as possible.

       PAYG and GST instalment GDP uplift factor reduced to 2 per cent: The reduced uplift factor will improve the cashflow for taxpayers whose 2022–23 income is not expected to differ markedly from that derived in 2021–22. Taxpayers can always choose to ensure their instalment settings appropriately reflect their economic activity throughout the year to avoid large top-up payments following lodgment. It will be important for small businesses to work with their tax advisers to manage cashflow and examine all their options when it comes to paying their tax and GST obligations.

       Temporary reduction in the fuel excise: The halving of the fuel excise from 30 March 2022 to 28 September 2022 will provide motorists with some temporary relief at the bowser. Not everyone, however, will be doing cartwheels at the temporary reduction in the excise. A flow-on effect is that any entitlement to fuel tax credits will also be reduced. While the ACCC will be monitoring prices to ensure the full reduction in the excise is passed on to motorists, there are forces beyond the government’s control that affect fuel prices, so it will be interesting to see the journey of fuel prices up to and beyond 28 September 2022.

Final thoughts

One of the main concerns expressed by practitioners is how to advise on measures that are announced but unenacted and won’t be until August at the earliest. This is nothing new, but familiarity doesn’t lessen the frustration of having to advise clients on decisions they need to make by 30 June 2022 in the absence of law. This is compounded by the uncertainty of the outcome of the election and no clear roadmap through the alternative tax policies being offered by the Opposition which are yet to be announced.

This budget was an election-friendly budget. We needed a budget that demonstrates the political courage of a government that understands the need for tax reform and is willing to finally address the perennial complexities and inefficiencies in our tax system. We hope to see this one day soon.

Robyn Jacobson is the senior advocate at the Tax Institute, the leading forum for the tax community in Australia.