Why the devil lurks in budget detail

What did the budget say?

If you think that federal budgets seem to be happening with increasing regularity, you’re right. We have had four budgets in three years, all of which have been delivered against the backdrop of a global pandemic, disrupted supply chains, labour shortages, the ongoing war in Ukraine, rising interest rates and decades-high inflation plus a change of government.

Treasurer Jim Chalmers’s first budget on 25 October was an opportunity for the government to explain how Labor’s fiscal policy, in conjunction with the RBA’s monetary policy, would address inflationary pressures in the economy.

It comes as no surprise that the underlying cash balance (deficit) remains stubbornly high. Although the forecast for 2022–23 of $36.9 billion is a $41.1 billion improvement on the original forecast of $78.0 billion in March this year, the forward estimates (for 2023–24, 2024–25 and 2025–26) place the deficit at roughly the same or in a worse position than originally forecast (around the $50 billion-mark).

Likewise, gross debt is expected to be $927.0 billion for 2022–23, then top the $1 trillion threshold for the first time ($1.004 trillion) in 2023–24, before continuing to rise to $1.159 trillion in 2025–26.

As far as tax measures go, our high expectations of the government giving a wide berth to tax reform measures were not disappointed. There is little appetite for spending that would create additional inflationary pressures, minimal opportunity for new taxes and a reluctance to increase debt beyond its already high level. This should be regarded as a mini budget with more significant changes to fiscal policy likely to be deferred until the budget expected on 9 May 2023.

The updated budget addressed cost-of-living pressures in the form of:

• Paid Parental Leave (PPL) scheme — proposed expanded access to the PPL scheme, although these changes will be progressively implemented from 1 July 2024 to 1 July 2026.
• Cheaper childcare — a proposed increase in the Child Care Subsidy rate from 1 July 2023.
• Downsizer contributions — a proposed reduction in the eligible age for making downsizer contributions from 60 to 55 to provide greater flexibility to contribute to superannuation, support eligible taxpayers to downsize sooner and increase the availability of suitable housing for families (effective from the start of the first quarter after the enabling legislation is enacted).
• Changes for pensioners — a proposed extension in the assets test exemption for sale proceeds of the principal home from 12 months to 24 months as well as changes to the income test.
• COVID-19 business grants — treating a range of COVID-19 state and territory government support payments made to businesses in Victoria and the ACT as non-assessable non-exempt income.

The budget contained a range of integrity measures that propose to:

• Off-market share buy-backs — treat an off-market share buy-back by a listed public company in the same way as an off-market share buy-back, such that no amount of the purchase price will be treated as a dividend from 7.30pm AEDT on 25 October 2022.
• Multinationals — amend the thin capitalisation rules, increase reporting requirements for certain companies and prevent tax deductions by significant global entities (global revenue of at least $1 billion) for payments made directly or indirectly to related parties in relation to intangibles held in low or no-tax jurisdictions from 1 July 2023.

The budget confirmed funding will be provided to the:

• ATO’s Tax Avoidance Taskforce — $200 million per year over four years from 1 July 2022 and the program will be extended for a further year from 1 July 2025.
• ATO’s Shadow Economy Program — the program will be extended for a further three years from 1 July 2023.
• ATO’s Personal Income Taxation Compliance Program — $80.3 million to extend the program for two years from 1 July 2023.
• Tax Practitioners Board — $30.4 million over four years from 1 July 2023.
• Modernising Business Registers program — $166.2 million over four years from 2022–23 for the ATO and ASIC to consolidate more than 30 business registers on to a modernised registry platform.

The budget confirmed that the Albanese government will not be proceeding with proposed changes to:

• The debt/equity rules
• The taxation of financial arrangements (TOFA)
• The taxation of asset-backed financing arrangements
• Introduce a new tax and regulatory framework for limited partnership collective investment vehicles
• Replace the annual audit requirement for certain SMSFs with a three-yearly requirement
• Introduce a $10,000 limit for cash payments to businesses for goods and services

Finally, the budget confirmed the following measures will proceed but the commencement dates will be deferred:

• Introduction of the sharing economy reporting regime
• Relaxation of residency requirements for SMSFs and small APRA-regulated funds
• Technical amendments to the TOFA hedging rules

What didn’t the budget say?

While some of the previously announced but unenacted measures (ABUMs) were addressed — which confirmed that some will not proceed, and others will proceed but with a deferred commencement date — there are many significant ABUMs that remain in limbo.

These include the proposed:

• Reforms to Division 7A
• Changes to corporate tax residency, including trusts and corporate limited partnerships
• Changes to individual tax residency
• Deduction for education and training expenses for individuals
• Clarification of the non-arm’s length income (NALI) provisions for superannuation funds
• Provision of access to superannuation for crime victims
• Introduction of the patent box regime
• Introduction of the Digital Games Tax Offset
• Reduction of the FBT record-keeping compliance burden
• Identification of the appropriate modifications to the meaning of “commercial parking station” relating to car parking fringe benefits
• Removal of the CGT discount at the trust level for managed investment trusts and attributed managed investment trusts
• Modernising the PAYG instalment system for companies, smarter reporting of Taxable Payments Reporting System data, digitalising the reporting of trust income by allowing trustees to lodge tax returns electronically and enhancing the sharing of Single Touch Payroll data

For the sake of taxpayer certainty, it is important that the government make its position on these ABUMs known as soon as possible. Some of the measures propose retrospective start dates going back many years; this puts taxpayers in a difficult position when preparing their tax returns. We hope that announcements on the status of these outstanding measures (ie: abandon, proceed as originally proposed or proceed with changes such as start dates) are made in the next few months, or at least by the budget in May 2023.

Funding of government agencies

Additional funding will be provided to various government agencies. Funding is essential for any well-administered tax system as it enables these agencies to undertake compliance activities. However, it also enables them to develop interpretive advice and guidance for taxpayers and tax practitioners, and continually improve systems and processes that improves the engagement experience for all users of the various services and platforms.

It is concerning that the funding continues to be granted with stringent caveats as to its timing and use, and that the funding is drip-fed on a temporary basis. A permanent flow of funding that is not linked to underlying revenue collections is preferred, and would enable the ATO, particularly those parts that are tasked with developing interpretive guidance, to be better resourced. More timely responses to application for private binding rulings, objections and lodgment deferral requests would also flow from better funding. The core agencies of Treasury and the ATO need their base funding levels replenished and reinforced to underwrite the provision of minimum service and support standards, particularly in the areas of law design and guidance, the resolution of disputes and customer service and experience.

Devil in the detail

Some welcome clarification of tax and superannuation policies was included in the budget, but — as those who have been in the tax profession for a long time well know — the devil is in the detail. The proposal to change the tax treatment of certain off-market share buy-backs is a prime example of this, as recently evidenced by the exposure draft legislation on franked distributions and capital raising which many practitioners contend goes beyond what is reasonable. Many will similarly be keeping a keen eye on the proposed multinational measures to understand the impact of the fine print once released. The Electric Car Discount, which is currently before the Senate, is a step towards the tax system being engaged as a primary mechanism to deliver incentives and encourage behavioural changes to address climate change. However, this legislation has various deficiencies and limitations, all of which may not be addressed before the bill is enacted.

All this serves to remind us, and the government, of the power of consultation and the benefits that can be drawn from early engagement with the tax profession and the professional bodies, including the Tax Institute.

Robyn Jacobson is the senior advocate at the Tax Institute.