Federal budget tipped to ‘target smaller, wealthier cohorts’

Accounting professionals expect the May budget to bring a raft of tax reforms as the government looks to address inflation concerns and the significant deficit.

Treasurer Jim Chalmers has indicated that the budget will need to “strike a series of difficult balances”.

“Our budget’s long-term structural position remains under pressure from the big five of interest costs, NDIS, aged care, health and defence. While elevated commodity prices should provide another near-term boost to revenue, this won’t make up for the medium-term pressures we face,” said Mr Chalmers in a recent opinion piece in The Australian.

“All of this means common threads tie the strategy of the last budget to the next one: striking the right balance of near-term and longer-term priorities; delivering the best combination of relief, repair and restraint; and putting a premium on the quality of spending not just the quantity.”

Mr Chalmers has suggested that the budget will provide some cost-of-living relief in areas such as energy bills.

“We’re conscious of the pressure from energy prices and rents and some of these other sort of core areas of household spending,” Mr Chalmers said in an ABC interview. “[We want to] to try and give people a little bit of relief from these cost‑of‑living pressures where we can do that responsibly.”

BDO tax partner Mark Molesworth said for the government to fulfil these various commitments, it will either need to reduce spending or increase tax revenue.

The government has already initiated consultation on a number of minor tax reforms including its proposal to impose an additional 15 per cent tax on earnings on balances above $3 million in super.

“That measure is very much targeted and is expected to affect relatively wealthy people with $3 million or more in superannuation. The government is estimating that 80,000 people will be impacted in total. So it’s targeted at a very small cohort,” said Mr Molesworth.

“What you can probably draw from that is that they might be looking at measures that similarly target a reasonably small cohort of people who might be thought to be relatively well off already or entities that are well off.”

Some commentators have suggested that the government may look to increase the amount of petroleum resource rent tax that gas producers pay or increase the levy rate for the major bank levy.

“In both cases, you’ve got entities that are doing well financially and who are very small in number,” said Mr Molesworth. 

The Morrison government previously passed reforms relating to petroleum resource rent tax in 2019, which reduced the uplift rates that apply to certain categories of carried forward expenditure.

The legislation also removed onshore projects from the scope of PRRT.

RSM national tax technical director Liam Telford said there were were also other reforms initiated by the Morrison government that were limited to gas transfer pricing arrangements, which were paused due to COVID-19.

“Around October last year, Treasury resumed its review of those reforms,” said Mr Telford.

“There’s been some indication that Treasury may broaden that review to include the uplift rates that apply to carried forward expenditure. While these were changed back in 2019, it’s still quite generous so we could see some changes around permissible deductions.”

The major bank levy was also introduced by the former Coalition government and applies to banks with over $100 billion in total liabilities. The levy rate is set at 0.015 per cent, paid each quarter on the balance of a bank’s liabilities.

Mr Molesworth said there is also a possibility that small tweaks could be made to the stage three tax cuts which are scheduled to start in 2025.

“[The government] may perhaps seek to reduce the generosity of those tax cuts for high income earners. Again, only a small number of people could be affected, it won’t trouble the vast majority of the population,” he said.

However, the largest tax concession of all remains the main residence exemption from capital gains tax.

“So its also possible to imagine a slight tweak [to the law] where certain main residences with assets over a certain value might be subject to tax on the increase in value of the property from the date of the Budget, for example,” said Mr Molesworth.

This would again enable the government to target taxpayers with relatively considerable wealth, while only impacting a small portion of the taxpaying population.

Mr Telford said that Labor may also look to revive its discretionary trusts reform which was previously floated when labor was in opposition, back in 2017.

“The genesis of this policy dates back to the Costello era but its effectively a proposal to tax each dollar distributed by a family or discretionary trust to anyone over the age of 18 at a rate of 30 per cent, like a company,” said Mr Telford.

This policy would mean that no matter how small the distribution was, it would be taxed at 30 per cent.

Labor outlined back in 2017 that there would be carve outs under the policy for testamentary trusts, fixed trusts, cash management unit trusts, public trusts, farm trusts and charitable and philanthropic trusts.

“Treasurer Chalmers has announced that he intends to pursue alternative avenues for responsible tax reform in the future, following some of the measures for multinationals,” said Mr Telford.

Given some of the recent case law surrounding trusts and the level of administrative complexity in this area, Labor may look to promote tax changes in this area as means to simplifying trusts, while also generating significant revenue.

When the policy was previously explored in 2017, it was estimated to raise $17.2 billion over the medium term.

“While trusts have traditionally been a no go area politically, we’ve seen with the super cap changes that there is now a willingness to go after high net worth individuals,” said Mr Telford.

“This [particular policy] wouldn’t be inconsistent with that.”

Franking credits is another area where there could be further changes made.

Labor has already announced some small incremental changes in relation to franking credits. One of the measures will prevent companies paying fully franked dividends that in Treasury’s view are directly or indirectly funded by capital raisings.

The other policy regarding off-market buy-backs restricts public companies from being able to frank certain distributions.

“We saw significant backlash when the ALP announced plans to remove or deny refunds for franking credits, which would have generated huge amounts of revenue. However, we’ve since seen incremental moves in the area of franking credits towards the end of last year,” said Mr Telford.

Support measures for small and medium businesses which will all cease on 30 June are not expected to be extended further, given the budget restraints the government is facing.

These measures include temporary full expensing, technology investment boost, loss-carry back tax offset.

“The government has been fairly tight lipped around this but given the commitments they’ve got around easing cost of living pressures, its likely the Budget will be pretty light on relief measures for small to medium business enterprises,” said Mr Telford.

Labor is also predicted to make further tweaks to superannuation policy following consultation on the $3 million threshold for super, according to Heffron managing director Meg Heffron.

“Government seems to be moving fast on the new tax for those with balances of more than $3 million which suggests we will see more here – possibly even draft legislation,” said Ms Heffron.

“I suspect we will see some super changes this time [in the Federal Budget] and I doubt those of us with SMSF clients will be excited about them.”

Mr Molesworth said the government may look to lower the Division 293 threshold from the current $250,000 down to $200,000 a year.

The Grattan Institute and a number of superannuation industry bodies have already been calling for the Division 293 threshold to be lowered.