Federal Budget 2023-24

The Federal Budget for 2023-24, handed down on 9 May 2023, forecasts a surplus of $4.2 billion in 2022–23 and the first surplus since 2007–08, followed by a forecast deficit of $13.9 billion in 2023–24.

Our alert provides a high-level overview of:

• the Economic and Fiscal Outlook; 
• select tax and superannuation-related measures for small-to-medium enterprises (SMEs) and individuals; and
• the effect of the already legislated Stage 3 personal income tax cuts.

Economic and Fiscal Outlook

The budget papers state that global growth is set to slow to 2.75 % in 2023, before a modest pick up of 3% in 2024. Elevated inflation, sharply rising interest rates and tighter financial conditions are all expected to constrain growth in advanced economies in 2023. These pressures are expected to more than offset the boost from the earlier than anticipated reopening of China’s economy due to the lifting of its pandemic restrictions.

While the Australian economy is expected to outperform all major advanced economies, global and domestic headwinds will be a drag on activity in 2023–24. High inflation and rising interest rates are squeezing households, and these cost of living pressures, along with weaker global growth, will contribute to real GDP growth slowing to 1.5% in 2023–24. 

However, real GDP growth is expected to pick up to 2.25% in 2024–2025 with continued positive real wages growth and a recovery in household disposable income bolstering household spending. 

The budget papers state that inflation has peaked and has begun to moderate. 

The unemployment rate is projected to rise modestly to 4.25% by the June quarter of 2024 and 4.5% by the June quarter of 2025. Wages growth is forecast to pick up further to 4% in 2023–24, its fastest pace since 2009. 

Nominal GDP is forecast to grow strongly by 10.25% in 2022–23. The strength of the labour market and a pick up in wages growth, an elevated terms of trade from higher commodity prices and stronger growth in domestic prices are all contributing to this strong growth. Nominal GDP growth is then expected to slow to 1.25% in 2023–24 due to the assumed decline in commodity prices, which is offset by ongoing strength in domestic prices and growth in output. Solid output growth is expected to support nominal GDP growth of 2.5% in 2024–2025. 

Figure 1: Major economic parameters

Table 1.1: Major economic parameters (a) 

a) Real GDP and Nominal GDP are percentage change on preceding year. Employment, the consumer price index and the wage price index are through the year growth to the June quarter. The unemployment rate is the rate for the June quarter.
Source: ABS Australian National Accounts: National Income, Expenditure and Product; Labour Force Survey, Australia; Wage Price Index, Australia; Consumer Price Index, Australia; and Treasury.

Source: Budget Paper 1, page 6

The Government has announced new initiatives of $20.6 billion over five years from 2022–23 to 2026–2027. This includes cost of living support and historic investment in Medicare.

While the tax take as a share of GDP over the medium term is broadly unchanged from the October 2022 Budget, the higher level of nominal GDP (from a higher price level and a higher level of potential GDP) is expected to increase tax receipts.

Figure 2: Budget aggregates

Table 1.2: Budget aggregates

a)    Total is equal to the sum of amounts from 2022–23 to 2026–27.
b)    Gross debt measures the face value of Australian Government Securities (AGS) on issue.
c)    Net debt is the sum of interest bearing liabilities (which includes AGS on issue measured at market value) less the sum of selected financial assets (cash and deposits, advances paid and investments, loans and placements).

Source: Budget Paper 1, page 7 

Select tax and superannuation-related measures¹

As part of the measures introduced for small business, a temporary $20,000 threshold for the small business instant asset write-off will apply per asset for one year, following the end of the temporary full expensing rules.

Several tax measures of the former Coalition government have also been amended or dropped, including the patent box tax incentive measures.

No changes were announced to the Stage 3 personal income tax cuts legislated to commence on 1 July 2024 (see further below).

Below is a summary and commencement date or proposed date of select tax and superannuation-related measures relevant to SMEs and individuals announced in the Budget. 

The date from which the measure is proposed to start is noted.

Start dates of select measures at a glance

Measures in brief

Income tax – Small Business $20,000 instant asset write-off

• Small businesses, with aggregated annual turnover of less than $10 million, will be able to immediately deduct the full cost of eligible assets costing less than $20,000 that are first used or installed ready for use between 1 July 2023 and 30 June 2024. The $20,000 threshold is an increased amount and will apply on a per asset basis, so small businesses can instantly write off multiple assets. 
• This measure ameliorates the effect of the temporary full expensing measures ceasing on 30 June 2023. Those measures have allowed an immediate tax write-off of the entire cost of an asset, for eligible entities using such assets for a taxable purpose.
• Assets valued at $20,000 or more (which cannot be immediately deducted) can continue to be placed into the small business simplified depreciation pool and depreciated at 15% in the first income year and 30% each income year thereafter. 

Source: Budget Paper No. 2, page 27-28 

Income tax – Small Business Energy Incentive

• Small and medium businesses, with aggregated annual turnover of less than $50 million, will be able to deduct an additional 20% of the cost of eligible depreciating assets that support electrification and more efficient use of energy. Up to $100,000 of total expenditure will be eligible for the Small Business Energy Incentive, with the maximum bonus deduction being $20,000. 
• A range of depreciating assets, as well as upgrades to existing assets, will be eligible for the Small Business Energy Incentive. These will include assets that upgrade to more efficient electrical goods such as energy efficient fridges, assets that support electrification such as heat pumps and electric heating or cooling systems, and demand management assets such as batteries or thermal energy storage.
• Eligible assets and eligible upgrades will need to be first used or installed ready for use between 1 July 2023 and 30 June 2024. 
• Certain exclusions will apply such as electric vehicles, renewable electricity generation assets, capital works, and assets that are not connected to the electricity grid and use fossil fuels. 

Source: Budget Paper No. 2, page 28 

Income tax integrity - Expanding the general anti avoidance rule in the income tax law

• The Government will improve the integrity of the tax system by expanding the scope of the general anti avoidance rule for income tax (Part IVA of the Income Tax Assessment Act 1936) so that it can apply to:

1. schemes that reduce tax paid in Australia by accessing a lower withholding tax rate on income paid to foreign residents; and

2. schemes that achieve an Australian income tax benefit, even where the dominant purpose was to reduce foreign income tax. 

• This measure will apply to income years commencing on or after 1 July 2024, regardless of whether the scheme was entered into before that date. 

Source: Budget Paper No. 2, page 29 

Superannuation – Non-arm’s length income (NALI)

• The non-arm's length income (NALI) provisions in s 295-550 of the Income Tax Assessment Act 1997, as they apply to non-arm's length expenses (NALE), will be amended to limit the income taxable as NALI to twice the level of a general expense for SMSFs and small APRA funds.
• Currently, under LCR 2021/2, NALE of a "general nature" (e.g. accounting fees, actuarial costs, audit fees, investment adviser fees and compliance costs) may still have a sufficient nexus to all of the income of a fund. As a result, if an SMSF incurs a small fund expense that is not on arm's length terms, all of the income derived by the fund (including taxable contributions and capital gains) could be taxable at 45%. The Budget changes propose to limit the income taxable at 45% as NALI to twice the level of a such general expenses.

Source: Budget Paper No. 2, pages 13-14

Superannuation - additional 15% tax on superannuation balances above $3 million

• The Government has confirmed that from 1 July 2025 t it will reduce the tax concessions available to individuals with a total superannuation balance (TSB) exceeding $3 million, from 1 July 2025. 
• This reform is intended to ensure generous superannuation concessions are better targeted and sustainable. It will bring the headline tax rate to 30%, up from 15%, for earnings corresponding to the proportion of an individual’s total superannuation balance that is greater than $3 million. This rate remains lower than the top marginal tax rate of 45%. Earnings relating to assets below the $3 million threshold will continue to be taxed at 15% or 0% if held in a retirement pension account. 
• As previously announced on 28 February 2023, earnings will be calculated with reference to the difference in TSB at the start and end of each financial year, adjusting for withdrawals and contributions.
• This means that the proposed additional 15% earnings tax on an individual's balance above $3m will operate on an accruals basis and include any notional (unrealised) gains and losses.
• Currently, fund earnings from superannuation in the accumulation phase are taxed at up to 15%. This 15% tax rate will continue for total superannuation balances below $3 million but individuals will pay an extra 15% for balances above that amount (around 80,000 people). The measure is expected to improve the Budget position by $900 million over the forward estimates, $2 billion in its first full year and $3.2 billion over five years.

Source: Budget Paper No. 2, page 15

Superannuation – increasing the payment frequency of the Superannuation Guarantee (SG) by employers and investing in SG compliance

• From 1 July 2026, employers will be required to pay their employees’ SG entitlements on the same day salary and wages are paid. 
• Currently, employers are only required to pay their employees’ SG on a quarterly basis. By increasing the payment frequency of superannuation to align with the payment of salary and wages, this measure is intended to both ensure employees have greater visibility over whether their entitlements have been paid and better enable the ATO to recover unpaid superannuation.
• The 1 July 2026 commencement date will allow the ATO, payroll service providers and superannuation funds time to make necessary system changes and for employers to adjust their cash flow practices.
• The ATO will also receive additional resourcing (some $40.2 million) to help it detect unpaid super payments earlier. It is estimated that $3.4 billion worth of super went unpaid in 2019-2020.

Source: Budget Paper No. 2, page 26-27

Tax administration – small business lodgment penalty amnesty 

• A lodgment penalty amnesty program is being provided for small businesses with aggregate turnover of less than $10 million to encourage them to re engage with the tax system. The amnesty will remit failure to lodge penalties for outstanding tax statements lodged in the period from 1 June 2023 to 31 December 2023 that were originally due during the period from 1 December 2019 to 29 February 2022. 

Source: Budget Paper No. 2, page 29

Tax administration – integrity measure to target unpaid tax and super

• The Government will provide $82.1 million in funding over four years from 1 July 2023 to enable the ATO to engage more effectively with businesses to address the growth of tax and superannuation liabilities. 
• The additional funding will facilitate ATO engagement with taxpayers who have high value debts over $100,000 and aged debts older than two years, where those where those taxpayers are either public and multinational groups with an aggregated turnover of greater than $10 million, or privately owned groups or individuals controlling over $5 million of net wealth. 

Source: Budget Paper No. 2, page 29

Tax administration – GST compliance program extended by four years

• The Government will provide $588.8 million to the ATO over four years from 1 July 2023 to continue a range of activities that promote GST compliance. This measure is estimated to increase GST receipts by $3.8 billion, and other tax receipts by $3.8 billion, over the five years from 2022–23. 
• These activities will ensure businesses meet their tax obligations, including accurately accounting for and remitting GST, and correctly claiming GST refunds. Funding through this extension will also help the ATO develop more sophisticated analytical tools to combat emerging risks to the GST system. 
• This measure is estimated to increase total receipts by $7.6 billion over the five years from 2022-23, consisting of increased GST receipts of $3.8 billion and other increased tax receipts of  $3.8 billion.

Source: Budget Paper No. 2, page 19

Stage 3 personal income tax cuts

As noted further above, no changes were announced to the Stage 3 personal income tax cuts legislated to commence on 1 July 2024 (see further below).

The effect of this legislated change on rates and thresholds for individual resident taxpayers is summarised below:

Figure 3: Summary of Stage 3 personal income tax cuts

For any enquiries, please get in touch with Michael Patane or Saxon Rose from HopgoodGanim’s Taxation team. 
 

1.  The Budget also includes other tax or tax-related measures which are not covered by this alert. These include the Build - To - Rent projects increased annual capital works deduction to 4% and associated reduction in the MIT withholding rate to 15% in certain circumstances, as well as economic relief measures, such as those associated with the Energy Relief Bill Fund for eligible households and small businesses.