Summary
On Tuesday, 25 October 2022, Treasurer Jim Chalmers handed down the 2022-23 October Federal Budget. This second Budget for 2022-23 updates economic forecasts and outlines the new Labor Government’s priorities following the May 2022 Federal election.
The Budget estimates an underlying cash deficit of $36.9 billion for 2022-23 and $44 billion for 2023- 24. While the economy is expected to grow by 3.25 per cent in 2022-23, it is predicted to slow to 1.5 per cent for 2023-24, a full percentage point lower than forecast in March 2022. Inflation is expected to peak at 7.75 per cent later in 2022 but is projected to moderate to 3.5 per cent through 2023-24 and return to the Reserve Bank’s target range in 2024-25. Against this backdrop, the Treasurer has sought to exercise fiscal restraint so as not to put more pressure on prices. Rather, the Budget sets out a 5-point plan for cost-of-living relief in the areas of:
1. child care
2. expanding paid parental leave
3. medicines
4. housing
5. getting wages moving.
While the Budget does not contain major tax changes it does seek to begin some Budget repair work via tax integrity measures.
Tax measures
Tax-related measures announced in the Budget included the following.
- Intangible assets depreciation – reversal of previously announced option to self-assess effective life for certain intangible assets (e.g., intellectual property and in-house software). The effective lives of such assets will continue to be set by statute.
- Previously announced measures – the Government has announced that it will abandon eight measures announced by the previous Government and defer the start date of three others. While most of the measures relate to the heading of “Business Taxation” (and are finance related), some proposals include superannuation and personal tax measures.
- Digital currencies not a foreign currency – the Budget Papers confirm that the Government is to introduce legislation to clarify that digital currencies (such as Bitcoin) continue to be excluded from the Australian income tax treatment of foreign currency.
- Off-market share buy-backs – the Government intends to align the tax treatment of off-market share buy-backs undertaken by listed public companies with the treatment of on-market share buybacks.
- COVID grants treated as non-assessable non-exempt (NANE) income – the Budget Papers contain a listing of further State and Territory COVID-19 grant programs eligible for nonassessable, non-exempt treatment.
- Penalty unit increase – the Government will increase the amount of the Commonwealth penalty unit from $222 to $275 from 1 January 2023.
- Tax Practitioners Board funding – the TPB will get increased funding to investigate high-risk tax practitioners and unregistered preparers.
Superannuation measures
The superannuation measures include:
- SMSF residency changes – the proposal to extend the central management and control (CM&C) test safe harbour from two to five years, and remove the active member test, will now start from the income year commencing on or after assent to the enabling legislation (previously 1 July 2022).
- SMSF audits every three years – the Government will not proceed with the former government’s proposal to allow a three-yearly audit cycle for SMSFs with a good compliance history. • Retirement income products – the Government will not proceed with the proposal to report standardised metrics in product disclosure statements. Other measures
- Affordable housing measures – the Government will establish a Regional First Home Buyers Guarantee Scheme and a Housing Australia Future Fund.
- Housing Accord – struck between State and Territory governments and investors, including super funds, targeting 1 million new homes over 5 years from 2024. The Government will commit $350 million over 5 years to deliver 10,000 affordable dwellings.
- Paid Parental Leave (PPL) scheme – to be expanded from 1 July 2023 so that either parent can claim the payment. From 1 July 2024, the scheme will be expanded by two additional weeks a year until it reaches a full 26 weeks from 1 July 2026.
- Child care subsidy – maximum CCS rate to be increased from 85 per cent to 90 per cent for families for the first child in care and increase the CCS rate for all families earning less than $530,000 in household income.
Budget highlights
Revenue and expenditure
- Total 2022-23 revenues are estimated at $607.2 billion (24.5% of GDP), compared with preelection update forecasts of $548.5 billion (23.8% of GDP).
- Expenses are seen at $644.1 billion (25.9% of GDP), compared with April forecasts of $626.5 billion (27.2% of GDP).
- Gross debt for 2022-23 is estimated at $927 billion (37.3% of GDP). Net debt is $572.2 billion (23% of GDP).
- Gross debt for 2025-26 is estimated at $1,159 billion (43.1% of GDP). Net debt is $766.8 billion (28.5% of GDP).
Interest payments are the fastest growing payment in the Budget, increasing on average by 14.4 per cent per year over the next decade.
Key commodity prices are assumed to decline from current elevated levels by the end of the March quarter 2023.
Savings measures
- $22.0 billion in spending reductions or reprioritisations.
- $3.7 billion from extending the Tax Avoidance Taskforce, Shadow Economy, and Personal Income Taxation Compliance programs to improve the integrity of the tax system.
- $952.8 million through action to enforce tax payment by multinationals.
Families
- $4.6 billion to increase Child Care Subsidy rates to make early childhood education and care more affordable for eligible families.
- $531.6 million to expand the Paid Parental Leave Scheme, part of changes to increase the number of weeks available to families to 26 weeks in 2026.
- $1.7 billion to support implementation of the new National Plan to End Violence Against Women and Children.
Housing
- $350 million over 5 years towards Housing Accord setting aspirational goal of 1 million new homes.
- Establishing $10 billion Housing Australia Future Fund to provide new social housing and affordable housing.
Defence/aid
- Defence funding will increase by 8 per cent in 2022-23 and rise to more than 2 per cent of GDP over the forward estimates.
- $1.4 billion in additional Official Development Assistance over 4 years, including $900 million to increase support to the Pacific region and $470.0 million to increase support to Southeast Asia.
Education
- 480,000 fee-free TAFE and community-based vocational education places.
Health
- $235 million to commence the rollout of Urgent Care Clinics.
- Maximum co-payment under the Pharmaceutical Benefits Scheme (PBS) will decrease from $42.50 to $30 per script from 1 January.
- $1.4 billion for new and amended listings, including treatments for various types of cancer and growth hormone deficiency in children. First Nations Peoples
- $75.1 million to prepare for referendum to enshrine a First Nations Voice to Parliament in the Constitution.
- $314.8 million to support First Nations peoples’ health and well-being outcomes.
- $100 million for housing and essential infrastructure in Northern Territory homelands and $99 million to support improved justice outcomes. Infrastructure
- $8.1 billion to deliver on key infrastructure projects including the Suburban Rail Loop East in Melbourne, the Bruce Highway and other important freight highways such as the Tanami Road and Dukes Highway.
- $2.4 billion to extend full-fibre access to 1.5 million additional premises, including to over 660,000 in regional Australia.
- $250 million will be provided to expand the Local Roads and Community Infrastructure Program. $150 million to upgrade regional airports and their precincts.
- $1.9 billion Powering the Regions Fund to support transition of regional industries to net zero.
- $1.2 billion to advance regional telecommunications. Climate/Environment
- $345 million to exempt eligible electric cars from fringe benefits tax and the 5 per cent import tariff.
- $204 million to lift total government investment in the Great Barrier Reef to $1.2 billion by 2030.
- $1.1 billion for the next phase of Natural Heritage Trust funding.
- $224.5 million to establish the Saving Native Species Program.
- $117.1 million to restore funding for environmental assessments.
Biosecurity
- $75.6 million to bolster biosecurity system against escalating animal disease risks and $11.7 million to increase detector dog capability. Disaster support
- Provision of $3 billion in the contingency reserve to meet disaster recovery costs from this year’s floods.
- Invest up to $200 million per year on disaster prevention and resilience through the Disaster Ready Fund.
- $22.6 million to address insurance affordability and availability issues driven by natural disaster risk.
Federal Integrity Commissioner
$262.6 million to establish and support the Commission, which will focus on detecting and investigating serious or systemic federal corruption.
Personal tax Personal tax rates unchanged for 2022-23; Stage 3 start from 2024-25 unchanged
In the Budget, the Government did not announce any personal tax rates changes. The Stage 3 tax changes commence from 1 July 2024, as previously legislated.
Resident rates and thresholds for 2022-23
The 2022-23 tax rates and income thresholds for residents (unchanged from 2021-22) are:
| Taxable income ($) | Tax payable ($) |
| 0 – 18,200 | Nil |
| 18,201 – 45,000 | Nil + 19% of excess over 18,200 |
| 45,001 – 120,000 | 5,092 + 32.5% of excess over 45,000 |
| 120,001 – 180,000 | 29,467 + 37% of excess over 120,000 |
| 180,001+ | 51,667 + 45% of excess over 180,000 |
Stage 3: rates and thresholds from 2024-25 onwards
The Budget did not announce any changes to the Stage 3 personal income tax cuts that are set to commence from 1 July 2024. Under the Stage 3 tax changes from 1 July 2024, as previously legislated, the 32.5 per cent marginal tax rate will be cut to 30 per cent for one big tax bracket between $45,000 and $200,000. This will more closely align the middle tax bracket of the personal income tax system with corporate tax rates. The 37 per cent tax bracket will be entirely abolished at this time.
Therefore, from 1 July 2024, there will only be 3 personal income tax rates – 19 per cent, 30 per cent and 45 per cent. From 1 July 2024, taxpayers earning between $45,000 and $200,000 will face a marginal tax rate of 30 per cent. With these changes, around 94 per cent of Australian taxpayers are projected to face a marginal tax rate of 30 per cent or less.
Low income tax offsets – LMITO not extended to 2022-23
The 2022-23 October Budget did not announce any extension of the low and middle income tax offset (LMITO) to the 2022-23 income year. The LMITO has now ceased and been fully replaced by the low income tax offset (LITO). The March 2022-23 Budget had increased the LMITO by $420 for the 2021-22 income year so that eligible individuals (with taxable incomes below $126,000) received a maximum LMITO up to $1,500 for 2021-22 (instead of $1,080). With no extension of the LMITO announced in the October Budget, 2021-22 was the last income year for which the offset was available. As a result, low-to-middle income earners may see their tax refunds from July 2023 reduced by between $675 and $1,500 (for incomes up to $90,000 but phasing out up to $126,000), all other things being equal.
Low income tax offset for 2022-23 (unchanged)
For completeness, and as a reminder, low and middle income taxpayers are entitled to one or 2 offsets: LMITO (until the 2021-22 income year) and the low income tax offset (LITO). No changes were made to the LITO in the 2022-23 October Budget. The LITO will continue to apply for the 2022- 23 income years and beyond. The LITO was intended to replace the former low income and low and middle income tax offsets from 2022-23, but the new LITO was brought forward in the 2020 Budget to apply from the 2020-21 income year.
Business tax
Thin cap: new earnings-based tests for limiting debt deductions Under the current thin capitalisation rules, a non-financial entity’s allowable debt (interest) deductions in relation to its cross-border investments are limited by the application of a number of statutory tests under which its maximum allowable debt is the greatest of:
• the safe harbour debt amount (60% of the average value of the entity’s Australian assets)
• the arm’s length debt amount, or
• the worldwide gearing debt amount which allows the entity to gear its Australian operations up to 100% of the actual gearing of its worldwide group.
The Government will replace the safe harbour and worldwide gearing tests with earnings-based tests to limit debt deductions in line with an entity’s profits. More specifically, the thin cap rules will be amended to:
• replace the safe harbour test with a new earnings-based test which under which an entity’s debt related deductions will be limited to 30% of profits (using EBITDA as the measure of profit) • allow deductions denied under the EBITDA test to be carried forward and claimed in a subsequent income year (up to 15 years)
• replace the worldwide gearing test and allow an entity in a group to claim debt deductions up to the level of the worldwide group’s net interest expense as a share of earnings (which may exceed the 30% EBITDA ratio).
The arm’s length debt test will be retained as a substitute test which will apply only to an entity’s external (third party) debt, disallowing deductions for related party debt under this test. The changes will apply to multinational entities operating in Australia and any inward or outward investor.
Anti-avoidance: denial of SGE deductions for payments for intangibles
The Government will introduce an anti-avoidance rule to prevent significant global entities (entities with global revenue of at least $1 billion) from claiming tax deductions for payments made directly or indirectly to related parties in relation to intangibles held in low- or no-tax jurisdictions.
Off-market share buy-backs: proposed integrity rules
The Government intends to align the tax treatment of off-market share buy-backs undertaken by listed public companies with the treatment of on-market share buy-backs. There is no further detail in the Budget Papers nor in any associated media releases as to what precisely is intended.
Tax transparency: new reporting requirements
The Government will introduce reporting requirements to enhance the tax information made available to the public. The Government will require:
• significant global entities to prepare for public release tax information on a country by country (CbC) basis and a statement on their approach to taxation, for disclosure by the ATO
• Australian public companies (listed and unlisted) to disclose information on the number of subsidiaries and their country of tax domicile. and
• tenderers for Australian Government contracts worth more than $200,000 to disclose their country of tax domicile (by supplying their ultimate head entity’s country of tax residence).
These new reporting requirements will apply for income years commencing from 1 July 2023.