2023/24 Federal Budget Special
In This Issue
Overview – FEDERAL BUDGET 23/24 – THE “cost of living 2.0” BUDGET
Superannuation Related Measures
Tax Compliance & Integrity Measures
FEDERAL BUDGET 23/24 – THE “COST OF LIVING 2.0” BUDGET
Last night, Treasurer Jim Chalmers announced that the 2023 Budget, delivered in October 2022, will now deliver a surplus for this financial year, before this, the 2023/24 Federal Budget and later Budgets return Australia to deficits for at least the next four years.
Nonetheless, the focus of this Budget is more on spending measures to those who need it, as distinct from a suite of tax or revenue measures aimed at the business community. As was widely expected, measures that seek to address the very real “cost of living” pressures on Australians are the headline measures, building on recent Federal Budget attempts to do the same. A Cost of Living 2.0 Budget if you will!
Headline cost of living measures which include:
- Energy Bill relief for households and small business;
- Increasing the JobSeeker base rate $40 per fortnight; and
- Pay rises for Aged Care workers.
That said, where measures do relate to your business or personal tax position, we have outlined them below.
Small Business Measures
Instant Asset Write Off
After much speculation, the Government has decided not to extend Temporary Full Expensing (TFE) past 30 June 2023. Instead, the Government proposes to allow a $20,000 Instant Asset Write Off (IAWO) for the 2023/24 income year. Further, the $20,000 IAWO will be limited to entities with an aggregated turnover of less than $10 million (i.e. SBEs). For non-SBE entities, the IAWO will revert back to $1,000.
The following table illustrates the key differences between the TFE applicable until 30 June 2023 and the IAWO from 1 July 2023 to 30 June 2024:
| TFE | IAWO | IAWO | |
| Asset cost threshold | No upper limit | $20,000 | $1,000 |
| Aggregated turnover threshold | $5 billion | $10 million | ≥ $10 million |
| Used or installed ready for use by | 30 June 2023 | 30 June 2024 | 30 June 2024 |
| Second hand assets eligible? | Only for entities with a turnover of less than $50 million | Yes | Yes |
There are other subtle differences between TFE and IAWO. The IAWO has a ‘depreciating asset lease’ exclusion for SBEs. This exclusion does not allow an immediate deduction for an asset that is predominantly leased to another entity. This will significantly restrict access to the $20,000 write off for SBEs carrying on plant hire businesses.
Further, the write off for second element expenditure is more accessible under TFE rather than IAWO. Under TFE, as long as the second element expenditure is incurred by 30 June 2023, a write off is generally allowable for such expenditure. Under IAWO, second element expenditure is only allowable for costs associated with underlying assets that were previously eligible for IAWO. Given that TFE has effectively replaced IAWO for the past three years, any second element expenditure incurred for assets acquired in the past three years would effectively be excluded from IAWO. There will need to be a legislative amendment to rectify this anomaly.
Whilst SBEs can somewhat rejoice the extension of the IAWO for assets costing up to $20,000, non-SBEs will experience a drastic change from 1 July 2023. Particularly medium sized businesses (with an aggregated turnover of up to $50 million). Medium-sized businesses have, since 2 April 2019, been able to enjoy an immediate write off for assets costing between $30,000 – $150,000 at different times and then for all assets since the introduction of TFE.
Small Business Energy Incentive
In line with the Government’s commitment to energy efficiency measures, a bonus deduction of 20% will be allowable for entities with an aggregated turnover of less than $50 million for a range of depreciating assets and upgrades to existing assets 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.
However, 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.
Up to $100,000 of total expenditure will be eligible for the incentive, with the maximum bonus tax deduction being $20,000 per business.
As an initial observation, for businesses to maximise deductions under both the IAWO and the 20% bonus deduction, expenditure on assets costing up to $20,000 should provide the optimal outcome. That is, the IAWO should allow a deduction for such asset up to $20,000 and the bonus deduction should allow another deduction up to $4,000 (being 20% of $20,000). The total deduction for an eligible asset costing just under $20,000 should therefore be approximately $24,000.
Personal Tax Measures
Medicare Levy Changes
The Government will exempt eligible lump sum payments in arrears from the Medicare levy for certain low-income taxpayers from 1 July 2024.
There are some specific eligibility requirements in terms of taxpayers being eligible for Medicare reductions in the previous two years and meeting the general conditions for the lump sum in arrears tax offset.
Medicare levy thresholds have also been slightly increased for the 2023 tax year across all taxpayer groups.
Personal Tax Changes
The Budget did not announce changes to the Stage 3 tax rate and threshold changes previously legislated to apply from 1 July 2024. The big question is, can clients now lock them in? However, we still have one more Federal Budget next May, before these changes will actually come into effect!
As a reminder these changes are as follows:
| Tax rates and income thresholds | |||
| Rate | 2021-22 | 2022-23 to 2023-24 | From 1.7.2024 (unchanged) |
| Nil | $0 – $18,200 | $0 – $18,200 | $0 – $18,200 |
| 19% | $18,201 – $45,000 | $18,201 – $45,000 | $18,201 – $45,000 |
| 30% | N/A | N/A | $45,001 – $200,000 |
| 32.5% | $45,001 – $120,000 | $45,001 – $120,000 | N/A |
| 37% | $120,001 – $180,000 | $120,001 – $180,000 | N/A |
| 45% | $180,001 + | $180,001 + | $200,001 + |
| Low and middle income tax offset (LMITO) | Up to $1,500 | N/A | N/A |
| Low income tax offset (LITO) | Up to $700 | Up to $700 | Up to $700 |
Superannuation Related Measures
There were several items announced in the Budget related to Superannuation, however most were either previously announced or were a work in progress for some time. Some of these measures will be well received, especially those that rectify previous unintended consequences. Some not so much!
Changes to NALE provisions
The Government have finally addressed the long running concerns around the NALE provisions in respect of general expenses.
The non-arm’s length income (NALI) provisions in s 295-550 of the ITAA 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. These proposed changes follow industry concerns regarding the ATO’s interpretation of the NALE provisions in Law Companion Ruling LCR 2021/2 which has seen several deferrals of application by the ATO in anticipation of Government change on this issue.
Under the ATO interpretation of the NALE provisions expenses of a “general nature” (eg accounting fees) 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 will be NALE and taxed at the top marginal tax rate. The Budget changes propose to limit the income taxable at 45% as NALI to twice the level of a such general expenses.
For example, if a fund incurs an expense that is determined to be $1,000 lower than it should have been if it was on arm’s length terms, the fund will be liable for tax at 45% on $2,000 (2 x $1,000) being $900. That’s $900 tax in respect of a $1,000 reduction in fees charged to the Fund!
That said, the most recent proposal from the consultation papers was for a 5-times multiple rather than a 2-times multiple, so it could have been worse.
This above change will apply from 1 July 2023 and the details surrounding how it will be implemented will be interesting, especially in regards to what constitutes a market rate expenditure.
Confirmation of tax on balances greater than $3 million
The Government confirmed it will implement superannuation tax changes for individuals with account balances above $3 million from 1 July 2025, including in relation to defined benefit schemes.
The Government is currently going through a consultation process and as such no further details were provided in the Budget. This will continue to be an item that will require a wait and see approach from advisers.
No reduction in Minimum Pension amounts
The Budget did not announce a further extension to 2023-24 of the temporary 50% reduction in the minimum annual payment amounts for superannuation pensions and annuities. As a result, the 50% reduction in the minimum pension drawdowns, which has applied for the 2019-20 through to 2023 income years.
The minimum drawdowns for 2023/24 are therefore as follows:
| Age | Drawdown rate |
| Under 65 | 4% |
| 65-74 | 5% |
| 75-79 | 6% |
| 80-84 | 7% |
| 85-89 | 9% |
| 90-94 | 11% |
| 95+ | 14% |
Tax Compliance & Integrity Measures
The Federal Budget 2023-24 contained several tax initiatives aimed at the ATO’s recovery of outstanding tax debt and the continuation and expansion of tax and GST compliance programs. Whilst these ATO tax compliance programs have been around for several years, the extension of government funding will enable the ATO use data analytics and AI tools to obtain and analyse significant volumes of data to red-flag risk areas and target its resources to compliance risk and evasion. From the projected receipts to result from these programs, the Government anticipates a significant recovery of tax and GST debt from these programs.
We provide a summary of the key measures below.
1. The Personal Income Tax Compliance Program will be extended by two years from 1 July 2025 with measures to expand the scope of the program from 1 July 2023 with the Government announcing that it will provide $89.6 million to the ATO and $1.2 million to Treasury. preventative and corrective activities in key areas of non-compliance, and to expand the scope of the program to address emerging areas of risk, such as deductions relating to short-term rental properties to ensure they are genuinely available to rent.
2. GST compliance activities will continue to receive significant government funding with the Government announcing that it will provide $588.8 million to the ATO over four years from 1 July 2023. The funding will assist the ATO to develop more sophisticated analytical tools to combat emerging risks to the GST system and to continue its compliance activities. GST compliance programs targeting businesses to ensure accurate accounting for and remittance of GST, and correctly claiming GST refunds.
3. Expanding the scope of Part IVA of the ITAA 1936, the general anti-avoidance rule for income tax so that it can apply to schemes that:
- reduce tax paid in Australia by accessing a lower withholding tax rate on income paid to foreign residents;
- achieve an Australian income tax benefit, even where the dominant purpose was to reduce foreign income tax.
Regardless of whether the scheme was entered into before that date, these measures will apply to income years commencing on or after 1 July 2024.
4. Targeting the recovery of ATO debt that presumably accumulated during the COVID period, additional funding will be provided to the ATO for engagement with taxpayers who have high-value debts over $100,000 and aged debts older than two years where those taxpayers are:
a. Either public and multinational groups with an aggregated turnover of greater than $10 million; or
b. Privately owned groups or individuals controlling over $5 million of net wealth.
A lodgement 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.
Other Measures
Build to Rent Incentives
A tax measure to be introduced to assist with Australia’s housing supply problem is the build-to-rent concession which will:
- Increase the rate for the capital works tax deduction to 4% per year; and
- Reduce the final withholding tax rate on payments from Managed Investment Trusts from 30% to 15%.
However, before property developers get too excited, in order to qualify as an eligible build-to-rent project, construction of 50 or more apartments or dwellings which are made available for rent to the general public. The dwelling must also be retained under single ownership for at least 10 years before being sold AND landlords must offer a lease term of at least 3 years for each dwelling.
The devil in this detail clearly shows it is targeted to large property developers who will commit to build large scale residential developments and rent their properties for at least 10 years.
