Labor’s Federal Budget was handed down last night offering an exemption for electric cars, energy efficiency grants, revised interest-limitation rules but primarily it delivered key election promises.
Childcare, aged care, university and vocational education were each prioritised and the already legislated ‘stage three’ tax cuts from FY24/25 that will reduce the marginal rate to 30% or less for around 95% of individual tax payers, will continue.
Electric car discount
In his first Budget, Treasurer Jim Charmers offered cut taxes on zero or low emissions vehicles including electric cars, hydrogen fuel cell electric cars and plug-in hybrid electric cars.
It will be achieved by exempting these vehicles from FBT and import tariffs, provided the cars have a first retail price below the luxury car tax threshold for fuel-efficient vehicles which is currently $84,916.
These measures may present an opportunity to purchase cars through a tax-effective salary sacrifice arrangement with employers. However, any exempt car fringe benefits amount would need to be included in the employee’s reportable fringe benefits amount
These measures are intended to apply to cars first held or used after 1 July 2022.
Energy efficiency grants for SMEs
From 2023, the Government will provide $62.6 million over 3 years to assist small to medium enterprises to fund energy efficient equipment upgrades. The funding will support studies, planning, equipment and facility upgrade projects that will improve energy efficiency, reduce emissions or improve the management of power demand.
Revised interest-limitation rules
Australian taxpayers that form part of multinational groups (inbound or outbound) are denied deductions for interest expenditure where they are considered to have excessive debt funding. The current rules limit debt deductions based on three different thresholds including the safe harbour test (debt to asset ratio); an arm’s length debt test; and a worldwide gearing test (debt to equity ratio). Any interest deductions denied under the current rules are lost.
The Government will replace the existing rules and limit interest deductions to 30% of profits (based on EBITA – Earnings Before Interest, Taxes, Depreciation, and Amortisation). Alternatively, debt related deductions can be claimed up to the level of the worldwide group’s net interest expense as a share of earnings. The arm’s length debt test will be retained only in respect of external debt funding. This will allow an entity to carry forward and claim the interest expenses denied to a subsequent income year (up to 15 years).
These measures, which relate to large multinational companies, will take effect from the income years starting on or after 1 July 2023. Financial entities will be subject to the existing thin capitalisation rules.
End of investment incentives
The temporary full expensing rules that provide businesses with a turnover of up to $5 billion with an immediate deduction for 100% of the cost of eligible depreciating assets, will end on 30 June 2023.
To take advantage of this limited incentive, purchase eligible depreciating assets and instal them ready for use prior to 30 June 2023.
Skilled migration
The permanent Migration Program will be increased by 35,000 to 195,000 in 2022–23.
More than 90% of new places will be for skilled migrants, and more than a quarter targeted to regional areas.
$42.2m will be allocated over two years from the 2022-23 year to increase visa processing capacity and raise awareness of opportunities for high-skilled migrants in Australia’s permanent Migration Program.
Student and secondary training visa holders will have their work restrictions relaxed until 30 June 2023. This will allow them to work additional hours in any sector, helping to address workforce shortages.
Investing in priority industries
The National Reconstruction Fund will be established to provide $15 billion of capital through loans, guarantees and equity to the private sector in seven priority industries including resources, agriculture, forestry and fisheries, medical science, renewables and low emission technologies, defence capability, transport and enabling capabilities.
This will include identifying and investing in manufacturing technologies to help the transition to net zero emissions.
Cutting and redirecting spending
The Government aims to provide $28.5 billion in Budget improvements by restraining spending during this period of high inflation.
The main items include cutting $3.6 billion in outsourcing expenses (to contractors, consultants, etc), changing spending priorities and aligning and redirecting some infrastructure investment. Some of the money saved will be redirected to various programs, including those that are mentioned below.
Existing tax rate cuts for individuals
The already legislated ‘stage three’ tax cuts for individuals are currently set to continue, delivering further tax relief in FY24-25. The ‘stage three’ tax cuts are estimated to reduce the marginal rate to 30% or less for around 95% of all individual taxpayers.
Paid parental leave
The Federal Government has announced the biggest expansion of the Paid Parental Leave (PPL) scheme since 2011, with parental leave pay increasing from 18 to 26 weeks by FY26-27.
Flexibility under the scheme will also be increased with both parents being able to take leave concurrently, or by allowing for periods of work in between leave periods.
To encourage both parents to access the reformed PPL scheme, there will be a, yet to be determined, ‘use it or lose it’ portion for each parent.
Eligibility for the PPL scheme will be expanded through the introduction of a $350,000 family income test which families can be assessed under (if they do not meet the individual income test of $150,000 of adjusted taxable income in the financial year prior to the date of birth or adoption).
Downsizer Contribution reduced to 55 years
The eligible age from which an individual can make a Downsizer Contribution to superannuation is reduced from 60 to 55 years of age. This will start from the first quarter after Royal Assent of the enabling legislation.
The Downsizer Contribution was first introduced on 1 July 2018 to allow an eligible individual to choose to make a one-off after-tax contribution to their superannuation fund of up to $300,000 per person from the proceeds of selling their home. The Downsizer Contribution does not count towards an individual’s non-concessional contribution cap and can be made even if the individual has a total superannuation balance of more than $1.7M.
This measure aims to encourage individuals who are 55 years or older to make a once-off larger superannuation contribution to boost their retirement savings.
Get ready for May 2023
We all expected this budget would be smaller than the usual May budget, and we also expected the new Government to outline how it will fund its election promises and seek to repair the budget deficit created from the COVID-19 pandemic. However, as the budget position deteriorates, we should also expect further tax measures in the May 23 Budget.
Among them will we see any of the mooted changes to CGT concessions, Division 7A or Trusts? I guess we’ll have to wait and see.
For more information, please contact Craig Barry, Resources Unearthed on +61 (0) 7 3007 2000 or email contact@resourcesunearthed.com.au.
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