Traditionally, the biggest changes to our tax and financial systems are announced on budget night. This is usually a late night for me as I review the budget outcomes, provide my thoughts and try to analyse how these changes might impact you. I expect I’ll have a fairly early night tonight as there isn’t really much to write about.
Essentially, the government has:
- Received record income as practically everyone has a job (and is paying tax) and commodity prices are very high;
- Not had any major blowout in its costs as welfare costs are quite modest (because everyone has a job);
- Given away part of the windfall to quite worthy though very politically safe groups;
- Whacked a few unpopular and politically safe groups (smokers, oil & gas producers) for some extra tax;
- Achieved a small surplus, which is very newsworthy though not really attributable to anything the government has actually done.
Importantly though, they haven’t made any significant or structural changes to our system, when the overwhelming consensus is that reforms are well overdue.
The government describes this budget as “cautious, careful and conservative”. I suggest that “timid, feeble, benign” might be more suitable adjectives.
The Inflation Debate
Inflation has dominated the news-cycle in recent times, as have the Reserve Bank’s attempts to stifle inflation by delivering interest rate increase after increase. Ironically, inflation really helps the federal budget (not that the government would ever admit it). As prices go up, the government earns more in tax. As the value of money decreases, the government’s debt in dollars stays the same though the value as a proportion of the economy (which is by far the more important measure) actually decreases. Take a simple analogy, if you buy a home on an interest only mortgage and the dollar value of your debt stays the same, though the value of the property and your income naturally increase with inflation, the debt proportionally gets smaller and easier to manage.
Government deficits and surpluses are generally a mechanism to either stoke or cool the economy. When the economy takes a big hit, the government ‘stokes the fires’ by running big deficits, as they did during the GFC and COVID-19 crisis. Conversely, when the economy is over-heated and unemployment is very low and inflation is very high (as they are now), governments can take the heat out of the economy by running big surpluses. This budget could easily have helped curb inflation by being a bit more robust and delivering a much bigger surplus, though this would have inevitably meant taking something away from some groups and spending some political capital. Instead, the government has opted to attempt to please everyone and left all the heavy lifting on the inflation front to the Reserve Bank.
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The Big Important Numbers
Total cash receipts: 2022/23 – $635.6b, 2023/24 – $668.1
Total cash payments: 2022/23 – $631.4b, 2023/24 – $682.1b
Budget Surplus/(Deficit): 2022/23 – $4.2b, 2023/24 – ($13.9b)
Net Government Debt in dollars: 2022/23 – $548.6b, 2023/24 – $574.9b
Net Government Debt % of GDP: 2022/23 – 21.6%, 2023/24 – 22.3%
Economic Growth (real GDP): 2022/23 – 3.25%, 2023/24 – 1.5%
Unemployment: 2022/23 – 3.5%, 2023/24 – 4.25%
Inflation (CPI): 2022/23 – 6.0%, 2023/24 – 3.25%
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Our very first budget
During his budget speech, the Treasurer referenced the first Australian parliament after federation in 1901, 122 years ago. I looked up the very first budget which you can access here if you’re interested: https://archive.budget.gov.au/1901-02/Budget_1901-2_OCR.pdf
Total revenue for this budget was £28,685,314, compared to the revenue in 2023 of $668,100,000,000… or about 23 thousand times as much.
Similar to modern budgets, the 1901 version contained lots of tables and boring accounting, though had a refreshing lack of political spin. It also included a lot of revenue from customs, especially for beer, spirits and tobacco… and $49,612 in customs duty on opium!
Year on year comparison
As noted in the opening commentary, the government has had a bumper year revenue wise, and the country has paid a lot more tax than the previous year. In fact, the government’s tax revenue went up more than $50billion year on year, though our tax rules largely stayed the same. This is function of record unemployment and very strong commodity prices.
The table below breaks this down by various taxes and demonstrates that individuals and companies paid nearly all the extra tax.
MOVEMENTS
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| Tax: |
2021/22 |
2022/23 |
$ |
% |
| Personal Income Tax |
259,052 |
297,000 |
37,948 |
15% |
| Fringe Benefits Tax |
3,331 |
3,630 |
299 |
9% |
| Company Tax |
123,308 |
138,400 |
15,092 |
12% |
| Superannuation Fund Taxes |
26,546 |
9,610 |
- 16,936 |
-64% |
| Petroleum Resource Rent Tax |
1,638 |
2,350 |
712 |
43% |
| Goods & Services tax |
73,498 |
81,761 |
8,263 |
11% |
| Wine Equalisation tax |
1,100 |
1,150 |
50 |
5% |
| Luxury Car Tax |
960 |
1,140 |
180 |
19% |
| Excise & Customs Duty |
39,126 |
43,250 |
4,124 |
11% |
| Major Bank Levy |
1,454 |
1,540 |
86 |
6% |
| Agricultural Levies |
626 |
631 |
5 |
1% |
| Visa Application Charges |
1,982 |
2,995 |
1,013 |
51% |
| Other Taxes |
3,964 |
4,593 |
629 |
16% |
| $ |
536,585 |
588,050 |
51,465 |
10% |
| Note: all dollar values thousands |
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Importantly, these amounts have increased as a function of the economy being strong. Conversely, if the economy weakens, and we have a recession for instance, taxes will naturally decrease.
Stage 3 tax Changes
If you can remember back when Malcolm Turnbull was Prime Minister, he set in place a series of tax cuts for individual taxpayers to recue tax rates and ease what is known as ‘bracket creep’ i.e. when tax brackets are set in dollar amounts though wages rises push people into higher tax brackets with no real increase in real wages and spending power.
Stages one and two tax cuts have come and gone though stage three is due to apply from 1 July 2024 onward and was a little controversial as it sought to give a big tax cut to higher income earners. Interestingly, this budget was completely silent on stage 3, which indicates that it is still on track to occur.
Our tax brackets currently look like this:
- up to $18,200 – no tax
- $18,201 to $45,000 – pay a 19% tax rate
- $45,001 to $120,000 – pay a 32.5% tax rate
- $120,001 to $180,000 – pay a 37% tax rate
- $180,001 plus – pay a 45% tax rate
Under the stage 3 cuts, they will look like this:
- $18,200 – no tax
- $18,201 to $45,000 – pay a 19% tax rate
- $45,001 to $200,000 – pay a 30% tax rate
- $200,001 plus – pay a 45% tax rate
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Superannuation - Previously Announced Measures
- Those with super balances over $3million will see tax on earning increase from 15% to 30% from 1 July 2025;
- From 1 July 2026, employers will be required to pay super on the same day as they pay their employees, rather than each quarter.
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Loss carry-back will end
Traditionally, if a company made a loss in a particular income year, it could carry this loss forward and ‘use up’ the loss against future profits and reduce a future tax bill. One of the COVID-19 measures was the introduction of a loss carry-back regime where if a company made a loss, it could actually receive a refund of tax it had paid in a previous year, gaining an immediate tax benefit. Ultimately, this was a timing measure and, I thought, provided a very sensible and beneficial outcome. This measure was due to cease on 30 June 2023. The budget was silent on extending this measure, which means it will die a natural death.
Depreciation
Accelerated depreciation has been a very hot topic the past several years for business owners and many have taken advantage of the essentially limitless depreciation and immediate write off concessions bought in during the COVID-19 crisis. From 1 July 2023, the depreciation limit will revert back to $20,000 for businesses with turnover of $10million or less. The government often tinkers with depreciation, and here is a quick summary of the changes over the last decade or so
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More money for the ATO
The Australian Taxation Office was a big benefactor of this budget and has received a substantial increase in funding. This funding will be targeted toward data-matching and integrity measures, particularly around GST compliance.
The National Disability Insurance Scheme (NDIS)
The NDIS is a very important scheme and I have seen first-hand how this scheme can make a vitally important difference in the lives of disabled people. This scheme however is costing the government far more than it was ever designed. The original cost of the NDIS, when it was introduced in 2016/17, was $4.2billion per year. This increased to $21.5 billion in 2019/20. The budgeted cost for the NDIS in 2022/23 is $36.9billion and is expected to reach $56bllion by 2026/27. The treasurer talked around the edges of this issue and used word like ‘sustainability framework’ and referenced getting the scheme ‘back on track’. He didn’t make any cuts though I expect that some hard decisions will have to be made on this one in future budgets.
Spending recipients
The purported ‘centrepiece’ of this budget is additional spending on JobSeeker, Medicare, aged care workers, rent assistance, energy price relief and single parenting payment. Many of these measures apply obviously to lower income earners and welfare recipients. The stage 3 tax cuts (see separate section) will primarily benefit high income earners. Interestingly, middle Australia (who are the vast majority) receives very little from this budget.
Tax Foregone
I saw a very interesting table in the budget papers which calculated the tax foregone on historical tax measures, a lot of these items I advise on regularly. Some of the top items e.g. main residence exemption, capital gains discount, concessional super contributions, accelerated depreciation, lower company tax rate etc. are topics I’ve had literally hundreds of conversations about over the years.
The cynic in me might think this list represents a ‘hit list’ for future governments if the budget came under much more pressure and they needed a quick fix. Here is a copy of the list, taken directly from the budget papers:
 
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