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There were few surprises and the cautious support measures for small business are short on detail.
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Why safety-first budget yields bonanza of questions
19 May 2023
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17 minute read
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Targeted relief for the most vulnerable
The measures in last week’s budget were not unexpected. It understandably seeks to assist those most in need, the most vulnerable, those most impacted by the broader macroeconomic situation who are struggling with the cost-of-living challenges resulting from inflation levels not seen for over three decades. It’s good to see investment in Medicare and improved access to GP services as well as support for the NDIS and aged care sector.
The budget also contained a range of targeted measures designed to support small businesses including:
- Small Business Energy Incentive
- Temporary $20,000 instant asset write-off
- Reduced uplift factor for pay as you go and GST instalments (measure in bill before Parliament)
- Allowing small businesses to authorise their tax agent or BAS agent to lodge multiple Single Touch Payroll reports
- Allowing small businesses up to four years to amend their income tax returns
- Providing an amnesty for lodging outstanding statements from 1 December 2019 to 29 February 2022, with full remission of failure-to-lodge penalties
- Energy bill relief
Key questions remain
Budget measures commonly lack the level of detail needed to better understand their impact on taxpayers and tax practitioners. The absence of details at this stage is not unusual but does leave questions regarding the design of the law to give effect to the policy intent and how the measure will be implemented by the ATO. Key questions are discussed below.
Small business instant asset write-off
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The $20,000 instant asset write-off for businesses with an aggregated turnover of less than $10 million is welcome but a permanent measure to provide certainty would be more desirable. The measure will allow eligible businesses to claim an immediate deduction where the depreciating asset is first used or installed ready for use from 1 July 2023 to 30 June 2024.
It’s clear the measure will not permit the first $20,000 of the cost of an asset to be deducted, irrespective of its cost, with the balance of the cost added to a general use pool. If the cost of the asset is $20,000 (GST-exclusive) or more, the cost of the asset must be pooled to the extent of its taxable purpose proportion.
Many practitioners will be out of practice running general use pools, as pools were required to be fully expensed if the balance was less than $150,000 on 30 June 2020 and regardless of balance on 30 June 2021–23. Accordingly, I struggle to think of any small business that currently has a balance in its pool. Practitioners will need to reacquaint themselves with the pooling rules and the tax consequences of selling an asset that was fully expensed or pooled.
The threshold of $20,000 will replace the full expensing measure that ends on 30 June 2023 for one year. Accordingly, I would expect the threshold to revert to $1,000 (which has been temporarily suspended since 12 May 2015) from 1 July 2024, unless there is a further legislative change.
Businesses with a turnover of $10 million or more from 1 July 2023 need to apply the normal depreciation rules to all their depreciating assets but may be able to use the ATO’s administrative approach in PS LA 2003/8 for low-cost assets that cost up to $100 (GST-inclusive).
Small business boosts
A third boost, the Small Business Energy Incentive, will provide an additional 20 per cent deduction (to a maximum of $20,000) to businesses with a turnover of less than $50 million for eligible capital expenditure that supports electrification and more efficient use of energy. This boost will be available only for the 2023–24 income year.
Meanwhile, we wait for the original two boosts – the skills and training boost and the technology investment boost – announced in the budget last March. These remain before Parliament and their status as unenacted measures is becoming pressing, particularly as the investment boost ends on 30 June 2023.
Measures that encourage businesses to invest in their operations and sustainability are commendable, but if such measures are not legislated (or legislated promptly), uncertainty may result in businesses understandably holding off on making those important investment decisions which undermines their purpose.
Four-year amendment period
The Income Tax Assessment (1936 Act) Regulation 2015 – Reg 14 contains additional circumstances (to those set out in subsection 170(1) of the Income Tax Assessment 1936) in which a taxpayer is not eligible for a two-year amendment period (and is subject to a four-year amendment period). Further changes were made to Regulation 14 on 8 December 2022 to expand its scope. Practically, this means that many small and medium businesses may already be subject to a four-year period.
A number of questions flow from the budget announcement to allow small businesses up to four years to amend their return from 1 July 2025:
- If, practically, many small businesses are already subject to a four-year period, as a result of this proposed measure, when will a small business ever benefit from the concessional two-year period?
- Will the Commissioner also have four years in which to amend the return of a small business?
- If this budget measure targets small businesses, where does this leave medium businesses (turnover of $10 million or more but less than $50 million)? I note that, since 1 July 2021 and subject to Regulation 14, the two-year period was expanded to include medium businesses, while large businesses with a turnover of $50 million or more remain subject to a four-year period.
Small business energy bill relief
Little is known about this measure design to assist small businesses, other than the federal government will partner with state and territory governments to deliver up to $650 of electricity bill relief for eligible businesses from July 2023.
The following questions logically flow from this announcement:
- What is an eligible small business?
- How will the relief be delivered to an eligible business?
- Will the relief be paid directly to the electricity retailer and subtracted by the retailer from the amount payable on the bill or paid directly to the small business?
- When will the relief be provided?
- The measure indicates the relief will be “up to” $650, so how will support payments of less than $650 be calculated?
Payday super
One of the most significant policy changes will require employers to pay superannuation guarantee contributions on the same day they pay salary and wages. Since 1 July 1992, employers have been imposed with a penalty, the SG charge, if they haven’t paid the SG contributions on a quarterly basis.
This change will require substantial consultation with industry stakeholders, including representatives of APRA-regulated funds as well as the SMSF sector, digital service providers, payroll providers, commercial clearing houses, the ATO and the profession.
Every moment between now and the delayed start date of 1 July 2026 will be needed to formulate and draft well-designed provisions and processes to give effect to this measure.
The government has flagged that consultation and consequential changes to the design of the SG charge will occur. This will be essential, as it would be unreasonable for an employer with weekly payroll who pays their SG contributions one day late each week to face four lots of SG charges and Part 7 penalties a month!
It will be interesting to see how many employers with weekly or fortnightly payroll consider switching to monthly payroll; however they will need to consider any legal impediments imposed by industrial law, awards or agreements in doing so.
Over the years, some employers have suggested the introduction of payday super would be a sensible approach to dealing with their employer obligations, while others have baulked at the thought as they’ve pondered the impact on their cash flow. Irrespective of an employer’s view on this, payday super is coming.
Questions on this measure include:
- How will be the SG charge be redesigned to deal with more frequent payments as often as weekly?
- What will the penalty be if an employer is just one day late?
- How will the timeframes be practically condensed when using external payroll providers and clearing houses, where the timing of the receipt of the contribution is usually outside the control of the employer once the payment leaves their bank account?
- What changes will be made to reporting obligations?
Non-arm’s length income
Following extensive consultation, the government has announced it will amend the non-arm’s length income (NALI) provisions to ensure they operate as intended. This includes limiting the income that is taxable as NALI to double the amount of a general expense, ensuring fund income that is taxable as NALI excludes contributions and exempting large funds from the NALI provisions for both general and specific expenses.
It is pleasing that consultation has resulted in change, but it is uncertain whether the broader underlying concerns raised by the professional associations, including the Tax Institute, will actually be addressed.
Additional tax on superannuation balances above $3 million
No further detail on the previously announced measure to tax earnings on superannuation balances above $3 million at an additional 15 per cent was provided in the budget. The measure remains the subject of consultation as the government works through the design of how the additional tax will apply to defined benefit fund interests.
The proposal to tax unrealised capital gains which will form part of “earnings” would set a worrying precedent for our tax system. The Tax Institute’s position is that if the taxation of unrealised gains proceeds, it should be overtly confined to this measure and not applied more broadly across the tax system. Consultation is key to ensuring the measure operates as intended.
Silence on unenacted measures
Finally, the list of announced but unenacted measures was disappointingly not dealt with in the budget, other than the government confirming it will not proceed with any of the three patent box measures announced by the former government; this will not come as a surprise to many.
The other measure mentioned in the budget revises the start date regarding franked distributions funded by capital raisings from 19 December 2016 to 15 September 2022, but this revision is already contained in a bill before Parliament.
In terms of unenacted measures, what is more important here is what was not said. We still need clarity on so many measures that have been announced over the years, but which remain unenacted. This results in uncertainty and inefficiencies where proposed starts dates are ultimately retrospective by the time the enabling legislation is enacted.
The following measures in particular warrant a mention:
- Corporate tax residency: announced on 6 October 2020 as part of the 2020–21 budget, these proposed changes were welcomed by industry at the time, yet they have not progressed.
- Individual tax residency: announced on 11 May 2021 as part of budget 2021–22 in response to the Board of Taxation’s recommendations — further consultation is needed to address some undesirable or unfair outcomes.
- Division 7A: this area still needs some work and further consultation is similarly needed to ensure that any change improves the operation of the provisions without resulting in undesirable or unfair outcomes.
The full list of unenacted measures is too long for this article, but the issue is broader than the measures themselves. As a matter of system maintenance, the government really needs to address the systemic issue of this list getting out of hand and how to manage it going forward. Greater certainty means a better tax system.
Robyn Jacobson is the senior advocate at the Tax Institute.
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