Federal Budget: Tony Greco on the tax revenue gap

The Federal Government is going into budget night with a need for great change – a significant revenue gap in taxation – but without a mandate for it. Here, Tony Greco on what he’ll be looking for among the budget announcements.  

by | 3 May, 2023

Tony Gresco sitting

The ALP will have been in office for 11 months by Budget night and, having gone to the election with few tax measures – certainly not with ‘big bang’ tax reform – it’s restricted in what it has a mandate to change.

It does need to make change, however, as it’s facing a significant revenue gap in taxation, with likely increases to the cost base stemming from cost of living and welfare campaigning from within and outside Canberra, outcomes of the Defence Strategic Review that highlighted a long-term mismatch between Defence spending and Defence strategy, increased interest heightening the cost of government debt, recently announced (and sorely needed) short-term spend aimed at decreasing the immense inefficiency of the NDIS over time, and increased funding for aged care.

Jim Chalmers recently told us the most likely scenario on budget night is ‘modest but meaningful tax reform’, citing changes to superannuation as an example. With $2 billion estimated revenue from mooted superannuation tax concession changes that will impact on a small proportion of taxpayers, the example suggests ‘modest’ might refer to the number of taxpayers impacted.

Wholesale tax reform that would address the longer-term tax revenue problem – of the kind recommended by Ken Henry back when Chalmers was chief of staff to then-Treasurer Wayne Swan – is highly unlikely in this government’s first May budget, despite Henry himself urging Chalmers towards it again over the past months.

We do, however, expect other ‘modest’ measures to sit alongside the proposed superannuation tax concession changes among Tuesday night’s announcements, including a reining in of subsidies and rebates.

Capital assets write-off

We’ve pretty much had utopia, but the ability of businesses up to $5 billion to write off the cost of capital assets without threshold is set to expire at the end of the FY. We haven’t had an indication of what will happen after that.

The small asset write-off threshold used to be $1,000, then it increased to $15,000, $30,000 and $150,000 before the threshold was removed. What happens next is an important question for our members – if nothing happens, then from 1 July any depreciating assets will have their decline in value worked out in accordance with either the uniform capital allowance rules or the simplified depreciation rules, with a $1,000 small asset threshold depending on whether or not the business qualifies as a small business entity.

It’s quite a departure. If an eligible business bought a piece of machinery for $500,000 and it was installed and ready for use before 30 June, then the business would be able to write that cost off completely. But if they got it paid for and operational on 1 July, that could be a completely different scenario.

We will be watching for an announcement on this on budget night. Our pre-budget submission to the government included strong backing for full expensing for small business entities. Should the threshold be reinstated as of 1 July, we have urged the government to allow businesses to fully expense assets for which they have entered into contracts before 30 June 2023, but which are not ready for use by that date.

Small business CGT concessions

There’s many tax concessions that could be trimmed. One that has been raised is the CGT discount for individuals – but it does impact quite a number of taxpayers so I’m not sure it qualifies as ‘modest’.

Small business CGT concessions, on the other hand, may. The suite of four concessions that help business owners to defer or reduce capital gains on business assets were originally designed to boost small business owners’ retirement savings and to remove a barrier to owners investing in their own small businesses.

The concessions, in practice, are incredibly generous – they have become one of the most highly valued tax concessions for small business, sheltering capital gains of a magnitude we did not anticipate at a substantial cost in tax revenue. They are also incredibly complex and carry high compliance costs.

And this is why they may hit the sweet spot of considerable tax revenue and Chalmers’ ‘modest’ impact – their compliance costs and complexity mean an outsized proportion of the benefit of these concessions is flowing to a relatively small proportion of small businesses.

Reforming small business CGT concessions to make them fairer and more sustainable has been recommended to the government by the Board of Tax.

In our pre-budget submission to the government, we argued that the policy’s intent does not support its current application, and changes should enable a larger proportion of the benefits to be accessed by a greater number of businesses.

Eligibility should be increased with a higher turnover threshold, compliance costs lowered with reduced complexity, and a cap on the benefits that can receive preferential tax treatment introduced to make these changes economically sustainable.

These and other concessions and rebates may provide some ‘nips and tucks’ but they will not address the longer term and widening taxation revenue gap.

The tension between economic need and the political capital that would enable tax reform is unlikely to shift until the election is a little smaller in the rearview mirror. For the moment, we’ll watch next week for announcements around capital assets, CGT concessions, corporate tax rates – as ever – and clarity on what ‘modest change’ really means.

Download the IPA’s FY24 pre-budget submission, produced in January 2023, for the full range of themes and recommendations the IPA is pursuing with the government, including around SME productivity, taxation, innovation policy, trade policy and more.

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