The first Labor Budget, and second for Australia in 2022, is focused on direct support for Australians living through challenging times. Nearly all the announced initiatives are focused on support for families, through childcare and parental leave, affordable housing, education and improving aged care.
In doing so, the government has arguably failed to recognise the central role that business plays in providing employment, generating profits to fund government spending and driving innovation for long-term structural benefits in its Federal Budget. At best, it could be said that this Budget stays out of the way of business. But there is little in the Budget for the businesses that have weathered financial storms across the last two years, and face surviving a significantly slowing economy in the coming 18 months.
The Budget was light on structural change for the Australian economy or the tax and compliance regimes. Previous programs that targeted the modernisation and transformation of middle market business have been aborted or wound back. This includes a third round of the Manufacturing Modernisation Fund, while nearly $200 million of uncommitted funding has also been taken from the Entrepreneurs’ Program, which was targeted at businesses with an annual turnover of $1.5 million to $100 million. While not yet enacted, another business policy to be impacted relates to IP and other intangible assets, with the Federal Government reversing a policy that would have allowed faster tax-write offs for patents, copyright and in-house software. These are key incentives in a knowledge economy, a transformation that Australia is still pursuing.
While the above represent loss of initiatives yet to be enacted, Australian-based international businesses (both inbound and outbound) will be subject to more stringent rules regarding the deductibility of interest on debt under the thin capitalisation rules. The new measures will, in some cases, result in a higher cost of doing business due to reduced debt deductions, also reducing the competitiveness of Australian businesses on the international stage.
Investors in ASX-listed companies are impacted with new tax rules to be passed to deny the common corporate capital management practice of conducting off-market share buy-backs in a form that allows buy-back proceeds to be split into its components of capital and franked dividend. This will remove the ability to access refundable franking credits and will increase the tax burden of such receipts in the shareholder’s hands. While government will claim this measure is targeted at the large superannuation funds, it will equally impact all investors, including self-funded retirees with self-managed super funds.
One bright light for business is the announcement of a $15 billion National Reconstruction Fund, which will seek targeted co-investments in resources; agriculture, forestry and fisheries; transport; medical science; renewables and low emission technologies; defence capability; and enabling capabilities.
In a sign of economic expectations for the next 18 months, $15 million over two years will be used to extend the Small Business Debt Helpline and the New Access for Small Business Owners programs to support the financial and mental wellbeing of small business owners as they struggle through the slowing world economy.
The expectations for the Australian (and world) economy within the Budget papers should be heeded by all businesses and preventative actions taken to weather the storm that is, in all likelihood, approaching. The Budget papers identify inflation peaking at 7.75% in late 2022, taking two years to recede. Economic growth will be significantly curtailed, from 3.25% in the current financial year to 1.5% in 2023-24, accompanied by unemployment rising to 4.5%. The Budget papers flag that these expectations may be more dire subject to the events in the world economy, domestic consumption being further constrained by inflation and rising interest rates and weather events such as recent floods.
At the same time, business will face a heavier burden of compliance, with increased funding for regulators across the board. As in most Budgets, funding for ATO compliance activity has increased; this time through various programs costing around $1.9 billion over the next four years and expected to increase receipts by approximately $5.3 billion in the same period.
The lack of any structural changes leads us to expect that this Budget points to the likelihood of more substantial changes in the next Budget. We would hope and expect that in May 2023 there is some clearer support for Australian business, international investment and a continued focus on growth and employment.