Mid-market businesses shoulder burden of pandemic payback.
Treasurer Tim Pallas handed down the Victorian State Budget 2023-24 on the afternoon of 23 May 2023.
It contains a number of proposed changes to Victoria’s tax regime, the most significant of which for business relate to payroll tax, land tax and stamp duty reform for commercial and industrial properties.
This Budget sees Victorian businesses shouldering the burden of debt recovery, with the introduction of a 10-year Debt Levy targeting any business with an annual Australian payroll above $10m. Business will also fund the paying down of state debt through higher payroll tax bills for around 4,000 SMEs and large businesses alongside higher land tax bills for around 380,000 landowners.
With mid-market businesses already facing significant cost pressures due to the impact of inflation on labour costs, energy bills and other operational expenses, increasing payroll tax bills will see the cost of doing business in this state continue to climb in comparison to other states. This financial burden is likely to be compounded as business activity slows in 2023-24.
However, there is some relief for micro businesses with wages below $1m, who will not be subject to payroll tax due to an increase in the tax-free threshold. This change is estimated to remove payroll tax from 4,200 businesses and reduce taxes for a further 22,000.
The Debt Levy, operating through the payroll tax regime, is scheduled to begin on 1 July 2023 and businesses with national payrolls above $10m a year will be subject to an additional 0.5% levy on top of the existing payroll tax rate, with a further 0.5% for businesses with a payroll over $100m.
Property investors with landholdings valued above $300,000, as well as trust taxpayers with property holdings above $250,000, will be hit with a temporary land tax rate increase of $975 plus 0.1% of the value of their landholdings above $300,000 (in the case of non-trust taxpayers) or $250,000 (in the case of trust taxpayers).
Looking to make reparations after an economically turbulent few years, the Debt Levy is expected to claw back $2bn from business and property owners in 2023-24 and the tax take is projected to grow by an average of 4.9% per year over the forward estimates to $2.3bn in 2026-27.
While supporting micro businesses with reduced payroll tax, the engine room of the economy, mid-market businesses, will be asked to pay even more with the Government also planning to eliminate the payroll tax-free threshold for businesses sooner. The tax-free threshold will reduce for each dollar a business pays in wages over $3m and the threshold will no longer apply to businesses with wages over $5m.
Eliminating the payroll tax-free threshold for mid-market business while also burdening businesses with an increased payroll tax bill wields a double blow for those already struggling with higher wages, additional costs and inflation.
It is likely that these measures will further fuel the inflationary environment, seeing increased prices for goods and services or businesses needing to ‘trim the fat’ and bypass additional staff or resources as they’re unable to absorb or justify these costs.
While some measures are covered in detail, there is a notable lack of specifics when it comes to the ‘signature’ announcement, the end to stamp duty for commercial and industrial property in favour of an annual property tax. There is a need for clarity around what will be considered or defined as industrial and commercial property as quickly as possible. There are a number of grey areas that may have deep implications for developers, including sites that are zoned or earmarked for industrial/commercial use, but which can be developed for residential use.
In a Budget that appears to focus more on reducing the debt burden of the current Government and less on building economic resilience for businesses, there were a number of further measures to boost revenue including:
- Foreign property investors being stung with an increase in the land tax surcharge for absentee owners (from 2% to 4%);
- Around 110 Victorian non-government schools losing their payroll tax exemption from 1 July 2024, with the Government targeting the top 15% of schools in terms of fees paid
After a trying few years for Victorian businesses, this Budget leaves a lot to be desired, and one could even question the effectiveness of the policies. The Government’s own budget expectations are that through to 2026-27 the state’s debt levels will grow from the current $116bn to $171bn. In relative terms, an increase from 20.6% of gross state product to 24.5%.
The various higher taxes do not solve the existing budget deficit or help to bring the balance sheet back into balance. However, it’s likely these measures will discourage business growth and investment at a time when resilience in the face of a slowing economy is required.
Please refer to the detailed analysis of the Victorian State Budget below and its specific impact on individuals and mid-market businesses.