BDO predictions for Federal Budget 2022: A performative budget

Accountants are not holding their breath over major tax changes during this year’s Federal Budget, with the government unlikely to pass substantive tax measures before Parliament rises for the federal election according to tax experts at BDO in Australia.

Neil Billyard, Partner & National Head of Tax at BDO in Australia says that “Australia is overdue for a full ‘root and branch’ review of our tax system to ensure that it deals with the modern decentralised and digitised economy.”

“Any such review could only be done in the next term of Government, and it is unlikely that any Government would commit to such a project in an election year. Hopefully, I am wrong and we will see something in the Budget but I expect we will continue to wait on this front.”

Mark Molesworth, Tax Partner at BDO in Australia says the Federal Budget will instead contain sure-fire sweeteners for voters such as an extension of the low and middle income tax offset (LMITO) and continuation of small business tax concessions.

“From a tax perspective, this is likely to be a purely performative Budget, with nothing enacted before parliament rises for the election” said Mr Molesworth.

“In that respect, we should expect all carrot and no stick for the masses. For example, this could be done through extensions of the LMITO (badged, yet again, as a ‘tax cut’) and a commitment to maintaining the small business tax concessions, introduced as a result of Covid, for another year.”

With gross government debt expected to exceed $1 trillion by the end of the decade, Mr Molesworth believes we can expect to see some increased taxation measures that will be largely targeted at large multinationals or temporary residents who won’t sway election votes.

“In the realm of multinational taxation, we would hope to see a clear timeline from the government for the introduction of the legislation to enact the OECD’s Pillar 1 (taxation at customer location) and Pillar 2 (minimum 15% global tax rate) measures,” he said.

“There will also be the usual announcement of at-the-margins integrity measures and additional funding to the ATO to show that ‘we are tough on tax avoidance’.

“But we don’t expect substantive tax policy announcements, which might be used to show a voter somewhere might be worse off, from either side. Both major parties appear to be running ultra-small target election campaigns, having learned what they think are the lessons of past polls.”

Mr Molesworth also noted that the mid-year economic and financial outlook had $16 billion of decisions which had been taken but not yet announced.

“While we might hope that some of these might be long-overdue tax reform measures, we will not be holding our breath,” he said. “Top of our tax reform wish list would be:

• Changes to Capital Gains Tax (CGT) to ensure that the tax treatment of a gain does not skew economic decisions and to make CGT consistent with international competitors. Alternatives to consider include the reintroduction of CGT indexation or amend the CGT discount with a reduced discount percentage for short term gains and a staggered increase in the CGT discount percentage the longer the asset is held.
• The introduction of permanent investment allowances to encourage businesses to invest in income-producing business assets and arrest the effects of long-COVID on the economy.
• Changes to the company tax rate to remove the complex and counter-intuitive two rate system and ensure that Australia remains an attractive destination for international capital.”

“All-in-all we expect this Budget to be like many of its predecessors – it will bring forward narrowly focussed, piecemeal tax announcements and put big-picture, economy enhancing tax reform measures off to another day.”