• Federal Budget 2022

    Expert Commentary

BDO's Commentary on Federal Budget March 2022

Our subject matter experts experts provide commentary for the March 2022 Federal Budget.

Big Picture

The Federal Budget represented an opportunity for the Government to set out how it plans to help Australian organisations aim for a Net Zero emissions target.  

Being bolder in this year’s budget would have incentivised organisations to mirror – or improve upon – Australia’s commitment at COP26 last November. As has been widely reported, Australia updated and enhanced its commitments under the Paris Agreement to include a net zero emissions by 2050 target.  

Whilst the rural and regional commitments and patent box regime extension are welcomed, the Federal Budget includes nowhere near enough support ($30 million over the forward estimates) for the development and commercialisation of low emissions technologies. The question remains, how will Australia achieve its COP26 net zero commitment? 

Where the budget does make a step in the right direction is on the social aspects of ESG. BDO welcome’s measures such as an increased focus on training and upskilling of the workforce, job creation, support for indigenous Australians, improving women’s safety, and increased NDIS funding.

“The Federal Budget includes nowhere near enough support for the development and commercialisation of low emissions technologies. The question remains, how will Australia achieve its COP26 net zero commitment?”

Aletta
Aletta Boshoff
National Leader, ESG & Sustainability

Balancing the needs of a recovering economy against the backdrop of budget austerity is a major challenge for governments across the globe today.   

Achieving this effectively relies upon providing a combination of short-term incentives and investments in long term assets that provide public benefit for generations to come. 

The infrastructure spend in this year’s Federal Budget hits the mark on the second of those factors, following a focus on the first last year. 

This year’s Federal Budget provides for the future by investing in infrastructure projects that will stimulate the regional and national economies during construction and well into their operational periods. 

The $120 billion 10-year infrastructure investment pipeline announced in the Budget will see additional investment across the country. New South Wales will receive $3.6 billion, Victoria $3.5 billion, Queensland, $4.4 billion, Western Australia $2.3 billion, South Australia $2.9 billion, Tasmania $662.2 million, the Northern Territory $538.7 million and the Australian Capital Territory $59.5 million.  

The combined investment in a variety of large infrastructure assets - such as the Brisbane to Gold Coast faster rail upgrade, the Melbourne Intermodal Terminal package, and the faster rail upgrade between Sydney and Newcastle - should provide adequate short and long term stimulus, whilst leaving a lasting legacy for the community. 

“This year’s Federal Budget provides for the future by investing in infrastructure projects that will stimulate the regional and national economies during construction and well into their operational periods. ”

Darren
Darren Black
National Leader, Project & Infrastructure Advisory

As Australia emerges from the economic challenges of the combined effects of COVID, global uncertainty, sanctions and natural disasters, the Federal Government’s budget is one of the most important in recent history. 

To support and drive the Australian economy, the Federal Government must strike the right balance between providing much-needed funds, maximising the value of every dollar, and minimising the risk of exploitation. 

Troubled times bring out the best and worst in people. The Federal Budget is “putting more money in the pockets of millions of Australians” through billions of dollars in sweeteners. Between the combined cost-of-living tax offset, low and middle income earner tax offsets and a raft of additional subsidies, the big spending budget measures will be a target for fraudsters looking to exploit compliance loopholes. 

According to the Australian Institute of Criminology, there are tens of thousands of reported fraud and corruption incidents against the Commonwealth each year. As the Government plans its way out of a 2021-22 forecast deficit of $106.6 billion, a sharp focus and ongoing vigilance is needed to minimise the risks of unnecessary loss through the unscrupulous conduct of a few who would take advantage of others in need. 

“As the Federal Government plans its way out of a 2021-22 forecast deficit of $106.6 billion, a sharp focus and ongoing vigilance of fraudulent activity is needed to minimise the risks of unnecessary loss through the unscrupulous conduct of a few who would take advantage of others in need.”

Stan
Stan Gallo
Partner, Forensic Services

International border closures during the pandemic slowed population growth to such an extent that Australia's population declined for the first time since World War I. The closure of borders also resulted in skill shortages and labour market tightening.

This year's Federal Budget has revealed a more optimistic outlook for population growth than previously released by Treasury. The main driver of this is a return to positive international migration by June 2022. The Budget predicts real GDP per capita will be higher than was forecast prior to the pandemic.

The Skilled Visa stream has been increased, and now accounts for nearly 70% of permanent migration, a shift away from the Family stream. This provides a boost in skilled labour for the business sector. This, along with increases to Work and Holiday visas will likely alleviate the current tight labour market and provide much needed help to organisations struggling to recruit.

The Budget projects the lowest unemployment rate since the 1970s, predicting it will fall to 3.75% by June 2023, with real wage growth to also turn positive at 0.25%.

“This year’s Federal Budget has revealed a more optimistic outlook for population growth than previously released by Treasury. It also predicts real GDP per capita will be higher than was forecast prior to the pandemic.”

Ally
Ally Flint
Partner, Project & Infrastructure Advisory

The 2021-22 Federal Budget provided $33.5 million over four years to respond to recommendations from the Medicare Benefits Schedule (MBS) Review Taskforce, which reviewed MBS items for clinical efficacy and relevance.[1]The 2022-23 Federal Budget builds upon the Guaranteeing Medicare Initiative, by including measures that reinforce the Government’s desire to align Medicare with contemporary practice[2].   

Regular review and assessment of items on the MBS is welcomed. It results in changes such as a reduction in services and treatments deemed obsolete and offers benefits to consumers via improved access and more judicious use of interventions. For industry, it provides opportunities to continue its focus on research-based innovation, which could lead to new items listed on the MBS.  

Ultimately, consumers should experience improved patient access to high-value, evidence-based healthcare. Regular review of MBS items fosters competitiveness and collaboration amongst researchers and industry to develop new technologies that allow clinicians to pursue decision support tools and new models of care.  

[1] Medicare Benefits Schedule continuous review to improve patient care | Australian Government Department of Health 

[2] Budget Paper No. 2 

 

“This year’s budget continues to focus on Medicare, with ongoing funding to respond to the Medicare Benefits Schedule Review Taskforce’s recommendations, reinforcing the Government’s desire to align Medicare with contemporary practice. ”

Kyffin
Kyffin Thompson
National Leader, Healthcare

Following the reopening of the international borders, the Federal Budget focuses on a range of immigration measures that will support Australia's economic recovery and investment agenda.

It focuses on skilled workers with targeted measures for rural and regional employers including bringing an additional 12,500 workers under the Pacific Australia Labour Mobility scheme and the new Australian Agriculture Visa.

The Government will maintain the 2022–23 permanent Migration Program planning level at 160,000, with an increase in skill stream places to 109,900 (around 70% of the permanent Migration Program).

The country caps for Work and Holiday visas will be increased by 30% (with overall places available at around 11,000).

It will re-incentivise international students and Working Holiday Maker Visa holders with refunds and waivers of Visa application charges for those who arrive in Australia in the first quarter.

There are some 70 changes to migration Visa settings in response to COVID-19 and to support Australia's labour market and economy. These include extensions of Visa validity periods, the removal of work restrictions and Visa application charge waivers or refunds.

The Government will increase funding over two years to continue the Global Business, Talent and Investment Taskforce, renamed as Global Australia Taskforce, to attract international talent and investment.

This year's Federal Budget commences what needs to be a long-term strategy to address skill shortages while investing in measures to expand and upskill the local workforce.

“This year’s Federal Budget commences what needs to be a long–term strategy to address skill shortages while investing in measures to expand and upskill the local workforce.”

Maria
Maria Jockel
Global and National Immigration Leader, Legal Principal

The Australian Government’s 2020 Cyber Security Strategy identified a number of strategic initiatives to keep Australia cyber safe. One of the priority initiatives identified in the strategy was for Government to invest in cyber threat intelligence sharing as a proactive measure to identify and stop cyber threats early.   

In this year’s Federal Budget, the Government has committed to investing $9.9 billion in Australia’s intelligence and cyber capabilities. This includes strengthening our alliances and partnerships with the Five Eyes, AUKUS and Indo-Pacific nations.   

Cyber threat intelligence seeks to identify the specific cyber threats – answering the who, what, when, why and how questions of a cyber attack which will allow organisations to be better prepared.  

The 2021 BDO and AusCERT Cyber Security Survey identified that 60% of respondents now use some form of threat intelligence. The survey highlights that organisations with cyber intelligence capabilities detected three times more incidents than those without, and experienced 30% less notifiable data breaches.   

BDO welcomes the Government’s investment in cyber intelligence. It is a significant step in strengthening Australia’s cyber defences and protecting our national interests. 

“BDO welcomes the Government’s investment in cyber intelligence. It is a significant step in strengthening Australia’s cyber defences and protecting our national interests.”

Leon
Leon Fouche
National Leader, Cyber Security

Business

From a corporate tax perspective, the Federal Budget appears light on the tax reform agenda, other than delivering an extension of the patent box regime it is notable for what it does not include. In particular, many of the COVID-19 incentives such as the temporary full expensing and loss carry back measures have not been extended beyond their announced sunset date of 30 June 2023.  

The only significant and welcome tax reform for corporates is the expansion of the patent box regime announced in last year’s budget. 

Specifically, for corporate taxpayers undertaking R&D in Australia, the patent box regime announced in the 2021/22 budget will be extended to certain agricultural sector innovations relating to the commercialisation of listed and registered agricultural and veterinary chemical products or plant breeders’ rights and to low emissions technology innovations. In addition, the patent box regime for medical and biotechnology innovations granted or issued after 11 May 2021 will now include standard patents granted by IP Australia, utility patents issued by the US Patent and Trademarks Office (USPTO) and European Patents granted under the European Patent Convention (EPC).  

This will provide concessional tax treatment under the patent tax regime at a rate of 17% to the extent R&D of the innovation is undertaken in Australia.  

The lack of tax reform may be understandable in the context of an election year, coupled with global challenges impacting Australia as well as the ongoing COVID-19 pandemic. However, this does beg the question when will we see meaningful tax reform in Australia?  

“The lack of tax reform may be understandable in the context of an election year, coupled with global challenges impacting Australia as well as the ongoing COVID-19 pandemic. However, this does beg the question when will we see meaningful tax reform in Australia? ”

Catherine
Catherine Dean
Partner, Tax

At its core, farming is about growing things that are sold to others. 

As the emphasis on net-zero continues to gain momentum, many farmers want to diversify their activities to undertake carbon farming projects.  

In very board terms, carbon farming means farmers will either grow different things (e.g. trees) or change how they grow things. In return, they receive Australian Carbon Credit Units (ACCUs) for free, which they can sell or use to offset emissions elsewhere in their business or supply chain. 

Under a technicality in the tax act, income that farmers make when they sell ACCUs is not considered to be primary production income, disrupting access to Farm Management Deposits and primary production tax averaging. 

In a common-sense change, the Government has announced it will amend the tax law with effect from 1 July 2022 so income from ACCUs will be primary production income. 

BDO welcomes these changes, and we call on the Federal Opposition to continue with them, should Labor come to power following this year’s Federal Election. 

“In a common-sense change, the Government has announced it will amend the tax law so income from Australian Carbon Credit Units will be primary production income.”

Andrew
Andrew Jones
Partner, Tax, Food & Agribusiness

Start-up organisations will be able to share more of their growth with employees following a major change to the employee share scheme rules announced in this year’s Federal Budget. 

Under the proposed rules, start-ups will be able to offer shares, with no limit on the number and value, provided the employee is not charged more than $30,000 per year, with an ability to accrue up to $150,000 over five years plus 70% of dividends and cash bonuses. 

This makes it easier for employees to profit from IPOs and the sale of a business, helping start-up organisations attract talent in a highly competitive global market. 

In addition, there will be a welcome relaxation of the onerous company disclosure obligations for shares and options offered to workers. 

“The announced changes to employee share scheme rules will make it easier for employees to profit from IPOs and the sale of a business, helping start-up organisations attract talent in a highly competitive global market. ”

James
James Trainor
Partner, Tax

The key measures impacting the tourism sector centre around the lack of an available workforce resulting from border closures and the increasing wage pressures that follow, as well as the cost of buying stock.

These increasing pressures have severely impacted operating margins across the sector at a time when cost of living pressures are directly impacting consumer discretionary spending.

This year’s Federal Budget announced several welcome initiatives to support the workforce recovery including:

  • Extending the work rights of international students and Working Holiday Maker Visa holders to enable full time work rights as a concessional arrangement
  • Increasing country caps for Work and Holiday visas by 2022-23 by 30 per cent
  • Refunds on visa application charges for students and working holiday makers.

These measures, along with the following, are a welcome relief for a sector still reeling from the impact of COVID-19's impact on business conditions during the past two years.

  • The previously announced $75.5 million to continue the Consumer Travel Support Program that provides direct support to eligible travel agents and tours arrangement service providers
  • An additional $63 million over three years to accelerate international tourism through targeted marketing campaigns
  • $6.8 million over three years to support the Government’s THRIVE 2030 Strategy – focused on improving planning and occupational opportunities in the sector.

The question that remains though is whether the measures go far enough to support the recovery of one of Australia’s key economic sectors.

“This year’s Federal Budget announced several welcome initiatives to support the tourism sector’s workforce recovery, travel support and planning and occupational opportunities. Yet, the question that remains is whether the measures go far enough to support the recovery of one of Australia’s key economic sectors.”

Leon
Clayton Eveleigh
National Leader, Tourism, Leisure & Hospitality

The Government has been under pressure in the lead up to this year’s Federal Budget to ensure small businesses are provided with further tax concessions and relief. The Government has indicated that for every $100 a small business spends on external training for its employees, it will receive a $120 tax deduction (subject to qualifying criteria). This is aimed at helping small businesses become more productive and competitive.

The Government is also encouraging small businesses to embrace going digital by providing a $120 tax deduction for every $100 they spend on digital technologies, such as cloud computing, e-invoicing, cyber security and web design (subject to an annual cap of $100,000). 

Small business will also be provided with cashflow support and red tape reduction, including changes to the way PAYG is calculated, resulting in significant annual compliance savings.  

Whilst this is good news for small businesses, it is important they use these measures as an opportunity to review their cash flow budgets and ensure the additional available cash is used in the most optimal way. Increased tax deductions are most useful if a small business is in a tax profit position, otherwise cash flow remains key. 

“The Government has been under pressure in the lead up to this year’s Federal Budget to ensure small businesses are provided with further tax concessions/relief. It has delivered some improvements, but small businesses must keep cash flow budgets top of mind. ”

Mark
Dr Mark Pizzacalla
Partner, Business Services

BDO welcomes the Government’s extension of the patent box regime (initially announced in May 2021) to apply to the agricultural sector and low emissions technology innovations. This will help solidify Australia as a global leader in agriculture and renewable energy, combat growing challenges such as food security while maintaining landscape function and go some way to meeting our commitments to emission reductions.  

In addition, the patent box regime for medical and biotechnology innovations granted or issued after 11 May 2021 will now include standard patents granted by IP Australia, utility patents issued by the US Patent and Trademarks Office (USPTO) and European Patents granted under the European Patent Convention (EPC). This will be applicable for income years starting after 1 July 2022. 

We are also pleased to see several of BDO’s recommendations, such as extending the regime to plant breeder rights, taken up. However, the measures do not provide a truly competitive means of attracting entities to base their R&D operations, retain IP ownership and commercialise innovations in Australia. In particular, a concessional rate of 17% is uncompetitive compared to other jurisdictions such as Belgium’s 4% rate and Poland’s 5% rate.  

BDO believes the Government should be braver and embrace an industry agnostic ‘knowledge box’ regime such as the one in the Netherlands, or at the very least, improve the competitiveness of the concessional tax rate offered, particularly in view of our comparatively high company tax rates.

“The Government should be braver and embrace an industry agnostic ‘knowledge box’ regime such as the one in the Netherlands, or at the very least, improve the competitiveness of the concessional tax rate offered. ”

Mark
Nicola Purser
Partner, Research & Development

This year’s Federal Budget has a clear focus on how to support customers given the rising cost of living. Several cash handouts have been announced to provide practical household assistance and encourage Australians to spend, including one-off payments for low and middle income earners, halving of the fuel excise for six months and a one-off $250 payment for eligible pensioners. 

However, given the current inflationary pressure, these cash handouts are most likely designed to help return households to a financially neutral position, rather than increasing the available disposable income to spend. 

One of the larger immediate challenges for organisations, including retailers, is the access to labour driven by skills shortage and the low unemployment rate. The measures aimed at responding to that challenge through new tax incentives for small retailers to train and upskill employees and the adoption of digital technologies are welcome additions, particularly with the rise in e-commerce transactions in the retail sector. 

Unfortunately, this year’s budget does not address one of the other big pressures facing retailers and the broader Australian business community - supply chain capability which will create further challenges on stock management and ultimately deliveries to customers.  

“Unfortunately, this year’s Federal Budget does not address one of the big pressures facing retailers and the broader Australian business community - supply chain capability.”

Salim
Salim Biskri
National Leader, Retail

During the past two years, the Government via the Reserve Bank of Australia (RBA), has provided banks with a Term Funding Facility (TFF). This has allowed banks to offer very attractive interest rates on new lending which, in turn, has lowered the cost of finance and increased the availability of debt capital for organisations during 2021 and into 2022.

Increased asset prices and an improved economic outlook as the threat of COVID-19 lockdowns has eased, gives organisations firepower to access additional debt.

Now that the Government has ended the TFF and with increasing inflationary costs, BDO's view is that interest rates will rise later this year and into next year.

This increased cost of debt may also coincide with other expense pressures in your organisation, so having an appropriate capital mix and access to sufficient working capital will be important. Longer term funding costs will widen when compared to short term financing, but for organisations with significant debt requirements, having funding certainty during the medium term may make it worth securing long term debt.

“Increased asset prices and an improved economic outlook as the threat of COVID-19 lockdowns has eased, gives organisations firepower to access additional debt. ”

Darren
Darren Stacey
National Leader, Finance Solutions

With manufacturing shaping up to be a major battleground ahead of the federal election campaign, the Government must tread carefully to avoid potentially leading Australia into an embarrassing global position.

The Government’s push for a move from a ‘just in time’ to ‘just in case’ model for supply chains could potentially damage our international trade obligations.

There is a fine line between enabling Australian industry and compromising our international obligations. Caution will be needed to avoid friction between our now extensive trade agreements and local production policy.

It will also be important for the government to engage more closely with businesses to understand their supply chain and manufacturing concerns. Key issues, like identifying the cause of problems around production or presence in particular sectors, will be crucial.

The response from government for fixing the supply chain is admirable and there is significant funding for establishing new, import replacing manufacturing endeavours, but an evidence-based approach is needed to ensure success for these policy initiatives.

“The Government’s response to fixing the supply chain is admirable and there is significant funding for establishing new, import replacing manufacturing endeavours, but an evidence-based approach is needed to ensure success for these policy initiatives.”

Maria
Bill Cole
Partner, International Trade

For many not-for-profits, this year’s budget provided much needed ongoing support to continue advancing priority projects.

This is good news, but it reaches only a select few. Many charities rely on the FBT exempt benefits to provide remuneration packages that attract employees but at a lower cost to the charity. This threshold has remained effectively unchanged for a decade, so is impacted by the reduced purchase power of the fixed dollar cap. It would have been good to see some indexation of the cap addressed through the Federal Budget this year.

“Some not-for-profits received welcome support to progress priority projects in this year’s budget, but with many charities relying on FBT exempt benefits, indexation on these benefits needs to be addressed to ensure they can attract employees.”

Russell
Russell Postle
Consultant, Business Services, Not-For-Profit

Individuals

On 22 March 2022, the Minister for Superannuation made a welcome announcement about the Government’s intention to make legislative changes to ensure the non-arm’s length expense (NALE) provisions in the tax laws operate as envisaged.  

Although it may have been ambitious to see something further about this in the Federal Budget (on the basis that the Government said it would achieve this outcome after consultation with relevant industry stakeholders), it would have been a welcome indication of the Government’s current understanding of the controversy. 

The superannuation industry has expressed various concerns surrounding the operation and effect of a recent relevant ATO Law Companion Ruling. Some have said it gives the laws much further reach than intended (e.g. by taxing the contributions and realised capital gains of an SMSF at 45%, in circumstances where it failed to incur a small item of expenditure on arm's length terms or because of an oversight or inadvertent error). 

Unfortunately, the Federal Budget contained no further information in relation to this measure and only minor tweaks in relation to superannuation broadly.

“Although it may have been ambitious to see something about non-arm’s length expense (NALE) provisions in the Federal Budget, it would have been a welcome indication of the Government’s current understanding of the controversy surrounding them. ”

Chris
Chris Balalovski
Partner, Business Services

Whilst it’s pleasing to see a 50% fuel excise reduction for the next six months in this year's Federal Budget, the Government has again failed to address the significant taxes that are borne by Australian motorists every year. It's estimated that more than $30 billion in taxes are paid annually, including Luxury Car Tax (LCT), GST, stamp duty, registration, and excise to name a few.   

Many of these taxes date back to the days when Australia had a local car manufacturing presence and they’ve continued despite the diminishing relevance to the current economic landscape. LCT is a prime example of an outdated tax, which sees consumers pay a premium for vehicles that, in some cases, are common family vehicles.  

Given the Government’s push for policy that reduces the impact of climate change and promotes road safety, making safer and more environmentally friendly cars as cost effective as possible would seem sensible. Whilst the abolishment of LCT may be a step too far for now, a considerable increase in the LCT threshold to capture only true ‘luxury’ cars would be a welcome relief for dealers and consumers. 

“Whilst it’s pleasing to see a 50% fuel excise reduction for six months in this year's Federal Budget, the Government has again failed to address the significant taxes that are borne by Australian motorists every year.”

Randall
Randall Bryson
Partner, Business Services, Automotive