Date posted: 26/10/2022

Federal Budget 2022-23 takes a cautious approach to taxation of individuals

Given the uncertain economic climate, the Labor Government is taking it steady as she goes.

In Brief

  • Stage 3 tax cuts are uncertain due to expected deteriorating economic conditions.
  • Cost of living concerns are being addressed by productivity-enhancing expenditure on childcare and education.
  • The May 2023 Budget may have more in store for individual taxpayers.

With a constantly changing economic landscape – and some predicting a global recession – the Government has taken a cautious approach towards assisting individuals through the taxation system. 

There is little in the Budget for individuals from a tax perspective, with no mention of stage 3 tax cuts, or the low- and middle-income tax offset (LMITO) and working-from-home deductions which expired on 30 June 2022. 

Rather, to improve long-term participation in the workforce, there are changes reducing the cost of childcare and education which are touted as cost-of-living assistance with a productivity payoff.  

Cost-of-living plan 

The Government’s five-point plan for cost-of-living relief is:

1. Cheaper childcare - the maximum childcare subsidy (CCS) rate will increase from 85% to 90% for first child in care and the CCS will increase for all families earning less than $530K.

2. Greater access to paid parental leave by increasing the current 20 weeks leave to 26 weeks leave by July 2026.  This has a ‘use it or lose it’ portion reserved for each parent and eligibility has expanded to include families with up to $350,000 income.  

3. Cheaper medicines - the PBS maximum general co-payment will be reduced from $42.50 to $30 a script.

4. More affordable housing through a variety of government funding initiatives such as:

  • 30,000 new social and affordable homes through the Housing Australia Future Fund.
  • An additional 5,500 homes through the National Housing Infrastructure facility.
  • Helping 40,000 people to own their home with a lower deposit and smaller mortgage through the Help to Buy Scheme.
  • Supporting 10,000 new homeowners through the Regional First Home Buyer Guarantee.
  • Assisting downsizers by reducing the age requirement to 55 years.  

5. Getting wages moving again. This includes investments in a smarter workforce including:

  • 480,000 fee free TAFE places.
  • 20,000 additional university places in 2023 and 2024 in areas of skills shortages such as nursing, teaching, engineering and technology.
  • $10,000 financial support for eligible apprentices in clean energy industries.
  • 2,000 income contingent loans for a university-based accelerator program.

A different kind of tax time

Many individuals will be in for a shock when tax time rolls around on 30 June 2023 as several significant tax measures expired on 30 June 2022.  

The LMITO was designed as a temporary measure in the transition to stage 3 tax cuts. After being extended several times and increased from $1,080 to $1,500 (an increase of $420) for the year ended 30 June 2022, the LMITO no longer exists. This, like the fuel tax excise reduction, was a poison chalice waiting for whoever won the election. 

At a cost of approximately $8 billion per annum and applying to people on incomes up to $125,333, some argue that this outlay is more appropriately directed to those on social security. However, those that have been receiving the LMITO for the past five years are likely to experience ‘bill shock’ as refunds that many have expected to receive after lodging their returns will not be available. 

Also, the simple temporary short cut method of 80 cents per hour working-from-home deduction has lapsed. Whilst individuals can still claim working-from-home expenses using alternative methods, it has become a lot harder to do so. The 52 cents per hour fixed-rate method requires a person to have an office – which many people don’t. In which case, you need to rely on the actual cost method which requires significantly more substantiation.

Lack of documentation due to the lack of awareness of the lapse of the temporary shortcut method is likely to adversely affect a number of people’s working-from-home deductions or encourage non-compliance with the tax laws.  

Stage 3 tax cuts are legislated but still uncertain. A Labor pre-election commitment was that stage 3 tax cuts would remain, however, a lot has changed since 2018 and the Budget papers indicate that international economic conditions may significantly worsen before the stage 3 tax cuts commence on 1 July 2024. The Government has left open the possibility of delaying, modifying or scrapping the stage 3 tax cuts.  

It is a question of waiting and seeing whether LMITO and working-from-home measures will appear in the May 2023 Budget. The Government is keeping its options open – will the economy pick up and these measures will have less of an impact on individuals? Will the economy dive and support need to be delivered through both the social security and tax systems? Can Australia only afford to support those on social security?   

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