In summary

Every year there is speculation in the media about just what this year’s budget will contain, and this year is no different.  Understandably, the focus of the tax community is on whether there will be any major tax announcements.  The current indications are that while stimulatory measures are a given to get the economy back on track, major tax reforms are unlikely.

In detail

In June and July this year there was some speculation that the Government might decide to undertake bold tax reforms in the October Budget in light of the undeniable economic problems caused by the bushfires and COVID-19: difficult times call for strong measures.  But it now seems that the speculation has settled around four less ambitious ideas. 

The first prediction is not guesswork at all.  Both the Prime Minister and the Treasurer announced early in the pandemic there will not be major tax increases in this year’s Budget – there will not be a Temporary Corona Virus Levy, for example.  Australia will need to start reducing the accumulated debt and work on Budget repair, but the Government’s plan is to do this through pro-growth measures rather than through increasing tax revenue.  The Treasurer put it this way:

... the pathway to paying back that higher debt that has been incurred ... is by growing the Australian economy. It’s not through higher taxes. It’s actually by growing the Australian economy with productivity-enhancing reforms. That’s what we're committed to.

So we can expect measures intended to try to grow the economy, not impede economic activity by adding to the tax burden. 

The second element – speculation about delaying the 0.5% increase to the Superannuation Guarantee Charge (SGC) due to start in 2021 – is consistent with this story.  In the current economic climate, pay rises for employees seem unlikely, but an increase to SGC would mean higher payroll costs brought about by a tax measure. The government seems disinclined to allow this to happen.

The third idea is the prospect of stimulating consumption.  Accelerating the second round of personal income tax cuts, currently scheduled for 2022, would put more disposable cash into the hands of households, hopefully leading consumers to buy more goods which should lead to increased demand and production. 

However, the impacts of this strategy would be muted if households are wary and decide to save the extra cash rather than spend it.  Current estimates suggest about 1.3m people have lost jobs or are subject to reduced hours so it is perhaps not surprising if people are cautious about discretionary spending.  Indeed, the National Accounts for the June 2020 quarter released in September suggest this might well happen: household disposable income actually increased during the June quarter, but it was accompanied by ‘the largest fall in household consumption on record’ while ‘household savings … increased to a record high …’.

So the fourth idea is that there will need to be other measures intended to stimulate production more directly. The usual candidate is some type of tax incentive for new investment in equipment.  There are many options for how this might be done. The simplest would be to extend the life of the two measures put in place earlier this year.  While that would be helpful, their scope might also need to be expanded: the instant asset write-off measure is limited to modest items of equipment and only benefits small business, while the accelerated depreciation measure is not available to large business.  The business community has already lobbied for a different type of accelerated depreciation measure with these limits removed.  But even a modified version of an investment incentive offers little for entities in the services sector.

But the overall impression suggests that tax is unlikely to be a major focus of the Budget.  In an address to the National Press Club in May the Prime Minister gave some clues as to the Government’s priorities in its emerging economic plan, called Jobmaker.  It seems the government’s attention is focused on things like:

  • changes to the industrial relations system, such as simplifying awards and improving enterprise agreements,
  • accelerating infrastructure projects,
  • regional development,
  • greater investment in skills training,
  • redirecting priorities in higher education, and
  • deregulation, particularly trying to streamline the procedures for environmental approvals.

The recent announcements about simpler corporate insolvency laws and relaxing lending requirements are in the same vein. No doubt there will be some tax measures in the October Budget but the current indications are that they will not be momentous.  Some people will view this as a missed opportunity; others will breathe a sigh of relief.  But even if the Budget will not be proposing a bold program of reforms in tax there may be some good news for taxpayers hoping for a reduction to their tax burden.