What will the Federal Budget mean for small business? An expert weighs in

With the Federal Budget imminent, I’ve been doing some crystal ball-gazing and considering what tax measures might – and what might not – be announced, and their impact on small businesses, writes Mark Chapman, Director of Tax Communications, H&R Block.

Sadly, when it comes to tax, this year’s Budget (due on 9 May 2023) is likely to be defined by what is unsaid rather than any specific announcements.

With the focus on challenging inflation and keeping the domestic economy in robust shape to deal with a worldwide downturn, the main focus is likely to be on targeted spending to help the most vulnerable groups rather than across-the-board tax measures like tax cuts.

The government already has a major program of tax cuts coming up (in July 2024) that it inherited from the last Liberal government and is unlikely to want to tinker too much with the tax system until it works out whether to proceed with those tax cuts.

Temporary Full Expensing

This tax break, first introduced in late 2020, provides a 100 per cent deduction for expenditure on most capital assets, without limit. It has provided welcome relief for almost all businesses, which can in effect reduce their taxable profits by the amount spent on motor vehicles, plant and equipment, tools, and fixtures and fittings.

Temporary Full Expensing is due to expire on 30 June 2023 and there are no indications that the Treasurer plans to extend it, let alone make it permanent (as many business groups have called for).

Therefore, from 1 July 2023, TFE will be replaced by the far less generous instant asset write-off, which is restricted to businesses with a turnover of less than $10m, enabling them to immediately write off the cost of a capital asset costing less than $1,000 – a big comedown from all businesses being able to write off all asset purchases!

Low-and-Middle Income Tax Offset

This tax offset, which delivered a tax break of up to $1,500 for people earning up to $126,000, actually expired at the end of the last tax year, on 30 June 2022. Many voters won’t cotton on to that fact until they come to lodge this year’s tax return and they notice that the size of their refund has dramatically shrunk!

The Treasurer has been under pressure either to reinstate the LMITO or introduce some other measures to protect low-and-middle income earners. It now appears clear that he won’t be reinstating the LMITO, which appears to have gone for good. Will he replace it with something else? Possibly, but it’s unlikely to be on the tax side. A package of spending measures to help these individuals – such as further support for energy bills or increases to the level of benefits for the unemployed or those on very low incomes – appears far more likely.

For small business owners, the effects are twofold. Firstly, it will impact their own hip pockets (if you actually received the offset, its loss will very much be noticed) and secondly, in customer spending. You can’t lose $1,500 out of your income in the current climate without it impacting your ability to go out and spend.

Businesses that rely on this discretionary spending – particularly in the leisure and entertainment sector such as hotels, restaurants and bars – are likely to be particularly affected.

Stage Three tax cuts

The most unloved tax cuts in the world are finally due to take effect from 1 July 2024. Pundits are mostly united in believing that the Liberal-era tax cuts (which heavily favour the highest income earners) are unaffordable and unfair and opinion polls suggest that most voters agree. But Labor is sticking with its election commitment to introduce them for now – and don’t expect this Budget to contain any surprise announcements reversing that.

It may well be that these tax cuts never see the light of the day – at least in their current form – but the government has time on its side and will probably make an announcement when it becomes clear which way the economy is going, later this year or early next year.

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