What to expect from next week's Federal Budget

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The Federal Budget is early this year; it's on March 29. That's because an election is due by May at the latest so the government wants to get the Budget passed in good time to take all the credit for everything contained within it.

The problem with pre-election Budgets is that they need to be taken with a pinch of salt. If the opposition wins the election, nothing within the Budget really matters - they will no doubt have their own particular priorities which they will want to legislate as soon as possible.

If the government wins the election, the refreshed lineup will no doubt be keen to make its mark by making the policies on which it won the election law, whether or not they were contained in the Budget.

what to expect from federal budget night lmito tax break

Really, the Budget is simply a way for the government to make a series of financial and tax statements before the election - whether they will survive to be actually implemented remains to be seen.

Given that there is an election shortly afterward, it's extremely unlikely that there will be any "bad news" delivered in the Budget. Expect all of the measures to be delivered with both eyes firmly fixed on the polls and the impact on voters.

So, given that, what are my predictions for the Federal Budget?

Personal taxes

Don't expect any negative changes to personal tax rates.

While the cost of COVID-19 means that there is probably a need to increase the personal tax take to pay down the deficit, the government is simply not going to process tax rises at this stage of the electoral cycle. Indeed, they are likely to offer counterintuitive tax cuts in the hope of bolstering their vote.

Expect the Low and Middle Income Tax Offset (that is currently scheduled to end this June 30) to be extended for one more year, through to June 30, 2023.

The LMITO - known colloquially as the Lamington tax cut - is an amount paid to people earning up to $126,000 when they lodge their tax return for the year. The amount varies between $255 and $1080, with people earning between $48,001 and $90,000 in the "sweet spot" where they get the full amount.

This will be sold as a tax cut but really it's simply a deferred tax rise. When the offset does finally end, everybody earning up to $126,000 will lose the amount of the tax offset, which has been a feature of the tax system since 2018-19.

Expect the government to recommit to its already legislated stage three tax cuts, which take effect from 2024, but not to bring them forward to this year. Under these cuts, the 37% tax bracket will be abolished, the top 45% bracket will start from $200,000 and the 32.5% rate will be cut to 30% for all incomes between $45,000 and $200,000.

Work-related deductions have been in the sights of Treasury boffins for years now but they have struggled to come up with a way of reforming the system that doesn't either outrage taxpayers or end up costing more than it saves. The Treasurer might have one eye on the purported $22 billion claimed in work-related deductions every year.

We're not convinced he has been able to work out a way of getting his hands on that pot of money without encountering the same hurdles as his predecessors who have gone down the same route so we don't believe any changes will be announced imminently but longer term change could be under consideration.

Lastly, in light of soaring petrol prices, expect the rate of fuel duty to be cut. In the great scheme of things, this will be a drop in the ocean compared to recent price rises but the Treasurer will want to be seen to be helping the great Aussie motorist.

Small business

I would expect the very popular temporary full expensing scheme, which gives businesses an immediate deduction for all capital items purchased right through to June 30, 2023, to be extended for another year, through to June 30, 2024.

This won't have an impact on revenue immediately but will signal the government's commitment to helping small businesses, which continue to "do it tough", with COVID-19 and now cost of living pressures to deal with.

The government set out an agenda of reducing corporate taxes for all companies, even the biggest ones, a few years ago but Parliament didn't take the bait and other than passing some modest tax cuts for businesses with a turnover up to $50 million, the Senate put a block on the governments more ambitious plan to reduce the corporate tax rate to 25% for all companies.

I don't believe that the government will give up on its aspiration for lower tax rates but it continues to be politically difficult to give tax cuts to big businesses so I wouldn't be surprised to see further cuts to the rate of tax for small businesses (accompanied with a possible increase in the turnover threshold - currently $50 million - to qualify).

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Mark Chapman is director of tax communications at H&R Block, Australia's largest firm of tax accountants, and is a regular contributor to Money. Mark is a Chartered Accountant, CPA and Chartered Tax Adviser and holds a Masters of Tax Law from the University of New South Wales. Previously, he was a tax adviser for over 20 years, specialising in individual and small business tax, in both the UK and Australia. As well as operating his own private practice, Mark spent seven years as a Senior Director with the Australian Taxation Office. He is the author of Life and Taxes: A Look at Life Through Tax.

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