Budget Update 2024-25

Amid an economic landscape marked by its weakest performance in 23 years, the Australian Federal Budget for 2024/25 emerges as a crucial blueprint aimed at strengthening economic sovereignty ahead of upcoming elections. Delivered by a government operating in surplus thanks to robust company tax receipts, this budget presents a complex tableau of opportunities and challenges, particularly for small businesses.

Fiscal Overview

The government reported a surprising $9.3 billion surplus, reversing an anticipated $1.1 billion deficit. However, this is forecasted to swing to a $28.3 billion deficit in 2024-25, with increasing deficits in subsequent years suggesting ongoing economic management challenges amidst efforts to curb national debt and manage significant expenditures, such as a notable increase in NDIS spending.

Strategic Investments and Small Business Focus

The budget outlines several targeted measures aimed at supporting small businesses, which are vital for economic recovery and growth:

1. Extended Instant Asset Write-off: Small businesses can continue to immediately deduct the cost of eligible depreciating assets under $20,000, aiding cash flow and reducing compliance costs.
2. Energy Bill Relief: From July 2024, approximately one million small businesses will benefit from energy bill rebates, easing operational costs amid rising energy prices.
3. Improved Payment Times: An investment of $25.3 million aims to enhance payment times for small businesses, increasing financial stability.
4. Innovation and R&D Support: Significant funds are earmarked for innovation, particularly in renewable energy and critical minerals, providing growth opportunities for businesses in these sectors.
5. Support for Mental Health and Franchising Standards: Additional funding is directed towards mental health support and enhancing the franchising code of conduct, recognizing the broader challenges faced by small business owners.

Stage 3 Tax Cuts: A Closer Look at the New Brackets

As part of its strategy to alleviate cost of living pressures and stimulate economic activity without exacerbating inflation, the Federal Budget includes significant changes to the personal income tax structure under the Stage 3 tax cuts. These changes are designed to provide tax relief and potentially increase disposable income for taxpayers, which could have indirect benefits for small businesses through increased consumer spending.

New Personal Tax Rates and Thresholds for 2024-25 Onwards:

• $0 to $18,200: No tax payable, maintaining the existing tax-free threshold.
• $18,201 to $45,000: Tax rate reduced from 19% to 16% of the excess over $18,200, decreasing the burden on lower-income earners.
• $45,001 to $135,000: The upper threshold for the middle tax bracket has been reduced significantly from $200,000, with taxpayers now paying 30% on the excess over $45,000 up to $135,000.
• $135,001 to $190,000: This new bracket introduces a tax rate of 37% of the excess over $135,000, targeting upper-middle-income earners.
• Above $190,001: For those earning above $190,000, the tax rate remains at 45% of the excess over $190,000.

These tax adjustments aim to simplify the tax system, reduce the tax burden on middle-income earners, and encourage economic participation. For small businesses, the potential increase in disposable income for consumers could translate into increased spending power and demand for goods and services.

Global Tax

From 1 July 2025, the foreign resident capital gains tax regime will be tightened to include increased disclosure requirements to the ATO when foreign residents dispose of certain Australian assets that exceed $20 million in value, as well as broadening the types of assets that foreign residents are subject to CGT on. This is in addition to the increase to the withholding rate from 12.5% to 15% and a reduction in the withholding threshold from $750,000 to $0 as announced in the Mid-Year Economic and Fiscal Outlook.

Budget Measures to Combat Inflation and Manage Cost of Living

1. Temporary Energy Bill Relief: The government has allocated substantial resources towards reducing the immediate burden of rising energy costs on households and small businesses. A $3.5 billion package has been earmarked for energy bill relief, which directly addresses the cost of living by helping to manage one of the most significant household and business expenses.
2. Housing Investments: With $6.2 billion allocated for new housing initiatives, the government aims to tackle one of the root causes of inflation — housing affordability. This investment not only aims to increase the housing supply but also includes support for the construction sector to boost employment and economic activity in this key area.
3. Continuation of the Instant Asset Write-off: By extending the instant asset write-off, the government provides small businesses with the opportunity to invest in new equipment and technology while managing cash flow more effectively. This stimulus helps maintain business operations and investments even during economic downturns, indirectly supporting employment and service levels in the economy.
4. Paid Superannuation on Parental Leave: Investing in family support by funding superannuation on parental leave contributes to long-term financial security for families. This measure is part of a broader strategy to support workforce participation and economic stability for working parents.
5. Increased HECS Support and Student Debt Waivers: The allocation of $3 billion to waive student debt for over three million Australians and additional support for HECS reforms can significantly reduce the financial burden on younger generations. This initiative is expected to increase disposable income and consumer spending, providing a stimulus to the economy.

Strategies to Manage Interest Rates and Economic Growth

1. Economic Diversification: The budget emphasizes diversifying the economy through investments in renewable energy, critical minerals processing, and technology sectors. By supporting these industries, the government aims to create more stable, sustainable economic growth, which can be less susceptible to global economic shocks and interest rate volatility.
2. Fiscal Responsibility: Despite the substantial investments and stimulus measures, the government has also focused on fiscal responsibility. By planning for a return to budget surplus and managing national debt levels, the government seeks to maintain Australia’s credit rating and keep interest rates from rising uncontrollably.

Lack of Permanent Tax Reforms: A Missed Opportunity

Despite these support measures, there is a significant gap in the budget: the absence of comprehensive tax reform. Small businesses continue to face uncertainty due to a long list of unaddressed legislative proposals and the lack of a clear strategy for long-term fiscal health and tax system maintenance.

Awaiting More Substantial Reforms

As the next Federal Budget will likely be a pre-election one, there is hope for a more extensive discussion on tax reform. Small businesses, integral to Australia’s economy, would greatly benefit from more robust, permanent reforms that go beyond the edges to establish a firmer groundwork for growth and stability. The ongoing cost-of-living pressures and economic forecasts suggest that while temporary measures provide short-term relief, the real test will be the government’s ability to implement sustainable economic policies moving forward.