Victorian business will be hit with a 10-year Debt Levy designed to repair a gaping hole in the state’s Budget, with the Treasurer leaning on any business with a turnover above $10m to begin to pay down debt.

In a Budget that is heavy on social measures and light on commercial incentives, Treasurer Tim Pallas unveiled higher payroll tax bills for around 4,000 SMEs and large businesses and higher land tax bills for around 380,000 landowners.

The only relief will be for micro businesses, with wages sub-$1m, who will not be subject to payroll tax due to an increase in the tax-free threshold.

But the cost of restoring the State’s finances will again sit on the shoulders of mid-market businesses, which have already hit by previous rounds of increased taxes and additional levies.

“Mid-market businesses are already facing significant cost pressures due to the impact of inflation on labour costs, energy bills and other operational expenses,” Craig Whatman, Partner at Pitcher Partners Melbourne said.

“Increasing their payroll tax bills as well as their WorkCover premiums will add to these cost pressures and further increase the gap between Victoria and our eastern seaboard neighbours in terms of the higher cost of doing business in this state.”

The Budget’s Debt Levy is scheduled to begin on 1 July 2023. Businesses with national payrolls above $10 million a year will be subject to an additional 0.5% levy on top of the existing payroll tax rate, with a further 0.5% for businesses with a payroll over $100 million.

Property investors with landholdings valued above $300,000, as well as trust taxpayers with property holdings above $250,000, will also see land tax rates increase temporarily by $975 plus 0.1% of the value of their landholdings above $300,000.

The Debt Levy is expected to claw back $2.0 billion from business and property owners in 2023-24 and grow by an average of 4.9% per year over the forward estimates to $2.3 billion in 2026-27.

In addition to the Debt Levy, there are changes to payroll tax rates that reduce the burden on micro businesses, starting on 1 July 2024. This is estimated to remove payroll tax from 4,200 businesses and reduce taxes for a further 22,000 in the initial change:

• From 1 July 2024, the payroll tax-free threshold will be lifted from $700,000 to $900,000;
• From 1 July 2025, the threshold will again be lifted to $1m.

However, the Government plans to eliminate the payroll tax-free threshold for businesses sooner:

• The threshold will reduce for each dollar a business pays in wages over $3m;
• The payroll tax-free threshold will no longer apply to businesses with wages over $5m.

Mr Whatman said the shift to burden businesses with additional payroll taxes — while eliminating the payroll tax-free threshold for small-to-medium business — was a double blow for companies already struggling with higher wages, additional costs, and inflation.

“Businesses can’t just absorb this cost; it instead gets passed on in the form of increased prices for goods and services, which simply fuels the inflationary environment,” he said.

“The alternative is for a business not to make the additional hire or invest in the additional capacity — neither of which is a good outcome for Victoria.”

Mr Whatman also urged more detail to be made available for the Budget’s signature policy which would see an end to stamp duty for commercial and industrial property in favour of an annual property tax equal to 1% of the property’s unimproved value, which would come into effect on 1 July 2024.

“There is an immediate need to get clarity around what will be considered or defined as industrial and commercial property as quickly as possible,” he said.

“Among the grey areas that may have deep implications for developers are sites that are zoned or earmarked for industrial/commercial use, but which can be developed for residential use.”

Among other revenue-generating measures in the Budget:

• Foreign property investors have also been stung with the land tax surcharge for absentee owners increasing from 2% to 4%;
• Around 110 Victorian non-government schools are set to lose their payroll tax exemption from 1 July 2024, with the Government targeting the top 15% of schools in terms of fees paid.

The scrapping of business insurance duty will deliver a small saving for businesses, with professional indemnity insurance and fire and other special risk insurance being phased out over 10 years.

For manufacturing, $21m over two years has been set aside for a manufacturing and industry sovereignty fund, while $15m will support private industry investment into research and development.