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May 10, 2023
Australia delivers 2023/24 Federal Budget
The Federal Treasurer handed down the 2023/24 Federal Budget on Tuesday, 9 May 2023.
Given the fiscal difficulties that Australia has found itself in over the past three years, a return to surplus, albeit relatively small at AU$4 billion,1 in this year's budget is certainly something worthy of applause. Admittedly, stronger than previously budgeted tax revenues from the mining sector along with record personal tax receipts from a strong economy and increased migration have aided immensely.
But to the government's credit, it has banked approximately 80% of the improvements in the budget and constrained forecast spending to only 0.6% a year on average to 2026/27. This has significantly slowed the rate of growth in national debt, resulting in a maximum gross-debt-to-GDP ratio of 36.5% for the four-year forecasts. However, it has not stopped the government from delivering a "compassionate" budget by providing for those in the community less able to cope with the current inflationary pressures.
What the budget lacks, however, is a recognition that Australia's large structural deficits embedded in the 2024/25 and later years remain unresolved. Secondly, the budget lacks broad productivity-enhancing measures, especially considering that the general full-expensing depreciation write-off, which has had the effect of bringing forward significant investment over the last few years, expires on 30 June 2023.
While there are many bespoke growth initiatives in the budget, including a $4-billion energy funding initiative and a $3.7-billion skills package, the lack of broader productivity incentives appears to be a missed opportunity to encourage productivity growth, which is critical to increasing wages into the future without inflationary repercussions.
From a tax perspective, the budget has a number of revenue-raising and compliance-related measures, including the expected introduction of the global 15% minimum tax regime (Pillar Two Global Anti-Base Erosion (GloBE) rules, incorporating a complimentary Domestic Minimum Tax), preannounced changes to Australia's Petroleum Resources Rent Tax regime, a similarly foreshadowed tax regime on earnings of over $3 million Superannuation balances and a tightening of various anti-avoidance measures. Concessions to improve the taxation of Build-To-Rent developments provide one of the few stand-out tax incentives for investment.
Separately, in a note accompanying the GloBE announcements, Treasury has confirmed that the October 2022 announced Multinational Tax Integrity Package, comprising changes to Australia's thin capitalisation rules, deductibility rules relating to intangible property and MNE tax transparency, all remain scheduled to commence from 1 July 2023.
Implementation of a global minimum tax and a domestic minimum tax
The Budget announced that Australia will adopt legislation to implement the Organisation for Economic Co-operation and Development's (OECD's) GloBE Pillar Two rules, effective for income years commencing on or after 1 January 2024. The adoption of these rules was previously flagged by the Government with public consultation conducted in late 2022.
The new regime will incorporate a multinational Income Inclusion Rule (IIR) and an Undertaxed Profits Rule (UTPR) as well as a Domestic Minimum Tax (DMT), which is intended to be a qualified domestic minimum top-up tax (QDMTT).
The IIR and DMT will take effect for income years commencing on or after 1 January 2024 and the UTPR will take effect for income years commencing on or after 1 January 2025.
Legislation has not yet been released. However, a period of consultation will follow once released.
The measures apply to all multinational groups (MNE Groups) that have consolidated (accounting) turnover of at least EUR 750 million. While the Budget is not explicit on this point, it is expected, based on the OECD Model Rules, that the measures will apply if the turnover exceeds the threshold in at least two of the preceding four years. The measures will apply equally to Australian multinational enterprises (MNEs) groups and foreign-headquartered MNE Groups. It appears that the DMT will only apply to Australian entities that are part of a multinational group and not to solely domestic corporations.
Importantly, these rules are centered on, and triggered by, a threshold measure being a jurisdictional Effective Tax Rate (ETR) for each country in which the MNE Group operates. This ETR is based on a calculation that, broadly, applies a jurisdiction's book-tax expense as the numerator and book profit as the denominator. However, both the numerator and denominated are subject to bespoke and nuanced adjustments. If the GloBE ETR is below the global minimum tax rate of 15% for a jurisdiction, the MNE Group is subject to top-up tax. The top-up tax collected under the IIR or UPTR will not give rise to franking credits, however any tax collected under the DMT will give rise to franking credits (pending OECD peer review).
While the Budget announcement is silent on compliance obligations, based on the OECD Model Rules, it is expected that MNE Groups will be required to submit the first filings under the new measures within 18 months after the end of the first relevant income year, and within 15 months after the end of each income year thereafter. In addition, there is expected to be an annual filing requirement to submit a detailed GloBE Information Return.
The rules associated with calculating the top-up taxes required under the IIR, UTPR and DMT are complex and will require further detailed consideration when the draft law is released. Given that the Australian measures will principally reflect the OECD Model Rules, Commentary and Administrative Guidance, we do not expect there to be any surprises in the measures. However, further work will be required to confirm this position, as well as to assess whether there are any unexpected outcomes due to the interaction of these new measures with existing Australian tax rules.
Changes to Petroleum Resource Rent Tax (PRRT)
Changes will be made to the PRRT in response to the Treasury's Gas Transfer Pricing (GTP) Review, as well as to the 2018 Callaghan PRRT Review. The Government will proceed with eight of eleven recommendations by the GTP Review, as well as eight recommendations made by the Callaghan Review that were announced but not implemented by the previous government. These PRRT changes were originally announced on 7 May 2023.
The most significant proposed change is to cap allowable PRRT deductions (including exploration expenditure transferred from other projects) for offshore liquified natural gas (LNG) project participants for a particular PRRT year at 90% of PRRT assessable receipts for that year. This means that most relevant PRRT taxpayers would, at minimum, be subject to PRRT on 10% of their assessable receipts, despite having a sufficient quantum of PRRT credits to offset the assessable receipts in full under the current PRRT law. This cap will apply from the later of seven years after the year of first production or 1 July 2023. The amounts that are unable to be deducted because of the cap will be carried forward and uplifted at the long-term bond rate.
The cap will not apply to certain classes of deductible expenditures in the PRRT (i.e., closing-down expenditure, starting base expenditure and resource tax expenditure). For most offshore LNG projects, the effective cash outflow impact when this cap applies would be 2.8% of the assessable receipts each year (i.e., 10% of assessable receipts will be subject to PRRT at 40%, with the PRRT paid deductible for income tax purposes).
The proposed PRRT deduction change will apply from 1 July 2023 which will bring forward PRRT revenue from the majority of the offshore LNG projects and is expected to increase tax receipts by $2.4 billion over five years. The Government will also provide $4.4 million to the ATO to administer and ensure compliance with this measure. Other proposed changes will apply from 1 July 2024 (with the exception of the general anti-avoidance measures and clarification of how the arm's-length rules will apply, which will apply from 1 July 2023).
The changes may impact the values of both current and future offshore LNG projects and may also impact the financial statements of the relevant LNG project participants and future financing arrangements.
Clarifying the tax treatment of 'exploration' and 'mining, quarrying and prospecting rights'
Due to a recent Full Federal Court decision, the Government will amend the PRRT legislation to clarify that "exploration for petroleum" remains consistent with the Commissioner of Taxation's view expressed in "Taxation Ruling TR 2014/9: Petroleum resource rent tax: what does 'involved in or in connection with exploration or petroleum' mean?" The amendments will apply to all expenditure incurred from 21 August 2013.
There is also a related income tax measure to clarify that mining, quarrying and prospecting rights (MQPRs) cannot be depreciated until they are used (not merely held). These amendments will apply to all MQPRs acquired or started to be used after 7:30 p.m. (Australian Eastern Standard Time) on 9 May 2023.
Incentives for industry
The Budget announced the following programs:
Patent box not proceeding and reduced funding for export market development
The Government will not proceed with the previously announced patent box tax regime, which was intended to stimulate innovation and encourage investment in Australia's medical, biotechnology and low emission technology sectors. Funding for the Export Market Development Grant program will also be reduced going forward.
Small business measures
Small business $20,000 instant asset write-off
The widely adopted temporary full expensing of depreciating assets measures comes to an end on 30 June 2023.
A more-targeted regime for small business will commence on 1 July 2023. There will be a one-off increase to the instant asset write-off threshold to $20,000 for businesses with an aggregated turnover of less than $10 million per annum.
This will apply (on a per-asset basis) for assets acquired and installed ready for use between 1 July 2023 and 30 June 2024.
The existing small business accelerated depreciation rules will continue to apply for assets costing more than $20,000.
Small Business Energy Incentive
Business with aggregated turnover of less than $50 million per annum will be entitled to an additional 20% tax deduction on spending that supports electrification and more efficient energy use (e.g., investments that electrify heating/cooling systems, upgrading to more efficient fridges, installing batteries/heat pumps). The incentive was originally announced on 1 May 2023.
Up to $100,000 of total expenditure will be eligible for the incentive, which will cap the additional deduction at $20,000. Eligible assets or upgrades will need to be first used or installed ready for use between 1 July 2023 and 30 June 2024. There will be some exclusions such as electric vehicles.
The temporary full expensing of depreciable assets measures finish on 30 June 2023, therefore such future capital expenditure on depreciable assets will be deductible under the normal depreciation provisions (subject to the new $20,000 write-off regime).
The additional 20% deduction (for eligible expenditure incurred from 7:30 p.m. 29 March 2022 onwards) under the small and medium business Technology Investment Boost ends on 30 June 2023, with the Skills and Training Boost continuing until 30 June 2024. Both these measures are currently in Parliament.
Helping small businesses manage tax instalments and cashflow
The GDP uplift rate that applies to small to medium businesses, sole traders and others who use the installment amount method for Pay As You Go (PAYG) and Goods and Services Tax (GST) installments will be reduced from 12% to 6% for the 2023/24 income year.
Build-to-rent — accelerating tax deductions and reducing managed investment trust withholding tax
Income tax incentives will be introduced to help increase the supply of housing by supporting investment in build-to-rent (BTR) assets. These include:
Both incentives will apply to BTR assets where construction commences after 9 May 2023 and where:
The first two eligibility criteria are similar to those that apply to stamp duty and land tax BTR concessions already implemented in certain States. There will be consultation on these eligibility criteria, including a minimum proportion of dwellings being offered as affordable tenancies.
The changes follow industry representations supported by an EY report for the Property Council of Australia, "A new form of housing supply for Australia: build-to-rent housing."
The Budget is silent on the potential GST leakage on the development of BTR assets.
Extending the clean building managed investment trust withholding tax concession
From 1 July 2025, the 10% Clean Building MIT withholding tax concession will be extended to cover data centers and warehouses where construction commences after 9 May 2023.
However, the minimum efficiency rating for existing and new clean buildings will be raised to the six-star Green Building Council Australia or National Australian Built Environment Rating System. There will be consultation on transitional arrangements for existing buildings.
Amending the tax law to reduce compliance costs for general insurers
The Government has provided a welcome clarification for general insurers in relation to the application of AASB 17 for tax, confirming that general insurers will be able to "use audited financial reporting information, which is calculated according to the new standard, as the basis for their tax returns." The measure will apply from 1 January 2023. The announcement is silent on any transitional implications for opening balance sheet adjustments and makes no mention of life insurers.
Increase to tobacco excise
The tax on tobacco will be increased by 5% per year for three years starting 1 September 2023, in addition to ordinary indexation. The Government will also align the tax treatment of loose-leaf tobacco products (such as roll-your-own tobacco) with the manufactured stick excise rate to ensure these products are taxed equally. These changes were announced on 2 May 2023. The changes are expected to raise an additional $3.3 billion over the next four years, including $290 million of GST payments to the states and territories.
Heavy Vehicle Road User Charge increase
The Government will increase the Heavy Vehicle Road User Charge rate from 27.2 cents per liter of diesel by 6% per year over three years from 2023/24 to 32.4 cents per liter in 2025/26. This will reduce the fuel tax credit available to business for fuel consumed in heavy vehicles travelling on public roads.
Delayed start date for streamlining of overlapping Australian Border Force and Australian Taxation Office (ATO) systems
There will be a 12-month delay, to 1 July 2024, of the start date of previously announced measures aimed at streamlining user experience and administration of excise and excise equivalent regulatory requirements.
Strengthened and sustainably funded biosecurity system
The Government will provide an additional $1 billion over the next four years to strengthen national biosecurity systems in response to pressures at the border and outbreaks in the region. These new measures will be partially offset through the introduction of cost-recovery arrangements for the clearance of low-value imported cargo and a new biosecurity protection levy.
Simplified trade system — additional funding
The Government will provide an additional $23.8 million in 2023/24 to continue initiatives to modernize and improve Australia's trade system and support exporters navigate regulatory requirements and access information on emerging markets.
Increasing the payment frequency of the Superannuation Guarantee
Employers will be required to pay their employees' superannuation at the same time as their salary and wages, from 1 July 2026, as opposed to on a quarterly basis. The ATO will receive additional resourcing to help it detect unpaid super payments earlier. This was originally announced on 2 May 2023.
Additional 15% tax rates on earnings from superannuation balances exceeding $3 million
From 1 July 2025, individuals with a total superannuation balance (TSB) exceeding $3 million will be subject to an additional tax of 15% on earnings accruing on the proportion of the individual's TSB that exceeds the $3-million threshold. The increased tax was originally announced on 28 February 2023. A March 2023 Treasury discussion paper outlines how this measure will operate including:
The measure is expected to increase tax receipts by $950 million over the forward estimates to 2026/27 and then by $2.3 billion in the first full year of receipts collection in the 2027/28 year.
Amendment to non-arm's-length income provisions
The non-arm's-length income (NALI) integrity rules applying to expenditures incurred by superannuation funds, which may result in the income of the fund being taxed at 45%, will be amended such that:
No new personal tax bracket adjustments
No changes were announced to personal income tax brackets, including the legislated "Stage 3" tax cuts (2019/20 Budget personal income tax relief plan) to commence from the 2024/25 income year.
Resident personal tax rates remain as:
*Rates do not include Medicare levy of 2% as applicable. Medicare low income and other thresholds will be adjusted from 1 July 2022, to take account of recent CPI movements.
The low- and middle-income tax offset (LMITO), which was extended and enhanced for the 2021/22 income year, has lapsed and is not available to taxpayers in the 2022/23 income year and later income years. No changes were made to the low-income tax offset (LITO).
Eligible lump sum payments in arrears will be exempt from the Medicare levy from 1 July 2024 where a taxpayer qualifies for a reduced Medicare levy.
Expansion of the General Anti-Avoidance Rule
Part IVA of the Income Tax Assessment Act 1936 (PIVA) will be amended to expand the scope of the rule. The amendments will ensure the continued integrity of PIVA and apply to "schemes" that:
The proposed amendments will apply to income years commencing on or after 1 July 2024, regardless of whether the scheme was entered into before that date.
The measure is estimated to result in an unquantifiable increase in receipts for the five years from 2022/23 (noting the amendments will only apply from the 2024/25 year).
Extension of ATO compliance programs
The Budget announced that the Government will provide additional funding to the ATO to extend its key compliance programs and fund new initiatives, with significant net increases in tax receipts.
Small business compliance saving initiatives
The Budget outlines a new initiative that provides the ATO with $21.8 million over four years from 2023/24 to temporarily expand the ATO independent review process to small business (aggregated turnover between $10m and $50m) for 18 months from 1 July 2024, and establish five new tax clinics from 1 January 2025 to improve access to tax advice and assistance for 2.3 million small businesses.
New resource-saving compliance reforms for small businesses were announced:
Ernst & Young (Australia), Sydney
Ernst & Young (Australia), Perth
Ernst & Young (Australia), Melbourne
Ernst & Young (Australia), Brisbane
Ernst & Young (Australia), Canberra
Ernst & Young LLP (United States), Australia Tax Desk, New York
Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor
1 Currency references in this Alert are to the AU$.