EY 2023-24 Federal Budget Tax Alert

The Federal Treasurer handed down the 2023/24 Federal Budget on Tuesday, 9 May 2023.

Given the fiscal abyss that Australia has found itself in over the last three years, a return to surplus, albeit a relatively small $4 billion one, 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 delivering a compassionate budget by providing for those in the community less able to cope with the current inflationary pressures.

What the budget does lack however is first, a recognition that Australia’s large structural deficits embedded in the 2024/25 and outer years still remain disturbingly unresolved. And second, a lack of broad productivity enhancing measures, especially in light of the fact that the general full expensing depreciation write off, that has had the effect of bringing forward significant investment over the last few years, expires on 30 June 2023.

Whilst there are a number of 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 the ability to increase 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 GloBE Rules, incorporating a complimentary Domestic Minimum Tax), pre-announced 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 lone standout tax incentives to 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 continue to be scheduled to commence from 1 July 2023.

International Tax

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 (OECD) Global Anti-Base Erosion (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 750 million Euros. While the Budget was 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 MNE 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 centred 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 also expected to be an annual filing requirement to submit a very detailed GloBE Information Return.

The rules associated with calculation of the top up taxes required under the IIR, UTPR and DMT are complex and will require further detailed consideration when 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.

Business Tax

Changes to Petroleum Resource Rent Tax (PRRT)

Changes will be made to the Petroleum Resource Rent Tax (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 8 of 11 recommendations by the GTP Review as well as 8 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 LNG project participants for a particular PRRT year at 90% of PRRT assessable receipts for that year. This means the majority of the relevant PRRT taxpayers would, at minimum, be subject to PRRT on 10% of their assessable receipts, despite the fact that they have a sufficient quantum of PRRT credits to be able to offset the assessable receipts in full under the current PRRT law. This cap will not apply until 7 years after the year of first production or from 1 July 2023, whichever is later. 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 expenditure in the PRRT (i.e. closing-down expenditure, starting base expenditure and resource tax expenditure). For the majority of the 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%, but the PRRT paid is deductible for income tax purposes).

The proposed PRRT deductions 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 the 5 years from 2023-24. 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 exception of general anti-avoidance measures and clarification to arm’s length rules application 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’

As a result of the Full Federal Court’s decision in Commissioner of Taxation v Shell Energy Holdings Australia Limited [2022] FCAFC 2 (Shell Case), the Government will amend PRRT legislation to clarify that ‘exploration for petroleum’ remains consistent with the Commissioner of Taxation’s view expressed in Taxation Ruling TR 2014/9. 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 PM (AEST) on 9 May 2023.

Incentives for industry

The Budget announced the following programs:

• Hydrogen Headstart - A new program to support Australia’s hydrogen industry by investing $2 billion in revenue support for investments in renewable hydrogen production through competitive production contracts. This is a significant source of new funding to support the emergence of Australia’s hydrogen industry
• Powering the Regions Fund – Decarbonisation for regional industries - $1.3 billion allocation of the previously announced Powering the Regions Fund to support the decarbonisation of existing trade-exposed industries (covered by the Safeguard Mechanism), develop new clean energy industries, and support sovereign manufacturing capacity in regional areas. There will be different streams including support for reducing existing industrial facilities emissions in regional Australia or encouraging industries (primary steel production, cement and lime, alumina, and aluminium) for a clean transition
• Industry Growth Program – Enhanced support for SME and start-up businesses - $392.4 million over 4 years has been repurposed to expand on funding from the Entrepreneur Program, to establish the Industry Growth Program. This program will support Australian SMEs and start-ups to commercialise their ideas and grow their operations, through grants, mentorship and advice

Patent box not proceeding and reduced funding for export market development

Disappointingly 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 (for example, 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 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 7:30pm 29 March 2022 onwards) under the small and medium business Technology Investment Boost ends on 30 June 2023, and the Skills and Training Boost continues 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 instalment amount method for PAYG and GST instalments will be reduced from 12% to 6% for the 2023-24 income year.

Real Estate

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:

• Increase the Division 43 building allowance from 2.5% to 4% per year for eligible new BTR projects
• From 1 July 2024, reduce the withholding tax rate for eligible fund payments from managed investment trusts (MIT) to foreign residents in Exchange of Information Countries from 30% to 15%

Both incentives will apply to BTR assets where construction commences after 9 May 2023 where:

• The project includes ≥ 50 apartments or dwellings made available for rent to the public
• Dwellings must be retained under single ownership for ≥10 years
• Landlords must offer a lease term of ≥ 3 years for each dwelling

The first two eligibility criteria are similar to those applying 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 centres and warehouses where construction commences after 9 May 2023.

However, the minimum efficiency rating for existing and new clean buildings will be raised to 6 star Green Building Council Australia or National Australian Built Environment Rating System. There will be consultation on transitional arrangements for existing buildings.

Financial Services

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 also makes no mention for life insurers.

Indirect Tax

Increase to tobacco excise

The tax on tobacco will be increased by 5% per year for 3 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 4 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 litre of diesel by 6 per cent per year over 3 years from 2023–24 to 32.4 cents per litre 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 ATO systems

There will be a 12-month delay to 1 July 2024 in 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 modernise and improve Australia’s trade system and support exporters navigate regulatory requirements and access information on emerging markets.

Employment Tax

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.

Superannuation

Additional 15% tax rates on earnings from superannuation balances above $3 million

From 1 July 2025, individuals with a total superannuation balance (TSB) above $3 million will be subject to an additional tax of 15% on earnings 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:

• “Earnings” used to determine the additional 15% tax payable is the difference between the member’s TSB for the current and previous financial years adjusted for net contributions and withdrawals - includes all notional (unrealised) gains and losses
• The tax liability is calculated by multiplying earnings by the proportion of earnings above $3 million and the additional tax rate of 15%
• Earnings relating to assets and TSB under $3 million will continue to be taxed at 15% and 0% if supporting a pension account
• Notices of tax liability will be issued by the ATO to individuals from the 2026–27 year - the liability can be paid from the individual’s superannuation interests or from funds held outside of superannuation

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 expenditure incurred by superannuation funds, which may result in income of the fund being taxed at 45%, will be amended such that:

• Large APRA regulated funds should be exempted
• Small APRA funds and self-managed superannuation funds will have no more than twice the value of a general expense treated as NALI. Further, fund income potentially taxable as NALI will exclude contributions

Personal Taxation

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.

Tax Administration

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 reduced tax paid in Australia by accessing a lower withholding tax rate on income paid to foreign residents
• Schemes that achieve an Australian tax benefit even where the dominant purpose of the scheme was to reduce foreign income tax

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 5 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.

• Extending the Personal Income Tax Compliance Program - Additional $89.6 million (and $1.2 million to Treasury) to extend the program for 2 years from 1 July 2025, and expand its scope from 1 July 2023 (address emerging areas of risk eg short-term rental property deductions). Expected to increase receipts by $474.9 million over 5 years
• Extending and merging the Serious Financial Crime Taskforce and Serious Organised Crime program - Additional $256.6 million to extend and merge both programs for 4 years to 30 June 2027, both of which were due to terminate on 30 June 2023. Expected to increase receipts by $279.5 million over 5 years
• Tax Integrity – improving engagement with taxpayers to ensure timely payment of tax and superannuation liabilities - Additional $275.4 million over 5 years from 2022-23 to facilitate ATO engagement with taxpayers who have high-value debts over $100,000 and aged debts older than two years. Applies where taxpayers are either public and multinational groups with aggregated turnover > $10 million, or privately owned groups/individuals controlling > $5 million of net wealth. This is expected to increase receipts by $718 million over 5 years
• GST compliance program – 4 year extension - Additional $588.8 million over 4 years from 1 July 2023 to ensure businesses meet their tax obligations, including accurately accounting for and remitting GST, and correctly claiming GST refunds. Expected to increase receipts by $3.8 billion over 5 years
• A penalty amnesty for small businesses with < $10 million turnover was announced covering lodgement of outstanding tax statements due from 1 December 2019 to 29 February 2022 if made from 1 July 2023 to 31 December 2023

Small business compliance saving initiatives

The Budget outlines a new initiative which provides the ATO with $21.8 million over 4 years from 2023-24 to trial an expansion of the ATO independent review process to small business (aggregated turnover between $10m -> $50m), for 18 months from 1 July 2024, and establish 5 new tax clinics from 1 January 2025 to improve access to tax advice and assistance for 2.3 million small businesses.

New compliance saving reforms for small businesses were announced:

• Permitting small businesses to authorise their tax agent to lodge multiple Single Touch Payroll forms on their behalf, from 1 July 2024
• Reducing the use of cheques from 1 July 2024
• Permitting small businesses up to 4 years to amend their income tax returns from 1 July 2025