Logan’s own Jim Chalmers has done his best Robin Hood impression in delivering Labor’s first Federal budget in nine years. The 2022-23 October budget reminds us of the ideological differences between Australia’s major parties.
This budget provides support for indigenous, green, family and women’s causes. The budget also provides funding for apprentices and workers. With very few announcements specifically focussed on business, apart from a number of measures aimed squarely at increasing the tax take from and transparency of significant multinational organisations. Of broader interest (and concern) to the local business community is yet more funding to the ATO’s tax avoidance taskforce who are increasingly active already.
Pilot’s summary of the key tax and business announcements that are likely to impact our clients is as follows:
Multinationals & Large Business
Not surprisingly, the Labor Government has announced various proposals to fulfil their election promise to crackdown on multinational tax avoidance. With expected returns of more than $950 million over four years, it seems the opportunity was too good to pass up by our new Government. These returns are expected to come from denial of tax deductions for intangible and interest payments, with a slather of extra reporting requirements for good measure.
Pay Tax There, or No More Deductions Here
As the globalisation of economies continues to increase, and more and more businesses find themselves crossing borders, our regulators are working hard at trying to keep taxes ‘fair’ across jurisdictions. Adding to the long list of increasing anti-avoidance measures for international businesses, the proposal to deny tax deductions for Significant Global Entities (SGEs) for intangibles has made its debut. The announcement in the October 2022-23 Federal Budget notes that tax deductions for payments made from 1 July 2023 to related parties in ‘low- or no- tax jurisdictions’ may be denied. The brief description of what constitutes a ‘low- or no- tax jurisdiction’ refers to those with:
- a tax rate of less than 15%; or
- a tax preferential patent box regime without sufficient economic substance.
Time will tell what “sufficient economic substance” means, and we expect commentary or guidance will need to be released by the Government to outline which countries they deem to fall within this blacklist.
For now, the measures will only hit home for SGEs (those with global aggregated turnover over AUD $1 billion). However, with expected rewards of $250 million for the ATO over the next four years, it will only be a matter of time before the rules begin to spread.
The announcement seems to further align with the Government’s goals of increasing tax ‘fairness’ globally. These measures are attempting to ensure that the ATO does not lose income tax revenues for businesses who are otherwise not paying their ‘fair share’ of tax elsewhere in the world. As the multi-national anti-avoidance rules tighten and strengthen, global entities will find it increasingly difficult to ‘park’ their intangible assets overseas in tax friendly environments, while still reaping the rewards that come with being established in Australia.
More Profits, More Interest Deductions
The Labor Government is proposing to ‘strengthen’ Australia’s thin capitalisation rules, alluding to the apparent risks to the corporate tax base arising from the use of excessive debt deductions. With some $720 million of increased revenue expected over the four years from the 2022-23 financial year, the proposal plugs a work-around that exists for multinational entities currently.
Under the current rules, debt (interest) deductions in relation to cross-border investments are limited by the application of three statutory tests under which the maximum allowable debt is the greatest of:
- The safe harbour debt amount (60% of the average value of the entity’s Australian assets);
- The arm’s length debt amount; or
- The worldwide gearing (debt to equity ratio) test.
The first and third tests are focused on testing an entity’s balance sheet, creating the opportunity for a low-profit-making entity with a high net asset position to obtain a larger interest deduction than the Government seems to believe they should be entitled to. To this end, the Government is proposing to replace the safe harbour and worldwide gearing tests with earnings-based tests, limiting debt deductions in line with an entity’s profits instead.
In particular, the thin capitalisation rules (to be applied for income years commencing on or after 1 July 2023) will be amended to:
- Limit an entity’s debt-related deduction to 30% of profits (using EBITDA – earnings before interest, taxes, depreciation, and amortisation – as the measure of profit). This will replace the safe harbour test;
- Allow deductions denied under the entity-level EBITDA test to be carried forward and claimed in a subsequent income year – for up to 15 years; and
- Replace the worldwide gearing test to instead allow an entity in a group to claim debt-related deductions up to the level of the worldwide group’s net interest expense as a share of earnings (which may exceed the 30% EBITDA ratio).
The arm’s length debt amount test will be retained as a substitute test, however this will only apply to an entity’s external debt. Therefore, deductions for related party debt must now satisfy one of the other tests to be allowed. In a previous Treasury consultation paper, it was discussed that the arm’s length test may need to be strengthened to prevent arrangements whereby greater debt deductions were allowed than the Government believes should be available. These changes seem to, at least in part, address this concern.
The changes are proposed to apply to multinational entities operating in Australia and any inward or outward investor, in line with the existing thin capitalisation regime. Financial entities will continue to be subject to the existing thin capitalisation rules.
Look out, Big Brother is Watching (More)
The supervision over multinationals is also proposing to be extended with the Labor Government introducing additional reporting requirements to enhance the tax information disclosures to the public.
For income years commencing from 1 July 2023, the following additional reporting will be required:
Significant Global Entities (SGEs) to prepare for public release of certain tax information on a country by country (CbC) basis and a statement on their approach to taxation, for disclosure by the ATO;
Australian public companies (listed and unlisted) to disclose information on the number of subsidiaries and their country of tax domicile; and
Tenderers for Australian Government contracts worth more than $200,000 to disclose their country of tax domicile (by supplying their ultimate head entity’s country of tax residence).
With no comments on how this reporting will practically be implemented, multinationals and big business will be eagerly awaiting to see what impact this has on their annual compliance costs and time. More red tape for the business – let’s hope that the “unquantifiable impact on receipts” will be worth it for the Government.
The Government has announced a handful of changes for the business sector, delivering somewhat of a mixed bag, with a broad focus on increasing receipts for the Treasury. We have examined some of the key changes below.
Restricting depreciation on intangible assets
The previous Government introduced a proposal to allow corporate taxpayers to self-assess the effective lives of their intangible depreciating assets. This measure was slated to begin from 1 July 2023, however Dr Chalmers has now consigned the proposal to the dustbin of history.
As a result, businesses will continue to be wedded to the legislated effective lives for intangible depreciating assets. For example, holders of standard patents cannot deduct the costs of the patents any faster than over the deemed effective life of 20 years.
Off-market share buybacks for listed companies – no more franking credits
The Government is proposing to implement measures to align the treatment of off-market share buybacks by listed companies, with the treatment of their on-market share buybacks. Broadly, this is designed to stop listed companies from buying back their shares at a discount to market prices, and simultaneously streaming franking credits to shareholders.
Under the existing laws, on-market share buybacks are treated as capital transactions for shareholders and the entire purchase price is taken to be capital proceeds for Capital Gains Tax (CGT) purposes.
The current tax treatment for off-market share buybacks depends on the makeup of the buyback. The amount of the off-market buyback that reduces the company’s share capital account is deemed to be the CGT proceeds for shareholders, and any excess amount is taken to be a taxable dividend for the shareholders. That dividend was able to be franked.
Assuming the proposed changes are legislated, this measure will remove the ability for listed companies to provide franking credits to shareholders in relation to share buybacks. The Government is proposing for this alignment to be effective from 7.30pm AEDT 25 October 2022.
Removing FBT on electric vehicles
From 1 July 2022, the Government will exempt new battery, hydrogen fuel cell and plug-in hybrid electric vehicles (EVs) from Fringe Benefits Tax (FBT) and import tariffs, provided the cars have a retail price below the luxury car tax threshold for fuel efficient cars (currently $84,916). However, the administrative burden isn’t completely erased, as employers will need to include the exempt electric vehicle fringe benefits in the employees’ reportable fringe benefits summary.
Employees may elect to salary sacrifice EVs, and employers should be cognisant of the changes here. For example, an employee on the highest marginal tax rate who salary sacrifices an $80,000 EV may end up better off each year by approximately $10,000 after tax compared to the old rules.
Bidding farewell to COVID concessions
This Budget has not resuscitated or lengthened the lifespan of the following Covid-19 concessions that were introduced by the previous Government:
Tax & Audit focus
The Government continues to value spending money to protect revenue and to recover taxes from non-compliant activity. Over the next 4 years, almost $2 billion is estimated to be spent on various compliance programs to increase tax receipts of approximately $5.5 billion. This increased spending will fund more ATO staff to spend more time on audits. Further, they are tasked with raising $5.5 billion over the next 4 years.
With the increase of data matching and data sharing, the ATO are focusing their audits and reviews to maximise their returns. With the relaxed pandemic ATO behaviour being a thing of the past, we are seeing more audits and reviews, particularly during the 2022 financial year. As such, having appropriate advisers and keeping up to date with your tax compliance is key.
The Government continues to support the following programs:
Tax Avoidance Taskforce
The Tax Avoidance Taskforce targets multinational enterprises, large public and private businesses (and associated individuals) to ensure the appropriate amount of tax is paid in Australia. The ATO is funded to continue to recover taxes under this program until 30 June 2026. We continue to see activity from the ATO in this space with pointed questions from their data matching systems.
Personal Income Taxation
The Personal Income Taxation Compliance Program has been extended for 2 years until 30 June 2025. The program will be modernised to prevent overclaiming of deductions and incorrectly reporting income by engaging earlier with taxpayers and tax agents.
Shadow Economy Program
The Shadow Economy Program, which focuses on dishonest and criminal activity, has been extended for 3 years until 30 June 2026. Activities targeted by this program include under-reporting income and overclaiming expenses, paying cash-in-hand to employees, underpayment of wages, failing to withhold tax, not contributing to superannuation, illegal phoenix activity, visa fraud, tax fraud, money laundering and excise evasion.
To assist with tax law compliance, the Government has proposed to increase the Commonwealth penalty unit from $222 to $275, from 1 January 2023. These increases are relevant to offences committed under Commonwealth laws, including in relation to communication, financial, tax and fraud offences. With this increase, failure to lodge penalties movements are:
Government funding will also support the Tax Practitioners Board to investigate high-risk tax practitioners and unregistered preparers over 4 years from 1 July 2023. With the development of technology, the Tax Practitioners Board will use new risk engines to better target tax agents giving inappropriate advice. Careful who you trust!
As previously leaked, the Labor Government has not made any comments in this budget in relation to the scrapping of the Stage 3 tax cuts, likely postponing any comments until the budget next year. Instead, for individuals, this budget has seen a big win for parents through expansion of paid parental leave and relief for childcare. Not wanting to leave out the older Australians, there has also been expansion to the downsizer contributions.
No changes to personal income tax rates… yet
The Government did not announce any personal tax rates changes. The Stage 3 tax changes are proposed to commence from 1 July 2024, as previously legislated. These changes will replace the 32.5% and 37% marginal tax rates with a 30% marginal tax rate for earnings between $45,000 and $200,000.
*This does not include the Medicare Levy (which remains unchanged at 2% of taxable income), as well as any applicable tax offsets.
There was also no extension of the low and middle income tax offset (LMITO) for the 2023 income year. With no extension, the 2022 income year is the last income year for which the offset was available. Low and middle income taxpayers will remain entitled to the low income tax offset (LITO) for the 2022 income year and beyond as no changes have been made here.
So, unfortunately, middle income earners have said goodbye to the delicious Lamington. Goodnight sweet prince.
Superannuation Downsizer Contribution
The Government has confirmed its election commitment by proposing to lower the minimum eligibility age for this contribution from 60 to 55 years of age. The downsizer contribution is available for individuals to make a one-off, post-tax contribution of up to $300,000 ($600,000 per couple) to superannuation from the proceeds of selling their home, to have effect from the start of the first quarter after Royal Assent. The contribution does not count towards their non-concessional contributions cap. The home must be in Australia, owned by the individual or spouse for at least 10 years and must be their main residence.
Delivering on the “biggest on-budget commitment”, this Budget proposes to increase the maximum Child Care Subsidy rate to 90% (from 85%) for families earning less than $80,000. Subsidies will then taper down one percentage point for each additional $5,000 in income until it reaches 0% for families earning $530,000. This is proposed to start on 1 July 2023.
In another win for parents, the Government is proposing to expand the Paid Parent Leave Scheme from 1 July 2023, allowing both parents to receive payment if they meet eligibility criteria. Further, from 1 July 2024 an additional two weeks per year will be added until the scheme reaches a full 26 weeks from 1 July 2026, suggesting a potential benefit to over 180,000 families each year.
Both parents will be able to share the leave entitlement, with a proportion maintained on a “use it or lose it” basis, to encourage and facilitate both parents to access the scheme and to share the caring responsibilities more equally, while single parents are able to access the entire 26 weeks. Eligibility is also proposed to be expanded through the introduction of a $350,000 family income test, which families can be assessed under if they do not meet the individual income test.
The Government will introduce legislation to clarify that digital assets (such as Bitcoin) are not treated as foreign currencies for taxation purposes in Australia. This maintains the current tax treatment of digital assets, including the capital gains tax treatment where they are held as an investment and taxation as ordinary income where not held as an investment. Digital currencies issued by, or under the authority of, a government agency, continue to be taxed as foreign currency.