Despite significant spending increases, the 2023 Federal Budget did not raise taxes (with a few, rare exceptions) largely because it did not have to. Historically, low unemployment means this budget benefited from more personal income tax receipts (exacerbated by bracket creep due to higher wages) and less welfare expenditure than ever before. Add in strong corporate receipts and record revenue from commodities (particularly coal and iron ore) and the result is a rare and enviable budget surplus – albeit of a relatively modest $4 billion.

The new spending measures include initiatives which will be popular and permanent, such as cost of living packages for low income households. On the revenue side, receipts will be moderate with rising employment and inevitable falling commodity prices, leading once again to deficits after the current year.

While the Government has commendably used almost 80% of the current windfall revenue to reduce debt, there is no doubt that future budgets will come under pressure to raise revenue. Increasing tax on large gas producers, superannuation funds, smokers and multinationals is not expected to add significantly to the bottom line, and it will be interesting to see if a broader cohort is affected in future years.

In the meantime, the ATO is again the beneficiary of a significant pay rise as it receives more funding to raise more revenue, this time with a focus on GST compliance and increasing focus on collections.

For the majority of our clients, this budget largely puts tax planning in a holding pattern. There are some helpful measures and clarifications outlined below, but there are continued notable absences – including changes to individual and corporate tax residence rules and Division 7A.

Our first impressions of some of the more surprising tax-related measures are set out under headings below.

• A later retrospective date pays (franked) dividends for some
• GAAR… anti-avoidance provisions are extended
• Incentives for build to rent developments
• More tax for resource clients
• How expensive are superannuation expenses?
• Less than super (but not new) news
• Global minimum tax rate (for the very big end of town)
• More coin for the ATO
• Reducing automatic increases in pay as you go and instalment payments

• Small businesses write offs – not done with yet
• Support for small businesses investing in energy efficient technology (but not Teslas…)
• Shocking relief for some electricity users
• Agriculture related measures
• Cigs Up!
• Fighting Scams
• Spending for everyone
• Miscellaneous matters of interest to us

A later retrospective date pays (franked) dividends for some

The last LNP Federal Budget announced that measures would be introduced to retrospectively deem fully franked dividends funded by capital raises as unfranked dividends. Initially, the measures were proposed to apply to dividends declared from 19 December 2016.

In a welcome change, the Federal Government has announced that the retrospective application of the measures will only apply retrospectively from 15 September 2022. This later date is also set out in the draft legislation, being the Treasury Laws Amendment (2023 Measures No 1) Bill 2023.

What this means

The original retrospective date for these measures had raised extensive concerns for companies, their shareholders and advisers, many of whom are small investors and superannuation funds, because of the potential impact for shareholders who have raised capital and used the funding to source the payment of franked dividends up to six years ago. This change to the retrospective date of these measures will alleviate the concerns for many taxpayers. However, while the new retrospective date is more reasonable, there may still be some concerns for shareholders of public companies who have funded franked dividends by capital raisings since September 2022.

Companies should consider these measures in the context of any capital raising activities, given the consequences for shareholders if the rules are found to apply.

GAAR… anti-avoidance provisions are extended

The Treasurer has announced that from 1 July 2024, the general anti-avoidance rules found in Part IVA ITAA36 will be extended to effectively arrangements designed to provide tax savings for foreign residents, specifically:

• Schemes that reduce tax paid in Australia by accessing a lower withholding tax rate on income paid to foreign residents (eg. through choice of jurisdiction); and
• Schemes that achieve an Australian income tax benefit, even where the dominant purpose was to reduce foreign income tax.

What this means

The proposed extension of Part IVA appears to generally align with the global expansion of the anti-avoidance provisions, which are now enshrined in many of Australia’s double taxation agreements through the MLI (the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting).

Unlike the double taxation agreements (DTAs) amended by the MLI however, the extension of Part IVA will give the ATO the ability to tax income that may presumably be beyond its purview and taxable by a foreign country.

It will be necessary to closely review the legislated extension of Part IVA alongside the avoidance provisions in the DTAs, and although the expected receipts from this measure are expressed to be ‘unquantifiable’, in the current environment of the ATO’s strong audit and international focus there seems little doubt that the unquantifiable receipts will soon become quantified.

Incentives for build-to-rent developments

New build-to-rent developments that begin construction after 9 May 2023 will be entitled to:

• An increased capital works tax deduction of 4% per year; and
• Where applicable, a reduced final withholding tax rate of 15% (down from 30%) on eligible fund payments from managed investment trusts to foreign resident unitholders.

Although announced prior to the Budget, there are now further details provided in relation to the eligibility criteria. In short, to be eligible for these concessions, the build-to-rent development must:

• Consist of 50 or more apartments or dwellings that are made available for rent to the general public;
• Be retained under single ownership structure for at least 10 years; and
• Each dwelling must be offered for a lease term of at least three years.

What this means

It is great to see the Government announcements in this space, which, together with the State Government incentives available for build-to-rent developments, should encourage investment and construction in Australia’s growing build-to-rent sector, and, in so doing, assist with much needed housing supply in the face of the nation’s current housing crisis.

However, there is still more that can be done in encouraging these projects – including adjusting the GST treatment of the supply of build to rent apartments to allow the landowner to claim input tax credits for the cost of construction (placing build-to-rent developments on a more ‘even footing’ with other asset classes).

It is estimated that the measures will decrease receipts by $30 million and increase payments by $4.3 million over five years from 2022-23.

More tax for resource clients

The Petroleum Resource Rent Tax (PRRT) will be amended in line with the Treasury’s Review of the PRRT Gas Transfer Pricing arrangements. The measures will introduce a cap on the use of deductions to offset assessable PRRT income on liquefied natural gas (LNG) producers at 90% of the PRRT assessable receipts of each project. The cap will bring forward PRRT receipts from LNG projects that are yet to pay PRRT.

The cap will only apply to PRRT projects producing LNG and projects will not be subject to the cap until seven years after the first production of LNG or from 1 July 2023 (whichever is later). Deductions which exceed the cap will be carried forward and uplifted at the Government long-term bond rate.

These measures estimate to increase receipts by $2.4 billion over the five years from 2022-23. The ATO is set to receive $4.4 million in resourcing to administer and ensure compliance with these tougher measures.

Furthermore, the PRRT legislation will be amended to clarify that ‘exploration for petroleum’ is limited to discovery and identification of the existence, extent and nature of the petroleum resources and does not extend to the initial activities and feasibility studies to determine if the project is commercially viable, applying to all expenditure incurred from 21 August 2013.

Importantly (given the potential impact for a much broader range of resources companies), the measures propose to clarify that mining, quarrying and prospecting rights (MQPRs) cannot be depreciated for income tax purposes until they are used (not merely held) and will limit the circumstances in which the issue of new rights over areas covered by existing rights lead to an ability to claim depreciation deductions under Division 40.

These amendments are said to be designed to restore the policy intent of the law and apply in respect of all MQPRs acquired or started to be used after the date of the Budget (9 May 2023).

These amendments are a result of the recent Full Federal Court’s decision in Commissioner of Taxation v Shell Energy Holdings Australia Limited [2022] FCAFC 2 (Shell). Whilst decided in the context of the petroleum industry, this decision had a broader application to MQPR’s across all resources industries. Ultimately, in Shell, the Court found in favour of the taxpayer – deciding that the meaning of ‘exploration’ was not limited to activities directed towards the actual discovery of a resource and that, due to the nature of an MQPR, it was ‘used’ at the time it was ‘held’ for Division 40 purposes.

What this means

Capping deductions under the PRRT is expected to bring forward PRRT receipts from LNG projects yet to pay PRRT as well as ensuring greater returns to offshore LNG industry taxpayers.

The amendments to Division 40 are expected to potentially impact a broader range of resources projects and clients should be aware of the proposed amendments, which will reverse the position as it was following the position set forth by the FFC in Shell.

How expensive are superannuation expenses?

As part of the measures to provide greater certainty on provisions announced by previous governments, the Treasurer announced that the non-arm’s length expenditure (NALE) rules in section 295-550 ITAA97 will be amended such that:

• The income of SMSFs and small APRA regulated funds that is taxed as non-arm’s length income as a result of the NALE rules will be limited to twice the level of the general expense that was not incurred or was less than would be expected if parties were dealing at arm’s length;
• Income that is taxable as NALI as a result of the NALE provisions will exclude contributions;
• Large APRA regulated funds will be excluded from the NALI provisions with respect to both general and specific expenses that would fall foul of the NALE provisions; and
• The NALE provisions will only apply to the financial years ended 30 June 2020 and later.

What this means

In practice, these measures are designed to combat the ATO’s LCR 2021/2 which was issued to address the NALE provisions that were legislated in 2019.

The Commissioner’s position in the LCR has generally been considered problematic – even if only due to the conclusion that if general expenditure, such as audit fees for the fund, were not incurred or were less than an arm’s length dealing, all income of the fund for the financial year would be taxed at the top marginal rate as NALI.

Shortly prior to the 2022 Election, the LNP Government announced that the position expressed by the Commissioner in LCR 2021/2 was not the intended result of these measures and proposed amendments have recently been raised as a mechanism to alleviate the operation of these provisions. Although the measures will go some way to address the potential inequity, they leave room for the current (prevalent) ATO audit activity which has a keen eye on superannuation funds and litigating what an arm’s length dealing involves.

Less than super (but not new) news

As previously announced, measures will be introduced to tax individuals on unrealised gains on superannuation balances that exceed $3 million.

We have previously discussed the new measures and the issues this may create here.

Global minimum tax rate (for the very big end of town)

The Federal Government will look to implement aspects of Pillar Two of the OECD Two-Pillar Solution in an attempt to address the challenges arising from the digital economy. The measures will apply to large multinationals with annual global revenue of $1.2 billion or more and are designed to prevent a so-called ‘race to the bottom’ on corporate tax rates.

The measures include:

• A 15% global minimum tax rate for income years starting after 1 January 2024; and
• A 15% domestic minimum tax rate for income years starting after 1 January 2024.

The domestic minimum tax would give Australia an entitlement to recover tax on domestic income in circumstances where a large multinational company’s effective Australian tax rate may fall below 15%.

What this means

These measures provide another link in the chain alongside the hybrid mismatch rules on extended anti-avoidance provisions (for example) to tighten the taxation net on multinationals.

More coin for the ATO

The Treasurer has announced two key extensions of funding for the ATO:

• Almost $590 million will be provided to the ATO over four years from 1 July 2023 to promote GST compliance. The measure is expected to increase GST receipts by $3.8 billion and other tax receipts by $3.8 billion;
• Another almost $90 million will be added to previous funding to extend the personal income tax compliance program, from 30 June 2025 to 30 June 2027. This is expected to raise approximately $475 million to the 2028 financial year; and
• The Serious Financial Crime Taskforce (e.g. illegal phoenix activity and offshore tax evasion) and the Serious Organised Crime (e.g. illicit drug and tobacco activity) programs will be merged, and the funding extended by an unspecified amount for another four years beyond the current termination date of 30 June 2023. This measure is expected to increase receipts by over almost $280 million, and increase GST paid to the states and territories by $32.7 million over the next five years.

What this means

Although this is the first Federal Budget in several years that has not provided additional funding for the ATO Tax Avoidance Taskforce (no doubt the announcement in the October 2022 Budget will be sufficient), these measures provide significant funding for ongoing ATO compliance activity.

It is also clear that the funding for GST compliance activity is expected to provide substantial additional revenue for the Government, and one can only assume that the $3.8 billion ‘other tax receipts’ will come from the income tax compliance activity which often goes hand in hand with GST reviews, as well as $475 million from personal income tax.

Reducing automatic increases in pay as you go and instalment payments

The Government will set the GDP adjustment factor for pay as you go (PAYG) and GST instalments at 6% for the 2023–24 financial year, a reduction from 12% under the statutory formula.

The reduced factor will provide cash flow support to small businesses and other PAYG instalment taxpayers. The 6% GDP adjustment rate will apply to small businesses and individuals who are eligible to use the relevant instalment methods.

What this means

Taxpayers under PAYG and GST instalment arrangements may be temporarily assisted by this proposed measure. However, there may be negative unintended consequences if the lower instalment rates result in a larger, and unexpected, end of year tax bill for the taxpayer.

Small businesses write offs – not done with yet

Small business (annual turnover <$10 million) will be able to access an instant asset write off and deduct the full cost of every eligible asset that costs less than $20,000. The asset must be first used, or installed ready for use between 1 July 2023 and 30 June 2024.

Assets that are valued at $20,000 or more and are therefore not eligible for the instant asset write off can be placed into the small business simplified depreciation pool, and businesses that had opted out of this pool will be able to opt back in up to 30 June 2024 while the standard prohibition for re-entering the pool for five years remains suspended.

What this means

The proposed measure by the Government will assist business cash flow over the years to come. Additionally, compliance costs for small businesses will be reduced by temporarily increasing the instant asset write off, which quite generously, can instantly write off multiple assets. Plenty of help, and more to come, for the little man…

Support for small businesses investing in energy efficient technology (but not Teslas…)

Up to 3.8 million small and medium businesses (annual turnover <$50 million) that invest in energy-efficient equipment may be eligible for an extended tax deduction up to $20,000 per business. Specifically, an additional 20% deduction will be available for eligible depreciating assets that support electrification and more efficient use of energy, up to a maximum total expenditure of $100,000 – this results in the maximum additional deduction of $20,000 (i.e. 20% of $100,000).

These businesses will receive a deduction to electrify cooling and heating systems, install new batteries and heat pumps, and replace ageing tools, such that a range of depreciating assets or the update of existing assets are covered. However, items such as electric vehicles, renewable electricity generation assets, capital works, and assets that are not connected to the electricity grid and use fossil fuels will be excluded and miss out.

What this means

Businesses looking to upgrade and advance their existing technology and systems will greatly benefit, particularly, those that rely on technology in day-to-day operations. As this incentive covers the electrification of old systems, businesses wanting to take a technology jump in an economic climate where the price of goods is ever increasing, will be highly encouraged to invest in new green technology.

Shocking relief for some electricity users

The Government will provide $1.5 billion over five years to reduce the impact of rising energy prices on Australian households and businesses by providing targeted energy bill relief and progressing market reforms. This relief includes:

• Energy relief – $1.5 billion over two years to establish the Energy Bill Relief Fund to support pensioners, Commonwealth Seniors Health Card holders, Family Tax Benefit A and B recipients and small business customers of electricity retailers; and
• Previously announced temporary price caps – funding of $14.7 million over five years will be provided to the ACCC to administer and enforce compliance and to develop and implement a mandatory gas code of conduct.

What this means

The Government is implementing a two-pronged approach to provide relief for energy consumers: relief for needy consumers at the bowser; and measures aimed at putting pressure on pricing by coal and gas producers.

While inflation rises in the energy sector due to international markets and geographical conflicts, the Government is tackling the problem from within. Consumers will feel relieved, but producers will be constrained by caps and increased regulation.

Last but not least, the Government is clearly keeping its eyes firmly set on regulating non-green energy production.

Agriculture related measures

The Budget included a number of spending measures in the agriculture space, including:

• $127 million for the Department of Agriculture, Fisheries and Forestry to meet funding shortfalls related to increased biosecurity operations;
• $845 million to be provided over five years to sustainably maintain Australia’s biosecurity policy, operational and technical functions;
• $145.2 million over three years to provide modernised digital systems in cargo pathways integrated with business systems and streamline regulation and service delivery for importers;
• $40.6 million over four years in continuance of the Indigenous Ranger Biosecurity Program for the reduction of biosecurity risks in Northern Australia while providing social and economic benefits to First Nations rural and remote communities;
• $38.3 million over four years to support the Australian Bureau of Agricultural and Resource Economics and Science in agricultural statistics, climate analysis and data and information system upgrades; and
• Australian biosecurity levy on agricultural, forestry and fishery producers set at 10% of the 2020-21 industry-led levies is estimated to increase receipts by $153 million.

What this means

While the ongoing funding for biosecurity measures is welcome given the ongoing foot and mouth disease concerns, the measures will be partly funded by a 10% increase in the biosecurity production levy on Australian producers of agricultural, forestry and fishery products from 1 July 2024.

Cigs Up!

This classic budget time headline (Beer Cigs Up!) could get another partial run this year – if it was actually news. Australia’s excise tax on tobacco products will continue to rise after the government announced an increase of 5% per year, over the next three years, in addition to ordinary indexation.

The Government will also align the tax treatment of tobacco products subject to the per kilogram excise and excise-equivalent customs duty (such as roll-your-own tobacco) with the manufactured per-stick rate, which will ultimately raise the per kilogram duty.

Further, the Government will expand compliance activity to address illicit tobacco, and work with relevant agencies and the States and Territories to develop an appropriate approach.

What this means

The Government will continue to encourage smokers to quit over the coming years, in line with its focus on reducing both tobacco and vaping consumption by increasing cost and reducing access. This is further supported by increased compliance over illicit tobacco dealings.

Importers and sellers of tobacco and tobacco-related products will continue to be stung by the increased costs. Clearly, Australia will continue to set the international bar for tobacco excise tax, and the Government does not seem to be slowing down.

Fighting scams

From 2023-2024, the Government will provide $86.5 million to combat scams and online fraud. Funding will include:

•  $58 million over three years to establish a National Anti-Scam Centre within the ACCC to improve scam data sharing across the government and private sector;
• $17.6 million over four years for ASIC to identify and take down phishing websites and other websites which promote investment scams; and
• $10.9 million over four years to the Australian Communications and Media Authority and the Department of Infrastructure, Transport, Regional Development, Communications and the Arts to establish and enforce an SMS sender ID registry to impede scammers seeking to spoof industry and government brand names (such as the ATO and myGov) in message headers

What this means

In a world now beset with data breaches, clever scams and the all-too-easy appropriation of personal information, it is hoped that these new measures will provide an additional layer of security for consumers, investors and business owners alike.

Spending for everyone

As part of a big spending budget, the Treasurer announced a number of measures that will help the individual, including:

• Contrary to the rampant rumour mill, there will be no change to the stage three personal income tax cuts previously announced by the LNP Government, which will see the following change to the upper marginal brackets for Australian residents from next financial year

Current: $45,001 to $120,000 income taxed at 32.5%, $120,001 to $180,000 income taxed at 37%, and income over $180,001 taxed at 45%

Post-stage 3: $45,001 to $200,000 income taxed at 30%, and income over $201,000 taxed at 45%

• For low-income taxpayers, the Medicare levy provisions will be amended as follows:
  • from this financial year, the low-income threshold for the Medicare levy will be increased for singles, couples that do and do not have children, and pensioners; and
  • from the next financial year eligible lump sum payments paid in arrears (such as compensation or underpaid wages) will be exempt from the Medicare levy for low-income taxpayers if they meet the relevant tests. The exemption to the Medicare levy is expected to cost only $2million over five years.

Miscellaneous matters of interest to us

• A glaringly obvious omission from the Federal Budget is any comment on the Australian individual and corporate residence tests. It was announced in the 2020-2021 Federal Budget that the corporate residence test would be updated in light of the vexed TR 2018/5; the 2021-2022 Federal Budget subsequently announced that the individual tax residence would be changed. The corporate residence test remains in need of either legislative or judicial confirmation given the ATO’s problematic interpretation of recent case law, and while individual residence rules have been clarified in the Courts recently, taxpayers need certainty regarding the relevant test.
• Despite numerous previous announcements in relation to significant amendments to Division 7A, the Budget was silent on Division 7A and any proposed amendments. It remains to be seen whether the extensive amendments will ever be legislated.
• The passenger movement charge for every passenger departing Australia internationally by air or by sea will be increased from $60 per passenger to $70 per passenger, further increasing the cost of your next holiday!
• The previously announced patent box concessions, which sought to tax income derived from medical, biotech and agriculture patents at a concessional 17% will not proceed.

Our dedicated tax team