An inflationary budget?  Or not?

The RBA thinks inflation will stay high for longer, Treasury thinks this budget will bring it down, and economists’ opinions are mixed.

Only time will provide the answer.  In the meantime though, the tax measures contained in this budget are relatively limited in scope.

The Stage 3 tax cuts for individuals have been well publicised.  To offset this, however, there is yet another round of extended funding for compliance measures.  It remains to be seen how much of the supposed low hanging fruit targeted by the Australian Taxation Office (ATO) remains ‘unplucked’.

Of particular note are mooted changes to capital gains tax reporting and withholding which suggests additional complexity for foreign residents dealing with the Australian capital gains tax (CGT) regime.  The headlines leading up to the budget promised ‘overhauling and reforming, strengthening and streamlining the foreign investment framework’.  Apparently that means making it harder and more complex, for most.

A further extension of the instant asset write off measures for small businesses provide some short term tax and cash flow relief for many of our clients.  That said, the Commonwealth has tended to recoup much of this benefit on the sale of businesses, as plant and equipment values remain high relative to their written down value.

On the spending side, social and affordable housing and related infrastructure measures will be a hugely popular and welcome measure.  If the red tape can indeed be cut, this might be the signature measure of this budget with the most chance of providing long-term societal benefit.  This area is a significant focus for many of our clients, and we are looking forward to navigating these additional measures with them.

Similarly there are some very interesting measures proposed for our clients in the food and agribusiness and resources sectors that will necessitate careful consideration.

This is a budget with much spending and few new tax incentives.  It is clear, however, that tax compliance and foreign investment regulation remains Treasury’s primary focus.

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

Foreign Investment

• How do you attract foreign investment? Make it harder!
• Targeted and more streamlined Foreign Investment processes

ATO compliance activity

• The gift that keeps on giving?

Industry Developments 

• Energy and Renewables: Big investment, small footprint
• Affordable Housing: Welcome to the neighbourhood

Agricultural sector

• Mo’ Money, Mo’ Spending: Reprioritisation and funding for the Agriculture sector
• Baaaaaaaaaaaad news for sheep farmers
• ACCUs
• Drippppp: Government raining cash on Water related initiatives

The golden child: basic tax changes

• Third time’s a Chalm(ers)
• Medi-cares: Cost of Living relief by increased low income Medicare levy thresholds
• Age like fine wine

Wins and losses

• Instant asset write off renewed (again)
• Can we fix it? Construction and infrastructure
• Discontinued and replaced: low/ no tax jurisdictions and minimum global taxes
• Caution, deep water!
• One for the chip lovers
• Was it forgotten, or deliberate?

Foreign Investment

How do you attract foreign investment? Make it harder!

The Federal Budget has further complicated the foreign CGT withholding regime, with the following measures proposed to apply from 1 July 2025:

• foreign residents that dispose of shares and other membership interests which exceed $20 million in value will be required to notify the ATO prior to the transaction documents being executed; and
• the types of assets for which foreign residents are subject to CGT on disposal will be broadened by amending the principal asset test from a ‘point in time’ test to a 365 day testing period.

What this means

The measures are claimed to improve oversight and compliance, and purportedly align the taxation treatment of foreign residents holding direct and indirect interests in Australian land with the tax treatment applicable to Australian residents (and Organisation for Economic Corporation and Development guidance).

In practice, the measures are likely to further complicate the valuation process already required on the sale or transfer of assets by foreign residents – particularly in assessing whether shares are indirect Australian real property interests. Transactions will also generally require more extensive planning in order to ensure that ATO notification processes are properly followed prior to the transaction being executed.

Targeted and more streamlined Foreign Investment processes

Notwithstanding the additional complications arising as a result of the proposed changes to the foreign resident capital gains tax regime, the Federal Government has announced that $15.7 million will be allocated to ‘refocus’ the Australian Government’s Foreign Investment Policy in attracting foreign capital – applying greater scrutiny to high-risk investments, while allowing low-risk investments to benefit from more streamlined processes. The Treasurer has claimed these measures will balance the need to attract foreign investment, whilst at the same time protecting Australia’s national interest.

From 1 January 2025, FIRB will adopt a new target to process 50% of foreign investment applications within the 30-day statutory time frame.

The Government has also promised to:

• lower foreign investment application fees for new build-to-rent developments; and
• introduced a 75% refund of fees for foreign investment applications that do not proceed because the applicant was unsuccessful in a competitive bid process.

What this means

The announcement is in line with the Treasurer’s earlier announcement (on 1 May 2024) to streamline and strengthen Australia’s foreign investment framework.  These changes will see foreign investment proposals facing a stricter assessment process with additional resources allocated toward investments deemed ‘high risk’.  We suspect this will largely impact foreign investment into critical mineral and infrastructure assets.  While the reforms do not target foreign investment from any specific country, it is likely that encouraging investment from ‘like minded’ countries will remain a factor in the assessment process.

Although the target of reducing approval timeframes is welcome, we have already seen some recent, much needed improvements in this regard so it is not really a ‘new’ policy initiative.  Also, notably absent is a target time frame to process the other 50% of applications (which routinely exceed the statutory 28 day time period by months).  While it is unclear what a ‘streamlined process’ will look like in practice, increased transparency in the approval process is a welcome change.

With a constant increase in application fees, it is promising to see a reduction in Foreign Investment Review Board (FIRB) fees for investment in build-to-rent developments, in line with Government proposals to increase housing stock (and the Federal Government recognition that much of the investment needed to generate the build to rent market will need to come from overseas).  We welcome further guidance on the definition of ‘build-to-rent’ and suspect more to come in this space.

A refund of fees for foreign investment applications that do not proceed because of an unsuccessful bid is a very welcome announcement, although with the recent (significant) fee increases, 25% of FIRB fees not refunded in the event of an unsuccessful bid could still be a hefty price to pay for foreign investors and will likely still incentivise bidders to wait until their bid is accepted before lodging their application which is part of the problem with the FIRB approval process delaying investment.

ATO compliance activity 

The gift that keeps on giving?

The Treasurer has announced significant spending for the ATO (yet again) across both a new compliance programs, and by extending several existing programs to the close of the 2028FY:

New program

• Counter fraud strategy: over the next four years, the ATO receive $187 million to commence a new program which focuses on the detection, prevention and mitigation of tax and superannuation fraud. The vast majority of this expenditure will go to upgrades to assist the ATO to identify and block suspicious activity (apparently, in real time), and to a compliance taskforce to locate lost revenue and attempts to obtain fraudulent refunds; complementary amendments will also be made to the Business Activity Statement retention periods – from 14 to 30 days.  Approximately 15% of the overall funding will also be allocated to the management and governance of counter-fraud activities (including assisting people harmed by fraud).  The program is expected to increase receipts by $302.2 million and payments by $187.4 million until 2028FY.

Existing programs extended to end of 2028FY

• Personal income tax compliance: this program is extended by one year, and is expected to increase receipts by $180.3 million and payments by $44.3 million up to that date.  The ATO is again focused on deductions and incorrect reporting, but this year have also identified ‘inappropriate tax agent influence’ as a key focus.
• Shadow economy compliance: the shadow economy compliance program has been a long running focus of the Federal Government, which is unsurprising given that the two year extension is expected to increase receipts by $1.9 billion and payments by $610.2 million over this period (including GST to the States of $429.6 million).
• Tax avoidance taskforce: this program appears to be another favourite of the Federal Government and ATO, and the two year extension of this ‘well-resourced’ program which focuses on multinationals, large public and private businesses and high-wealth individuals is expected to increase receipts by $2.4 billion and increase payments by $1.2 billion.

In related measures, the Treasurer has also announced funding associated with the Inspector-General of Taxation (IGT) and for the new Administrative Review Tribunal (ART) (which will replace the Administrative Appeals Tribunal):

• Over the next four years, Treasury will receive approximately $80 million, at least some part of which is intended to assist the Government in consultation with the IGT.
• Over the next five years, the Government will provide $1 billion to establish and support the ART and, in particular to, address the AAT’s historical backlog issues (although these primarily relate to migration). There was no mention of any measures directed towards funding taxpayers in the Small Business Taxation Division, which typically provides access to taxpayers in the cost-prohibitive world of litigation against the ATO.

What this means

There is no particular surprise in the extended funding allocated towards the ATO’s ongoing compliance programs, which reflect what we have seen in the market – extensive ATO activity and resources focused on high net worth individuals, businesses and multinationals.

The only new program appears to be reactionary to the embarrassing (and largely unsophisticated) fraud scheme which was publicised on TikTok and addressed under Operation Protego. Although it is only a small item, the increased Business Activity Statement retention period from 14 to 30 days will no doubt cause issues for some businesses (although hopefully, that will be where the reactionary legislation ends).

One of the most interesting elements of this funding comes from the casual reference in the personal income tax compliance program to ‘inappropriate tax agent influence’, which might suggest where the ATO compliance activity will ultimately end. This reference seems to allude to and is (unfortunately), consistent with the recent mandatory reporting measures commencing on 1 July 2024, which require tax agents to report their colleagues, and the Commissioner’s indication that he will limit the exercise of discretions for previous, honest mistakes in certain circumstances.

There was almost a hint of positive news amongst the usual tax compliance focus with potential funding to the IGT and ART, but only very superficial commitments have been made which do not promise any real review or prompt management of the conduct of the ATO’s compliance activity.

Industry Developments

Energy and Renewables: Big investment, small footprint

With the view of catalysing Australia’s clean energy supply chains and Australia becoming a renewable energy superpower, the Government will provide an estimated $19.7 billion up to the 2035FY to accelerate investment in Australia’s resources and renewables sector, including renewable hydrogen, green metals, low carbon liquid fuels, refining and processing of critical minerals and manufacturing of clean energy technologies.

The Government will also provide $182.7 million over eight years until the end of the 2032FY (and $4.5 million ongoing from 2031–32) to strengthen approval processes to support the delivery of the Government’s Future Made in Australia agenda, including Australia’s transition to a net zero economy. This will include funding for the Department of Climate Change, Energy, the Environment and Water to develop, agree and maintain a national priority list of renewable energy related projects and process assessments for priority projects.

From a tax perspective, this budget measure includes:

• a Critical Minerals Production Tax Incentive from 2027–28 to 2040–41 to support supply chains in respect of the refining and processing of critical minerals such as cobalt, lithium and rare-earth elements; and
• a Hydrogen Production Tax Incentive from 2027–28 to 2040–41 to support producers of renewable hydrogen as Australia moves closer to net-zero.

What this means

Although the detail in terms of these taxation measures is unlikely to be released in the near future, there appears to be clear room for businesses investing in the renewable and solar energy sector to take advantage of increased federal funding and (the promise of) greater tax incentives to develop renewable and clean energy projects and technologies in Australia (and hopefully also taking advantage of a streamlined process to obtaining approval for the funding of Australia’s priority energy projects).

Affordable Housing: Welcome to the neighbourhood

In an effort to combat the current housing crisis, the Government will provide additional funding (including a new five year agreement with the States and Territories and concessional finance arrangements) for social and affordable housing and homelessness providers – aimed at increasing services, growing Australia’s housing stock, and investing in more housing infrastructure.

Subject to the States and Territories signing the National Agreement on Social Housing and Homelessness, the Government will provide additional funding of up to:

• $423.1 million to support the provision of social housing and homelessness services by States and Territories; and
• $1 billion to support enabling infrastructure for new housing through a new Housing Support Program.

The Government also proposed measures to increase apprenticeship programs relevant to the construction sector and commit $19.7 million over six years to support housing research, policy and programs and on feasibility studies aimed at the release of Commonwealth land to support social and affordable housing.

What this means

Social and affordable housing providers can look forward to an increase in Commonwealth land being made available for social and community housing projects over coming years and accessing continued funding from the States and Territories to build more housing for those in need. This should presumably result in additional (and much-needed) housing projects funded by way of capital funding arrangements between the States and Territories and housing providers.

Agriculture sector 

Mo’ Money, Mo’ Spending: Reprioritisation and funding for the Agriculture sector 

The Government will provide $20.7 million over the course of the next five years up to the 2028FY and $3.4 million per year ongoing to support the agriculture, fisheries and forestry portfolio.  This funding will extend support to certain key areas, including:

• $13.9 million for the Department of Agriculture Fisheries and Forestry to support drought relief and readiness;
• $3.4 million to develop Timber Fibre Strategy and review the National Forestry Policy Statement;
• $1.5 million to accurate and clear labelling of plant-based alternative protein products; and
• $1 million for a skilled agricultural work liaison targeted at attracting graduates to work in agriculture and additional funding for AgCAREERSTART pilot program.

Although this spending looks relatively minimal, the Treasurer has also targeted drought relief with the allocation of $519.1 million over eight years for initiatives that provide support to farmers and communities for the management of drought related issues and adaptation to climate change.  Further, the Government will provide $42.2 million over four years for the Department of Agriculture, Fisheries and Forestry to support the delivery of Future Drought Fund initiatives.

Baaaaaaaaaaaad news for sheep farmers

The reduction and ‘orderly phase out’ of live sheep export by sea has been allocated further funding, with the Federal Government announcing a range of measures directed towards the support of an orderly phasing out of such exports.

The funding will be directed towards ensuring that sheep producers and the supply chain are well positioned for when exports will end. Measures will be directed towards assisting sheep producers to implement transition actions, the expansion of domestic processing capabilities and community support and counselling, together with $27 million of funding directed towards enhancing demand (both in Australia and internationally) for sheep products.

ACCUs

Following the Independent Review of Australian Carbon Credit Units (ACCUs), the Government will also provide an additional $48 million over four years from the 2025FY to the Australian Carbon Credit Unit scheme.

Drippppp: Government raining cash on Water related initiatives 

With a new budget comes the chance for cash to flow. The Government has revealed a white wash of $460 million in spending over the next four to six years for water related initiatives. This spending includes $28.6 million over the next four years for the Inspector-General of Water Compliance to maintain its independence and undertake its functions under the Water Act 2007, $174.6 million over the next six years on multiple new water infrastructure projects, and $262.2 million over the next five years to various departments supporting the Federal Government’s water policy functions.

While the headline figure looks a bit ‘splashy’, the majority of the spending seems to relate to governance functions and policy, with only approximately $175 million on new infrastructure across six years.

The golden child: basic tax changes

Third time’s a Chalm(ers)

In case you have been living under a rock, the Government will be introducing its revised Stage 3 tax cuts from 1 July 2024. The Treasurer said all 13.6 million taxpayers will receive a tax cut from 1 July 2024. The average annual tax cut is $1,888.

Essentially the Government has:

• reduced the 19% tax rate to 16%, and the 32.5% tax rate to 30%;
• increased the 37% tax rate threshold from $120,000 to $135,000; and
• increased the 45% tax rate threshold from $180,000 to $190,000.

The existing marginal rates for the 2024FY, the previously proposed Stage 3 cuts and the changes to be enacted for the 2025FY are:

Medi-cares: Cost of Living relief by increased low income Medicare levy thresholds

Alongside the Stage 3 tax cuts and the proposed adjustments to the HECS-HELP regime to effectively limit unprecedent indexation (announced prior to this budget), the Treasurer announced that the Federal Government will also attack the cost of living crisis through the Medicare levy.

From 1 July 2024, the Medicare levy thresholds for low-income families, singles and seniors and pensioners will increase:

• from $40,939 to $43,846 for families, with the threshold per child increasing from $3,760 to $4,027;
• from $24,276 to $26,000 for singles;
• from $38,365 to $41,089 for seniors and pensioners; and
• from $53,406 to $57,198 for seniors and pensioners families.

Although the increases appear relatively small, the Treasurer estimated that they will decrease receipts over the next four years by $640 million.

Age like fine wine

The Federal Government will spend $531.4 million in the 2025FY to fund 24,100 additional home care packages, which primarily support older persons requiring assistance to continue to live at home.

This should provide further opportunities for service providers for recipients of home care packages to engage with persons eligible to receive this additional funding.

Wins and losses

Instant asset write off renewed (again)

In supporting small businesses, the Government has announced a further extension of the instant asset write off measures – allowing small businesses with aggregated turnover of less than $10 million to immediately write off the cost of assets costing up to $20,000 (per asset) when first used or installed ready for use before 30 June 2025. Assets whose cost exceeds the instant asset write-off limit of $20,000 will continue to be added to a small business simplified depreciation pool and depreciated at 15% in the first year and 30% each year thereafter.

What this means

While this is a welcome extension, with the increased cost of everything, this is unlikely to have a real impact for the businesses that need it the most which is demonstrated by the expected decrease in receipts of only $260 million over five years. Furthermore, the benefit to small business is largely negated on the sale of written down assets.

Can we fix it? Construction and infrastructure

The Federal Government is turning their wallets towards infrastructure, transport, regional development including $4.1 billion over seven years for 65 priority infrastructure projects Australia wide. These projects include infrastructure in Western Sydney, Zero Emission Busses Tranche 1 Infrastructure in New South Wales, Automatic Train Control in Western Australia, and roads in the Northern Territory, Queensland and Tasmania.

There will also be $10.1 billion spent over 11 years for existing projects and $1.7 billion to continue existing road maintenance and safety programs.
This spending on construction and infrastructure is one of the biggest ticket items in Federal Government funding.

This spending should surely generate substantial new jobs and work in Australia, working alongside initiatives in the housing sector and increased incentives to support apprentices and their employees.

Discontinued and replaced: low/no tax jurisdictions and minimum global taxes 

The measures announced in the 2022-23 Budget in relation to denying deductions for payments relating to intangibles located in low or no tax jurisdictions have been discontinued and will now be addressed in the Global Minimum Tax and Domestic Minimum Tax measures. In addition, it is anticipated that new provisions will be introduced from 1 July 2026 that aim to penalise significant global entities that have found to mischaracterise or undervalue royalty payments to which royalty withholding payments would otherwise apply.

Caution, deep water!

From the 2025FY, a further $250 million will be added to the GST pool each year (in addition to the additional $600 million annual boost implemented in the 2022FY, and potential receipts from the new ATO counter fraud strategy compliance program). This may influence decision making in respect of State budgetary and revenue measures.

One for the chip lovers

Lastly, in welcome news for all the sweet potato lovers and following from the potato shortage in January, the Australian Sweetpotato Growers Inc successfully lobbied to decrease the marketing component of the agriculture levy from 1% of the sale value to nil. This decreases the overall levy rate on sweet potatoes from 1.5% to .5%.

Was it forgotten, or deliberate?

There were two key items that we expected would warrant a comment in the Budget, which did not appear:

• The deductibility of the shortfall and general interest charges: As part of the 2023-2024 Mid-Year Economic and Fiscal Outlook, the Government announced that Shortfall Interest Charge and General Interest Charge would no longer be deductible if incurred after 1 July 2025, which may have significant impacts on businesses particularly if it is enacted without the review of the existing processes to challenge the charge. Although this item might easily be omitted because it was previously raised, we expected (or hoped) to see some mention around changes to the regulatory system or the reduced payments to taxpayers.
• Increase of CGT withholding rates: Although the Treasurer announced changes to the CGT withholding regime (discussed above), there was no mention of the increase of the CGT withholding rates or reduction of the associated threshold which is due to take effect from 1 January 2025. Again, this item may be easily skirted given the previous announcements, but we expected mention given the increased revenue.

Our dedicated tax team