October Federal Budget 2022
The new Federal Government’s first budget is interesting for what it does not do, as much for what it does. Dr Jim Chalmers has flagged a new period of restraint, which may not quite qualify as austerity, but it definitely targets and prioritises spending and specific programmes.
There is little of note in relation to new tax measures – although outlined below are the major issues that have attracted our attention, particularly as they relate to our clients and advisers.
The measure that may perhaps have the most practical impact on taxpayers generally is the increased expenditure on compliance activities – not just for multinationals and large businesses, but also small businesses and private groups. This new funding (on top of significant expenditure in prior budgets) will certainly lead to increased audit activity. Taxpayers will have to ensure that they are not only well aware of the ATO’s position, but also prepared for audits in relation to matters such as trusts and private companies, where the ATO’s position may have evolved over recent years.
Off-market share buy-back changes
The Federal Government has announced that off-market share buy-backs in listed companies are to be treated the same as on-market share buy-backs. This measure is aimed at preventing any part of the consideration paid for an off-market buy-back from being treated as a dividend, which means the payment cannot be franked. The measure is estimated to save Treasury $550 million in revenue in the first three years and the measure will apply from 25 October 2022.
As the current legislation does not distinguish between off-market buy-backs undertaken by listed and private companies, the draft legislation will need to be read carefully to ensure the changes are confined to listed companies, in accordance with the budget announcements.
Budgets keep giving for the ATO
The budget appears to again adopt the adage that you have to spend money to make money, with significant further funding announced for the ATO with respect to its compliance programs (on top of already announced measures in previous budgets).
The three programs that will be extended, and the expected spending and receipts include:
- $80.3million to extend the Personal Income Taxation Compliance Program to 30 June 2025 (an additional three years), which is estimated to increase by $674.4million by 30 June 2026.
- the extension of the Shadow Economy Program to 30 June 2026 (an additional three years), which the ATO estimates will increase receipts by approximately $2.1billion within that period. The Budget did not specify any additional spending on this program for its extension.
- increased funding of $200million and the extension of the ATO Tax Avoidance Taskforce to 30 June 2026 (an additional year), which is estimated to increase receipts by approximately $2.8billion over that period.
If these estimates are achieved, this will represent a truly staggering return on investment.
What this means
The extended programs and spending not only reflect the ATO’s ongoing focus on the taxation of multinational enterprises and large businesses (through the Tax Avoidance Taskforce) which is largely expected, but reflects the apparent increase in compliance activity involving individuals.
With compliance activity certain to increase further, it has never been more important for practitioners and private client groups to understand exactly what the ATO’s position is on matters such as trust distributions and private companies, particularly where the ATO is actively seeking support from the courts for previously untested positions.
Changes to thin capitalisation rules
The 2022-2023 budget has introduced new changes to the thin capitalisation rules which will commence on or from 1 July 2023.
Currently the “maximum allowable debt” tests for general entities include:
- the safe-harbour debt amount, which is 60% of the average value of the entity’s Australian assets less its non-debt liabilities (safe-harbour test);
- the amount that would or could have been borrowed and lent by an independent third party (arm’s length debt test); and
- the geared up amount of the entity’s worldwide group (worldwide gearing ratio).
What are the changes
The Government will repeal the safe-harbour test and the worldwide gearing ratio measures.
The safe harbour test will be replaced by the earnings-based test which will limit an entity’s debt-related deductions to 30% of profits (using EBITDA — earnings before interest, taxes, depreciation, and amortisation – as the measure of profit). The Government has further announced that it will allow deductions denied under the entity-level EBITDA test (interest expense amounts exceeding the 30% EBITDA ratio) to be carried forward and claimed in a subsequent income year (up to 15 years).
The worldwide gearing ratio will be replaced with the earnings-based group ratio which will 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 test will remain, however it will only apply to external third party debt, disallowing deductions for related party debt under this test.
What this means
Moving forward, taxpayers will need to carefully consider which tests they wish to use to determine their maximum allowable debt (provided the ability to elect remains). The new safe-harbour test (i.e. the earnings-based test) may be beneficial, particularly if it will allow disallowed interest deductions to be carried forward and these may be utilised in future years.
Planning for Australia’s housing future
In response to Australia’s significant housing pressures, the Government is bringing states and territories, the Australian Local Government Association, investors, and construction representatives together under a new national Housing Accord. The Accord sets an ambitious target of one million new, well- located homes over five years from 2024, whereby the Government will provide $350 million over five years to deliver 10,000 affordable and energy efficient dwellings. States and territories will support this commitment by providing contributions enabling delivery of a further 10,000 affordable homes, increasing the total homes to be delivered to 20,000.
The Government will also develop a National Housing and Homelessness Plan establishing a clear national strategy to address the significant challenges facing the housing and homelessness sector. The plan will focus on the key reforms required to make it easier for Australians to buy a home or rent, and to provide shelter for more homeless Australians.
Beyond the Accord and the Housing Plan, the Government is establishing the $10 billion Housing Australia Future Fund to provide a sustainable funding source to improve service delivery and increase housing supply, delivering 30,000 new social and affordable dwellings. It will seek to draw in investments from state and territory governments and private capital providers.
What this means
The focus on Australia’s current housing crisis, as part of a broader focus on the cost of living, is timely and desperately required. These measures should ease the burden of locating a home for Australian individuals and families, along with assisting more Australians to realise their dream of home ownership and ensuring homeless Australians have a place to rest their head at night.
Notable inclusions and exclusions
Carbon Farming Outreach Program: The Government will provide $20.3 million over four years from 2022–23 to establish an outreach program to empower Australian farmers and land managers, including First Nations peoples, to participate in carbon markets and integrate low emission technologies and practices.
This measure is a part of the broader focus on restoring Australia’s reputation on climate change and energy transformation issues.
Clarifying the taxation of cryptocurrency: The Government will introduce legislation to clarify that cryptocurrencies (such as Bitcoin) continue to be excluded from being treated as foreign currency for Australian income tax purposes. This maintains the current tax treatment of cryptocurrencies, including the taxation of capital gains on those assets.
Increased competition and increased penalties: The Government will increase the penalties for breaches of competition and consumer law to deter anti-competition behaviour. The maximum penalty for corporations that have contravened the competition and consumer law will increase from $10 million to $50 million per contravention, and from 10 per cent of annual turnover to 30 per cent of turnover (whichever is greater) in the 12 month period prior to the contravention.
This will be a substantial change for many corporations, especially since the ACCC has been increasingly relying on the annual turnover in seeking penalties.
Individual and corporate tax residency: No change has been announced for individual and corporate tax residency. In the 2020/2021 and 2021/2022 Federal Budgets, the Coalition Government announced that the tests for Australian corporate and individual tax residency would be modernised in accordance with reports of the Board of Taxation. While the individual tax residency tests have seen a lot of action and been clarified in the Courts recently (though they remain factually complex), there remains an unresolved disjunct between the ATO’s rulings and the cases on corporate residence.
The lack of comment by the Government is notable. With no apparent movement to legislate this modernisation by the previous Coalition Government (where legislation would be complicated with respect to individual residency in particular), and with the release of the ATO’s draft ruling on individual residence (TR 2022/D2), it seems unlikely there will be any change in the immediate future.