Australian Federal Budget 2023-24
The Australian Treasurer, the Hon. Jim Chalmers, delivered the 2023/24 Federal Budget (Budget) on Tuesday 9 May 2023. Whilst describing the Budget as providing a “modest and meaningful” tax package, he demonstrated and reaffirmed the Government’s commitment to critically important international and related tax reforms.
The key initiatives from the Budget include:
- Implementation of the OECD/G20 led Pillar II solution, incorporating the 15% global minimum tax for large multinational enterprises for income years commencing on or after 1 January 2024;
- Expanding Australia’s general anti-avoidance rules (Part IVA) to apply, firstly, to arrangements designed to access lower withholding tax rates on income paid to foreign residents (for example, under Double Tax Treaties) and, secondly, even potentially where there is a dominant purpose to reduce foreign income tax;
- Reducing the Managed Investment Trust withholding tax rate from 30% to 15% for eligible new build-to-rent projects;
- Extending the clean building Managed Investment Trust withholding tax concession (10%) to eligible data centres and warehouses;
- Limiting the proportion of Petroleum Resource Rent Tax (PRRT) ‘assessable income’ that can be offset by deductions to 90% (of the assessable receipts), effectively introducing a “cap” on deductions. Separately, the Government will “modernise” the PRRT from 1 July 2024 following the Treasury review of the PRRT, including gas transfer pricing;
- Tightening (or clarifying) the concept of “exploration for petroleum” in the context of the practical application of PRRT; and
- Deferring the start date for the tax integrity measure previously announced for franked distributions funded by capital raisings from 19 December 2016 to 15 September 2022.
It is noted that the Budget did not provide further details regarding previously announced amendments regarding thin capitalisation, deductibility of payments for intangibles, tax transparency and franking credits relating to capital raisings and listed companies off-market share buybacks.
We provide further details on these key tax initiatives on the Budget below.
Implementation of a global minimum tax and a domestic minimum tax
The Government announced it will implement key aspects of Pillar Two of the OECD/G20 Two Pillar Solution.
These measures essentially aim to introduce a global minimum corporate tax rate of 15% for multinationals. The original OECD proposals spoke of an Income Inclusion Rule (IIR), which imposes a top-up tax on a parent entity in respect of low taxed subsidiary income, and an Undertaxed Payment Rule (UPR), which requires an equivalent adjustment to the extent the low tax income of a group member is not subject to tax under an IIR. A treaty “subject to tax rule” (STTR) also allowed a creditable tax to be imposed on payments such as interest and royalties where they were not taxed up to 15%. The STTR was to be creditable under the rules. The OECD originally intended the IIR would have effect in 2023 and the UTPR from 2024. Presently approximately 26 out of 136 countries have announced commencement dates for Pillar 2 measures, generally ranging from 2024 to 2025.
Australia’s announcement today is of:
- a 15 per cent global minimum tax for large multinational enterprises with the Income Inclusion Rule applying to income years starting on or after 1 January 2024 and the Undertaxed Profits Rule applying to income years starting on or after 1 January 2025.
- a 15 per cent domestic minimum tax applying to income years starting on or after 1 January 2024.
It was announced the global minimum tax and domestic minimum tax will be based on the OECD Global Anti-Base Erosion Model Rules. Close adherence to the Model Rules would be welcomed for consistency, and the process by which they are legislated in Australia remains to be seen, although it was announced that draft legislation would shortly be released for comment.
The global minimum tax and domestic minimum tax will apply to large multinationals with annual global revenue of EUR750 million (approximately AUD1.2 billion) or more.
The global minimum tax and domestic minimum tax will have some exclusions for investment funds, pension funds, government entities, international organisations, not-for-profits and income from international shipping.
The domestic minimum tax will give rise to franking credits, but the global minimum tax will not.
It is not clear yet how the recently released draft integrity measures denying deductions for intangibles fit into the scheme of the announced OECD measures. On one view the draft resembles an STTR measure of the sort contemplated by the OECD for developing countries. But the impact of “non deductibility” is inconsistent with the creditable treaty-based measure contemplated by the OECD proposals. Treasury announced that, during the implementation of the Budget measures, it would consider the interactions of draft integrity measures which commence from 1 July 2023.
GAAR broadened to schemes that reduce Australian withholding taxes or foreign taxes
Australia’s general anti-avoidance rule (GAAR) will be broadened to apply to:
- schemes that reduce tax paid in Australia by accessing a lower withholding tax rate on income paid to foreign residents (e.g. under tax treaties); and
- schemes that achieve an Australian income tax benefit, even where the dominant purpose was to reduce foreign income tax, rather than Australian income tax.
These measures will apply to income years commencing on or after 1 July 2024, regardless of whether the scheme was entered into before that date.
In relation to the withholding tax measure, currently, section 177C(1)(bc) of the Income Tax Assessment Act 1936 only defines a ‘tax benefit’ to include instances where the taxpayer is not liable to pay (i.e. nil) withholding tax when the taxpayer should have been liable to pay had the scheme not been entered into.
However, the current rules do not strictly appear to include as a tax benefit a ‘reduction’ in the withholding tax liability, which is typically obtained through the application of double tax agreements. For example, the non-treaty withholding tax rate for royalties is 30% whilst the rate is typically reduced to 5% or 10% for treaty countries. It is expected that this withholding tax measure is intended to capture instances where entities “treaty shop” to obtain lower (rather than nil) withholding tax rates without having any economic substance in that jurisdiction.
The second proposed measure expands the dominant purpose test to include instances where foreign tax is reduced. Currently, the multinational anti-avoidance law (MAAL) in section 177DA of the Income Tax Assessment Act 1936 and diverted profits tax (DPT) in section 177J of the Income Tax Assessment Act 1936 both include references or tests relating to foreign tax and foreign laws. Thus, the proposed amendments bring GAAR in line with the MAAL and DPT in this regard.
Thin capitalisation (previously announced) – significant changes with a proposed 1 July 2023 start date
Previously, on 16 March 2023, the Government released draft legislation that proposed significant changes to Australia’s thin capitalisation rules. For context, Australia’s thin capitalisation rules limit the amount of tax deductions available for interest expenses for multinational enterprises.
The proposed changes include:
- a 30% ‘tax EBITDA’ limit to replace the current 60% LVR limit, with any denied deductions being able to be carried forward for 15 years;
- an external third-party debt limit (with specific recourse and debt funding usage requirements, conduit financier concessions and tightened associates testing) to replace the current arm’s length debt limit;
- a group EBITDA ratio test to replace the current worldwide gearing test.
This Budget was silent on this proposed measure. At the time of writing, the draft legislation has not yet been updated.
If enacted in its current form, the changes will apply to income years commencing on or after 1 July 2023, with no grandfathering or transitional rules for existing arrangements.
Affected businesses are urged to consider the impact of these changes on their existing and future debt arrangements, to prepare for the imminent 1 July 2023 start date.
Intangible deductions (previously announced) – deduction denial for payments by SGEs to low tax and patent box jurisdictions, with a proposed 1 July 2023 start date
Previously, on 31 March 2023, the Government released draft legislation that proposed to deny tax deductions for certain payments made by Significant Global Entities (members of groups with total global turnover of AUD1bn or more annually), where the payments were directly or indirectly in relation to “intangibles” held in low or no-tax jurisdictions. These jurisdictions are those with:
- a corporate tax rate of less than 15%; or
- a tax preferential patent box regime without sufficient economic substance.
This Budget was silent on this proposed measure – this suggests that the proposed measure is expected to proceed. At the time of writing, the draft legislation has not yet been updated.
If enacted in its current form, the measure will apply to payments made on or after 1 July 2023.
Affected businesses are urged to prepare for these measures, ahead of the 1 July 2023 start date. For further details, refer to our Federal Budget 2022-23 (October 2023) alert.
REAL ESTATE INVESTMENT & FUNDS
Build-to-rent tax concessions
The Government will introduce the following tax concessions for eligible build-to-rent projects where construction commences after 7:30PM AEST on 9 May 2023 (Budget night):
- Eligibility for the reduced 15% managed investment trust (MIT) withholding tax (down from 30%) where the project is held by a withholding MIT; and
- Increased tax depreciation rate for ‘capital works’ (e.g. building constructions costs) to 4%, up from 2.5%.
The key requirements to qualify for these tax concessions for build-to-rent projects are as follows:
- The project must consist of at least 50 apartments or other dwellings that are made available for rent to the general public;
- The dwellings must be retained under “single ownership” for at least 10 years before being sold; and
- Tenants must be offered a lease term of at least 3 years for each dwelling.
Further, the Government has announced that consultation will be undertaken on the details of implementation of this measure, including any minimum proportion of dwellings being offered as affordable tenancies and the length of time dwellings must be retained under single ownership.
This reduced MIT withholding tax concession is to apply from 1 July 2024.
These measures are designed to encourage investment (including foreign investment via MITs) and construction of build-to-rent projects as part of a broader package of reforms aimed at supporting housing affordability in Australia. Developers and investors for such projects should carefully monitor these measures as the specific eligibility requirements are refined during the consultation period.
Extending the clean building MIT withholding tax concession to data centres and warehouses
The Government will expand the existing clean building MIT withholding tax concession to apply to data centres and warehouses. Currently, the clean building MIT withholding tax rate of 10% (down from the standard 15% rate) only applies to commercial office buildings, hotels and shopping centres.
The reduced withholding tax rate will only apply to data centres and warehouses that meet the relevant energy efficiency standard, where construction commences after 7:30 PM (AEST) on 9 May 2023. Existing buildings will not qualify for the lower withholding tax rate.
This measure is to apply from 1 July 2025.
However, the Government also announced that the minimum energy efficiency requirements for eligible clean buildings will be increased to a 6-star Green Star rating (up from 5-star) or a 6-star NABERS rating (up from 5.5-stars). The Government will consult on transitional arrangements for existing buildings.
Thus, whilst these amendments will expand the clean building MIT withholding tax concessions to data centres and warehouses, they also increase the energy efficiency requirements to qualify for the concessions.
ENERGY & RESOURCES
Changes to the Petroleum Resource Rent Tax Regime
The Government’s long-standing position is that the PRRT has not been structured or modernised to appropriately tax the LNG industry. In an effort to boost tax revenue in the wake of soaring commodity prices, the Government has announced several major changes to the PRRT regime.
Clarifying the tax treatment of ‘exploration’ and ‘mining, quarrying and prospecting rights’- Limiting the Full Federal Court decision in Shell Energy
The Petroleum Resource Rent Tax (PRRT) legislation will be amended to clarify that ‘exploration for petroleum’ is limited to the ‘discovery and identification of the existence, extent and nature of the petroleum resource’ and does not extend to ‘activities and feasibility studies directed at evaluating whether the resource is commercially recoverable’. Importantly, these changes represent a limitation of the practical application of the Full Federal Court’s decision in Commissioner of Taxation v Shell Energy Holdings Australia Limited  FCAFC 2 (Shell Energy). The Full Federal Court had previously adopted a wider meaning of what constitutes ‘exploration’ for income tax purposes.
The Government’s position is that these amendments reflect the Government’s policy intent and the Commissioner of Taxation’s position as set out in TR 2014/9. Notably, the amendments will have a retrospective application to all expenditure incurred from 21 August 2013.
In another limitation of the Shell Energy case, changes will also be made to ensure 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 tax adjustments. The Full Federal Court had previously held that the ‘first use’ and ‘start time’ for an MQPR corresponds with when the MQPR is taken to be held by an entity. These amendments will apply in respect of all MQPRs acquired or started to be used after 9 May 2023.
To an extent, these amendments reflect the Commissioner of Taxation’s reluctance to fully endorse the Full Federal Court’s decision in the Shell Energy case, as set out in his decision impact statement in February 2023. For taxpayers who may have previously chosen to rely on the principles in Shell Energy, the potential impact of these measures should be evaluated.
A cap on PRRT deductions and other changes to Gas Transfer Pricing
Broadly, the Government proposes to introduce a cap on the use of deductions to offset assessable PRRT income of liquefied natural gas (LNG) producers under the PRRT from 1 July 2023.
The cap will limit deductible expenditure to the value of 90% of each taxpayer’s PRRT assessable receipts in respect of each project interest in the relevant income year and apply after mandatory transfers of exploration expenditure. Expenditure that cannot be deducted because of the cap will be carried forward and uplifted at the Government long-term bond rate.
Importantly, only PRRT projects that produce LNG are subject to these cap. There is some relief for LNG producers given that projects would not be subject to the cap until 7 years after the year of first production or from 1 July 2023, whichever is later. There are certain exemptions from the cap for closing down expenditure, starting base expenditure and resource tax expenditure.
In response to Treasury’s final report on the Gas Transfer Pricing (GTP) regime, the Government also intends to introduce several supporting changes to the GTP arrangements:
- From 1 July 2023, the PRRT general anti-avoidance rule and the arm’s length rule will be updated to put beyond doubt that they apply to the GTP regulations. Briefly, these rules operate in circumstances where entities structure their tolling arrangement to artificially shift value to the host project or artificially shift the toll fee either to the upstream or downstream part of the project.
- From 1 July 2024, the PRRT will be updated to better reflect emerging developments in LNG project structures, to take into account the contributions and risks of the notional entities that comprise the LNG value chain, align the regulations with current transfer pricing practices and provide appropriate integrity rules for the regime. We anticipate that these measures may potentially include changes to the current safe harbour GTP method (the residual pricing method).
The Government expects to consult on the final design and implementation details on these various measures later this year, and also in early 2024.
SUPPORT FOR SMALL BUSINESSES
The Budget contains a number of measures aimed at supporting small businesses. These include:
- Reducing the rate of pay-as-you-go (PAYG) and GST instalments.
- Increasing the instant asset write-off to AUD20,000.
- Introducing the Small Business Energy Incentive.
The Government is seeking to improve the cashflow of small businesses by reducing the PAYG and GST instalments rate. This will be benefit business and individuals with up to $50 million annual aggregate turnover for PAYG instalments, and up to AUD10 million aggregated annual turnover for GST instalments. To achieve this, the GDP adjustment factor for PAYG and GST instalments will be set at 6 per cent for the 2023–24 income year, a reduction from 12 per cent under the statutory formula.
Small business will also be able to claim an immediate deduction for the full cost of eligible assets costing less than AUD20,000 that are first used or installed ready for use between 1 July 2023 and 30 June 2024. This measure will apply to small businesses with aggregated annual turnover of less than AUD10 million. The AUD20,000 threshold will apply on a per asset basis.
Small and medium businesses will also be able to deduct an additional 20% of the cost of eligible depreciating assets that support electrification and more efficient use of energy, called the ‘Small Business Energy Incentive’. Up to AUD100,000 of total expenditure will be eligible for the Small Business Energy Incentive, with the maximum bonus deduction being AUD20,000. This will be available for businesses with aggregated annual turnover of less than AUD50 million. A range of depreciating assets (as well as upgrades to existing assets) will be eligible, provided they are first used or installed ready for use between 1 July 2023 and 30 June 2024. Examples of eligible assets include more efficient electrical goods such as energy-efficient fridges, assets that support electrification such as heat pumps and electric heating or cooling systems, and demand management assets such as batteries or thermal energy storage.
SUPERANNUATION PAYMENT FREQUENCY
From 1 July 2026, employers will be required to pay superannuation to an employee’s superannuation fund on the same day that their salary and wages are paid (rather than the quarterly superannuation contributions that are presently required). This is a very significant change to the superannuation system and the payment processing infrastructure that underpins it, hence the start date for these measures being in 3 years’ time. The changes to the frequency of superannuation payments will also ultimately require changes to the rules for the superannuation guarantee charge (with such amendments still to be determined with stakeholders).