October 27, 2022
Australia issues 2022-23 October Federal Budget
The Australian Federal Treasurer handed down the second 2022-23 Federal Budget on 25 October 2022, following the previous government's 29 March 2022 Budget, and outlining the new Labor Government's priorities following the May 2022 Federal election.
This Tax Alert focuses on the key announced tax measures that impact business tax planning and compliance processes. The broader economic and policy issues in the Budget are on the EY Australia website.
The Budget reports a lower-than-expected deficit of AU$37 billion1 but foreshadows a dire future of expected low Gross Domestic Product (GDP) growth of 1.5% by 2024, higher inflation of nearly 8% next year and no growth in real wages, if at all, until 2024. The Budget has been carefully curated to ensure new policy spending did not fall into the current financial year when the inflation risk is (at least on current forecasts) most acute. Only a net $1.6 billion was added to the net policy spend in 2022-23 and $130 million to direct capital spend. The stimulatory policy flows from 2024-25, when the forecasts safely park inflation in the 2-3% target band.
While the Budget noted possible productivity improvements to come from less expensive childcare and a few other measures, it is hard to see any significant drivers or incentives to promote materially higher investment in manufacturing or other job creating or export driven sectors, especially given that GDP growth is expected to slow down significantly in 2024 to 1.5%.
The revenue raised from this Budget is low compared to Australia's structural budget deficit and without significant tax reforms in the near to medium term ahead, Australia's budget position remains precarious.
Perhaps, by May 2023 when the next Budget is due, the Government can articulate a longer-term plan to address this, as well as hopefully some incentives to encourage the significant energy transition investment to renewables that Australia needs.
Multinational tax integrity package
The Budget includes details of three measures announced by the Australian Labor Party during their election campaign "to ensure multinationals pay their fair share of tax." This follows an August 2022 Treasury consultation paper and submissions in response to that paper by EY and others. It is proposed to:
A further election announcement to implement a public registry of beneficial ownership to improve transparency on corporate structures, to show who ultimately owns or controls a company or legal vehicle, is yet to be developed.
Consultation is currently ongoing concerning the election commitment to implement the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Two-Pillar solution which includes the 15% global minimum effective tax rate on profits of large MNEs.
MNE package - Amending Australia's interest limitation (Thin Cap) rules
The Budget confirmed the Government's election commitment to amend the thin capitalization rules to limit debt deductions of MNEs to 30% of earnings before interest, taxes, depreciation, and amortization (EBITDA) in line with the OECD's recommended approach under the BEPS program. The current thin cap rules provide three tests for MNEs, being:
The Budget indicated the following key changes to the thin cap rules:
The Budget confirms that financial entities (and presumably authorized deposit-taking entities) will not be subject to the amended thin cap rules.
The amended thin cap rules will apply to income years commencing on or after 1 July 2023. This is a very tight timeframe for taxpayers to prepare for the amendments.
Since there is no mention of transitional rules, it appears that existing debt arrangements will not be grandfathered. As such, borrowers need to urgently review the impact of these new rules on interest expenses arising on existing debt structures which up until now may have been fully deductible.
The Budget is silent on several key points, including whether:
The insurance industry may be excluded from being subject to the amended thin cap rules.
MNE package - Denying deductions for payments relating to intangibles and royalties paid to low or no tax jurisdictions
The Budget builds on the Government's election commitment for an integrity measure applying to significant global entities (SGEs) which would deny deductions in Australia on related party cross-border payments relating to intangibles.
The anti-avoidance measure will apply to organizations in Australia who are SGEs (entities with global revenue of at least $1 billion) who make payments, directly or indirectly, in relation to intangibles in low or no tax jurisdictions. The measure is proposed to apply to payments made on or after 1 July 2023.
Specifically, the anti-avoidance measure will apply to payments where:
The announcement contains limited detail on the proposed extent of the rule. It is unclear whether a payment for "intangibles" will include circumstances where the payment is for intangibles and/or royalties, even if the payment is not so characterized or is an embedded one (such as those arrangements covered under the Australian Taxation Office's (ATO) Taxpayer Alerts, TA 2018/2 - Mischaracterisation of activities and payments in connection with intangible assets and TA 2020/1 - non-arm's length arrangements and the DEMPE of intangible assets). A complementary statement on the ATO website suggests that the rules will extend to payments for advertising algorithms and customer data bases.
It is also unclear the extent to which the measure would apply to an indirect payment and the required tracing which would need to be undertaken by an Australian payer. This could result in significant compliance costs.
Further, while the measure is described as an "anti-avoidance rule," it is unclear whether the measure will also include a purpose test and whether the measure is proposed to form part of the anti-avoidance rules in the tax legislation. This would potentially result in the rule being carved out of Australia's Double Tax Agreements (DTAs). The use of the term "anti-avoidance rule" as well as the reference to "sufficient economic substance" (a term defined in the current anti-avoidance rules) suggests the intention is to include the rule within the anti-avoidance provisions.
It is disappointing to see this measure announced in the proposed form. Australia's tax rules already contain significant powers and anti-avoidance rules to tackle structures and behaviors to which the proposed measure is targeted at. Furthermore, the proposed measure is likely to apply to a range of normal commercial arrangements that are not tax-driven. The measure has the potential to deter investment into Australia and certainly runs contrary to limiting compliance costs for businesses conducting genuine commercial activities. The measure also has the potential to run contrary to Australia's DTA commitments and obligations.
MNE package - Multinational tax transparency
Under the Government's broader Multinational Tax Integrity Package, the Budget confirms the Improved Tax Transparency measures that will require certain companies to disclose information to the public for income years beginning on or after 1 July 2023.he Improved Tax Transparency measures will require:
Other details (such as format and detailed content of reporting) are yet to be released.
Increased levels of Australian tax transparency for multinationals will require a strengthening of local and global tax governance frameworks. This latest requirement for companies to make their historically private tax affairs public, will enhance the necessity to ensure disclosures are supportable and based on accurate and tested data. In making the new disclosures, multinational companies will need to manage internal stakeholder expectations, particularly given local Australian disclosures may require review of global tax issues and therefore consideration and sign-off of the company's global communications/public disclosure protocols. Increased resources may be required for companies to obtain the required information from subsidiaries and particular details of that subsidiary.
Program to expand treaty network behind schedule
The program announced in September 2021 to expand Australia's tax treaty network to cover 80% of foreign investment by 2023 is behind schedule. The Budget reflects the DTA signed with Iceland on 12 October 2022 and the existing treaty with India has been unilaterally amended by Australian legislation.
Otherwise, there is no major update on negotiations with Luxembourg, Greece, Portugal and Slovenia nor has there been any announcement as to which countries make up the remaining 4 spots of the proposed 10 updates in total. The lack of progress means impacted businesses may need to make representations to ensure this remains on the Government's agenda.
Providing certainty on unlegislated tax and superannuation measures announced by the previous government
The Budget includes a list of tax and superannuation measures which were announced but not legislated by the previous government which will now not proceed:
Further, the Government will defer the start dates of the following measures to allow sufficient time for policies to be legislated and implemented:
We note that the Government remains silent on the status of a number of key announced but unlegislated measures including:
Improving the integrity of off-market share buy-backs
Without undertaking a public consultation process, the Government has announced the taxation treatment of off-market share buy-backs will be aligned with on-market share buybacks for listed public companies. Although there is no further detail accompanying the announcement, this is expected to mean that no part of the purchase price for an off-market buy-back can in future be treated as a frankable dividend and the tax outcomes on disposal of the share (such as Capital Gains Tax (CGT)) for participating shareholders will also change. The measure applies from 7:30pm AEDT on 25 October 2022.
Incentives for Industry – Creating a stronger and more resilient economy
The Government has signaled strong support for industry through multiple measures which target priority sectors to grow and expand Australia's industrial manufacturing base and reduce Australia's environmental impact. To fund these new measures, the Government has redirected significant funding programs from the previous government, including the previous Modern Manufacturing Strategy, Building Better Regions Fund, and Entrepreneurs' Program.
National Reconstruction Fund
The Government will invest $15 billion over the next seven years to establish the National Reconstruction Fund which will co-invest in projects aimed at diversifying and transforming the Australian economy. The fund will be delivered through loans, guarantees and equity, partnering with the private sector to unlock further investment. The fund will focus on seven priority areas including resources, agriculture, medical science, renewables, defense, transport, and enabling capabilities
Support for the regions
The Government will invest $5.4 billion over seven years to support the economic growth and development of regional Australia. This includes $1 billion for the Growing the Regions Program and the regional Precincts and Partnerships Program, which will delivered through competitive grants and collaborative partnership programs
The Government is investing in a suite of measures under the Powering Australia Plan to build a future with cleaner and cheaper energy. This includes $20 billion for concessional loans and equity to invest in transmission infrastructure projects, $1.9 billion to transform regional industries and $275.4 million to reduce transport emissions
Critical minerals and resources
The Government will support the critical minerals sector by investing up to $1 billion under the National Reconstruction Fund, as well as $160.3 million over the next four years to drive innovation and enable projects to be market ready. This includes $99.8 million to support critical mineral producers in overcoming technical and commercial barriers.
COVID-19 business grants
Further COVID-19 payments from certain additional state and territory business grants made prior to 30 June 2022 have been made non-assessable non-exempt (NANE) for income tax purposes, under the current measure.
Electric car discount
The Budget paper notes the Government's two electric car measures:
No new personal tax bracket adjustments
As expected, no changes were announced to personal income tax brackets including the legislated "Stage 3" tax cuts (2019-20 Budget personal income tax relief plan) to commence from the 2024-25 income year. Resident personal tax rates remain as:
*Rates do not include Medicare levy of 2% as applicable
A reminder that the low- and middle-income tax offset (LMITO), which was extended and enhanced for the 2021-22 income year, has now lapsed and is not available to taxpayers in the 2022-23 income year.
Superannuation downsizer measures extended
Eligibility for individuals utilizing the proposed downsizer measures, which allow individuals to make a once-off transfer of up to $300,000 of personal home proceeds into superannuation, will drop from age 60 to age 55. All existing criteria must be satisfied, including that the home (excluding mobile homes) must have been owned by the respective individual or spouse for more than 10 years, and must be eligible for the main residence CGT exemption.
Extension of ATO compliance programs
The Budget announced that the Government will provide additional funding to the ATO to extend three of its key compliance programs.
The Personal Income Taxation Compliance Program, the ATO Shadow Economy Program and the Tax Avoidance Taskforce have been provided additional funds to allow the ATO to continue to operate the respective programs of work.
The Tax Avoidance Taskforce has been extended by an additional year and, importantly, has had its funding boosted by $200 million for each year over the next four years. This builds on the previous Government's announcement in March to extend the Taskforce and provide additional funding. The Taskforce will now operate to July 2025. This additional investment is a major investment by Government into the Taskforce and the Budget details the anticipated returns from the activities of the Taskforce over the four years from 2022-23 of $2.8 billion. It is clear that the ATO focus on multinationals and large public and private businesses will be intensive and significant in the coming years – as evidenced by both this funding extension and by the announced multinational tax measures.
The Shadow Economy Program and Personal Income Taxation Compliance Program will also receive additional funds to continue their compliance programs focusing on, respectively, shadow economy compliance issues (including a GST focus) and personal individual compliance which includes both preventative and corrective activities. Both programs are estimated to result in collective receipts of over $2.7 billion over the four years from 2022-23.
For additional information with respect to this Alert, please contact the following:
Ernst & Young (Australia), Sydney
Ernst & Young (Australia), Perth
Ernst & Young (Australia), Melbourne
Ernst & Young (Australia), Brisbane
Ernst & Young (Australia), Canberra
Ernst & Young LLP (United States), Australia Tax Desk, New York
1 Currency references in this Alert are to the AU$.