Federal Budget 2023-24: what does it mean for you? Commentary from our tax experts

Insights10 May 2023

By Frank Hinoporos, Anthony Bradica, Jim Koutsokostas, Andrew O'Bryan, Michael Parker, Jacqueline McGrath, Todd Bromwich, Adam Dimac and Rachel Law

The Budget 2023-24 is nothing short of an election budget. It is big on spending and short on substantive tax measures.

The 2023-24 Federal Budget was all about inflation and cost of living pressures. Global economic uncertainty and sky-high inflation set the scene for this year’s Budget announcements, with pressure on the new Government to provide financial relief.

International and investment

Limited changes for Managed Investment Trusts

Summary

The Government has announced it will tweak the concessions available to foreign investors who invest in managed investment trusts (MITs):

First, there will be an extension of the clean building MIT withholding tax concession to data centres and warehouses that meet the relevant energy efficiency standard, where construction commences after 7.30 pm (AEST) on 9 May 2023 (Budget night). Currently, fund payments made to eligible foreign investors of an MIT that invests in clean energy buildings are subject to a concessional 10% withholding tax rate. The requirement for a ‘clean building’ will also be increased to a 6-star rating rather than the current requirement of a 5-star Green Star rating or 5.5-star Energy Rating. This applies to both new and existing buildings with transitional measures to be put in place for MITs with existing buildings who may need to increase their rating in order to maintain their concessions. This measure will apply from 1 July 2025.
Secondly, the final withholding tax rate on eligible fund payments from investments made by MITs into build-to-rent projects will reduce from 30% to 15%. This measure will apply where construction commences after 7.30 pm (AEST) on 9 May 2023.

Observation

Together with an announcement that will increase the rate for the capital works tax deduction (depreciation) to 4 per cent per year (up from 2.5%), these measures are intended to encourage investment and construction in the build-to-rent sector, with the aim of expanding Australia’s housing supply.

The Federal Government’s measures complement certain state-based build-to-rent concessions introduced in recent years. While the higher building allowance will be welcomed by local property investors, these changes are incremental, lacking a seismic force of attraction for foreign capital.

Global minimum tax and domestic minimum tax

Summary

The Government has announced it will implement two key aspects of Pillar Two of the OECD / G20 Two-Pillar Solution to address tax challenges arising from the digitalisation of the economy.

First, measures supporting a 15% global minimum tax for large multinational enterprises will be implemented as follows:

The Income Inclusion Rule will provide that a minimum 15% tax rate is paid at the parent entity level in Australia, where the group has income taxed below 15% in overseas jurisdictions. This will apply to income years starting on or after 1 January 2024.
The Undertaxed Profits Rule will apply as a ‘backstop’ to capture circumstances where a group’s effective tax rate falls below the minimum rate of 15%, but no country is collecting top-up tax as the Income Inclusion Rule has not been fully applied. This measure will operate to allocate the top-up tax between countries in which the group makes deductible payments to low-taxed jurisdictions. This will apply to income years starting on or after 1 January 2025.

Second, a 15% domestic minimum tax will also be introduced to complement these measures. This measure is designed to cover limited circumstances where a large multinational company’s effective Australian tax rate falls below 15%. The domestic minimum tax will allow Australia to collect top-up tax to bring this effective rate up to 15%, where that amount would otherwise be collected by another country’s global minimum tax rules. This will apply to income years starting on or after 1 January 2024.

Both measures will be based on the OECD Global Anti-Base Erosion Model Rules which were designed to ensure large multinationals pay an effective minimum level of tax on the income arising in each jurisdiction where they operate.

These measures will apply to large multinationals with annual global revenue of €750 million (approximately A$1.2 billion) or more.

Observation

The introduction of measures to enforce a 15% global minimum tax reflects the Government’s commitment to Pillar Two and protecting Australia’s corporate tax base. These measures should enable Australia to apply a top-up tax on a resident parent or subsidiary company of a multinational group – particularly those with globally mobile capital – where the group’s income is effectively taxed below 15% overseas.

Similarly, the domestic minimum tax gives Australia the first claim on top-up tax for any low-taxed domestic income in those rare circumstances in which the effective Australian tax rate of a resident company of a multinational group falls below 15%.

The days of tax haven and low-tax jurisdiction shopping may be nearing their end. But at what cost? The rules are complex. Compliance costs for companies caught in the web of these global minimum tax measures remains to be seen, but we expect they will be material to say the least.

PRRT limit on petroleum exploration deductions

Summary

The Petroleum Resources Rent Tax Assessment Act 1987 will be amended to refine the definition of ‘exploration for petroleum’.

The Budget has announced that the definition of ‘exploration for petroleum’ will be limited to the ‘discovery and identification of the existence, extent and nature of the petroleum resource’. It will not extend to ‘activities and feasibility studies directed at evaluating whether the resource is commercially recoverable’.

Importantly, these changes will operate retrospectively and apply to all expenditure incurred since 21 August 2013.

The amendments have been triggered by the recent Full Federal Court decision in Commissioner of Taxation v Shell Energy Holdings Australia Limited [2022] FCAFC 2 where the taxpayer successfully argued that, in its circumstances, the definition of ‘exploration’ extended to activities associated with determining the commercial viability of the resource. The Government’s view is that this is not how the Petroleum Resources Rent Tax (PRRT) is intended to operate and the amendments announced in the Budget are aimed at clarifying the definition to ensure it is consistent with the intention of the legislation and the view of the Commissioner of Taxation expressed in Taxation Ruling TR 2014/9. In particular, the TR 2014/9 states that the ordinary meaning of ‘exploration for petroleum’ is limited to the discovery and identification of the existence, extent and nature of petroleum.

Separately, the Government announced measures to clarify the depreciation rules in respect of ‘mining, quarrying and prospecting rights’. Specifically, these rights cannot be depreciated for income tax purposes until they are ‘used’, rather than just ‘held’. This is intended to be consistent with the Government’s initial policy intent and the rules. This change will apply from the date of the Budget (7.30 pm 9 May 2023).

Observation

The proposed amendments provide welcome clarification to taxpayers who may have been unsure about the extent to which they could claim exploration deductions since the Shell decision. However, limiting the ability of taxpayers to claim deductions for determining the commercial viability of resources is costly for those businesses and may result in a disincentive for some businesses to proceed with exploration activities.

The retrospective nature of the amendments could have huge ramifications for taxpayers who have relied on an extended definition of ‘exploration petroleum’ and may need to amend tax returns going back up to 10 years. For larger entities, this may have a significant impact on cash flow if reducing their deductions results in tax needing to be repaid to the ATO.

PRRT limit on gas transfer pricing arrangement deductions

Summary

The Government is fast-tracking PRRT returns from offshore liquified natural gas (LNG) projects by introducing a cap on the use of deductions.

The changes mean the offshore LNG industry pays more Australian tax sooner. The Government intends to provide policy certainty to industry and investors to allow sufficient supply of domestic gas and solidify Australia’s reputation as a reliable international energy supplier.

Deductions for each project will be limited to 90% of PRRT assessable receipts per year. Any deductions that cannot be claimed may be carried forward and increased at the Government long-term bond rate. Certain classes of expenditure will be excluded from the cap including closing-down expenditure, starting base expenditure and resource tax expenditure.

The measures apply from seven years after the first production of LNG or from 1 July 2023 – whichever is later. The Budget acknowledges that the Government is continuing to consult on the details of the cap.

The changes come as part of a suite of reforms to the PRRT originally recommended under the Callaghan Review and Treasury Gas Transfer Pricing Review. In addition to the cap on deductions, the Government will amend the anti-avoidance rules and arm’s length rules.

Additional further changes are expected from 1 July 2024, as the Government intends to ‘modernise’ the PRRT and align the rules with the transfer pricing practices to create clarity and consistency for taxpayers. However, the Budget announcement makes it clear that the deduction cap is a priority and will be enacted before any other changes are made to the PRRT.

Observation

The measures will benefit and protect the domestic LNG market by ensuring the offshore LNG industry pays more tax sooner and domestic LNG businesses can be more competitive. However, there is a risk that lower deductions may discourage offshore investment in Australia’s LNG industry.

Tobacco excise to rise

Summary

The excise on tobacco will be increased by 5% per year for three years, from 1 September 2023, in addition to ordinary rate increases that occurs when indexed in March and September each year.

Further, the per kilogram excise duty rate will be aligned with the per stick manufactured rate. This is achieved with the introduction of progressive decreases of the manufactured per-stick weight, also commencing on 1 September 2023. The new weight will come into effect from 1 September 2026.

Business and innovation

Accelerating build-to-rent tax deductions

Summary

The capital works tax deduction rate will increase from 2.5% to 4% for businesses undertaking eligible build-to-rent projects.

Eligible build-to-rent projects includes those with at least 50 apartments or dwellings which are made available to the general public to rent. Landlords must offer a lease of at least three years for each dwelling and they must be held under the same ownership for at least 10 years. After 10 years, the dwelling may be sold.

This measure applies to projects where construction commenced after Budget night (ie 7.30 pm AEST on 9 May 2023).

Observation

The higher 4% rate of deduction will allow taxpayers to accelerate their deduction of eligible construction expenditure. These measures, along with the reduced withholding tax rates for managed investment trusts investing in build-to-rent projects, should act to encourage investment in Australia’s housing industry. These measures are complementary to concessions provided by some State Governments in recent years in relation to land tax and stamp duty for certain build-to-rent properties.

Complications may arise if taxpayers sell the dwelling within 10 years and therefore lose their entitlement to the accelerated deduction. In that case, they would presumably have already begun claiming deductions at the 4% rate and would need to amend their prior year returns to reduce the capital works deduction claimed. These details should become clear once draft legislation is released.

Small business $20,000 instant asset write-off

Summary

From 1 July 2023 until 30 June 2024, businesses with an annual turnover under $10 million will be able to immediately deduct the full cost of eligible assets costing less than $20,000 that are first used or installed ready for use during this period.

The threshold will apply on a per-asset basis, allowing small businesses to write-off multiple assets during the year.

Assets worth $20,000 or more can continue to be depreciated in the small business simplified depreciation pool at 15% in the first income year and 30% each year thereafter. Small businesses can opt-out of the simplified depreciation regime without facing restrictions for five years until 30 June 2024.

Observation

Instant asset write-off measures for small business has continued to be a popular and successful tool for incentivising small businesses to invest in new equipment, tools and other assets that can help them improve their operations and productivity.

During the pandemic years, the instant asset write-off was effectively replaced by the very generous temporary full expensing measures. The return to a more modest $20,000 brings it back in line with the threshold that existed from 1 July 2016 to 28 January 2019.

This measure is one of several released in the Federal Budget for 2023-24 that are targeted toward improving cash flow and reducing compliance costs for small businesses who are crucial for the country’s economic growth.

Small Business Energy Incentive (bonus deduction)

Summary

Businesses with an aggregated annual turnover of less than $50 million will be able to deduct an additional 20% of the cost of eligible depreciable assets that support electrification and more efficient use of energy. This bonus deduction is capped at $20,000 and requires that eligible assets are installed and ready for use between 1 July 2023 and 30 June 2024.

The range of eligible assets includes upgrades to existing assets. Examples include upgrades to more efficient electrical goods and those that support electrification such as heat pumps, cooling systems, batteries and thermal energy storage.

Importantly, investments in certain assets will be excluded, such as in electric vehicles, renewable electricity generation and assets that are not connected to the electrical grid and use fossil fuels.

Observation

Being targeted at small to medium businesses, this bonus deduction will likely come as a welcome measure for those looking to invest in energy efficient resources – it provides businesses with a means of creating their own savings. However, the overall utility of this measure will largely depend on whether businesses have available cashflow to make these investments.

FBT exemption for plug-in hybrid electric cars to sunset

Summary

Currently, battery, hydrogen fuel cell and plug-in hybrid electric cars are exempt from fringe benefits tax (FBT) and import tariffs, provided that:

they have a first retail price below the luxury car tax threshold for fuel efficient cars; and
the car was held or used for the first time on or after 1 July 2022.

The Government will sunset the FBT exemption for plug-in hybrid electric cars from 1 April 2025.

Plug-in hybrid electric cars which were purchased or used for the first time between 1 July 2022 and 31 March 2025 remain eligible for the FBT exemption.

Observation

The Government maintains its commitment to making electric cars more affordable, with the sunset of the FBT exemption only applying to plug-hybrid electric cars. The purchase of battery or hydrogen fuel cell electric cars is still eligible for the fringe benefits tax exemption.

Keep in mind that employers are still required to report an employee’s reportable fringe benefit amount even where the Electric Car Discount applies.

Unenacted patent box measures discontinued

Summary

In the 2021-22 Federal Budget, it was announced that concessional tax treatment would apply to income earned from patents relating to medical and biotechnology innovations; the result being that income earned from these eligible patents would be taxed at a concessional rate of 17%. In the 2022-23 Federal Budget, this proposal was expanded to apply to income generated from patents in the agriculture and low emissions technology sectors.

These measures were never enacted and the Government has now announced that they will be discontinued.

Observation

When these measures were announced, the Treasurer noted that they would level the global playing field and enable Australia to become a hub for the creation and incubator of innovation. Sadly, no legislation saw the light of day, and the current Government seems to have prioritised increasing tax receipts over invention.

Reduced GDP adjustment factor for PAYG and GST instalments

Summary

The Government has announced that it will amend tax laws to reduce the GDP adjustment factor for pay as you go (PAYG) and Goods and Services Tax (GST) instalments from 12% to 6% for the 2023-24 income year.

The reduced factor will apply to small businesses and eligible individuals with up to $10 million aggregated turnover for GST instalments and $50 million annual aggregate turnover for PAYG instalments.

Superannuation & Medicare Levy

Payday superannuation

Summary

The Government has confirmed an earlier announcement to implement ‘payday’ superannuation requirements for employers.

Currently, employers are only required to pay superannuation guarantee entitlements on a quarterly basis. From 1 July 2026, employers will be required to pay their employees’ superannuation guarantee entitlements on the same day that they pay salary and wages.

The aim of the measure is to ensure employees have greater visibility over whether their entitlements have been paid, better enable the ATO to recover unpaid superannuation and to support better retirement outcomes.

Observation

The increased frequency of payments under the proposal should result in better retirement outcomes for employees, as superannuation payments will be credited to the funds earlier (and will start to earn income earlier).

However, in turn, this will place increased cash-flow pressures on some employers who have historically used the quarterly payment requirement to assist in managing cash-flow.

Unless the ATO expands its clearing house service to encompass larger taxpayers, it is expected that current financial systems in place (such as private clearing houses) will bear significant additional burden in assisting businesses to meet payday superannuation obligations. With this in mind, the proposed start date of 1 July 2026 is intended to allow the ATO, payroll service providers and superannuation funds time to make necessary system changes and for employers to adjust their cash flow practices.

The proposal is estimated to reduce the underlying cash balance by $256.6 million, as there will be less superannuation guarantee charge debt raised due to increased compliance. However, it is unclear whether this takes into account the possibility of increased instances of non-compliance arising from more regular payment date obligations – which will trigger the superannuation guarantee charge, and the amount collected by the ATO.

It is hoped that when implementing this measure, Government will take the opportunity to overhaul the Superannuation Guarantee (Administration) Act 1992 (Cth), which is widely viewed as being awkwardly drafted and oppressive. At the very least, that Act would require significant amendment to accommodate the proposed measure.

This Budget announcement, together with the ‘new 30% tax rate for super balances over $3 million’ and NALI announcements, are part of a clear targeting of proposed changes to the superannuation system.

Reduced upper limit to amounts taxable as NALI

Summary

Under the heading ‘Amending measures of the former Government’, the Budget release has confirmed some earlier announcements made by the former Government. Among these are proposed changes to the non-arm’s length income (NALI) provisions.

Observation

This announcement largely reflects proposed measures previously announced in a Consultation Paper released by Treasury in January 2023.

The Consultation Paper came in response to industry feedback about the disproportionate application of the NALI and non-arm’s length expenses (NALE) rules. The concern arose following the ATO’s draft ruling – LCR 2019/D3, which was finalised in LCR 2021/2.

The ATO’s position is that, in some circumstances, NALE would have a sufficient nexus to all of the ordinary and/or statutory income derived by the superannuation fund. The consequence of that position is that a minute amount of NALE could taint all of the income of a fund which would then be taxed at the top marginal rate.

The Consultation Paper proposed an upper limit to amounts taxable as NALI of five-times the amount of a general expense breach. This upper limit would result in an effective tax rate of 225%!

However, this appears to have been wound-back in the Budget announcement, which proposes an upper limit of two-times a general expense breach, which would also exclude contributions.

The Budget release confirms the earlier proposals in the Consultation Paper that large APRA regulated funds would be exempt from the NALI provisions for both general and specific expenses.

‘30% tax rate’ for super balances over $3 million

Summary

The Government has confirmed earlier announcements regarding a new ‘30% tax rate’ for earnings on superannuation balances over $3 million. There appears to be no material difference between the Budget announcement and the Fact Sheet previously released by the Government, providing additional details to that set out in the Budget.

Observation

Read our detailed article on the Fact Sheet previously released by the Government on this measure.

Importantly, it appears that there has been no reversal of the announcements more fully set out in the Fact Sheet, which proposes a regime that would impose tax on notional increases to superannuation account balances, including unrealised and, in some scenarios, unfunded gains.

This Budget announcement, together with the ‘payday superannuation’ and NALI announcements, are part of a clear targeting of proposed changes to the superannuation system.

Medicare Levy changes

Summary

The Government has announced two key changes to the Medicare Levy as part of its cost of living relief measures for low income earners.

Exclusion of eligible lump sum payments in arrears from the Medicare Levy

Certain lump sum payments made in arrears will be exempt from the Medicare Levy. From 1 July 2024, low-income taxpayers will not pay higher amounts of the Medicare Levy as a result of receiving an eligible lump sum payment, including compensation for underpaid wages.

Strict eligibility requirements will ensure relief is provided to those who need it. Taxpayers must be eligible for a reduction in the Medicare Levy in the two most recent years to which the lump sum accrues, and satisfy the eligibility requirements of the existing lump sum payment in arrears tax offset, including that the lump sum accounts for at least 10% of income in the year of receipt.

Increase to Medicare Levy low-income thresholds

The Medicare Levy low-income thresholds will be increased for singles, families, and seniors and pensioners to account for recent CPI outcomes, thereby expanding the groups of individuals exempt from paying the Medicare Levy.

Applicable from 1 July 2022, the threshold for singles will increase to $24,276, for families to $40,939, for single seniors and pensioners to $38,365, and for family seniors and pensioners to $53,406. For each dependent child or student, the family income threshold will increase by a further $3,760.

Tax integrity and compliance

Expanding the general anti-avoidance rule in the income tax law

Summary

The general anti-avoidance measures under Part IVA of the Income Tax Assessment Act 1936 will be expanded so that they can apply to specific cross-border tax avoidance schemes:

Schemes that reduce tax paid in Australia by accessing a lower withholding tax rate on income paid to foreign residents. This may include, for example, treaty-shopping arrangements or arrangements to re-characterise income to forms that are subject to preferential withholding rates.
Schemes that achieve an Australian income tax benefit, even where the dominant purpose was to reduce the amount of foreign income tax payable. Currently the rules only capture arrangements where there is an intention to obtain an Australian tax benefit.

Although this measure will apply to income years commencing on or after 1 July 2024, schemes entered into before this date (but still in place as at 1 July 2024), can be captured.

Observation

These measures are designed to capture specific schemes that have come to the attention of the ATO in recent years, to ensure that they come within the scope of the existing framework of general anti-avoidance rules.

While we will need to wait for legislation, this amendment will presumably expand the meaning of tax benefit as well as possibly altering the dominant purpose test; which could have the potential for a broader application than intended.

For those who have structured their businesses in a way to take advantage of lower withholding or domestic tax rates, we recommend seeking guidance from your tax advisors as to whether your structure needs to be reviewed.

The Government has specifically noted that the new measures can apply to arrangements in place before 1 July 2024, meaning a ‘wait and see’ approach, could cause significant headaches.

For further detail of some of the arrangements that may be captured by the new rules, refer to Tax Alert TA 2022/2: Treaty shopping arrangements to obtain reduced withholding tax rates.

Lodgement amnesty

Summary

A lodgement penalty amnesty program will be provided for small businesses with aggregate turnover of less than $10 million to encourage them to re-engage with the tax system. This will remit failure-to-lodge penalties for outstanding tax statements lodged in the period from 1 June 2023 to 31 December 2023 which were originally due during the period from 1 December 2019 to 29 February 2022.

Observation

We welcome any measures that encourage taxpayers to re-engage with the taxation system, particularly where many taxpayers with overdue lodgements can ill-afford to pay failure to lodge penalties.

While failure to lodge penalties will be waived for certain lodgements, including income tax returns and business activity statements, there is no mention of whether this extends to Part 7 penalties for superannuation guarantee charge assessments. Given the ATO already offered a superannuation guarantee amnesty back in 2020, it is unlikely that the current amnesty will extend to Part 7 penalties.

As always, once the amnesty ends, we expect that the ATO will take a harder line with taxpayers who have outstanding lodgements. So this is the perfect time for your clients to get their house in order.

Boosting ATO compliance resources and programs

Summary

The Government will provide additional funding to the ATO and Treasury to expand its compliance activities and programs, including:

$90.8 million to extend the Personal Income Tax Compliance program for two years from 1 July 2025 and expand its scope from 1 July 2023. This will enable the ATO to continue to deliver a combination of proactive, preventative and corrective activities in areas of non-compliance, and to expand the scope of the program to address emerging areas of risk, such as deductions relation to short-term rental properties to ensure they are genuinely available to rent.
$588.8 million to continue a range of activities that promote GST compliance, including accurately accounting for and remitting GST and correctly claiming GST refunds. This funding will also help the ATO develop more sophisticated analytical tools to combat emerging risks to the GST system.

Additionally, the Government is continuing to fund compliance activities directed at private business and high-wealth compliance, with a heightened focus on tax debt collection.

Funding will be provided to enable the ATO to engage more effectively with businesses to address the growth of tax and superannuation liabilities, assisting with tax integrity and encouraging voluntary compliance. This will promote ATO engagement with taxpayers with high-value debts over $100,000 and aged debts older than two years, for public and multinational groups with an aggregated turnover of greater than $10 million, or privately owned groups or individuals controlling over $5 million of net wealth.

Observation

These announcements come as no surprise. Increased funding for targeted compliance programs has been a ‘growth area’ in the Budget for a better part of the decade and one might infer that it is yielding good returns. The focus on debt collection and recovery actions, particularly from taxpayer groups who are seen to be able to afford it, signals that the COVID-19 hangover and ‘soft touch’ approach, are truly over – the ATO is focused on bursting the tax debt bubble.

It is interesting that the Budget papers say that by directing significant funds to the ATO to expand GST compliance programs, they expect that this will lead to not only increased GST revenue, but an equal increase in revenue from other taxes. This bears true in light of our recent experience: a GST (or FBT or rental property) audit is often a springboard to the ATO discovering a broader range of tax compliance and commencing a broad-based tax audit.