Updated Federal Budget 2022-23: what does it mean for you? Commentary from our tax experts

By Michael Parker, Jacqueline McGrath, Todd Bromwich and Rachel Law

The 2022-23 Federal Budget (updated following the 2022 Federal election) is light on substantive tax measures. Against a backdrop of rising costs of living and substantial Government debt, the focus seems to be on improving Government revenues by expanding and extending existing Australian Taxation Office (ATO) compliance programs and increasing funding for the Tax Practitioners Board (TPB). We should expect an uptick in proactive ATO compliance activity and increasing referrals of individual tax agents to the TPB as a result.

Some tax measures have been announced, including additional tax integrity measures for multinationals and the alignment of the tax treatment of on- and off-market share buy backs undertaken by listed public companies. However, as expected, no major changes to tax policy have been announced in this Budget. It remains to be seen whether there will be any meaningful (and long overdue) tax reform in coming years, including in relation to areas such as Division 7A and section 100A of the Income Tax Assessment Act 1936 (Cth).

In this article, we examine the key taxation announcements and how they may impact you or your business.

• Increased funding for ATO and TPB compliance

• Aligning on- and off-market share buy back tax treatment

• Multinational Tax Integrity Package

• Miscellaneous announcements

Increased funding for ATO and TPB compliance

Summary

The Government has allocated substantial additional funding to permit the extension and expansion of existing ATO compliance programs.

• The Personal Income Taxation Compliance Program will be extended by two years (now ending 30 June 2025). The funding is designed to enable the ATO to modernise its guidance products, undertake more early engagement with taxpayers and tax agents and better target its compliance activity.

• The Shadow Economy Program will be extended by three years (now ending 30 June 2026).

• The Tax Avoidance Taskforce will be extended by one year (now ending 30 June 2026) and will receive additional funding of around $200 million per year over the next four years.

Additionally, $30.4 million will be provided to the TPB to increase compliance investigations into high-risk tax practitioners and unregistered preparers over the next four years. This will include an increased use of risk engines to better identify tax practitioners who continually engage in poor and unlawful tax advice.

Observation

These programs are a big part of the ATO’s tax compliance toolkit. In particular, we have seen the Tax Avoidance Taskforce playing a significant role in the ATO’s compliance activities in relation to high wealth individuals and private groups, given the ATO’s continued focus on the taxation of trusts.

Paired with the ATO’s renewed attention on proactive debt recovery, taxpayers and their advisors should expect an uptick in ATO compliance activity.

The increased funding for the TPB should come as no surprise to those paying attention to the recent spate of tax agents being deregistered by the TPB, and the recommendations coming from the 2019 review by Treasury into the TPB, led by Hall & Wilcox Consultant Keith James.

Anecdotally, referrals of tax agents to the TPB have been increasing in recent years and with substantially increased resources, we expect the TPB will be more proactive in its investigations and disciplinary actions.

Aligning on- and off-market share buy back tax treatment

Summary

The tax treatment of off-market share buy backs undertaken by listed public companies will be aligned with the treatment of on-market share buy backs from 7.30pm AEDT, 25 October 2022.

Under the existing rules, proceeds from an off-market share buy-back are allocated between a capital component and a frankable dividend component. Conversely, proceeds received by shareholders from an on-market share buy back are treated as capital proceeds subject to capital gains tax.

Observation

This measure may detrimentally affect investors who are income tax exempt or concessionally taxed, such as superannuation funds and charitable organisations, who may otherwise receive a refund of excess franking credits from an off-market share buy back under the current rules.

Multinational Tax Integrity Package

Amendments to thin capitalisation rules
Deductions denied for certain intangibles
Improved tax transparency Amendments to thin capitalisation rules

Summary

The Government will amend Australia’s thin capitalisation rules from 1 July 2023.

The thin capitalisation rules operate to limit gearing in Australian entities investing overseas and foreign entities investing in Australia by preventing these entities from claiming excessive debt deductions. Currently, entities can rely on three different tests to calculate the maximum level of gearing that will not result in denial of debt deductions: the safe harbour test (which compares the debt to assets ratio), the arm’s length debt test and the worldwide gearing test (which compares the debt to equity ratio).

The Government intends to replace the safe harbour and worldwide gearing tests with new earnings-based tests which will be tied to the entity’s profits rather than assets/equity.

Specifically:

• debt deductions will be limited to 30% of profits (EBITDA) (this replaces the safe harbour test).

• any deductions that are disallowed may be carried forward up to 15 years and claimed in a future income year.

• debt deductions for an entity in a group are allowed up to the level of the worldwide group’s net interest expense as a share of earnings (this replaces the worldwide gearing test).

• arm’s length debt test remains but will only apply to third party debt.

The changes do not apply to ‘financial entities’ which will continue to apply the existing thin capitalisation rules.

Observation

This announcement is consistent with ongoing discussion around the operation of Australia’s thin capitalisation rules. Earlier this year, the Government announced that it would amend the thin capitalisation rules to limit debt deductions based on profits rather than assets. This approach is consistent with the OECD’s recommendations and similar regimes have already been adopted in other jurisdictions. By creating a test that ties to the profits of the entity rather than its assets, is intended to better link debt deductions with the economic activity of the group. A consultation paper was released by Treasury in August 2022 with further details on the proposed regime.

Multinational entities will need to carefully review their level of gearing in light of the new rules as their allowable debt deductions may vary.

Deductions denied for certain intangibles

Summary

The Government will introduce new anti-avoidance measures that will deny tax deductions for significant global entities (SGE) acquiring certain intangibles. An SGE is broadly, an entity with at least AU$1 billion annual global revenue. Where an SGE makes a payment, directly or indirectly, to a related party, in exchange for an intangible held in a ‘low or no tax jurisdiction’, the SGE will not be entitled to claim a tax deduction for the payment.

A ‘low or no tax jurisdiction’ is one with a tax rate of less than 15%. It will also capture jurisdictions that have implemented a preferential ‘patent box’ regime where the intangibles do not have sufficient economic substance/connection in that jurisdiction.

The measures will apply from 1 July 2023.

Observation

The measures appear quite broad and strict and do not seem to require the SGE to have a purpose of avoiding tax so it may capture genuine transactions between Australian SGEs with related parties in low or no tax jurisdictions. The announcement does not outline the extent to which a payment is ‘in exchange’ for an intangible. We will await, with interest, further legislative and other guidance on this measure.

Improved tax transparency

Summary

New reporting requirements will be introduced by the Government to broaden the information that certain companies must disclose to the public.

• Significant global entities (SGEs) (entities with AU$1 billion global revenue) will need to prepare certain tax information (on a country by country) basis and a statement on their approach to taxation for public release.

• Australian public companies (listed and unlisted) must disclose the number of subsidiaries they hold as well as their country of tax domicile.

• Any entity tendering for an Australian Government contract worth over $200,000 must disclose their country of tax domicile.

The measures will apply from 1 July 2023.

Observation

There have been a number of measures over the years in which the Government has gradually been increasing the reporting requirements of multinational entities and large corporates with the aim of improving transparency in the tax system. These measures are another step towards greater tax transparency and will likely provide the ATO with more data to better target its compliance activities.

While exact details are not provided in the announcement, the preceding consultation paper from Treasury (in August 2022) foreshadowed the information to be made public by SGEs would be directed to high level data on the amounts these large tax entities pay in all the jurisdictions they operate, as well as on the number of employees in these jurisdictions. It is also said to align with the Directive issued by the European Union (in December 2021) on Country-by-Country reporting.

Miscellaneous announcements

The Government has also made the several other announcements of note.

• The proposal to permit taxpayers to self-assess the effective life of intangibles for depreciation purposes will not proceed.

• Digital currencies such as Bitcoin will be specifically excluded from the Australian income tax treatment of foreign currency in line with the ATO’s current view. This would not apply to digital currencies issued by, or under the authority of, a government agency, which continue to be taxed as foreign currency.

• The measure – originally announced 13 September 2020 – that enables payments from certain state and territory COVID-19 business support programs to be made non-assessable non-exempt for income tax purposes is extended on an ongoing basis.

• From 1 July 2022, battery, hydrogen fuel cell and plug-in hybrid electric cars will be exempt from fringe benefits tax and import tariffs if they have a first retail price below the luxury car tax threshold for fuel efficient cars, provided the car was not held or used before 1 July 2022.

• The minimum age required for a taxpayer to be eligible to make a downsizer contribution to their superannuation will be reduced from 60 to 55 years of age.