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

Summary

The Government has announced highly anticipated regulatory changes to the employee share scheme (ESS) rules to facilitate greater access for companies and employees.

Employers use ESS to attract, retain and motivate staff by issuing equity interests – typically shares and options over shares – usually at a discount.

Under the revised ESS rules, employers who make offers in connection with ESS in unlisted companies, enable participants to invest up to:

• A $30,000 ‘monetary’ cap per participant annually (removing the existing $5,000 ‘value cap’ for unlisted companies) – accruable for unexercised options for up to five years, plus 70% of dividends and cash bonuses.
• Any amount – provided it would allow them to immediately take advantage of a liquidity event (for example, profit from a trade sale or initial public offering).

Unlisted companies using ESS will be afforded simplified disclosure rules. A removal of certain regulatory requirements imposed on offers to independent contractors was also announced.

Observation

The Treasurer let the cat out of the bag regarding employee share schemes late last week, so this announcement should come as no surprise.

In 2015, we had the release of some terrific tax concessions for employees of start-ups that deferred the tax on employee options until a sale event and any gains were subject to the CGT discount. Unfortunately, the company law didn’t keep pace, so we had scenarios where start-ups couldn’t offer meaningful equity to their employees due to regulatory restrictions on the amount of equity that could be offered. 

These new measures will increase the ability of Australian start-ups to attract and incentivise staff. The changes are limited to removing regulatory caps on the amount of equity that can be offered to employees, but it remains to be seen whether there will be any further easing of conditions that need to be met to access the start-up tax concessions.

Summary

The Government has announced it will halve the excise and excise-equivalent customs duty rate for petrol, diesel and other fuel and petroleum-based products (except aviation fuel) for the next six months, beginning at 12:01am on 30 March 2022.

Currently, excise and excise-equivalent customs duty is levied at 44.2 cents per litre but will be reduced to 22.1 cents per litre. 

The Australian Competition and Consumer Commission is expected to monitor fuel retailers to ensure the full benefit of the reduction is passed on to consumers. Consumers are also expected to receive an additional flow-on benefit from the reduction with GST being levied on the lower excise rate.

The changes will not impact the existing indexation of fuel excise and excise-equivalent customs duty, which will continue as normal.

Observation

These changes are part of a number of measures in which the Government is targeting the rising cost of living in Australia. It is welcome news for individuals and businesses who have had to endure markedly higher fuel prices as a result of COVID and Russia’s invasion of Ukraine and can now have a six-month reprieve starting almost immediately.

Summary

The Government has extended 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 (NANE) for income tax purposes until 30 June 2022. The measure will now also apply to the following programs:

• NSW Accommodation Support Grant
• NSW Commercial Landlord Hardship Grant
• NSW Performing Arts Relaunch Package
• NSW Festival Relaunch Package
• NSW 2022 Small Business Support Program
• QLD 2021 COVID-19 Business Support Grant
• SA COVID-19 Tourism and Hospitality Support Grant
• SA COVID-19 Business Hardship Grant

Observation

The increase in the number of grants eligible for NANE treatment is welcomed. This measure is targeted to predominantly SME businesses that have been hit hardest by the pandemic, ensuring that they benefit from the full amount of the grant.

Summary

The Government has announced an extension of the operation of the ATO’s Tax Avoidance Taskforce, through additional funding of $325 million in 2023-24 and $327.6 million in 2024-25.

Following the funding of Project Wickenby, the ATO’s Tax Avoidance Taskforce was first established in 2016 to undertake compliance activities targeting multinationals, large public and private groups, trusts and high wealth individuals.

Observation

Since its inception, the ATO’s Tax Avoidance Taskforce has played a large role in the ATO’s tax compliance toolkit for high wealth individuals and private groups.

The Government’s announcement to provide additional funding to the Taskforce will be interpreted by some as tacit support for the ATO’s recent focus on the taxation of trusts, which is evident through the ATO’s recent release of:

• Draft Taxation Determination TD 2022/D1 Income tax: Division 7A: when will an unpaid present entitlement or amount held on sub-trust become the provision of 'financial accommodation'?
• Draft Taxation Ruling TR 2022/D1 – Income tax: section 100A reimbursement agreement (TR 2022/D1).
• Draft Practical Compliance Guideline PCG 2022/D1 – Section 100A reimbursement agreements – ATO compliance approach.
• Taxpayer Alert TA 2022/1 – Parents benefitting from the trust entitlements of their children over 18 years of age.

Summary

The Government is introducing two tax deduction measures – called ‘boosts’ – designed to support small businesses with an aggregated annual turnover of less than $50 million to train and upskill their employees and to support digital adoption.

• Training and upskilling employees: Eligible businesses will be able to deduct an additional 20% of expenditure incurred on external training courses provided to their employees, provided that the external training courses are provided to employees in Australia or online, and delivered by entities registered in Australia. Exclusions will apply, such as for in-house or on-the-job training and expenditure on external training courses for persons other than employees. Applies to expenditure incurred from 7:30pm (AEDT) on 29 March 2022 until 30 June 2024.
• Digital adoption: Eligible businesses will be able to deduct an additional 20% of expenditure incurred on business expenses and depreciating assets that support the business’ digital adoption, such as portable payment devices, cyber security systems or subscriptions to cloud-based services, subject to an annual cap of $100,000. Applies to expenditure incurred from 7:30pm (AEDT) on 29 March 2022 until 30 June 2023.

Specific rules will apply in relation to timing. The boost for eligible expenditure incurred on by 30 June 2022 may be claimed in tax returns for the following income year (FY2023). The boost for eligible expenditure incurred between 1 July 2022 and 30 June 2024, will be included in the year in which the expenditure is incurred.

Observation

These are welcome announcements that will hopefully result in an upskilling of Australian employees and increased adoption of digital technology by small businesses.

Businesses operating through certain trust structures should be wary in relation to these measures; they may appear to be a ‘sugar hit’ for small businesses, but they potentially have a hidden downside. The application of these measures may result in an excess of trust income over net (tax) income. In some circumstances, this can result in trusts making distributions of non-assessable amounts to beneficiaries, which may trigger CGT event E4 for that beneficiary.

Businesses that claim additional tax deductions under these measures will also need to ensure that they keep adequate records of eligible expenditure in case their claims are challenged.

Summary

Support is to be provided to primary producers in regional and remote areas undertaking carbon abatement and biodiversity stewardship activities by the following measures commencing 1 July 2022:

• Currently, proceeds from selling Australian Carbon Credit Units (ACCUs) and biodiversity certificates are treated as non-primary production income and are generally ineligible for concessional tax treatment under the Farm Management Deposits (FMD) scheme or tax averaging. From 1 July 2022, this will be reversed – the proceeds of sale of ACCUs and biodiversity certificates generated from on-farm activities to be treated as primary production income for the purposes of the FMD scheme and tax averaging.
• Currently, ACCU holders are taxed based on changes in the value of their ACCUs each year, which can result in tax liabilities prior to sale. From 1 July 2022, the taxing point for ACCUs for eligible primary producers (being those who are currently eligible for the FMD scheme and tax averaging) will now be the year in which they are sold, with similar treatment to be extended biodiversity certificates issued under the Agriculture Biodiversity Stewardship Market scheme.

Observation

The price of ACCUs has been soaring of late, achieving a 200% increase alone in 2021 from $16 per tonne to $49 per tonne, reportedly due to the surge of companies purchasing the credits to meet future emissions reductions targets. 

An active carbon credits market can be a good thing, but due to the current tax treatment of ACCUs, this can result in primary producers of ACCUs having a sudden increase in tax liabilities prior to selling their ACCUs; effectively handing them significant unfunded tax liabilities.

These changes are designed to encourage more primary producers in regional and remote areas to undertake additional carbon abatement and biodiversity stewardship activities by alleviating these tax impacts and will surely be welcomed by the market.

Summary

In last year’s 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%. To be eligible, the patents must have been granted or issued after 11 May 2021.

This proposal is to be expanded to apply to income generated from patents in the agriculture and low emissions technology sectors. Concessional tax treatment will apply to income earned from patents relating to low emissions technologies and certain agricultural products from 1 July 2023, provided the patents were granted or issued after 29 March 2022.

Observation

While the expansion of the patent box measures to the low emissions technology and agriculture sectors is welcome, it is unsurprising. Extending these measures to low emissions technologies was contemplated by the discussion paper released by Treasury in July 2021.

It is important to note that the patent box measures announced last year have not yet been legislated, so this is an expansion of a promise, not of an existing measure. The Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022 was introduced to Parliament on 10 February 2022 to legislate the biotechnology innovation patent box measures, but there has been no discernible movement since that time. 

With a federal election looming for May 2022, there is little hope of this measure or the proposed expansion of this program being legislated before the House of Representatives is dissolved prior to the election.

The Bill is nonetheless interesting, as it announced the expansion of the scheme to patents issued by the United States Patent and Trademark Office and the European Patent Convention, broadening the availability of the regime.