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

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.

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.

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.

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.

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.