Federal Budget 2023-24: The Essential Tax Update for Private Businesses and their Owners

Extending the Instant Asset Write Off

The Government will ‘increase’ the instant asset write-off to $20,000, from 1 July 2023 to 30 June 2024.

Small businesses (those with aggregated 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 between 1 July 2023 and 30 June 2024.

While this is described as an ‘increase’, it is worth noting that significantly more generous asset write-off rules are currently in place until 30 June 2023 (known as the temporary full expensing rules). Under the current temporary full expensing rules, businesses with an aggregated turnover of up to $5 billion can immediately write-off the full value of a business asset. Thus, it appears that any business with an aggregated annual turnover of $10 million or more, will return to depreciating assets in line with usual effective life depreciation rules.

Measures Regarding On-time Payment of Tax and Superannuation Liabilities

The Government will provide funding over four years from 1 July 2023 to help address the growth of tax and superannuation liabilities. Specifically, the funding will be used to facilitate ATO engagement with taxpayers who have high-value debts (over $100,000) and aged debts (older than two years). The taxpayers that the measure is directed towards includes privately owned groups or individuals controlling over $5 million of net wealth. Exactly what ‘facilitate ATO engagement’ means is unclear, however one would assume that this would include the full range of debt enforcement tools available to ATO (for example, bankruptcy, insolvency, asset freezing orders, garnishee orders and departure prohibition orders).

The Government has also announced a lodgement penalty amnesty program for small businesses ($10 million aggregate turnover). The amnesty will remit failure-to-lodge penalties for outstanding tax statements lodged in the period from 1 June 2023 to 31 December 2023 that were originally due during the period from 1 December 2019 to 29 February 2022. The measure appears to cover both GST and income tax. From an income tax perspective, this should include FY2019, FY2020 and FY2021.

Expanding ATO Compliance Programs (Personal Income Tax and GST)

The Government will provide $679.6 million of additional funding to finance various ATO compliance programs. This includes:

1. extending the Personal Income Tax Compliance Program by two years – until 30 June 2027, to enable the ATO to combat key areas of non-compliance and address emerging risk areas, such as deductions relating to short-term rental properties;
2. extending and merging the Serious Financial Crime Taskforce and Serious Organised Crime program, which are focused on combating organised crime, serious financial crime and tax evasion; and
3. extending the GST compliance program by four years to 30 June 2027 to ensure businesses meet their GST obligations. This will include ensuring businesses accurately account for and remit GST and correctly claim GST refunds.

In total, it is estimated that these measures will result in additional tax receipts of roughly $4.207 billion during the period 1 July 2022 to 30 June 2027.

Clarifying NALI Issues (Non-arm's Length Income)

In 2019, the definition of ‘non-arm’s length income' or ‘NALI’ was amended to include income earned in circumstances where the expenditure incurred in earning that income was not incurred on an arm’s length basis. Such expenses are referred to as ‘non-arm’s length expenditure’ or ‘NALE’. Income that is NALI is taxed at a rate of 47% (compared to the superannuation concessional rate of 15%).

The introduction of NALE created numerous problems, particularly where the NALE related to a ‘general expense’ that had a nexus to the entirety of the superannuation fund (e.g. accounting fees). This issue was explicitly identified by the ATO in its Law Companion Ruling LCR 2021/2 as determination that a general expense was NALE could result in all the income of the super fund being treated as NALI.

To address this (and other) issues, the Government has announced that the NALI provisions will be amended to:

1. limit the amount of income which will be treated as NALI because of a general expense (i.e. because it is NALE) to twice the amount of the general expense, for self-managed super fund and small APRA regulated funds. This will prevent the entire income of the fund being treated as NALI, even for a relatively small expense;
2. ensuring that contributions made to the super fund by its members are not treated as NALI;
3. exempting large APRA regulated funds from the NALI provisions for both general and specific expenses of the fund. In effect, this would switch off the application of the NALE provisions for large APRA funds; and
4. exempting expenditure incurred prior to the 2018-2019 income year (the year when the NALE provisions were introduced).

Limiting Superannuation Concessions ($3M+ Balances)

From 1 July 2025, earnings relating to superannuation balances over $3 million will effectively be charged tax at a rate of 30%. This is increased from the historic rate of 0-15% which will continue to apply to earnings on balances below $3 million. This measure was first announced by Government on 28 February 2023.

The Government notes that the higher 30% rate is still lower than the top individual marginal rate of 45% (47% including Medicare Levy). However, with the corporate tax rate now at 25% for base rate entities, the attractiveness of superannuation for balances greater than $3 million is significantly diminished – particularly where amounts in excess of $3 million can be retained in a private company where it may incur less tax and significantly less regulation.

The key criticisms of this measure to date include that the $3 million cap is unindexed (in contrast to the ‘transfer balance cap’), that the additional tax is proposed to apply to unrealised capital gains and that discount capital gains could be taxed at up to 25% (in contrast, the maximum tax rate for a  discount capital gains for Australian resident individuals is 23.5%).

Aligning Super Guarantee with Take Home Pay

From 1 July 2026, employers will be required to pay their employee’s super guarantee entitlements on the same day that they pay salary and wages. This measure was first announced by Government on 2 May 2023.

At present, super guarantee must be paid by employers at least quarterly. Aligning super guarantee payments with payroll will result in far more frequent employer superannuation contributions being made, with the result that:

• employees and the ATO will more easily detect if superannuation is not paid; and
• employees can enjoy increased superannuation in retirement, due to increased employer compliance and the benefit of compounding earnings for each contribution.

Presumably, the change should also result in a decrease in unpaid super and a decrease in director’s penalty notices in respect of unpaid super. The delayed commencement date of 1 July 2026 is to enable businesses, the ATO, superannuation funds and payroll processing to adapt to the cash-flow and reporting impacts which this measure will have.

Changes to Part IVA

In an unexpected announcement, the Government has announced that the general anti-avoidance rules for income tax (Part IVA) will be amended, so that it can apply to:

1. schemes that reduce tax paid in Australia by accessing a lower withholding tax rate on income paid to foreign residents; and
2. schemes that achieve an Australian income tax benefit, even where the dominant purpose was to reduce foreign income tax.

Unlike the changes made to Part IVA in 2013, these changes do not appear to be in direct response to any judicial decision regarding the operation of Part IVA. However, it may be that taxpayers have privately argued that Part IVA should not apply in the above circumstances. The Commissioner successfully applied Part IVA in Minerva Financial Group Pty Ltd v Commissioner of Taxation [2022] FCA 1092 which concerned a lower interest withholding rate compared to the Australian corporate tax rate.

Part IVA is already complex and difficult to apply in practice, even for experienced tax practitioners and advisors. It is unclear how these changes will interact with the existing rules. It is notable that the scheme that has the dominant purpose of reducing an Australian State based tax appears not to be covered by either the existing rules, or the announced changes.

Improving ‘Build-to-Rent' Incentives

Affordable and social housing continues to be a significant issue in Australia. The Government has announced further measures to incentivise the private sector to increase housing supply by investing in Build-To-Rent developments. This measure was first announced by Government on 28 April 2023.

The specific incentives include:

1. increasing the rate for capital works tax deductions to 4% per year. At present, the capital works deduction rate for residential properties used to produce income is 2.5%; and
2. reducing the final withholding tax rate on eligible fund payments from managed investment trust (MIT) investments from 30% to 15%.

To be eligible, the build-to-rent project must commence after 7.30PM on 9 May 2023 and must consist of:

• 50 or more apartments in a development; or
• dwellings made available for rent to the general public. Presumably this could also apply to small-scale developers where the 50-apartment condition is not met (e.g. small scale development).

The dwelling must be retained under single ownership for at least 10 years before being able to be sold, and landlords must offer a lease term of at least 3 years for each dwelling. It is not clear how a failure to meet these conditions will be implemented (e.g. for deductions that have already been claimed and payments where withholding tax has already been withheld).

These measures do not appear to require the dwellings to be offered for below-market rent. Unfortunately, the measures do not address the ongoing build-to-rent issue that input tax credits cannot be claimed for build to rent projects.

Scrapping and Deferral of Certain Unlegislated Measures

The Government has announced that it will scrap or alter certain tax and superannuation measures which were announced by previous Governments. This includes:

1. the start date of the 2016–17 MYEFO measure: Tax integrity – franked distributions funded by capital raisings will be amended from 19 December 2016 to 15 September 2022. This measure is intended to prevent a company franking a distribution to shareholders where the distribution was funded directly or indirectly by capital raising activities that result in the issue of new equity interests. Given that legislation was only first introduced in 2022, there had been widespread criticism of the retrospective nature of these changes; and
2. none of the patent box measures announced by the former Government will proceed. The previous Government announced that it will introduce a patent box which would tax corporate income derived from eligible Australian patents in the medical and biotechnology sectors, at a concessional rate of 17 per cent, effective from 1 July 2022. The 2022-23 March Budget then announced that the patent box measures would be extended to clean energy and agriculture. Draft legislation in respect of the medical and biotechnology sectors was introduced to Parliament in February 2022, however the Bill was not legislated prior to the most recent Federal election.

Implementation of a Global Minimum Tax and a Domestic Minimum Tax

In its continuing efforts to fight base erosion and profit shifting by multinational enterprises, the Government will implement the following aspects of the OECD/G20 Base Erosion and Profit Shifting (‘BEPS’) Project ‘Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy’:

• a 15% global minimum tax for large multinational enterprises, with:

a. the ‘Income Inclusion Rule’ (by which top-up tax will be paid at the parent entity level based on its proportion of ownership interests in entities with low-taxed income) applying to income years starting on or after 1 January 2024; and

b. the ‘Undertaxed Profits Rule’ (which allows a country to increase taxes on a company if it is part of a multinational group that pays less than the global minimum tax in another jurisdiction) applying to income years starting on or after 1 January 2025; and

• a 15% domestic minimum tax applying to income years starting on or after 1 January 2024.

These rules are aimed at ensuring that large multinationals pay an effective minimum level of tax on income arising in each jurisdiction where they operate. Importantly:

• the global minimum tax rules would allow Australia to apply a top up tax on a resident multinational parent or subsidiary company where the group’s income is taxed below 15% overseas; and
• the domestic minimum tax would give Australia first claim on top-up tax for any low-taxed domestic income.

The global minimum tax and domestic minimum tax will apply to large multinationals with annual global revenue of EUR750 million (approximately $AUD1.2 billion) or more.

Petroleum Resource Rent Tax – Government Response to the Review of the PRRT Gas Transfer Pricing arrangements

The Government has announced significant changes to the Petroleum Resource Rent Tax ('PRRT'). The PRRT is a tax on oil and gas projects located offshore in Australian waters. Onshore oil and gas projects, in contrast, are subject to royalties that are payable to State and Territory governments.

PRRT taxes profits of petroleum projects above a specified rate of return. The 'taxing point’ (being the point at which petroleum, or products produced from petroleum become taxable) is when a petroleum project's total assessable receipts exceed total deductible expenditure.

The changes announced include:

1. introducing a cap on the use of deductions to offset assessable PRRT income of LNG producers under the PRRT. The cap will limit deductible expenditure to the value of 90% of each taxpayer’s PRRT assessable receipts in respect of each project interest in the relevant income year and apply after mandatory transfers of exploration expenditure. The amounts that are unable to be deducted because of the cap will be carried forward and uplifted at the Government long-term bond rate;
2. making a number of supporting changes to the gas transfer pricing arrangements.  This includes updating the PRRT general anti-avoidance rule and the arm’s length rule.

The Government will consult on final design and implementation details for the deductions cap and on the draft PRRT regulation later this year. Consultation on the other policy changes will occur in early 2024. The Petroleum Resource Rent Tax Assessment Regulation 2015 will not be remade until the legislation implementing the deductions cap has been enacted. The measures announced are projected to result in additional tax receipts of $2.4 billion over the four year forward estimate period.

What’s Not in the Budget?

This year’s Budget contains some important tax announcements. However, it is important to note that there are many several significant items on the ‘tax agenda’ which are not mentioned in the Budget. These include:

• the Stage 3 tax cuts – under which income between $45,000 and $200,000 would be taxed at a flat 30% tax rate (legislated and due to take effect from 1 July 2024);
• the loss carry-back rules (which are due to expire on 30 June 2023);
• the low-and-middle-income tax offset (LMITO – which expired on 30 June 2022);
• Division 7A reform;
• reforming the tax residency rules (for individuals and companies);
• a review of the CGT rollovers and demerger rollover relief;
• CGT concessions for small business (the small business CGT concessions and Small Business Restructure Rollover);
• trust reimbursement integrity rules (section 100A);
• taxation of trusts; and
• previously shelved policies (e.g. restricting negative gearing or halving the general 50% CGT discount).