Federal Budget 2024-25: The Essential Tax Update for Private Businesses and their Owners

Foreign Residents – CGT Measures

In an unexpected announcement, the Government has announced a series of measures to strengthen the foreign resident capital gains tax (CGT) regime. The measures will apply to CGT events on or after 1 July 2025. The measures include:

• ‘clarifying' and ‘broadening’ the types of assets in respect of which foreign residents are subject to CGT;
• amending the point-in-time principal asset test to a 365-day testing period; and
• requiring foreign residents that are disposing of shares and other membership interests exceeding $20 million in value to notify the ATO, prior to the transaction being executed.

In respect of the first measure – it is not known what the measure is intending to clarify or broaden. Under current law, non-residents are only subject to CGT on ‘taxable Australian property’ - which is broadly directed towards taxable Australian real property, indirect interests in Australian real property and assets used in carrying on a business through a permanent establishing in Australia.  

In respect of the second measure – non-residents are subject to CGT on indirect interests (e.g. shares or units) where the company/trust satisfies the principal asset test. The principal asset test assesses whether an entity’s underlying value is principally derived from “Australian real property”. The test is currently performed at the time of disposal. Going forward, the test will be performed over a 365-day testing period. While not immediately known, presumably the new test must be satisfied for the entire 365-day period prior to a disposal.    

In respect of the final measure – CGT withholding obligations exist where a foreign resident disposes of taxable Australian property. This measure requires that advanced notice must be provided to the ATO where a foreign resident is disposing of shares/units in a high value transaction. The measure appears to apply to all transactions and appears to be directed towards verifying whether a transaction should or should not be subject to withholding obligations (before the transaction happens and funds change hands). It is unclear what penalty or consequence will apply where a notification failure occurs.

From a revenue perspective, the measures are expected to increase receipts by $200 million per year.  

Extending the Instant Asset Write Off  

In last year’s (2023-24) Budget, the instant asset write-off was ‘increased’ to $20,000 from 1 July 2023 to 30 June 2024. This write-off is available to small businesses, with an aggregated annual turnover of less than $10 million. It allowed those small businesses to immediately deduct the full cost of eligible assets costing less than $20,000 that were first used or installed ready for use between 1 July 2023 and 30 June 2024. In contrast, businesses with an aggregated annual turnover of $10 million or more must depreciate their assets in line with usual effective life depreciation rules.

The Government has announced that the $20,000 instant asset write-off will be extended for another year to 30 June 2025. Given the instant asset write-off's track record, further extensions are probable.  

Cost of Living Tax Cuts (Stage 3 Tax Cuts)

Inflation and cost of living continue to be significant issues in Australia. The 2024-25 Federal Budget, includes the following tax cuts, which are set to apply from 1 July 2024.

• the 19% tax rate will be reduced to 16%;
• the 32.5% tax rate will be reduced to 30%;
• the income threshold above which the 37% tax rate applies will be increased from $120,000 to $135,000;
• the income threshold above which the 45% tax rate applies will be increased from $180,000 to $190,000.

The changes to the stage 3 tax cuts were initially announced in January 2024, where the Labor Government argued that its changes to the stage 3 tax cuts are better aimed at low and middle income households (whereas the original stage 3 tax cuts legislated by the Morrison government were skewed more heavily to high-income earners).

Legislation to enact the above changes has already received Royal Assent. This measure is estimated to decrease receipts by $1.3 billion over the 5 years from 2024–25.  

Small Business – Power Bill Relief

In an attempt to provide cost-of-living relief to taxpayers and reduce the cost of energy bills, the Government has announced a one-off $300 rebate to all Australian households and $325 to eligible small businesses. It is not clear what an ‘eligible small business’ is, and it is noted that various definitions of a small business exist within the tax law.

The Government’s previous round of energy bill relief in 2022 was only available to households receiving government payments, whereas all Australian households will be eligible to receive this new relief payment.

The measure will cost the Government approximately $3.5 billion.

Extending Various ATO Compliance Programs

In the 2024-25 Federal Budget, the Government continues to focus on extensive tax compliance programs and has allocated substantial additional funding to raise revenue from audit and review activity, including the following:

1. Personal income tax compliance program (extended for one year from 1 July 2027);
2. Tax avoidance taskforce (extended for two years from 1 July 2026);
3. Shadow Economy Compliance Program (extended for two years from 1 July 2026); and
4. a new ATO counter fraud strategy.

The Government’s continued focus on committing substantial funding to ‘expanding and strengthening’ tax compliance programs will lead to taxpayers and their advisers seeing further increases in audit and review activity. For small businesses and their owners, this highlights the importance of reviewing their affairs carefully to ensure that their tax obligations are complied with (and seek specialist advice where necessary).

The tax compliance programs discussed in the 2024-25 Federal Budget are summarised below.

Personal income tax compliance program  

• the Government considers that the one year extension will enable the ATO to continue focus on key areas of non-compliance (including overclaiming of deductions particularly in relation to short-term rental properties, incorrect reporting of income and inappropriate tax agent influence).
• this measure is estimated to increase receipts by $180.3 million and increase payments by $44.3 million over the 5 years from 2023–24.

Tax avoidance taskforce  

• the Government considers that the two year extension will focus on multinationals, large public and private businesses, and high-wealth individuals.
• this measure is estimated to increase receipts by $2.4 billion and increase payments by $1.2 billion over the 5 years from 2023–24.

Shadow Economy Compliance Program

• the Government considers that the two-year extension of the Shadow Economy Compliance Program will enable the ATO to continue to reduce shadow economy activity, thereby protecting revenue and preventing non-compliant businesses from undercutting competition.
• this measure is estimated to increase receipts by $1.9 billion and increase payments by $610.2 million over the 5 years from 2023–24. This includes an increase in GST payments to the states and territories of $429.6 million.

ATO counter fraud strategy  

• $187 million will be provided to the ATO to ‘strengthen’ the ATO’s ability to mitigate fraud against tax and super systems through upgrading technologies to identify and block suspicious activity;
• further, the Government intends to extend the time the ATO has to notify a taxpayer if it intends to retain a BAS refund for further investigation (ATO’s mandatory notification period for refund retention will be increased from 14 days to 30 days).  This appears to address one of the issues identified by Operation Protego (an ATO-led investigation into large-scale GST fraud that was promoted particularly on social media).

Commissioner’s Discretion – Resurrected Tax Debts

In recent times, the ATO has been publicly criticised for engaging in the practice of ‘resurrecting’ old tax debts which had previously been placed on hold as being ‘uneconomical to pursue’. While taxpayers considered these debts had been wiped, many had the misfortune of discovering that those debts still existed, and that tax refunds would be withheld to pay off these old and forgotten tax debts.

In response to this criticism, the ATO released a ‘Statement of debts on hold program’ where it stated that:

‘The ATO has no discretion under the law to waive these amounts and must use any future refund to reduce these debts. In the past, the ATO has excluded some debts from being recovered from taxpayer refunds in this way through long-standing exclusionary criteria, such as for taxpayers on low incomes.’

The Government has announced that it will address this issue by amending the law to give the ATO a discretion to not use a taxpayer’s refund to offset old tax debts, where the Commissioner had put that old tax debt on hold prior to 1 January 2017.

The discretion will apply to individuals, small businesses and not-for-profits. Time will tell whether the ATO makes use of this discretion, or what conditions may need to be met before it will be exercised.

Part IVA: Anti-avoidance Extension

On 9 May 2023, as part of the 2023-24 Federal Budget, the Government announced that it would expand the general anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936 (Cth) 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.

The measure was to apply to income years commencing on or after 1 July 2024, regardless of whether the scheme was entered into before that date.

One year on and the measure has yet to be legislated. As a result, the Government has announced that it will amend the start date for the measure so that it will apply to income years commencing on or after the day the amending legislation receives Royal Assent, regardless of whether the scheme was entered into before that date.

The announcement follows significant recent losses by the Commissioner in Part IVA cases, namely, in Minerva Financial Group Pty Ltd v Commissioner of Taxation [2024] FCAFC 28 (Minerva) and in Mylan Australia Holding Pty Ltd v Commissioner of Taxation (No 2) [2024] FCA 253. It is interesting to observe that the facts in Minerva involved interest distributions being subject to withholding tax of 10% rather than the (higher) 30% corporate tax rate that would have otherwise applied.

Deductions for Intangibles and Royalties  

The Government has announced that it will discontinue the measure Denying deductions for payments relating to intangibles held in low- or no-tax jurisdictions announced on 25 October 2022 in the 2022-23 Federal Budget (take two).

The Denying deductions for payments relating to intangibles held in low- or no-tax jurisdictions measure was an anti-avoidance measure to prevent significant global entities (entities with global revenue of at least $1 billion) from claiming tax deductions for payments made to related parties in relation to intangible assets held in ‘low- or no-tax jurisdictions’ (jurisdictions with a tax rate of less than 15% or a preferential patent box regime without economic substance).

The measure was discontinued on the basis that the integrity issues will now be addressed through the Global Minimum Tax and Domestic Minimum Tax that is currently being implemented by the Government. On 21 March 2024, the Treasury released exposure draft materials in relation to the Global Minimum Tax and Domestic Minimum Tax for public comment.

While the Government will be discontinuing the Denying deductions for payments relating to intangibles held in low- or no-tax jurisdictions measure, it announced that it would introduce a new provision from 1 July 2026 that applies a penalty to taxpayers who are part of a group with more than $1 billion in global turnover annually that are found to have mischaracterised or undervalued royalty payments, to which royalty withholding tax would otherwise apply. This announcement follows on from the decision PepsiCo, Inc v Commissioner of Taxation [2023] FCA 1490 (30 November 2023, currently on appeal) where payments made under exclusive bottling agreements were held to be royalties.  

Future Made in Australia

One of the headline announcements in the 2024-2025 Federal Budget is the introduction of the $22.7 billion Future Made in Australia agenda. The package, which will be implemented over the next 10 years, seeks to promote and regenerate Australia’s domestic industries and create a sustainable and modern economy.

This package has targeted key areas of the economy to invest, including:

1. making Australia a renewable energy superpower through accelerating investment in industries such as hydrogen, green metals, low carbon liquid fuels and clean energy technologies;
2. developing skilled and diverse workforce and trade partnerships;
3. strengthening and improving the process of environmental approvals;
4. providing additional funding of ASIC, APRA and Treasury to deliver a sustainable finance framework; and
5. investing in Australia’s innovation, science and digital capabilities.

This initiative has likely been designed to address perceived weaknesses in the Australian domestic economy and over-reliance on foreign supply chains. It may also assist the Government in achieving its Climate commitments.  

The measures include a Hydrogen Production Tax Incentive (for producers of renewable hydrogen) and a Critical Minerals Production Tax Incentive (for downstream refining and processing of Australia’s 31 critical minerals).

What’s Not in the Budget?

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

• Division 7A reform (including a legislative response to the decision in Bendel v FCT [2023] AATA 3074);
• 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).

‍This article in no way constitutes legal advice. It is general in nature and is the opinion of the author only. You should seek legal advice tailored to your individual circumstances before acting on anything related to this article.