Federal Budget 2022-23: The Essential Tax Update for Private Businesses and their Owners
Insights by Andrew Henshaw, Rajan Verma, Rosalind Li & Amy Harrison.
On 29 March 2022, Treasurer Josh Frydenberg handed down the 2022-23 Federal Budget. This year’s Budget aims to achieve the simultaneous goals of ‘securing our recovery’ and preparing for an imminent Federal Election.
Given the circumstances, it is perhaps unsurprising that this year’s Budget adopts a relatively light touch on major tax announcements, and focusses on funding measures and immediate (but temporary) tax relief.
Read on for our full breakdown of some of the more significant tax announcements in this year’s Budget for private businesses and their owners. Labor’s Budget reply will also be closely watched – as it may impact on the likelihood of the various measures ultimately becoming law.
Employee Share Schemes – Unshackling Disclosure and Associated Requirements
The Government has announced significant changes which will not only reduce the regulatory burden of unlisted companies seeking to implement an employee share scheme, but also significantly increase the level of possible participation of employees more generally.
Under the current law, companies issuing shares to their employees are generally required to provide them with a disclosure document. There are limited exceptions to this requirement, including:
- offers to senior managers;
- small-scale offers (offers to up to 20 persons not exceeding $20 million); and
- offers which comply with ASIC Class Order 14/1001. Under that class order, the employee share offer must be made by an unlisted company, capped at $5,000 per employee, and with only nominal monetary consideration permitted.
The Budget proposes to significantly relax the conditions that must be met for unlisted companies to qualify for the exemption from providing a disclosure document. Under the proposed amendments, the employee share offer cap will:
- increase from $5,000 per employee to $30,000 per employee. This cap can be accrued for unexercised options for up to 5 years, meaning that cap can potentially be increased up to $150,000 per employee where options are involved; or
- be removed entirely (i.e. no cap), where the share offer is made just prior to a liquidity event (such as a sale of shares or listing). This essentially allows unlisted companies to issue an unlimited number of shares to their employees, effectively giving them a significant stake in the benefits of the liquidity event.
This measure appears to apply to all companies (not just start-ups).
Importantly, the Budget announcements do not affect Division 83A of the Income Tax Assessment Act 1997 (Cth), which describes the tax consequences of issuing employee share and options at a discount. Those provisions (including the rules for start-up companies) remain unchanged.
Significant Expansion of the ‘Patent Box’ Scheme – Agriculture and Low Emissions Technology
In the 2021-22 Budget, the Government announced a ‘patent box’ scheme, whereby corporate income derived from Australian medical and biotechnology patents would be taxed at a concessional corporate tax rate of 17 per cent (rather than 25 or 30 per cent).
Legislation paving the way for this existing patent box scheme is currently before Parliament (the Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022 (Cth)).
In this year’s Budget, the Government has expanded on the 2021-22 Budget measures. Medical and biotechnology patents issued after 11 May 2021, utility patents issued by United States Patent and Trademark Office and European patents granted under the European Patent Convention (EPC) will now be eligible for the patent box scheme.
In addition, the patent box scheme will be further extended to apply to agricultural sector innovations and low emissions technology innovations. Eligible income from patents in those industries (that are granted after 29 March 2022) will also be taxed at the concessional tax rate of 17 per cent for income years starting on or after 1 July 2023.
The above tax concessions will only apply if the research and development of the innovation takes places in Australia. The Budget states that the Government will consult with the relevant industries before implementing the expanded scheme.
Increased Deductions for Small Businesses (Technology and Training)
The Government will introduce two targeted ‘boosts’ for small businesses (a technology investment boost and a training boost). The measures will apply to certain ‘technology investment’ spend and external training courses paid for by employers.
The measures will allow ‘small businesses’ (aggregated annual turnover of under $50 million) to deduct an additional 20 per cent of the cost incurred on certain expenditure from Budget Night for a temporary period. The technology investment boost is effectively capped to $100,000 of expenditure (i.e. an additional deduction of $20,000) and will expire on 30 June 2023. In contrast, the skills boost is uncapped and will expire on 30 June 2024.
It appears that all types of taxpayers (e.g. companies, unit trusts, discretionary trusts and partnerships) will be eligible for the increased deduction regime. However, how the increased deduction regime will apply is likely to depend on the entity involved. For a company, the regime may lead to situations where a company cannot fully frank its dividends.
The technology investment boost is expressed as applying to certain costs that support a business’s ‘digital adoption’ (e.g. portable payment devices, cyber security systems or subscriptions to cloud-based services). It is not clear whether any purposive element will be required, or whether existing ongoing subscriptions to cloud-based services will qualify.
Tax Avoidance Taskforce and Digitising Trust Tax Returns
The Government will extend the existing Tax Avoidance Taskforce by two years to 30 June 2025 and provide funding to the ATO of roughly $650 million over that period.
The Taskforce was established in 2016 to undertake compliance activities targeting multinationals, large public and private groups, trusts as well as high net wealth individuals. It also scrutinises specialist tax advisors and intermediaries that promote tax avoidance schemes and strategies.
It appears that exactly how and where the additional funding is spent is yet to be determined, and will form part of an independent review of the ATO’s ongoing resourcing requirement. Despite that uncertainty, it is estimated that the extension will result in additional receipts of $2.1 billion during the period between 1 July 2023 and 30 June 2026 – presumably through additional assessments, penalties and interest.
In addition, as a separate measure, the Government will digitalise trust and beneficiary income reporting and processing from 1 July 2024. It is noted that the measure will automate ATO assurance processes, which may streamline (or potentially increase) audit activity. It is unknown whether the new processes will require any additional information to be provided as part of the tax return process (for example, any discrepancies between what a beneficiary is ‘presently entitled to’ and the amount that has actually been paid to that beneficiary).
Low and Middle Income Tax Offset – Once-off Increase
In the 2021-22 Budget, the Government extended the Low and Middle Income Tax Offset (LMITO) until 30 June 2022 (beyond the original 30 June 2021 expiration date). In this year’s Budget, the Government has announced that LMITO will be increased by $420. As a result, the maximum LMITO benefit will increase from $1,080 to $1,500 for individuals (or $3,000 for couples) for the 2021-22 income year.
All other features of the current LMITO remain unchanged. Taxpayers with a taxable income of between $48,000 and $90,000 are eligible for the maximum offset. Taxpayers with incomes of $126,000 or more will not receive the additional $420.
It is noted that the LMITO is stated to end on 30 June 2022 (and does not apply for the income year commencing 1 July 2022). For that reason, the increase of the LMITO should be seen as a temporary ‘sugar hit’.
PAYG Instalment (Reform?)
Under the current system, taxpayers pay a PAYG instalment based on the taxpayer’s prior year taxable income, plus a GDP uplift factor of 10% to account for expected growth in the business. While the system is necessary to approximate the assessable income of the business so taxes can be collected over the course of the year (rather than in one large lump sum), it is a blunt instrument for approximating a business’ true tax liability.
Unfortunately, this system can disadvantage taxpayers in circumstances where a good year is followed by a bad one. In that case, the taxpayer may pay tax instalments based on a higher level of profit than it is actually generating. While this is ultimately corrected through the income tax return and assessment process, in the interim, the business’ cash flow is negatively affected.
To correct this issue and make the instalment system fairer, the Government has announced that the PAYG instalment system will be modernised so that:
- instalments will be based on current financial performance as recorded in the business’ accounting software. This means that if the business is having a ‘bad’ year, it will pay instalments in line with that; and
- the GDP uplift factor will be reduced from 10% to 2% for small businesses ($50 million annual aggregated turnover for PAYG instalments and $10 million in annual aggregated turnover for GST instalments).
While the change may provide a temporary cash flow benefit, this is ultimately just a timing benefit as the tax liability will be ‘squared up’ in the usual manner when annual returns are lodged. Accordingly, the Budget does not anticipate any overall financial impact to this measure, and it should be regarded as a temporary ‘sugar hit’.
Temporary Fuel Excise Cut
Fuel excise is a flat tax levied by the Federal Government on petrol, diesel and all fuel and petroleum-based products. The current rate is 44.2 cents per litre.
With the recent sharp spike in Australian (and global) fuel prices, the Government has announced a temporary reduction that on all fuel and petroleum-based products, except aviation fuels. The measure will apply for 6 months, from 30 March 2022 to 28 September 2022.
This should translate through to a reduction of at least 22.1 cents per litre for consumers and businesses (plus reduced GST). The Government has indicated that the Australian Competition and Consumer Commission will monitor the petrol retailers to ensure that the full benefit of the reduced excise is passed on to the consumers.
Deregulation – Fuel and Alcohol Producers, Importers and Distributors
The Government has announced certain deregulation benefits to fuel and alcohol producers, importers and distributers. The changes will streamline the excise and excise-equivalent customs goods where small businesses (annual aggregate turnover under $50 million) can lodge and pay their excise and excise-equivalent customs duty on a quarterly basis, instead of a weekly or a monthly basis.
Businesses will also have additional options to defer the payment of their excise and related duties. Where a business chooses to do so, their fuel or alcohol goods will be transferred to an ATO administered warehouse after customs clearance. Further changes are also proposed regarding licensing requirements and refund mechanisms.
Lastly, a public register is proposed containing details of excise and excise-equivalent customs goods licences administered by the ATO.
What’s Not in the Budget?
Given that this year’s Budget is relatively ‘light on’ in terms of tax announcements, it is important to note that there are several significant items on the ‘reform agenda’ which are not mentioned in the Budget. These include:
- Division 7A reform;
- 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);
- CGT for foreign beneficiaries of Australian discretionary trusts; and
- certain previously announced measures that have not yet progressed (e.g. the individual and corporate tax residency rules).
Andrew acts for a diverse range of private businesses, high net-wealth individuals and family groups. He specialises in business structuring, tax disputes and complex tax issues. He is passionate about leading by example, getting wins for his clients, solving difficult legal issues and … snowboarding!
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Rajan is all about tax structuring and restructuring. He gets satisfaction from helping his clients obtain real tax benefits, such as CGT concessions or stamp duty exemptions. He has also learnt that saving tax is a great way to make friends. When things get too hard, Rajan is the guy you need to sort things out.
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Who said tax lawyers can’t have personality? Rosalind has real international flair, having lived in New Zealand, a native speaker in Mandarin and experienced in multinational tax issues. She’s also a self-confessed ‘foodie’ enjoying exotic culinary delights with friends and family.
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Amy has experience in both private practice and in-house legal teams in government departments and statutory authorities. She has passion for tax law and assisting clients in realising the best outcome possible. Outside of work, Amy loves training, exploring Melbourne’s best dining spots and spending time with her family.