Federal Budget 2022-23 (Take Two): The Essential Tax Update for Private Businesses and their Owners

Expanding ATO Compliance Programs

The Government will provide roughly $1.8 billion of additional funding to finance various ATO compliance programs. This includes:

• extending the Personal Income Taxation Compliance Program by two years - until 30 June 2025 (focusing on issues such as overclaiming of deductions and incorrect reporting of income);
• extending the ATO Shadow Economy Program by three years - until 30 June 2026 (focusing on unreported or dishonest economic activity);
• extending the Tax Avoidance Taskforce by a further year - until 30 June 2026; and
• increase funding for the ATO Tax Avoidance Taskforce by around $200 million per year.

In total, it is estimated that the measures will result in additional receipts of roughly $6.5 billion during the period between 1 July 2022 and 30 June 2026 – presumably through additional assessments, penalties and interest.

The ATO’s spotlight recently has been on the application of section 100A (a once largely dormant section of anti-avoidance legislation). It remains to be seen what priorities will be pursued by the Tax Avoidance Taskforce.

Restricting Foreign Debt Deductions – Thin Capitalisation Changes

The Government has announced significant changes to the 'thin capitalisation’ rules with effect from 1 July 2023. These changes will further restrict the ability of multinational groups to claim deductions for debt used to fund their Australian operations.

Under the current thin capitalisation regime, debt deductions are not limited where the relevant entity satisfies one of the following three tests:

1. the 'safe harbour’ test, which permits a gearing ratio of 1.5:1 or 60% (i.e. $1.5 of debt per $1 of equity);
2. the arm's length debt test, which attempts to determine the amount of debt that the relevant entity could reasonably be expected to obtain from a commercial lender, having regard to its Australian operations; and
3. the worldwide gearing ratio, which compares the worldwide debt of the relevant entity with its worldwide equity.

The Government has announced that it will:

• replace the safe harbour test with a new earnings-based test which will limit an entity's debt deductions to 30% of its EBITDA (earnings before interest, taxes, depreciation, and amortisation). Deductions denied under this test can be carried forward and claimed in subsequent income years for up to 15 years;
• replace the worldwide gearing ratio with an earnings-based group ratio, which will limit debt deductions up to the level of the worldwide group's net interest expense as a share of earnings; and
• retain the arm's length debt test, but only for an entity's third-party debt. That is, the arm's length debt test cannot be used to claim deductions on related party debt.

These changes will not apply to financial entities, which will continue to be subject to the existing rules. Further, these changes do not appear to impact the existing de minimis threshold ($2 million of interest deductions). Finally, it is noted that the thin capitalisation rules are complex, and the legislation (once available) will need to be carefully reviewed to determine the precise impact of these rules on interest deductions.

Restricting Foreign Intangible Deductions and Tax Transparency

As part of its package of measures to enhance multinational tax integrity, the Government will introduce measures that deny deductions for payments relating to intangibles held in low or no-tax jurisdictions and improve tax transparency for certain multinationals and other entities.

Denying deductions for payments relating to intangibles held in low or-no-tax jurisdictions

This is an anti-avoidance measure to prevent significant global entities from claiming tax deductions for payments made (whether directly or indirectly) to related parties in relation to intangible assets held in 'low- or no-tax jurisdictions'.

For the purpose of this measure:

• 'significant global entities' means entities with global revenue of at least $1 billion (the test will presumably involve an aggregation of assets held by related entities, however, we will need to wait until the release of the draft legislation to see how this will operate); and
• a 'low- or no-tax jurisdiction’ means a jurisdiction with either: (a) a tax rate of less than 15%; or (b) a tax preferential patent box regime without sufficient economic substance.

The measure will apply to payments made on or after 1 July 2023.

Improved tax transparency

The Government has also announced that it will introduce reporting requirements for certain types of companies to enhance the tax information they disclose to the public as follows:

• large multinationals (defined as significant global entities – see above) will be required to prepare for public release certain tax information on a country-by-country basis and a statement of their approach to taxation, for disclosure by the ATO;
• Australian public companies (both listed and unlisted) will be required to disclose information on the number of subsidiaries and their country of tax domicile; and
• tenderers for Australian Government contracts worth more than $200,000 will be required to disclose their country of tax domicile (by supplying their ultimate head entity's country of tax residence).

These reporting requirements will apply for income years commencing from 1 July 2023.

Scrapping and Deferral of Certain Unlegislated Measures

Tax practitioners will be aware that there is an ever-growing list of previously announced tax changes which are yet to be legislated.

In an attempt to reduce the backlog, the Government has announced that it will scrap the following tax and superannuation measures which were announced by the former Government. This includes:

• the 2013-14 MYEFO measure that proposed to amend the debt/equity tax rules;
• the 2016–17 Budget measure that proposed changes to the taxation of financial arrangements (TOFA) rules;
• the 2016–17 Budget measure that proposed changes to the taxation of asset-backed financing arrangements;
• the 2016–17 Budget measure that proposed introducing a new tax and regulatory framework for limited partnership collective investment vehicles.
• the 2018–19 Budget measure that proposed changing the annual audit requirement for certain self-managed superannuation funds; and
• the 2018–19 Budget measure that proposed introducing a limit of $10,000 for cash payments made to businesses for goods and services.

Additionally, the Government has listed several measures which it will defer for the time being.

While the above list reduces the backlog and clarifies the future of those measures, there are still many measures which remain in limbo. See our comments below.

Intangible Depreciating Assets – Self-Assessment Mechanism Scrapped

The Government has scrapped a previously announced Budget measure that would have permitted some taxpayers to claim more rapid deductions for intangible depreciating assets (as compared to the current rules).

As part of the 2021-22 Budget, the Morrison Government announced changes to the calculation of the effective life of intangible depreciating assets (which include innovation patents, in-house software and certain copyright). It was proposed that the changes would take effect from 1 July 2023 for assets acquired from the same date. These changes would have allowed the acquirer to self-assess the effective life of intangible depreciating assets, rather than be required to use the statutory effective life of intangible depreciating assets specified under the Income Tax Assessment Act 1997.

This change effectively ‘maintains the status quo’, where the taxpayers will continue to use the statutory effective life of intangible depreciating assets. The Government estimates that this will result in an increase in receipts by $550 million over the four-year estimates period.

Digital Currency – Not Taxed as Foreign Currency

The Government has confirmed that it will introduce legislation to clarify that cryptocurrency (e.g. Bitcoin) is not foreign currency for tax purposes. This follows the release on 6 September 2022 of exposure draft legislation in the form of the Treasury Laws Amendment (Measures for Consultation) Bill 2022: Taxation Treatment of Digital Currency on the matter.

The effect of the clarification is that:

• the current tax treatment of digital currencies will be maintained, including the capital gains tax treatment, where they are held as an investment; and
• any uncertainty is removed following the decision of the government of El Salvador to adopt Bitcoin as legal tender.

The measure will be backdated to income years that include 1 July 2021.

The exclusion does not apply to digital currencies issued by, or under the authority of, a government agency, which continue to be treated as foreign currency. It is also noted that the Board of Taxation is currently conducting a review into the tax treatment of digital assets and transactions in Australia.

Aligning the Tax Treatment of Share Buybacks

In a somewhat cryptic announcement, the Government has stated it will 'improve the integrity of the tax system by aligning the tax treatment of off-market share buy-backs undertaken by listed public companies with the treatment of on-market share buy-backs'.

Under the current tax law, on-market and off-market share buybacks are treated differently both from the perspective of the company and the shareholder. In an off-market share buyback, the buyback price is treated partly as a return of capital (to the extent the purchase price is debited by the company against its share capital account) and partly as a frankable dividend.

In contrast, on-market share buybacks are not treated as dividends. From the perspective of the shareholder, the entire amount paid under an on-market buyback is treated as consideration for the shares. However, for the company, a debit arises in their franking account as if the buy-back occurred off-market.

Because off-market buybacks result in a return of capital and franked dividends, they can create opportunities for franking credit and capital streaming. On-market buybacks in contrast provide no opportunities for franking credit or capital streaming, but nevertheless result in a wastage of franking credits as they are not passed on to shareholders under an on-market buyback. In this way, aligning the tax treatment of on- and off-market share buybacks is expected to generate significant increased tax collections over the next four years.

The change is set to apply from the Budget night announcement (i.e. 7:30pm on 25 October 2022). It is noted that this measure does not affect the tax treatment of share buy-backs concerning private companies.

Housing Accessibility and Affordability Measures

Under the downsizer scheme, older Australians can contribute up to $300,000 from the proceeds of the sale of their home into superannuation. This measure was designed to encourage older Australians to sell their homes and move into smaller accommodation, thereby freeing up larger family homes for younger, growing families.

The current (i.e. from 1 July 2022) age threshold for the downsizer scheme is 60 years. The Government has announced that this age threshold will be reduced to 55 years of age, with effect from the first quarter after Royal Assent of the relevant legislation.

This is the second time the age threshold for the downsizer scheme has been reduced. Prior to 1 July 2022, the age threshold was 65 years, reduced to 60 years from 1 July 2022. Considering the current housing supply issues, it is not surprising to see the age thresholds reduced again, in the hopes of increasing participation in the scheme.

In addition to the downsizer scheme, the Government has also announced a raft of measures to address the current housing supply issues. These include:

• a plan to provide $350.0 million over 5 years from 2024-25 to fund the building of 10,000 affordable homes;
• a $10.0 billion investment in the Housing Australia Future Fund which aims to provide 30,000 social and affordable homes over 5 years;
• a help to Buy scheme to assist people on low to moderate incomes to purchase a new or existing home with an equity contribution from the Government and
• an allocation of $330 million for acute housing needs over 5 years.

Tax Practitioners Board – Increased Compliance Investigations

The Tax Practitioners Board (TPB) is responsible for the registration and regulation of tax agents and BAS agents and ensuring that tax practitioners comply with the Tax Agent Services Act 2009 (Cth) and the Code of Professional Conduct.

The Government will provide approximately $30 million to the TPB to increase compliance investigations into high-risk tax practitioners and unregistered tax practitioners over 4 years from 1 July 2023.

The possible outcomes of the TPB investigation include the suspension or termination of a tax practitioners’ registration, injunctions and significant fines. It is anticipated that the TPB will use new systems to better identify tax practitioners who engage in poor and unlawful tax advice – thereby improving tax compliance and industry standards.

This measure is estimated to increase receipts by $81.9 million over the four-year estimates period.

Electric Cars - FBT and Import Tariff Cuts

The Government promised, as part of its pre-election announcement, to improve the affordability of electric vehicles by introducing tax and import tariff cuts for electric vehicles. Following through with its promise, in July 2022, the Government introduced the Treasury Laws Amendment (Electric Car Discount) Bill 2022 to introduce a fringe benefits tax (FBT) exemption for electric vehicles in certain circumstances. As part of the Budget, the Government reiterated the measures contained in the Bill as well as its commitment to removing import tariffs, specifically:

• from 1 July 2022, battery, hydrogen fuel cell and plug-in hybrid electric cars will be exempt from FBT and import tariffs if: (i) the car has a first retail price below the luxury car tax threshold ($84,916 for fuel efficient vehicles for the 2022-23 income year), and (ii) the car was not held or used before 1 July 2022; and
• for employers, the exempt electric car fringe benefits must be included in an employee’s reportable fringe benefits amount.

The measure will be reviewed after three years and is estimated to decrease receipts by $410 million and decrease payments by $65 million over the four-year estimates period.

Expanded Paid Parental Leave and Childcare Subsidies

This Budget includes significant expansions (and revenue outlays) to the Paid Parental Leave (PPL) scheme and Childcare Subsidy (CCS) rules - providing some relief from the surging cost of living.

The Government will provide $531.6 million over four-year estimates period to expand the Paid Parental Leave (PPL) scheme (and roughly $620 million per year outside of the four-year estimate period).

From 1 July 2023, the PPL scheme will be reformed so that either parent is able to claim the payment and both birth parents and non-birth parents are allowed to receive the payment if they meet the eligibility criteria. From 1 July 2024, the PPL scheme will be extended by two additional weeks per year, until it reaches a full 26 weeks by 1 July 2026. In the new scheme, two parents will be able to share the leave entitlement (with a proportion maintained on a “use it or lose it” basis). The ‘use it or lose it’ approach is intended to encourage both parents to take parental leave and greater shared parenting. The ongoing cost of these measures are roughly $620 million per year.

From 1 July 2023, the CCS rates will increase for all families earning less than $530,000 in household income. Currently, families earning more than $356,756 are not eligible for CCS.  Importantly, families will continue to receive existing higher subsidy rates where the family has multiple children aged 5 or under in childcare. The ongoing cost of these measures are roughly $1.7 billion per year.

What’s Not in the Budget?

This year’s Budget contains some important tax announcements – particularly concerning multinationals, ATO compliance programs, home ownership and family. 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 temporary full expensing rules (due to expire on 30 June 2023);
• the loss carry-back rules (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 the refundability of franking credits, restricting negative gearing or halving the general 50% CGT discount).