The Federal Treasurer handed down the new Labour Government’s first Federal Budget on 25 October 2022.
Despite an uncertain global economic environment, the Budget projects a deficit of $36.9 billion lower than the forecast earlier this year of $78 billion, a function of Australia’s strong economic growth of 3.5%, low unemployment and strong commodity prices. Continuing global pressures, however, will see economic growth slow to 1.5% in 2023–24.
Key tax measures are targeted at multinational entities, particularly changes to the thin capitalisation rules, and changes to deduction rules for intangibles. Importantly, no amendments have been proposed at this stage to the already legislated Stage-3 individual tax rate cuts.
Key measures
1. FBT exemption for electric vehicles.
This is a previously announced measure and legislation is already before Parliament.
The FBT exemption will apply to battery, hydrogen fuel cell and plug-in hybrid electric cars that are below the luxury car tax threshold for fuel efficient cars (being $84,916 for the 2022-23 financial year) and first held and used from 1 July 2022.
This measure is to be reviewed in 3 years.
2. COVID- 19 grants.
A number of Victorian and ACT based business grants relating to the COVID-19 pandemic will now be treated as non-assessable non-exempt income for tax purposes.
3. Depreciation of intangible assets.
The 2021–22 Budget measure to allow taxpayers to self-assess the effective life of intangible depreciating assets (patents, registered designs, copyrights, and in-house software) will not proceed.
Reversing this decision will maintain the current treatment where effective lives of intangible depreciating assets will continue to be set by legislation. This will avoid the potential integrity concerns associated with self-assessment by taxpayers. However, it is now the Government’s responsibility to ensure the legislative effective lives properly reflect the reality of how fast such assets depreciate in a modern high-speed, high-tech economy.
4. War in Ukraine.
Additional tariffs on goods imported from Russia and Belarus have been extended by a further 12 months, to 24 October 2023, whereas good from Ukraine will be exempted from import duties for a period of 12 months from 4 July 2022.
5. Confirmation of treatment of digital currencies.
Legislation will be introduced to clarify that digital currency (or crypto currencies) will not be treated as foreign currency for income tax purposes.
This maintains the current tax treatment of digital currencies, including the capital gains tax treatment where they are held as an investment. This measure removes uncertainty following recent decisions by some Governments around the world to adopt Bitcoin as legal tender.
The exclusion does not apply to digital currencies issued by, or under the authority of, a government agency, which continue to be taxed as foreign currency.
6. Extension of ATO Compliance programs.
The Government has provided additional funding to extend the Tax Avoidance Taskforce, Shadow Economy Program and Personal Income Taxation Compliance Program.
These extensions will enable the ATO to continue to deliver a combination of proactive, preventative and corrective activities in key areas of non‑compliance, including overclaiming of deductions and incorrect reporting of income and to support the ATO in cracking down on new tax risk areas identified in multinational enterprises and large public and private enterprises.
7. Eligibility to make a downsizer contribution to superannuation.
The Government has confirmed its earlier announcement that the eligibility age to make downsizer contributions will be reduced from 60 to 55 years of age.
The downsizer contribution allows people to make a one‑off post‑tax contribution to their superannuation of up to $300,000 per person within 90 days from the proceeds of selling their home. Both members of a couple can contribute, and contributions do not count towards non‑concessional contribution caps.
This measure provides greater flexibility to contribute to superannuation and aims to encourage older Australians to downsize sooner to a home that better suits their needs, thereby increasing the availability of suitable housing for Australian families.
8. Thin capitalisation rules will be amended
The Government will strengthen Australia’s thin capitalisation rules to address risks to the corporate tax base arising from the use of excessive debt deductions. This measure will apply to income years commencing on or after 1 July 2023.
The Government will replace the existing safe harbour (debt to asset ratio) test and worldwide gearing (debt to equity) test with earnings‑based tests to limit debt deductions in line with an entity’s activities (profits).
This measure includes changes to:
- limit an entity’s debt‑related deductions to 30 per cent of profits (using EBITDA —earnings before interest, taxes, depreciation, and amortisation – as the measure of profit). This new earnings‑based test will replace the safe harbour test
- limit an entity’s debt‑related deductions to 30 per cent of profits (using EBITDA —earnings before interest, taxes, depreciation, and amortisation – as the measure of profit). This new earnings‑based test will replace the safe harbour test
- allow deductions denied under the entity‑level EBITDA test (interest expense amounts exceeding the 30 per cent EBITDA ratio) to be carried forward and claimed in a subsequent income year (up to 15 years)
- allow an entity in a group to claim debt‑related deductions up to the level of the worldwide group’s net interest expense as a share of earnings (which may exceed the 30 per cent EBITDA ratio). This new earnings‑based group ratio will replace the worldwide gearing ratio
- retain an arm’s length debt test as a substitute test which will apply only to an entity’s external (third party) debt, disallowing deductions for related party debt under this test.
The changes will apply to multinational entities operating in Australia and any inward or outward investor, in line with the existing thin capitalisation regime. Financial entities will continue to be subject to the existing thin capitalisation rules.
9. Payments for intangibles in low tax jurisdictions
Significant global entities will be denied a tax deduction for payments to related parties in relation to intangibles held in low- or no-tax jurisdictions.
The Government will introduce an anti‑avoidance rule to prevent significant global entities (entities with global revenue of at least $1 billion) from claiming tax deductions for payments made directly or indirectly to related parties in relation to intangibles held in low‑ or no‑tax jurisdictions. For the purposes of this measure, a low‑ or no‑tax jurisdiction is a jurisdiction with:
- a tax rate of less than 15 per cent or
- a tax preferential patent box regime without sufficient economic substance.
The measure will apply to payments made on or after 1 July 2023.
10. Additional reporting for multinational entities
Significant global entities and public companies will have additional reporting requirements for income years commencing from 1 July 2023.
The Government will introduce reporting requirements for relevant companies to enhance the tax information they disclose to the public, for income years commencing from 1 July 2023.
The Government will require:
- large multinational entities, defined as significant global entities, to prepare for public release of certain tax information on a country by country (CbC) basis and a statement on their approach to taxation, for disclosure by the ATO
- Australian public companies (listed and unlisted) 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 to disclose their country of tax domicile (by supplying their ultimate head entity’s country of tax residence).
If you would like to learn more about the 2022-23 Federal Budget, please contact Calibre Business Advisory on (02) 9261 2177. Our dedicated team will be more than happy to assist.