We breakdown the Multinational Tax Integrity Package, COVID-19 grants, digital currencies, personal tax implications, superannuation measures, R&D tax incentives and more below.
International Tax
Multinational Tax Integrity Package
Changes to thin capitalisation rules
Amending Australia’s interest limitation (thin capitalisation) rules for income years commencing on or after 1 July 2023:
- 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
Denying deductions for payments made on or after 1 July 2023 relating 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 $1b) from claiming tax deductions for payments made directly or indirectly to related parties in relation to intangibles held in low- or notax 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.
Greater tax transparency
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 multinationals, 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
- 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)
Corporate Tax
COVID-19 grants treated as NANE
The Government has elected to make certain COVID-19 business grants made prior to 30 June 2022, non-assessable, non-exempt income (NANE) for tax purposes. This means that eligible businesses will be exempt from paying tax on the grants. This is subject to eligibility and dependent on the type of certain state and territory business grants. The tax treatment is also only provided in exceptional circumstances, such as the severe economic consequences facing businesses during the COVID-19 pandemic. The state and territory COVID-19 grant programs eligible for the NANE treatment currently declared include several grant programs from Victoria and ACT.
Digital Currencies
The Government will introduce additional legislation to clarify that digital currencies (such as bitcoin) will continue to not be considered foreign currencies for Australian income tax purposes. Broadly, this will mean that digital currencies will continue to be treated as capital gains tax assets where they are held as investments. This measure will be backdated to income years beginning 1 July 2021. The measure provides clarity after the government of El Salvador adopted Bitcoin as legal tender. It is noted that this measure excludes digital currencies issued by or under the authority of a government agency.
Depreciation of intangibles
The Government has announced they will not proceed with the measure to allow taxpayers to self-assess the tax effective lives of intangible depreciating assets that they start to hold on or after 1 July 2023 which was first announced in the 2021-22 Federal Budget. The tax effective lives of intangible assets will continue to be set by statute.
Extend ATO Compliance Programs – Tax Avoidance Taskforce, Shadow Economy Program, Personal Income Taxation Compliance Program
The Government is providing additional funding to extend both the Tax Avoidance Taskforce and Personal Income Taxation Compliance Program. The ATO Tax Avoidance Taskforce’s funding will increase by $200m per year for the next four years from 1 July 2022, and its operation extended by one further year from 1 July 2025. This extension is expected to support the ATO in cracking down on new tax risk areas identified in multinational enterprises and large public and private businesses. The measure is estimated to increase receipts by $2.8b over the next 4 years from 2022-23 with a cost to the Government of $1.1b.
The Personal Income Taxation Compliance program will receive $80.3m and be extended for two years from 1 July 2023 with a focus on key areas of non-compliance such as overclaiming of deductions and incorrect reporting of income. The funding is expected to help the ATO modernise its guidance products and improve its compliance activities with taxpayers.
The Shadow Economy Program will be extended for a further three years from 1 July 2023 to allow the ATO to continue targeting shadow economic activity, protect revenue and support the businesses that are following the rules.
Improving the integrity of off-market share buy-back
Effective from 7:30pm AEDT 25 October 2022 the Government will now align the tax treatment of off-market share buy-backs undertaken by listed public companies with the treatment of on-market share buy-backs.
Commonwealth Penalty Unit update
The Commonwealth penalty unit will increase from $222 to $275 from 1 January 2023. This amount is indexed every 3 years in line with CPI, with the next indexation on 1 July 2023. This increase applies to offences committed after the relevant legislative amendment comes into force.
Personal Tax
The Government did not announce any changes to personal tax rates or the proposed Stage 3 tax changes which will commence from 1 July 2024.
Under the Stage 3 tax changes, the 32.5% marginal tax rate will be cut to 30% for taxable income between $45,000 and $200,000 and the 37% tax bracket will be entirely abolished.
The budget did not announce any extension of the low and middle income tax offset which has now ceased and been replaced by the low income tax offset (LITO).
Superannuation
The Government has not applied any further pressure on retirees, leaving the current superannuation tax rate and current contribution caps unchanged.
There are some further measures which I would have liked to have seen in regard to simplifying the superannuation system, such as the removal of various superannuation caps to just one cap. This would take the confusion out of implementing retirees superannuation strategies, as well as allowing for more affordable strategy advise without the need for various cap calculations currently required.
Year-on-year, tax receipts from superannuation funds are expected to drop sharply in FY23 by 52.5% to $12.6b. Utilisation of franking credits made available through the payment of a significant in-specie dividend, coupled with recent off-market share buy-back activity, is the key driver for the revision.
The Government is expanding eligibility for downsizer contributions, reducing the minimum age eligibility from 60 to 55 years of age. This measure will:
- Allow people to make a one-off post-tax contribution to their superannuation of up to $300,000 per person from the proceeds of selling their home, with this amount not counting towards the non-concessional contribution caps.
- Assist in providing available housing for younger families, allowing retirees to downsize their home to better suit their needs, whilst providing more housing stock for younger Australian families
- Gives individuals who are currently unable to make further contributions (such as having superannuation balances in excess of $1.7m) to now have the opportunity to contribute up to $300,000 per person without breaching superannuation contribution caps
The Government has also expanded the exemption of home sale proceeds from pension asset testing from 12 to 24 months to allow pensioners more time to purchase, build or renovate before their pension is affected.
Innovation Incentives
Much needed certainty was provided by the Government to business around its continued support for the R&D Tax Incentive. This reflects the importance placed on innovation as a tool to grow the Australian economy and to provide certainty to businesses planning future investment in R&D based projects. The R&D Tax Incentive (R&DTI) is Australia’s flagship innovation program to support companies conducting Australian based R&D activities.
Key big ticket innovation centric items flagged in the Federal Budget include:
- The cornerstone announcement of a National Reconstruction Fund which will provide a $15b investment in key national infrastructure and sovereign manufacturing projects. This reinforces the Government’s ongoing support of key priority areas including: resources, agriculture, forestry and fisheries sectors; transport; medical science; renewables and low emission technologies; defence capability; and enabling capabilities.
- Industry specific measures including $50.5m to establish the Australian Critical Minerals Research and Development Hub. The body will focus on domestic and international R&D collaboration to address key challenges in the sector, with a focus on Lithium.
Although the Federal Government did not announce any specific changes to the Export Market Development Grant, it was acknowledged that the global economic slowdown coupled with rising inflation will likely have a negative impact on Australian exports. There was also no mention of the opposition’s proposed Patent Box scheme which was in place to encourage innovation in the medical and agricultural sectors. The proposed Patent Box legislation lapsed at the dissolution of Parliament prior to the last federal election.
