Tax Measures

Federal Treasurer, Hon Dr Jim Chalmers MP delivered his first budget as Federal Treasurer on Tuesday, 25 October 2022.

The Government’s Budget papers acknowledge that there has been a substantial improvement in the near-term fiscal outlook (although forward forecasts are less promising). In 2022–23, the deficit is expected to be AU$36.9 billion (1.5% of GDP), a remarkable AU$41.1 billion improvement since the Pre-election Economic and Fiscal Outlook. This is attributed to the high commodity prices and strong employment growth (which has boosted forecast tax receipts). However, the uncertain Global outlook has prompted the Government to deliver what the Treasurer described as a “responsible” Budget.

Most tax measures proposed in the Budget either preserve the status quo or seek to prevent tax leakage, with no major new tax reforms announced.
The Government will need the support of the Greens and crossbenchers to legislate its Budget measures.

Some of the more notable tax measures are outlined below.

Tax transparency for large businesses

From 1 July 2023, certain organisations may face new reporting requirements with public disclosure of their tax information. The Government proposes that:

• “significant global entities” (multinationals with global revenue of at least AU$1 billion) will be required to prepare tax information on a country by country (CbC) basis and a statement on their approach to taxation, for public release by the ATO;
• Australian public companies (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 AU$200,000 will be required to disclose their country of tax domicile (by supplying their ultimate head entity’s country of tax residence).

Denying deductions for payments relating to intangibles held in certain jurisdictions

The Government will introduce an anti-avoidance rule to prevent “significant global entities” from claiming tax deductions in relation to related-party payments for intangibles held in low-tax or no-tax jurisdictions.

For these purposes, a low-tax jurisdiction is a jurisdiction with:

• a tax rate of less than 15%; or
• a tax preferential patent box regime without sufficient economic substance.

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

Effective life of intangible depreciating assets

The Government will not proceed with a measure announced by the Coalition Government in its 2021–22 Budget that would have allowed businesses to self-assess the effective life of intangible depreciating assets. Reversing this decision will maintain the status quo – that is, effective lives of intangible depreciating assets will continue to be set by statute.

The Budget papers refer to potential integrity concerns for the reversal of this measure. It seems that what the former Coalition Government hailed as a “red-tape cutting” measure, Labor views as a “loophole”.

Thin capitalisation rules

The Government proposes to strengthen Australia’s thin capitalisation rules with effect from 1 July 2023.

The current thin capitalisation rules limit debt deductions up to the maximum of three different tests:

• a safe harbour (debt to asset ratio) test;
• an arm’s length debt test; and
• a worldwide gearing (debt to equity ratio) test.

The Government proposes to replace the safe harbour and worldwide gearing tests with earnings-based tests to limit debt deductions in line with an entity’s activities (profits). This new earnings-based test would limit an entity’s debt-related deductions to 30% of profits (using EBITDA — earnings before interest, taxes, depreciation, and amortisation – as the measure of profit).

This measure also proposes to:

• allow deductions denied under the entity-level EBITDA test (interest expense amounts exceeding the 30% 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% EBITDA ratio). This new earnings-based group ratio will replace the worldwide gearing ratio; and
• 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 measure 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 not be affected.

Off-market share buy-backs

The Government proposes to align the tax treatment of off-market share buy-backs undertaken by listed public companies with the treatment of on-market share buy-backs. This is described as an integrity measure.

Electric Cars

In accordance with Labor’s pre-election commitment, the Government proposes to cut taxes on electric cars. From 1 July 2022, battery, hydrogen fuel cell and plug-in hybrid electric cars will be exempt from fringe benefits tax and import tariffs if they have a first retail price below the luxury car tax threshold for fuel-efficient cars. The car must not have been held or used before 1 July 2022.

Employers will need to include exempt electric car fringe benefits in an employee’s reportable fringe benefits amount.

Digital Currency

The Government will introduce legislation to confirm that digital currencies (such as Bitcoin) are excluded from the Australian income tax treatment of foreign currency. This maintains the current tax treatment of digital currencies, including the capital gains tax treatment where digital currencies are held as an investment.

Superannuation – expanding eligibility for downsizer contributions

The Government proposes to allow more people to make downsizer contributions to their superannuation, by reducing the minimum eligibility age 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 AU$300,000 per person from the proceeds of selling their home. Both members of a couple can contribute, and contributions do not count towards non-concessional contribution caps.

The measure is intended to have effect from the start of the first quarter after Royal Assent of the enabling legislation.

Cancellation of previous Government’s unlegislated announcements

One of Labor’s pre-election commitments was to enact the Morrison Government's tax cuts whereas other unlegislated tax measures would be scrutinised.

The Government has confirmed that it does not intend to proceed with, or will delay, a raft of unlegislated measures proposed by the former government.

The start dates will be postponed for several Coalition proposals, including a measure that will require operators of electronic platforms within the sharing economy (including ride sharing and short-term accommodation sourcing) to report the identification and payment information regarding participating suppliers to the ATO.

Extension of ATO compliance programs

The Government has also announced the proposed extension of several ATO compliance programs targeting personal and business tax avoidance, including the Shadow Economy Program.