Federal Budget 2022/23 Highlights

22 minute read  26.10.2022 Hamish Wallace, Adrian Varrasso, Robert Yunan, Tim Lynch, Craig Bowie, Shyam Srinivasan, Georgia McCarthy, Sarah Sapuppo, Daniel Kornberg, Cynthia Vasanthanathan, Julia Brosnan, Lilit Mouradian, Arabella Tuck, Aaron Chisholm, Jenny Chen, Adam Schwartz, Olivia Fairbank, Saxon Ward, Charlie Richardson, James Den, Emma Bannister, Lovedeep Sohi, Liam Inglis, Zachary Gordon

The 2022/23 Budget primarily provides targeted cost-of-living relief and sets out how the Government intends to invest in Australia's future in times of economic and inflationary pressures as well as continuing global uncertainty. MinterEllison explores the impact and implications across the key commercial focus areas raised in the Government's Budget announcement.

Key takeouts

  • Changes to the thin capitalisation regime: the Government will introduce earnings-based tests to replace the safe harbour and worldwide gearing tests under the current thin capitalisation regime. This measure reflects the Government's commitment to amending Australia's thin capitalisation rules to align with the Organisation for Economic Cooperation and Development's (OECD) recommended approach under Action 4 of the BEPS Action Plan.
  • Denials of deductions for payments relating to intangibles: the Government will introduce an anti-avoidance rule to deny deductions for payments made directly or indirectly to related parties relating to intangibles held in low or no-tax jurisdictions leading to 'insufficient' tax being paid outside Australia. This is proposed to apply to Significant Global Entities (entities within a consolidated group that have an annual global income greater than A$1 billion) and will apply to payments made on or after 1 July 2023.
  • Alignment of the tax treatment of off-market and on-market share buybacks: the Government has signalled its intention to introduce integrity measures which will align the tax treatment of off-market share buy-backs undertaken by listed public companies, with the treatment of on-market share buy-backs.

The Government has announced, in its October Budget, several important corporate and international taxation measures.

While some measures, such as significant changes to the thin capitalisation regime, and denials of deductions for payments relating to intangibles, have previously been the subject of consultation with Treasury, a previously unannounced measure will align the tax treatment of off-market and on-market share buybacks.

The Government will also further invest in a number of Australian Taxation Office (ATO) compliance programs in relation to personal income taxation, the shadow economy and the tax avoidance taskforce.

The Government has provided welcome certainty on a number of previously announced, but not legislated, measures which will either not proceed or will proceed but with deferred start dates.

As anticipated, the Government did not announce any changes to the Stage 3 tax cuts but did confirm that the low and middle income tax offset will not be extended for a further year.

Economic snapshot Navigation Show below Hide below

The Budget was primarily driven by inflationary concerns and global challenges. While the economy is expected to grow solidly this financial year, it is forecast to decline to 1.5% in the next financial year. Unemployment is expected to rise steadily along with the dip in economic growth, but will remain relatively low. Inflation is expected to peak at above 7% later this year, its highest rate since the early 90s. Rising inflation has caused greater cost of living pressures and a fall in real wages.

These inflationary pressures will have continuing effects on the Government's net position. The deficit for 2022–23 is now forecast to be $36.9 billion – an improvement of $41.1 billion compared to the Coalition's May Budget. The underlying cash balance deficit is expected to remain around $50 billion for each of the following three years.

Overall, the Government has emphasised the need to cut spending to avoid causing any further inflationary pressure. As such, the changes announced in the Budget have been fairly modest. Importantly, the Government announced a suite of corporate and multinational tax measures to broaden the tax base. The savings will be offset by increased expenditure on affordable housing measures, child care support and expanding paid parental leave, and investing in vocational and tertiary education.

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Digital currency – clarifying that digital currencies are not taxed as foreign currency

The Government will introduce legislation to clarify that digital currencies (such as Bitcoin) are not treated as a foreign currency for Australian income tax purposes. The law will be backdated to income years that include 1 July 2021. This is further to the Government's release of exposure draft legislation to address this measure, Treasury Laws Amendment (Measures for Consultation) Bill 2022: Taxation treatment of digital currency and associated draft explanatory material on 6 September 2022, which was open for public consultation that has now closed.

This measure is intended to remove uncertainty following the decisions of the Government of El Salvador and the Central African Republic to adopt Bitcoin as legal tender (and thus making Bitcoin 'a foreign currency'). The law change does not apply to digital currencies issued by, or under the authority of, a government agency, which continue to be treated as foreign currency for Australian income tax purposes.

The Board of Taxation is also currently undertaking a review of the tax treatment of digital assets and transactions in Australia. The Board released a Consultation Guide and sought submissions on various issues, including in relation to the current tax treatment of crypto assets (and the capital gains tax treatment where crypto assets are held as an 'investment'). The Board is required to submit its final report to the Government by the end of the year.

Changes to depreciation of intangible asset effective lives

The Government has decided not to proceed with a tax reform measure allowing the self-assessment of effective lives of intangible depreciating assets. This measure was originally announced by the previous Government in the 2021-22 Budget and was intended to apply to intangible assets acquired from 1 July 2023.

Effective lives of intangible depreciating assets will therefore continue to be set under the Income Tax Assessment Act 1997 (Cth) (ITAA97).

The Government has highlighted potential integrity concerns with the previously announced measure, which presumably relate to significantly reducing, by self-assessment, the effective lives of intangible assets (and thus bringing forward depreciation). Reversing the measure will contribute to budget repair and is estimated to increase tax receipts by approximately $550 million over 4 years from 2022-23.

COVID-19 business grants

States and Territories have provided a range of business support grants to assist small and medium businesses through the COVID-19 pandemic. Many of these grants have previously been made non-assessable non-exempt (NANE) income for eligible businesses. As has been the case in a number of previous Federal Budgets, this Budget has announced further classes of COVID-19-related grants which will be eligible for NANE treatment, so that eligible businesses are not subject to tax on those grants.

Powering Australia – electric car discount

Electric cars currently make up only a small proportion of the motor vehicles purchased in Australia, especially when compared with other countries. In line with the Government’s election commitments in its Plan for a Better Future, this measure aims to make electric vehicles affordable for more Australians and will apply to a range of electric vehicles from 1 July 2022. The Government has introduced exposure draft legislation in July which has already been the subject of Senate Economics Committee Report.

Broadly, electric vehicles first held or used after 1 July 2022 will be exempt from fringe benefits tax (FBT) and import tariffs where their first retail price is below the luxury car tax threshold for fuel-efficient cars (currently $84,916). Employers that provide an electric car to employees will be required to include exempt electric car fringe benefits in an employee’s reportable fringe benefits amount, so the FBT taxable value will still need to be calculated notwithstanding FBT is not payable.

While certain States have already introduced stamp duty exemptions and other rebates, the Budget announcement jump starts the Federal Government’s commitment to investing in cheaper and cleaner transport. In addition to the concessions announced for electric vehicles, the Budget announcement has solidified Australia’s investment in the sector through the Driving the Nation Fund which will co-invest in projects to reduce emissions from Australian roads, create hydrogen refuelling stations on Australia’s busiest freight routes as part of the Hydrogen Highways initiative, and establish a National Electric Vehicle Charging Network to deliver 117 fast charging stations on highways across Australia.

Off-market share buy-backs – integrity measures

In a surprise announcement, the Government has signalled its intention to introduce integrity measures which will align the tax treatment of off-market share buy-backs undertaken by listed public companies, with the treatment of on-market share buy-backs.

From a company’s perspective, the buy-back and cancellation of its shares (whether on-market or off-market) has no income tax or capital gains tax (CGT) consequences for the company.

However, the tax implications of on-market and off-market buy-backs can differ substantially for shareholders, and result in distortions to shareholder preferences between on-market and off-market buy-backs.

Where a shareholder in a listed company sells their shares back to the company on-market, the full proceeds of the sale are assessable to the shareholder as if the shares were sold to any other third party purchaser. For example, for shareholders holding their shares on capital account, the sale price is treated as capital proceeds and subject to CGT.

In contrast, in the case of an off-market share buy-back, the buy-back consideration can consist of both a ‘dividend component’ and a ‘capital component’, depending on how the consideration is treated by the company in its accounts. To the extent the buy-back consideration has a ‘dividend component’, this component is effectively treated as a dividend for tax purposes, and can be franked by the company.

This has resulted in listed companies increasingly utilising off-market buy-backs (often at a discount to market price) and attracting shareholders with buy-back consideration that will largely be treated as a dividend for tax purposes and franked by the company. Such offers are especially appealing to concessionally taxed shareholders, including superannuation funds, who can receive a refund of the franking credits.

The Government’s announcement in the Budget did not provide any detail on how the integrity measures will be given effect. However, the announcement referred to aligning the tax treatment of buy-backs undertaken by listed public companies specifically. This may suggest that the integrity measures will be limited in their application to off-market share buy-backs by listed companies only, and may not impact off-market buy-backs by unlisted companies.

Once finalised, the measures are intended to apply from the time of the announcement (7.30pm AEDT, 25 October 2022) and the Government has estimated that the measure will generate approximately $550 million over four years.

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Multinational Tax Integrity Package – amending Australia’s interest limitation (thin capitalisation) rules

The Government will introduce earnings-based tests to replace the safe harbour and worldwide gearing tests under the current thin capitalisation regime. This measure reflects the Government's commitment to amending Australia's thin capitalisation rules to align with the OECD recommended approach under Action 4 of the BEPS Action Plan.

The measures introduced by the Government will include:

  • A new earnings-based test that limits an entity's debt-related deductions (e.g. interest) to 30% of profits, using EBITDA as the profits measure. This test will replace the current safe harbour test. It is not clear whether the Government will measure EBITDA on a book or tax basis at this point.
  • Allowing for denied deductions under the new earnings-based test to be carried forward (up to 15 years).
  • A new test that will permit an entity in a group to claim debt-related deductions up to the level of the worldwide group's net interest expense as a proportion of earnings. This new test will replace the worldwide gearing test.
  • The retention of an arm's length debt test as a substitute test that will be applicable only to an entity's external (third-party) debt. Under the proposed arm's length debt test, deductions for related party debt will now be disallowed.

The measures introduced by the Government will apply to multinational entities operating in Australia and any inward or outward investor. Financial entities (such as authorised deposit-taking institutions) will continue to be subject to the existing thin capitalisation rules.

The measure will apply to income years commencing on or after 1 July 2023.

The Government forecasts that the changes to the thin capitalisation regime will increase receipts by $720 million over the four years starting 2022 – 23.

Multinational Tax Integrity Package – denying deductions for payments relating to intangibles held in low- or no-tax jurisdictions

Consistent with its 2022 election commitment, the Government will introduce an anti-avoidance rule to deny deductions for payments made directly or indirectly to related parties relating to intangibles held in low or no-tax jurisdictions leading to 'insufficient' tax being paid outside Australia. This is proposed to apply to Significant Global Entities (entities within a consolidated group that have an annual global income greater than A$1 billion) and will apply to payments made on or after 1 July 2023. 'Low or no-tax jurisdictions' is to be defined as a jurisdiction with a tax rate of less than 15% or a tax preferential patent box regime without sufficient economic substance. The Government sought consultation in relation to the definition of 'Low or no-tax jurisdictions' in the 'Multinational Tax Integrity and Tax Transparency' Consultation Paper released in August 2022 (Consultation Paper).

The Consultation Paper highlights a concern regarding arrangements involving intangibles and royalties where taxpayers seek to reduce Australian tax by avoiding royalty withholding tax, claiming increased deductions, or reducing income recognised in Australia. The Consultation Paper references two taxpayer alerts, TA 2020/1 and TA 2018/2 which include embedded royalties. The scope of the payments caught by this rule is unclear.

The Government is estimating to increase receipts by $250 million over the 4 years from 2022-23.

Australia's Foreign Investment Framework – increase to fees and penalties

On 29 July 2022, fees for all applications made under the Foreign Investment Review Board (FIRB) framework were doubled, with a new fee cap of $1,045,000 introduced. The Government has now announced additional measures to increase the maximum financial penalties that can be applied for breaches of the Foreign Acquisitions and Takeovers Act 1975 (Cth) in relation to residential land, doubling what was already in place. These new measures will apply from 1 January 2023.

The Government announced the increase in fees to ensure Australians do not bear the cost of administering the foreign investment framework and the increase in penalties is designed to encourage compliance with the FIRB rules.

The introduction of this measure is predicted to add $457.4 million to the Australian budget over the 4 years from 2022–23 through to 2025-26. This is in addition to the amount the earlier increase of fees is predicted to generate.

Australia-Iceland Tax Treaty

The Government announced that on 12 October 2022 the Convention between Australia and Iceland for the Elimination of Double Taxation with respect to Taxes on Income and the Prevention of Tax Evasion and Avoidance (DTA) was signed. This was referred to in the Budget.

The DTA is intended to facilitate trade relations between the two countries by relieving double taxation and lowering withholding tax rates. The DTA will have the following effects:

  • Lowering withholding tax rates on dividends: the withholding tax rate applying to dividends will be reduced to 15%. In addition, a 0% dividend withholding tax rate will apply to intercorporate dividends paid to companies that hold at least 80% or more of the paying company throughout a 365 day period as well as dividends derived by governments, including government investment funds, central banks, tax exempt Icelandic pension funds or Australian recognised pension funds and other Australian residents carrying out complying superannuation activities.
  • Lowering withholding rates on interest: the withholding tax rate applying to interest will be lowered by 2% for Australians conducting business in Iceland and to 0% for interest derived by governments (including government investment funds), central banks, tax exempt Icelandic pension funds, Australian recognised pension funds and other Australian residents carrying out complying superannuation activities, and unrelated financial institutions.
  • Lowering withholding tax on royalties: the withholding tax rate applying to royalties will be reduced to 10%.
  • Prevention of multinational tax avoidance: the DTA incorporates important integrity provisions consistent with the outcomes of the G20/OECD Base Erosion and Profit Shifting recommendations.

Indirect Tax Concession Scheme – extended diplomatic and consular concessions

The Government has granted access and increased entitlements to refunds of indirect taxes under the Indirect Tax Concession Scheme (ITCS) to the diplomatic and consular representations of Bhutan.

The ITCS allows certain consular bodies, organisations and individuals to claim refunds on specified indirect taxes, including GST, fuel excise, luxury car tax and alcohol taxes. The Government has also extended ITCS access for Bhutan to include construction and renovation relating to their current and future diplomatic missions and consular posts.

This measure complements the extension of the ITCS to a number of other diplomatic and consular representations in recent Budgets.

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ATO compliance programs

The Government has extended funding for three ATO compliance programs:

  • $80.3 million over two years for the Personal Income Taxation Compliance Program;
  • $685.2 million over three years (for both the ATO and the Treasury) for the Shadow Economy Program; and
  • $1.14 billion over four years for the Tax Avoidance Taskforce.

The funding extension to the Personal Income Taxation Compliance Program is aimed to allow the ATO to modernise its guidance products, engage earlier with taxpayers and tax agents and target its compliance activity. Key compliance areas includes the overclaiming of deductions and incorrect reporting of income. This measure is estimated by the Government to increase receipts by $674.4 million and increase payments by $80.3 million over the four years from 2022–23.

The Shadow Economy Program will be extended for a further three years, enabling the ATO to continue its response to target shadow economy activity, protect revenue, and level the playing field for compliant businesses. The Government expects an increase of receipts by $2.1 billion and payments by $685.2 million over four years from 2022-23, including an increase in GST payments to the States and Territories of $442.3 million.

The Tax Avoidance Taskforce has received boosted funding from 1 July 2022 for four years, in addition to extending the taskforce for a further year from 1 July 2025. The increase in funding will allow the ATO to pursue new priority areas of observed business tax risks, complementing the ongoing focus on multinational enterprises and large public and private businesses. The Government expects this measure to increase receipts by $2.8 billion and increase payments by $1.1 billion over the 4 years from 2022–23.

Competition and Consumer law penalties

The Government will increase penalties for breaches of competition and consumer law to deter conduct that stifles competition and increases costs to consumers. Maximum penalties for corporations will increase from $10 million to $50 million per breach, and from 10% of annual turnover to 30% of turnover (whichever is greater) during the period the breach took place. This measure is estimated to increase receipts by $62.6 million over the 4 years from 2022–23.

The Commonwealth penalty unit will also be increased from $222 to $275 from 1 January 2023, which is expected to increase receipts by $31.6 million over the 4 years from 2022–23.

Tax Practitioners Board – compliance program to enhance tax system integrity

The Tax Practitioners Board (TPB) was established by the Tax Agent Services Act 2009 (Cth) (TASA) as a national body responsible for the regulation of tax agents and BAS agents and ensuring compliance with the TASA (which includes the Code of Professional Conduct (Code)). The TPB was established to ensure tax advisers provide services at an appropriate standard by requiring individuals and companies that provide 'tax agent services' or 'BAS services' for a fee to register as a tax agent with the TPB.

The Government announced it will provide $30.4 million to the TPB to increase compliance investigations into high-risk tax practitioners and anyone who offers tax agent or BAS services for a fee without being registered over, four years from 1 July 2023. The TPB will use new risk engines to better identify tax practitioners who provide poor and unlawful tax advice, to improve compliance and raise industry standards.

Tax practitioners, as well as entities providing services that might fall within the definition of 'tax agent service' or 'BAS service' for a fee, should consider whether they are required to register as a tax agent with the TPB and familiarise themselves with the Code.

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Announcements on unlegislated tax and superannuation measures announced by the previous Government

The Budget includes announcement of tax and superannuation measures that were proposed by the previous Coalition Government but never legislated. The Government announced that it will abandon eight measures previously announced and defer the start date of three others.

Cancellation of measures

From the 2013 -14 Mid-Year Economic and Fiscal Outlook (MYEFO), the proposal to amend the debt / equity tax rules has been cancelled.

The following 2016-17 Budget measures will no longer proceed:

  • Change to the Taxation of Financing Arrangements (TOFA) rules that were intended to link the TOFA rules more closely with accounting principles, providing simplified accruals and realisation rules (which would have reduced the number of taxpayers subject to the TOFA rules and simplified the calculation methods).
  • Changes to asset-backed financing arrangements designed to align the tax outcomes with those for financing arrangements based on interest bearing loans and investment.
  • Proposal to introduce a new framework for limited partnership collective investment vehicles similar to that introduced for corporate CIVs.

The following 2018-19 Budget measures will no longer proceed:

  • Adjusting the annual audit requirement for self-managed superannuation funds (SMSF) which would have allowed a three year audit cycle for SMSFs with a three year consecutive history of clear audit reports.
  • Introducing a limit of $10,000 for cash payments made to businesses for goods and services.
  • Introducing a requirement of retirement income product providers to report standardised metrics in product disclosure statements.

Finally, the 2021-22 MYEFO measure to create a deductible gift recipient category for providers of pastoral care and analogous well-being services in schools will not proceed.

Deferral of legacy measures

In addition, the Government has confirmed that the start date of a number of legacy tax and superannuation measures will be deferred to allow time for the policies to be legislated and implemented.

The following 2019-20 'black economy' MYEFO measures that proposed introducing a sharing economy reporting regime requiring platforms to report identification and income information regarding participating sellers to the ATO for data matching purposes, from:

  • 1 July 2022 to 1 July 2023 in relation to the supply of ride sourcing and short-term accommodation; and
  • 1 July 2023 to 1 July 2024 for all other reportable transactions such as asset sharing, food delivery and tasking-based services.

The following 2021-22 Budget measures have been deferred from 1 July 2022 to the income year on or after the legislation receives Royal Assent:

  • relaxation of residency requirements for SMSFs which will extend the central control and management test safe harbour from two to five years in addition to removing the active member test; and
  • technical amendments to the TOFA rules that would facilitate access to the hedging rules on a portfolio basis.

The Government has estimated these measures will increase receipts by $29.4 million and decrease GST payments to the States and Territories by $4.1 million over the last 4 years between 2022-23.

Consultation announced

Following the release of the 2022-23 Budget, Treasury has opened consultation until 31 January 2023 for the public to provide their views on how the Government can better 'measure what matters'. The purpose of this consultation project is to provide a complete or holistic view of the community’s well-being, rather than relying on traditional macroeconomic indicators and insights that typically form the basis of the annual Federal budgets.

What was not in the Budget Navigation Show below Hide below

Stage three tax cuts and LMITO

Despite some early indications that the Government would scrap the Stage 3 cuts to personal income tax, which are set to come into effect from 1 July 2024, they have remained unchanged in this Budget.

Stage 3 cuts are the largest and most impactful of a series of tax cuts announced by the Coalition in the 2018-19 Budget. The tax cuts were legislated with the reluctant support of the current Government (whilst in opposition). The first two stages entered into force prior to the last election, but Stage 3 has become a controversial topic for the current Government.

Stage 3 is set to reduce the 32.5% tax bracket to 30%, and entirely remove the 37% tax bracket. The effect of this change will be that the same marginal tax rate of 30% will apply to all income earned between $45,001 and $200,000, as set out in the table below. Stage 3 is set to come into effect from 1 July 2024 and expected to cost the Government $254 billion in the ten years after the cuts are introduced.

Throughout its election campaign, the Government committed to leave Stage 3 cuts unchanged. However, the Government has highlighted the importance of fiscal responsibility in light of current economic conditions. The need to reduce the deficit and stem inflationary pressure led to some speculation that Stage 3 tax cuts would be scraped in this Budget. Although no changes were made in this year's budget, future changes have not been ruled out.

Corporate tax residency

As part of the 2020-21 Federal Budget, the Coalition Government proposed an amendment to the law to treat a company incorporated overseas as an Australian tax resident if it has a 'significant economic connection to Australia'. The test would require a company's core commercial activities to be undertaken in Australia and its central management and control to be in Australia.

As previously reported by MinterEllison, the proposed amendment was intended to address the decision in Bywater Investments Limited & Ors v Commissioner of Taxation [2016] HCA 45 (Bywater) and the ATO's response to that decision wherein a company would be deemed to carry on business in Australia if its 'central management and control' was in Australia. The ATO has since adopted a transitional compliance approach to the central management and control test, which is contained in PCG 2018/9, but that is due to expire on 31 December 2022.

Another Budget has now passed with no further announcements regarding the proposed new test, which Is particularly concerning given the impending end of the transitional compliance approach.

Public registry of beneficial ownership

The Government has previously announced that it will implement a public registry of beneficial ownership to improve transparency on corporate structures, to show who ultimately owns (or controls) a company or legal vehicle. There is no further announcement on the beneficial ownership register.

Franked dividend restrictions

The Budget does not reference the contested issue of denying franked distributions received by retail shareholders, superannuation funds and trusts resulting from capital raising measures despite estimates that it would raise $10 million per year. Although announced in the 2016-2017 Budget of the previous Government, nothing was enacted and there was speculation some modifications may have been announced in this Budget.

The relevant draft legislation, Treasury Laws Amendment (Measures for a later sitting) Bill 2022: Franked distributions funded by capital raisings was recently open for consultation between 14 September and 5 October this year.