Federal Budget 2024/25 Highlights

23 minute read  14.05.2024 Adrian Varrasso, Elissa Romanin, Robert Yunan, Hamish Wallace, Tim Lynch, Jeremy Geale, Craig Silverwood, Cynthia Vasanthanathan, Georgia McCarthy, Julia Brosnan, Lilit Mouradian, Olivia Fairbank, Adam Schwartz, Johanna Wells, Aaron Chisholm, Daniel Kornberg, James Den, Wendy Lim, Sarah Sapuppo, Craig Bowie, Jason Hawe, Charlie Richardson, Jenny Chen, Aidan Kleynhans

The Government's Budget forecasts a budget surplus in the 2023-2024 year, followed by larger deficits than expected across the next 4 years.

Key takeouts

  • The Government proposes to strengthen the foreign resident capital gains tax (CGT) regime to expand its operation and to ensure greater compliance by foreign residents with their CGT obligations in Australia.
  • The Government will extend the $20,000 instant asset write off by 12 months to 30 June 2025 in an effort to improve cash flow and reduce compliance costs for small businesses.
  • Significant longer term tax incentives for renewable investments were announced.

Economic snapshot Navigation Show below Hide below

As it has done for the last few years, the Budget seeks to walk a tightrope between inflationary pressures and cost of living concerns. The Budget appears to reflect a cautious optimism that inflation targets are within reach, with inflation forecast to fall to 2.75% by the end of 2024-25. Growth is expected to remain subdued, with real GDP forecast to grow by between 2% and 2.75% through the forward estimates.

Commodity prices and labour markets have remained stronger than expected for longer than expected, contributing to a $9.3 billion surplus in 2023-24 and far exceeding expectations of a $1.1 billion deficit forecast in the Mid-Year Economic and Fiscal Outlook 2023-24 (MYEFO). As those cyclical factors moderate over the following years, the budget is forecast to be back in the red, with an expected cumulative deficit of $112.8 billion through the forward estimates. That figure includes increases of $7.8 billion in cost of living relief and $15.4 billion in unavoidable spending (with the latter including the extension of programs and services which were terminating) since the MYEFO.

The key measures in the Budget suggest that inflation is no longer the Government's primary concern as it looks to pursue other policies. Key amongst those is the Future Made in Australia plan, which will see $22.7 billion invested in the development of green technologies and advanced manufacturing over the next 10 years. Meanwhile, the stage 3 tax cuts are set to kick in from 1 July 2024, which are touted to deliver cost of living support. It remains to be seen whether these measures will counteract efforts to reduce inflation.

Corporate and international tax Navigation Show below Hide below

Strengthening the foreign resident capital gains tax regime

The Government proposes to strengthen the foreign resident capital gains tax (CGT) regime to expand its operation and to ensure greater compliance by foreign residents with their CGT obligations in Australia. The proposal seeks to close the gap on the amount of CGT being collected when foreign residents dispose of their indirect interests in Australian land.

The amendments will apply to CGT events that occur on the entry into sale contracts on or after 1 July 2025.

The amendments seek to:

  • broaden the types of assets on which foreign residents are subject to CGT;
  • amend the point-in-time principal asset test to a 365-day testing period; and
  • require foreign residents disposing of shares, units and other membership interests exceeding A$20 million in value to notify the ATO, prior to the transaction being executed.

Currently, foreign residents are subject to CGT on taxable Australian property. This is, broadly, direct interests or certain indirect interests in Australian land (such as shares or units in landholder companies and trusts).

Indirect interests in Australian land will be taxable Australian property only if the following 2 tests are satisfied:

  • principal asset test: the market value of the assets held by the company or trust is more than 50% attributable to taxable Australian real property (being Australian real property or mining, quarrying or prospecting rights in respect of Australian minerals, petroleum and quarry materials), measured at the time of the CGT event that is relevant to the disposal of the interests; and
  • non-portfolio interest test: the foreign resident (together with its associates) held 10% or more of the interest in the company or the trust either at the time of the CGT event or throughout a 12 month period that began no earlier than 24 months before the time of the CGT event.

The proposal is to apply a 365 day testing period to the principal asset test, which essentially means that staggered sell downs of the underlying land assets cannot be undertaken within a 12 month period prior to a disposal by foreign residents of their indirect interests so as to avoid CGT. The longer testing period also means that a single market valuation at a point during the 365 day window may be sufficient to satisfy the principal asset test, even though the market value of taxable Australian real property may subsequently fall.

There is no change to the non-portfolio interest test and so it remains the case that foreign residents can hold an associate inclusive interest of up to 9.99% in an entity holding Australian land assets without triggering CGT on disposal.

There is not a lot of detail about the additional types of assets that are proposed to be subject to CGT for foreign residents, but the Budget has commented that the measure ensures that Australia can tax foreign residents on direct and indirect sales of assets with "a close economic connection to Australian land, more in line with the tax treatment that already applies to Australian residents". This suggests that the concessional CGT treatment that applies to foreign residents could be significantly wound back.

The nebulous concept of "a close economic connection to Australian land" would also suggest that the test may now legislatively capture assets that have not consistently been considered to be fixtures at common law and therefore not part of land, notably renewable energy assets. For example, in the case of Valuer-General v AWF Prop Co 2 Pty Ltd & Ors [2021] VSCA 274, the Victorian Supreme Court of Appeal considered that the above-ground towers in a wind farm were chattels. The proposed amendments may deem such assets to be part of land for the purposes of the CGT rules.

The proposed new obligation on foreign residents to notify the ATO of a disposal exceeding $20 million in value applies only to disposals of indirect interests in Australian land (shares and units) and does not apply to direct holdings of Australian land. Currently, a purchaser must apply foreign resident capital gains withholding (FRCGW) at the rate of 12.5% to a purchase price, unless the sale is excluded or the vendor provides a declaration (typically in the unit or share sale agreement) stating that the units or shares are not an indirect Australian real property interest and the purchaser does not know or does not have reasonable grounds to believe the vendor is a foreign resident. It appears that the new vendor notification is designed to operate together with the FRCGW regime, in order to alert the ATO to high value transactions that may appropriately be subject to CGT. It will be interesting to see how this is actually enforced by the ATO.

Notably, the Government has already announced (in the MYEFO) its intention to amend the law to increase the FRCGW rate to 15% and reduce the purchase price threshold for which FRCGW applies from $750,000 to nil, from 1 January 2025.

Denials of deductions for payments relating to intangibles

The Government will discontinue the measure Denying deductions for payments relating to intangibles held in low-or no-tax jurisdictions, which was initially announced in the 2022/23 October Budget as part of the Government's Multinational Tax Integrity Package. The measure was an anti-avoidance rule to deny deductions for payments made by a Significant Global Entity (entities with global revenue of at least A$ 1 billion) to associates in respect of intangible assets resulting in the recipient deriving income in jurisdictions with a corporate tax rate of less than 15%. The Government first released exposure draft legislation in relation to the measure on 31 March 2023 and subsequently released an updated exposure draft legislation on 23 June 2023 (Revised ED) to reflect feedback received from public consultation. Under the Revised ED, it was unclear whether any income taxed at 15% under a qualifying domestic minimum top-up tax (QDMTT) in accordance with the Pillar Two regime would be subject to foreign tax and thus fall outside the Revised ED. The integrity issues associated with this measure will now be addressed through the Global Minimum Tax and Domestic Minimum Tax. Exposure draft legislation in relation to the Global Minimum Tax and Domestic Minimum Tax was released for consultation by Treasury on 21 March 2024. Submissions on this exposure draft primary legislation and consultation paper were due by 16 April 2024 and submissions on the exposure draft legislation are due by 16 May 2024.

New penalty for mischaracterised or undervalued royalty payment

The Government will introduce a new provision that imposes a penalty on Significant Global Entities that are found to have mischaracterised or undervalued royalty payments, to which royalty withholding tax would otherwise apply. The provision will apply from 1 July 2026. The proposed penalty demonstrates the ATO's continued concerns with the potential existence of royalty payments embedded in the consideration paid for tangible goods or services. This new penalty provision may also be relevant in the context of Draft Taxation Ruling TR 2024/D1, which details the ATO's view on when payments made in respect a software arrangement will be subject to royalty withholding tax. The Budget has provided no further commentary as to the operation of the new provision, the details of which will be significant to Significant Global Entities. Detail will also need to be issued in relation to how this provision will interact with existing anti-avoidance and transfer pricing provisions.

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Superannuation on Government-funded paid parental leave

The Government has confirmed its pre-Budget announcement that for births and adoptions on or after 1 July 2025, it will pay superannuation on the government-funded paid parental leave. The ATO’s website indicates that this will be administered by the ATO.

Payday Superannuation

In the lead up to the 2023/24 Budget, the Government had announced that from 1 July 2026, employers would need to pay an employee’s superannuation guarantee (SG) entitlements at the same time as they pay salary and wages (referred to as payday superannuation). Under the current regime, SG contributions are generally made quarterly.

While the Government has not confirmed the specifics as to how payday super will be implemented or whether the superannuation guarantee charge (SGC), which is payable under the current regime by an employer if they do not make the minimum SG contribution by the quarterly due date (i.e. it is designed for a quarterly payment model), is to be updated, the Government has announced that it will provide funding of $60 million over four years from 2024-25 to the Productivity, Education and Training Fund, part of which is intended to support workplaces to implement changes such as the introduction of payday superannuation.

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Small business instant asset write off

The Government will extend the $20,000 instant asset write off by 12 months to 30 June 2025 in an effort to improve cash flow and reduce compliance costs for small businesses.

This should enable small businesses (with an aggregated annual turnover of less than $10 million) to immediately deduct the full cost of eligible assets costing less than $20,000 that are first used or installed ready for use for a taxable purpose between 1 July 2023 and 30 June 2025.

Assets valued at $20,000 or more (which cannot be immediately deducted) can continue to be placed into the small business simplified depreciation pool and depreciated at 15% in the first income year and 30% each income year thereafter.

The $20,000 instant asset write off was initially announced as part of the 2023/24 Budget, and was touted as a temporary measure following the expiry of the temporary full expensing measure introduced in the 2020/21 Budget (which was available up to 30 June 2023).

Interestingly, the $20,000 instant asset write off is not yet law.

The legislation to enact the measure as initially announced in the 2023/24 Budget was introduced to Parliament on 31 September 2023 in the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2023 (Cth). The Bill has been the subject of multiple committee reviews and various amendments have been tabled. On 27 March 2024, the Senate communicated a schedule of amendments to the House of Representatives proposing:

  • an increase in the asset threshold from $20,000 to $30,000; and
  • extending the measure to 'medium' businesses by increasing the aggregate annual turnover test from $10 million to $50 million.

Based on the Budget announcement, other than extending the availability of this measure by a further 12 months, it seems the Government will not be entertaining an increase to either the $20,000 asset threshold or the $10 million aggregate turnover threshold.

It will be important for the Government to pass this Bill capturing the 12 month extension prior to 30 June 2024 so that taxpayers have certainty with respect to their tax affairs.

As part of the Budget announcement, the Government has also confirmed its intention to continue to suspend operation of the provisions that prevent small businesses from re-entering the simplified depreciation regime for five years if they opt-out of the regime until 30 June 2025.

Compliance and tax integrity Navigation Show below Hide below

Income tax compliance by individuals

The ATO Personal Income Tax Compliance Program will be extended to 1 July 2027 to allow the ATO to continue to target what it has identified as key non-compliance areas, including overclaiming of income tax deductions, incorrect reporting of income and inappropriate tax agent influence.

ATO counter fraud strategy

The Government will provide $187 million in funding to the ATO over four years from 1 July 2024 to strengthen the ATO's ability to detect, prevent and mitigate fraud against the tax and superannuation systems. The funding will be directed towards:

  • upgrading the ATO's information and communications technologies to enable the ATO to identify and block suspicious activity in real time;
  • establishing a new compliance taskforce to recover lost revenue and intervene when attempts are made to obtain fraudulent refunds; and
  • improving the ATO's management and governance of its counter-fraud activities, including improving how the ATO assists individuals harmed by fraud.

Additional funding will be provided to the Department of Finance to undertake a Gateway Review process over the life of this proposal to ensure independent assurance, oversight and delivery of the measure.

Furthering the ATO's ongoing focus on GST compliance, the Government will extend the time the ATO has to notify a taxpayer if it intends to retain a business activity statement (BAS) refund for further investigation from 14 days to 30 days to align with time limits for non-BAS refunds. Interest will be payable by the ATO on legitimate BAS refunds that are retained by the ATO for over 14 days. The extension will take effect from the start date of the first financial year after the enabling legislation receives Royal Assent. These measures are in addition to the four-year extension to the ATO's GST compliance program announced as part of the 2023/24 Budget (Federal Budget 2023/24 Highlights).

This measure is estimated to increase receipts by $302.2 million over the next five years.

Extension to ATO Shadow Economy Compliance Program

The Government will extend the ATO Shadow Economy Compliance Program for a further two years from 1 July 2026. The extension is intended to allow the ATO to continue to reduce shadow economy activity, protect revenue and prevent non-compliant businesses from undercutting competition. This measure is intended to increase receipts by $1.9 billion over the next 5 years, including an increase in GST payments to the states and territories of $429.6 million.

Extension to ATO Tax Avoidance Taskforce

The Government will extend the ATO Tax Avoidance Taskforce for a further two years from 1 July 2026 to 30 June 2028. It is stated that the extension is intended to ensure the ATO continues to be well-resourced to pursue key tax avoidance risks, focussing on multinationals, large public and private businesses and high-wealth individuals and that it is intended to increase receipts by $2.4 billion over the next 5 years.

The announcement is remarkable for two things:

Firstly, the annual funding of the Tax Avoidance Taskforce when first announced by the previous government in 2015/16 peaked at $214.2m. The funding of this taskforce has now increased significantly to $586.7m in 2027/28. Notwithstanding this increase, the dividend now being received is falling, marginally, in dollar terms from $1,610m to $1,602m (in FY 2027/28), with audit yield dropping from a return of $7.50 per dollar funding to $2.73 per dollar funding. This demonstrates that targeting multinationals, large public and private and high wealth individuals is no longer yielding significant returns for the ATO, confirming that the tax compliance of these sectors has improved.

Secondly, what the Budget does not measure is the significant compliance cost for taxpayers that arises as a consequence of these ongoing measures. If, conservatively estimated, compliance costs are assumed to be $1 for every $1 of ATO funding, this announcement now means these measures are yielding not much more than is raised. Future governments will no doubt need to consider alternatives to raising revenue from corporate Australia through an ever increasing compliance burden.

Anti-avoidance

In the 2023 Federal Budget the Government announced an expansion of the anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936. As previously announced these measures were to apply to income years commencing on or after 1 July 2024, irrespective of when the scheme was entered. The Government has announced that the commencement date will now be for income years commencing on or after the amending legislation receives Royal Assent.

This previously announced measure will expand the scope of the general anti-avoidance rule in Part IVA. The rule will now include:

  • schemes that reduce tax paid in Australia by accessing a lower withholding tax rate on income paid to foreign residents; and
  • schemes that achieve an Australian income benefit, even where the dominant purpose was to reduce foreign income tax.

The first measure expands the anti-avoidance rule from applying only to schemes that result in a taxpayer no longer being liable to pay withholding tax to schemes that merely reduce the amount of withholding tax payable. The measure can therefore potentially apply to the clean building, datacentre and warehousing 10% concessional MIT and the BTR MITs that were announced in that same 2023 Federal Budget.

The second measure brings the general anti-avoidance rule in line with the Multinational Anti-Avoidance Law and Diverted Profits Tax regimes in so far that taxpayers will no longer be able to rely on a scheme resulting in a larger (or otherwise more important) foreign tax benefit than Australian tax benefit to avoid the application of Part IVA.

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Future Made in Australia and Carbon Credits initiatives

The Government also announced significant investment – $22.7 billion over the next decade – in innovation and technology measures designed to help Australia "build a stronger, more diversified and more resilient economy powered by clean energy" under the 'Future Made in Australia' plan.

At the same time, a joint announcement between the Prime Minister and Treasurer has provided further details on the measures announced in the Budget: Investing in a future made in Australia | Prime Minister of Australia.

The Budget includes $19.7 billion in funding over ten years to fund investment in industries prioritised under the Future Made in Australia plan. The funding primarily supports the refining and processing of critical minerals, at a cost of $7.1 billion over 11 years and $1.5 billion per year from 2034-35 to 2040-41, and the production of renewable hydrogen, at a cost of $8 billion over ten years and $1.2 billion per year from 2034-35 to 2040-41. Significant measures announced include:

  • a Critical Minerals Production Tax Incentive to provide a production incentive valued at 10% of relevant processing and refining costs for Australia's 31 critical minerals processed and refined between 2027-28 to 2039-40, for up to 10 years per project, at a cost of $7 billion over 11 years from 2023-24 and an average of $1.5 billion per year from 2034-35 to 2040-41;
  • a Hydrogen Production Tax Incentive to provide a $2 incentive per kilogram of renewable hydrogen produced between 2027-28 to 2039-40, for up to 10 years per project, at a cost of $6.7 billion over 10 years from 2024-25 and an average of $1.1 billion per year from 2034-35 to 2040-41;
  • $1.3 billion for an additional round of the Hydrogen Headstart program for early-mover renewable hydrogen projects;
  • $1.5 billion for the Australian Renewable Energy Agency;
  • $1.7 billion for the Future Made in Australia Innovation Fund; and
  • $1.4 billion in the medium term to support manufacturing of clean energy technology (including solar manufacturing, battery manufacturing and a techno-economic feasibility study of the green polysilicon industry).

Additional measures announced under the Future Made in Australia scheme include:

  • creating a streamlined 'front door' for investors with major, transformational investment proposals to simplify and encourage major investment in Australia;
  • priority approvals for renewable energy projects of national significance;
  • $17.3 million over 4 years to promote the development of sustainable finance markets in Australia;
  • $1.7 billion over 10 years for investments in innovation, science and digital capabilities, including mapping Australia's critical minerals and national groundwater systems and building quantum computing capabilities;
  • $218.4 million over 8 years to support these measures through the development of a skilled and diverse workforce and trade partnerships; and
  • $182.7 million over 8 years to strengthen approval processes to support these measures, including strengthening environmental approvals for renewable energy, transmission and critical minerals projects.

Further, the Government had announced that it will make up to $1.2 billion in strategic investments in priority critical mineral projects, including previously announced financing for the Alpha HPA alumina project and Arafura Rare Earth's Nolans Rare Earth project. The Government's support to Renascor Resources Limited (which had been announced in April 2024 to be a $185 million loan to fast-track the development of stage one of its Sivious Graphite Project) has been revised, with financial implications not disclosed due to commercial sensitivities.

Promoting social impact investment

The Government has announced a number of significant funding initiatives over five years to improve the employment services systems and deliver key employment outcomes for vulnerable members of the community, in collaboration with government departments, social enterprises, philanthropic organisations and eligible employers. The key measures announced include:

  • committing $32.1 million over four years from 2024-25 for the Real Jobs, Real Wages pilot to incentivise employers to hire and support people at risk of long-term unemployment;
  • investing $21.9 million over five years from 2023–24 to create job opportunities for people facing barriers to work through partnerships with social enterprises and employers;
  • providing $4.7 million over three years from 2024–25 (and an additional $0.8 million from 2028–29 to 2033–34) to create the Outcomes Fund which will focus on breaking cycles of intergenerational and community disadvantage, barriers to employment, and housing needs of vulnerable people. This measure builds on a 2023/24 Budget measure, which announced $100 million in funding to establish the Fund; and
  • delivering $227.6 million over five years from 2023–24 (and $11.4 million per year ongoing) to implement a new specialist disability employment program to replace the existing Disability Employment Services program by 1 July 2025.

What was not in the Budget Navigation Show below Hide below

ABN enhancement – Black economy integrity measures

In the 2019-20 budget, the previous government announced measures to strengthen the ABN system while maintaining the system's navigability and low barriers to access. This was in response to the work of the Shadow Economy Taskforce. The recommendation was to introduce measures that would make ongoing registration contingent on the lodgement of relevant income tax returns and regular confirmation of the accuracy of holder details.

Initially deferred by a year in the March 2022 budget, exposure draft legislation was released by Treasury in November 2022. Following consultation, no further progress was made. The Government has now said that it will no longer proceed with the initiative as integrity issues are now being addressed through enhanced administrative processes implemented by the ATO.

Changes to corporate tax residency

The Budget provided no update on the long awaited changes to the corporate tax residency tests.

The ATO's position as set out in Taxation Ruling TR 2018/5 is that a foreign incorporated company would be an Australian tax resident where its central management and control (CMC) is exercised in Australia, as this will mean it will be carrying on business in Australia. The ATO view is that a company's CMC is factually part of carrying on business. We explored the background to this in our Federal Budget 2023/24 Highlights.

The ATO released a Practical Compliance Guidelines PCG 2018/9 which set out a transitional and ongoing compliance approach that was intended to assist foreign incorporated companies in managing their compliance risks and provide certainty regarding the ATO's compliance approach. A draft update to the PCG – PCG 2018/9DC1 – was issued in June 2023 and provided a draft risk assessment framework against which companies could self-assess to understand the likelihood of the ATO utilising compliance resources to consider their tax residency status. Any group with a foreign incorporated company should therefore self-assess its risk level using the draft framework issued by the ATO.

Denial of deduction for ATO interest expenses

As part of the 2023–24 Mid-Year Economic and Fiscal Outlook (MYEFO), the Government announced it will amend the tax law to deny deductions for ATO interest charges – the general interest charge (GIC) and the shortfall interest charge (SIC) - incurred on or after 1 July 2025. As the deductions will be denied, any GIC or SIC that is later remitted would then not need to be included in the calculation of assessable income.

Despite being recently announced and addressed on the ATO's website as an upcoming measure, and with legislation yet to be enacted, the Budget contained no announcement on its progress and whether or not it will be implemented.

Legislating the object of superannuation

The Budget did not comment on the Superannuation (Objective) Bill 2023 (Objective Bill), which was released for consultation by the Government in September 2023. However, it was noted that the announced and enhanced Commonwealth Government-Funded Paid Parental Leave was consistent with the proposed Objective Bill.

The Objective Bill outlines that the objective of superannuation is to ‘preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way’. The Objective Bill was read in the Senate for the first time on 20 March 2024, with its second reading being moved. We await further updates as to its progression.

To discuss how the Federal Budget 2024/25 measures will impact your organisation, please contact your MinterEllison Tax specialist.

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