The 2022/23 Australian Federal Budget contained various measures to ease the significant cost of living pressures faced by Australians in an era of rising inflation as well as expected rises to interest rates, whilst the nation is emerging from the economic challenges of the COVID-19 pandemic.

The centrepiece of the cost of living measures is a 50% reduction in fuel tax excise (from 44.2 cents per litre to 22.1 cents per litre) for a period of six months. This will no doubt be welcome relief to motorists given the recent significant increase in the global oil price. Further cost of living relief has been provided in the form of a one-off $250 payment to eligible taxpayers and an additional $420 payment to recipients of the low and middle income tax offset (LMITO), taking the maximum LMITO to $1,500.

The Government has emphasised falling unemployment and an improving underlying cash balance over the forward estimate period. Debt as a share of the economy is expected to peak at around 45% of GDP by 30 June 2025.

The Budget has also included a raft of big ticket infrastructure, defence, cyber security and National Disability Insurance Scheme (NDIS) spending measures.

For example, $17.9 billion has been allocated for new road and rail projects around the country, $15 billion has been earmarked for defence (including an east coast submarine base), $9.9 billion has been put aside to enhance cyber-security and intelligence capabilities and spending on the NDIS will increase by $40 billion over the forward estimate period.

Importantly, the Budget does not contain many significant international or corporate tax reform measures. Further, as would be expected in an election year, this Budget does not include any controversial new taxes, increases in taxes or significant reductions in tax concessions. It remains to be seen whether this 'cash splash' will resonate with voters, noting the likely impact of such expansive spending measures on the national deficit and inflation.

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. Small and medium businesses with an annual aggregated turnover of less than $50 million are able to treat a range of COVID-19 grants that were received in the 2021 and 2022 income years as non-assessable non-exempt (NANE) income. The 2022/23 Federal Budget expands on the class of grants which are treated as NANE. This concessional measure was originally announced in the 2020/21 Federal Budget.

COVID test expenses

Originally announced on 8 February 2022, from 1 July 2021 costs of COVID-19 tests for individuals which are used for an individual to attend their place of work will be tax deductible. Where a business purchases a COVID-19 test and provides the test to an employee for the purposes of attending their place of work, fringe benefits tax will not be payable by the business. A tax deduction is available to businesses for both polymerase chain reaction (PCR) and rapid antigen tests. Although announced on 8 February 2022, this measure is yet to be legislated.

Employee share scheme – reducing red tape

In similar fashion to the 2021/22 budget, the Government has announced its intention to further 'reduce red tape' for companies wanting to incentivise staff with shares or options. These announcements, while not tax related, mean that the use of employee share interests are far more likely to be utilised in the 'war for talent'.

Subject to certain exceptions, employee share schemes (ESS) are subject to a wide variety of regulatory requirements (including disclosure requirements, licensing, anti-hawking and advertising requirements). The Government proposes to increase the scope of the exceptions for unlisted companies to substantially broaden the issuance of employee share interests.

The Budget measures indicate that relief will be provided where the amount that employees are required to pay for shares or options under ESS is $30,000 or less per employee. It appears that this monetary cap will replace the current value cap which provides relief where the value of the shares or options granted under ESS is $5,000 or less per employee. This means that there will be no value cap on the share or options, and therefore, unlisted employers can grant shares or options for an unlimited value provided the amount that the employee is required to pay is $30,000 or less.

The new monetary cap will be accruable for unexercised options for up to five years. In addition to the $30,000 monetary cap, employees can invest a further 70 per cent of dividends and cash bonuses received in respect of the scheme.

The monetary cap will not apply where shares or options are granted immediately before a planned sale or listing of the company and the employee can sell their purchased interests at a profit. In these circumstances, there is no monetary or value cap for relief from the regulatory requirements to apply.

In addition, the Government has said that it will remove the regulatory requirements for offers to independent contractors where they do not have to pay for their interests (i.e. no monetary or value cap will apply to independent contractors).

The new measures will, in particular, assist start-ups in attracting employees where they cannot compete with larger employers on salary.

The 2022/23 Budget announcements only relate to the easing of regulatory requirements. When issuing ESS interests, employers will need to ensure that the start-up concessions or deferred taxation concessions are satisfied to ensure there is no upfront taxation (e.g. employees cannot hold more than 10% of the shares or control more than 10% of the voting rights on a fully diluted basis).

The Budget changes will be welcomed by the tech/start-up industry. Whilst the Government has made some other welcome tax and regulatory changes in recent years, there is still more that could be done to improve the global competitiveness of Australia’s ESS tax regime, including lifting the current $1,000 tax-free concession limit, expanding the $5,000 salary sacrifice concession, reconsidering the eligibility requirements for the start-up concession and looking at ways to encourage alternative incentive models (e.g. the employee ownership trust model used in a number of overseas countries).

Patent box – expanding the tax concessions to agricultural sector innovations and low emissions technology innovations

The patent box regime was introduced in the 2021/22 Federal Budget, with the Bill currently before Parliament. The scheme is designed to incentivise companies to pursue research and development (R&D) activities in Australia rather than offshore.

In the Budget, the Government has proposed to extend the patent box scheme to:

• agricultural sector technology-focussed innovations; and
• low emissions technology innovations.

This will allow more companies to access tax concessions for R&D activities to the extent that they are performed in Australia.

Under the proposed expansion, corporate income derived from Australian agricultural sector innovations and low emissions technology innovations will be taxed at a concessional effective corporate tax rate of 17% (rather than the 30% or 25% rates that otherwise apply to corporate taxpayers). Eligible patents need to be developed in Australia.

For agricultural sector innovations, the scheme will apply to eligible patents linked to agricultural and veterinary chemical products listed on the Australian Pesticides and Veterinary Medicines Authority, PubCRIS (Public Chemicals Registration Information System) register, or eligible Plant Breeder's Rights.

For low emissions technology innovations, the scheme will apply to patents relating to low emissions technology included in the:

• 140 technology areas listed in the Government's 2020 Technology and Investment Roadmap Discussion Paper; or
• priority technologies set out in the Government's 2021 and future annual Low Emissions Technology Statements.

The concession for agricultural and low emissions technology innovations is proposed to take effect for patents granted or issued after 29 March 2022 and for income years beginning on or after 1 July 2023.

The Government has indicated that consultation will be undertaken with industry before settling the design of the enhanced patent boxes.

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) for a number of diplomatic and consular representations.

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. This measure complements the temporary reduction in the fuel excise announced in this year's Budget.

The ITCS will be extended for: Fiji, India, Indonesia, Latvia, Malaysia, Nauru, Papua New Guinea, the Taipei Economic and Cultural Office, the Democratic Republic of Timor-Leste, Tonga, Samoa, the Solomon Islands, the United Kingdom and Vanuatu.

Modernising the PAYG instalment systems

Companies will be able to choose to have their pay as you go (PAYG) instalments calculated based on their current financial performance as extracted from business accounting software. This measure is aimed at aligning the PAYG instalment liabilities of companies with their profitability (which should give a more accurate reflection of the tax liability of a business for a particular period). The Government will consult on finalising the scope, design and specifications of this measure. It is anticipated that the systems to facilitate this new system will be in place by 31 December 2023.

This measure will assist businesses with their cash flow, should reduce overpayments of PAYG instalments and avoid the difficult situations that arose for businesses during COVID-19 (where a business' PAYG estimates did not reduce during a period that a business ceased trading due to lockdowns).

Reducing compliance costs for business through enhanced sharing of single touch payroll data

The Government will develop IT infrastructure to allow the ATO to share Single Touch Payroll (STP) data with the State and Territory Revenue Offices on an ongoing basis. This new data-matching capability will assist those Revenue Offices in verifying and determining employers' State and Territory payroll tax liabilities. Such STP data would include salaries and wages amounts, PAYG withholding amounts and superannuation. It is anticipated that the States and Territories will also invest into their own IT systems and administrative processes to pre-fill payroll tax returns with STP data.

Digitalising trust income reporting and processing

Trust income reporting and assessment calculation processes have, to date, not been automated to the same extent as for individual and company tax returns, resulting in a higher compliance burden for taxpayers due to longer processing times and limited pre-filling opportunities.

The Government has committed to digitalising trust and beneficiary income reporting and processing, allowing all trust income tax returns to be lodged electronically, to assist with pre-filling of tax returns and streamlining ATO assurance processes. The measures are intended to commence from 1 July 2024, subject to the Government consultation.

Tax Integrity – extension of the ATO Tax Avoidance Taskforce on multinationals, large corporates and high wealth individuals

The Government will provide an additional $652.6 million over the next two years to the ATO to extend the operation of the Tax Avoidance Taskforce (Taskforce) to 30 June 2025. The Taskforce will continue to undertake compliance activities targeting multinationals, large public and private groups, trusts and high wealth individuals and continue to scrutinise specialist tax advisors and intermediaries that it considers promote tax avoidance schemes and strategies.

Since its inception following the 2016 Budget, the Government has funded the Taskforce with $679 million over the first four years, followed by $1 billion over the subsequent four years to 30 June 2023.

While only a two year extension (unlike prior four year grants), it does nearly align with the balance of the current Commissioner of Taxation's term in office. The Government has however noted that the ATO's total resourcing requirement, including the extension of the Taskforce's existence, will be settled as part of the independent review of the ATO's ongoing resourcing requirement announced as part of the 2021-22 Mid-Year Economic and Fiscal Outlook.

The Government is estimating to increase receipts by $2.1 billion from this measure, being a greater than three times multiple on the outgoing.

The Government is introducing two small business 'boosts' designed to provide further incentives for small and medium businesses to invest in technology, upskill staff and grow their business:

• the 'skills and training boost' will support small businesses to train and upskill their employees; and
• the 'technology investment boost' will support digital adoption by small businesses.

Both incentives will apply to businesses with an annual aggregated turnover of less than $50 million. They build on existing measures accessible by these entities such as the temporary loss carry-back and temporary full expensing.

Skills and training boost

Under the skills and training boost, small businesses can deduct an additional 20% of eligible expenditure.

At this stage, eligible expenditure will capture spending on external training courses provided to employees. The external training courses need to be provided to employees in Australia or online, and delivered by entities registered in Australia.

Limited detail is currently provided about the nature of expenditure covered and whether any further conditions will apply. The Government has flagged that exclusions will apply and specifically reference expenditure for in-house or on-the-job training, and expenditure on external training courses for persons other than employees. The ATO's recent moves to deny tax deductions for certain types of employee expenses may also be relevant to this measure. The open ended language in the Budget suggests that further conditions and exclusions are likely to apply to this measure which are unlikely to be known until introduction of the enabling legislation.

Technology investment boost

Small businesses will be able to deduct an additional 20% of the cost incurred on business expenses and depreciating assets that support their digital adoption, such as portable payment devices, cyber security systems or subscriptions to cloud-based services.

This boost will be subject to a $100,000 annual expenditure cap. This seems to suggest that a business's additional deduction for an income year under this measure will be limited to $20,000 where its eligible expenditure for that income year is in excess of $100,000.

Whilst the Budget vaguely describes the categories of expenditure covered by this boost, the 'devil will be in the detail', which is yet to be provided. The Government specifically references eligible expenditure as including costs incurred on depreciating assets. However, it is unclear whether the additional 20% 'boost' will be calculated on the basis of the full cost of the asset or only the portion of the asset's cost which would be deductible in the relevant income year under the capital allowance regime.

Period of eligible expenditure

Both measures will cover eligible expenditure incurred from release of the Budget. The skills and training boost will cover expenditure incurred up until 30 June 2024, whereas the technology investment boost will only cover expenditure incurred up until 30 June 2023.

The boost for eligible expenditure incurred by 30 June 2022 will be claimed in tax returns for the following income year. The boost for eligible expenditure incurred after 30 June 2022 will be included in the income year in which the expenditure is incurred.

Fuel tax excise

The Government's cost of living measures package includes a temporary reduction in the fuel tax excise by 50% from 44.2 cents per litre to 22.1 cents per litre. Importantly, the Government has resisted the temptation to provide for a permanent reduction, although it remains to be seen whether the reduction will be extended if fuel prices continue to remain high.

Fuel tax credits

The reduction in fuel tax excise will be accompanied by a matching reduction in fuel tax credits, so that non-road transport users who currently receive a 100% fuel tax credit, such as miners and farmers, will not benefit from any reduction in fuel prices. This is consistent with the Government's objective to provide cost of living assistance to ordinary Australians.

Heavy vehicles travelling on public roads presently receive a fuel tax credit, which is reduced by a road user charge (RUC), meaning that heavy vehicle operators are subject only to the RUC. The RUC is presently 26.4 cents per litre. As the rate of excise will be reduced from 44.2 cents to 22.1 cents per litre, and the fuel tax credit for heavy vehicle operators will reduce to nil, the net effect for heavy vehicle operators is a fuel tax saving of 4.3 cents per litre, being the difference between the RUC and the reduced excise rate.

What does the reduction apply to?

The 50% reduction applies to the excise on petrol and diesel, as well as to the excise and excise-equivalent customs duty rates for all other fuel and petroleum-based products, except aviation fuels. For fuels which are presently subject to rates other than 44.2 cents per litre, the reduction will be 50% of the existing rate, rather than the 22.1 cents per litre reduction which applies to petrol and diesel.

Administration

We expect that the ATO will be asked to pass on the reduction with immediate effect, which we expect they will be willing to do as an administrative matter until such time as legislation giving effect to the changes has been passed, subject to the Opposition confirming that they will not oppose the change.

Transitional issues

Fuel retailers will be expected to pass on the reduction as soon as it is passed on to them by fuel wholesalers. This may not be immediate, and will depend on the extent to which stockpiles of fuel have already been subject to excise.

Businesses claiming fuel tax credits will also need to ensure that their claims for credits are matched to the rate of excise imposed on the fuel used. For businesses with multiple stockpiles of fuel, there may be some complexity tracking the rate of excise applied to particular fuel.

These transitional issues will also need to be considered in reverse on expiry of the temporary reduction. We also note that it is proposed that, on expiry, the rate will return to its original rate, plus any 'missed' indexation in the interim.

Price monitoring

The Government has tasked the ACCC with monitoring fuel prices to ensure that the discount is being passed on to motorists. At this stage, the Government has not announced amendments to the Competition and Consumer Act to give the ACCC specific powers to penalise failure to pass on the discount. If the Government did form the view that the discount was not being passed on appropriately, it might elect to give the ACCC powers similar to those which were introduced with GST, to ensure that tax savings are passed on.

Cost of Living Payment

In addition to the fuel excise cuts, the Government has announced two further payments specifically targeted at alleviating cost of living pressures. These are the Cost of Living Payment and the Cost of Living Tax Offset.

Cost of Living Payment

A once-off cost of living payment of $250 will be paid in April 2022 to eligible Australian residents. The payments are exempt from tax and will not count as income support for the purposes of any income support payment. Eligible recipients are certain concession card holders and recipients of certain Government benefits, including the age pension, disability payments, carer payments and Jobseeker.

Cost of Living Tax Offset

The Cost of Living Tax Offset is essentially an increase to the LMITO for the financial year ending 30 June 2022 (FY22). The proposal will increase the LMITO by $420 for the income year ending 30 June 2022, which will result in a maximum LMITO of $1,500 for individuals and $3,000 for couples. In all other respects, the LMITO will remain unchanged, so eligibility for the $420 increase will cease once taxpayers reach an income of $126,000 for the income year ending 30 June 2022.