2022-23 Labor Federal budget highlights
The Federal Treasurer, Dr Jim Chalmers, handed down the Labor government's first Federal Budget at 7:30 pm (AEDT) on 25 October 2022.
Despite an uncertain global economic environment, the Treasurer has lauded Australia's low unemployment and strong export prices as reason for a 3.5% growth in the current financial year, slowing to 1.5% in 2023–24. The Budget projects a deficit of $36.9 billion, lower than the forecast by the former Government earlier this year of $78 billion.
The Budget contained no real surprises for a Government taking stock of the nation’s finances handed to it following its election win earlier in the year. Many Budget measures had already been announced since winning Government.
Described as a sensible Budget for the current conditions, it contains various cost of living relief measures including cheaper child care, expanding paid parental leave and encouraging downsizing to free up housing stock. Key tax measures are targeted at multinationals, particularly changes to the thin capitalisation rules, and changes to deduction rules for intangibles.
Importantly, no amendments have been proposed to the already legislated Stage-3 individual tax rate cuts. Additional funding for a range of tax administration and compliance programs have also been announced. Finally, the fate of a suite of announced but unenacted tax measures, including a few that have been around for at least 10 years, has been confirmed.
This Mazars Federal Budget brief summarises the key tax and superannuation announcements that we expect will most affect Mazars individual and business clients. See also planning suggestions for superannuation in anticipation of future tax increases.
Please note that as these are just announcements they cannot be regarded as law until legislated.
The full Budget papers are available at www.budget.gov.au and the Treasury ministers’ media releases are available at ministers.treasury.gov.au. The tax, superannuation and social security highlights are set out below.
Read ahead:
Individuals
Committing to a key election promise, there were no announced changes to the already legislated ‘Stage 3’ tax cuts which will proceed from 1 July 2024.
The Budget did not announce a further extension to the Low & Middle Income Tax Offset (LMITO) which was extended multiple times by the previous Government up to 30 June 2022, so this has now ceased. This means low and middle income earners (incomes up to $126,000) will see a reduction in tax refunds in 2023 and beyond of between $675 and $1,500.
With no real tax changes for individuals, we highlight some spending measures that may benefit some clients.
Extension of personal income tax compliance program
Funding will be provided to extend the Personal Income Taxation Compliance Program a further 2 years to 30 June 2025. This program targets the key areas of non-compliance, including overclaiming of deductions and incorrect reporting of income.
Incentivising pensioners into the workforce
Age and veterans pensioners will be provided with a once off credit of $4,000 to their Work Bonus income bank. This will increase the amount pensioners can earn in 2022–23 from $7,800 to $11,800, before their pension is reduced. The measure will support pensioners who want to work or work more hours to do so without losing their pension.
Incentivising pensioners to downsize
The assets test exemption for principal home sale proceeds will be extended from 12 months to 24 months for income support recipients. The income test will also be changed, to apply only the lower deeming rate (0.25%) to principal home sale proceeds when calculating deemed income for 24 months after the sale of the principal home.
Income threshold for the Commonwealth Seniors Health Card increased
The maximum income threshold for the Commonwealth Seniors Health Card will be increased from $61,284 to $90,000 for singles and from $98,054 to $144,000 (combined) for couples.
The government will also freeze social security deeming rates at their current levels for a further 2 years until 30 June 2024, to support older Australians who rely on income from deemed financial investments, as well as the pension, to deal with the rising cost of living.
Paid Parental Leave flexibility reforms
The Paid Parental Leave Scheme will be amended from 1 July 2023 so that either parent is able to claim the payment and both birth parents and non-birth parents are allowed to receive the payment if they meet the eligibility criteria. Parents will also be able to claim weeks of the payment concurrently so they can take leave at the same time.
From 1 July 2024, the scheme will be expanded by 2 additional weeks a year until it reaches a full 26 weeks from 1 July 2026. Both parents will be able to share the leave entitlement, with a proportion maintained on a “use it or lose it” basis, to encourage and facilitate both parents to access the scheme. Sole parents will be able to access the full 26 weeks.
The Women’s Economic Equality Taskforce will assist in the finalisation of the changes to the scheme to ensure that the final model supports women’s economic participation and gender equality, including the period of concurrence and the most appropriate proportion of “use it or lose it” weeks.
Child care subsidy rate increased
The maximum Child Care Subsidy (CCS) rate will be increased from 85% to 90% for families for the first child in care. The CCS rate for all families earning less than $530,000 in household income will also be increased.
Higher child care subsidy rates for families with multiple children maintained
The current higher Child Care Subsidy (CCS) rates for families with multiple children aged 5 or under in child care will be maintained, with higher CCS rates to cease 26 weeks after the older child's last session of care, or when the child turns 6 years old.
Digital currency will not be taxed as foreign currency
Legislation will be introduced to clarify that digital currency (or crypto currencies) will continue to not be treated as foreign currency for income tax purposes. The treatment does not apply to digital currencies issued by, or under the authority of, a government agency, which continue to be taxed as foreign currency.
This tax treatment for digital currency will be backdated to apply to income years that include 1 July 2021. The position was announced on 22 June 2022 following the decision of the government of El Salvador to adopt Bitcoin as legal tender, and draft legislation was released by Treasury on 6 September 2022 for consultation.
This measure should simplify tax affairs for investors in digital currencies and those businesses accepting digital currencies as payment.
Businesses
FBT and tariff exemptions for electric vehicles
Electric vehicles (battery, hydrogen fuel cell and plug-in hybrid electric cars) under the luxury car tax threshold ($84,916 for 2022–23) will be exempt from fringe benefits tax and import tariffs. To qualify for the exemption, the electric vehicle must not have been held or used prior to 1 July 2022. Legislation introducing the FBT exemption is before the Senate.
The FBT exemption ultimately provides an opportunity for individuals to purchase an electric vehicle under a salary sacrifice novated lease arrangement. Without the FBT exemption, any benefit of this type of arrangement can be negligible. This is especially the case when an employee’s business use percentage is very low or nil. A salary sacrifice arrangement provides effective tax saving for the user of an electric vehicle, as the payment of the vehicle will reduce their income tax. Along with the FBT savings, consumers of electric vehicle will also benefit from the removal of a 5% import tariff.
Despite the FBT exemption, an employer will still be required to report their employee’s reportable car fringe benefits in the employee’s reportable fringe benefits amount.
More business grants to be given non-assessable non-exempt income status
State-based business grants handed out during the COVID-19 pandemic are assessable income to the recipient unless the government places that grant in a special exclusion category.
The government has announced the following Victorian and ACT business grants to be non-assessable non-exempt income for tax purposes:
- Victoria
- Victoria Business Costs Assistance Program Round 2 – Top up
- Victoria Business Costs Assistance Program Round 3
- Victoria Business Costs Assistance Program Round 4
- Victoria Business Costs Assistance Program 4 – Construction
- Victoria Business Costs Assistance Program Round 5
- Victoria Commercial Landlord Hardship Fund 3
- Victoria Impacted Public Events Support Program Round 2
- Victoria Licensed Hospitality Venue Fund 2021 – July extension
- Victoria Licensed Hospitality Venue Fund 2021 – Top up payments
- Victoria Live Performance Support Program (Presenters) Round 2
- Victoria Live Performance Support Program (Suppliers) Round 2
- Australian Capital Territory
- ACT HOMEFRONT 3
- ACT Small Business Hardship Scheme
This announcement is in addition to several other state-based business grants that have been give non-assessable non-exempt status since the beginning of the COVID-19 pandemic.
Energy efficiency grants for SMEs
Grants will be provided to small and medium-sized businesses to fund energy efficient equipment upgrades.
The grants will be available to support studies, planning, equipment and facility upgrade projects that improve energy efficiency, reduce emissions or improve management of power demand.
Tax treatment for off-market share buy-backs of listed public companies – Integrity Measure
The tax treatment for off-market share buy-backs undertaken by listed public companies will be aligned with the treatment of on-market share buy-backs.
Under the current tax treatment for an off-market buy-back, the difference between the purchase price and the part of the purchase price in respect of the buy-back which is debited against the company's share capital account is taken to be a dividend. Franking credits may be available with respect to such a dividend.
In the case of an on-market buy-back, no part of the buy-back price is treated as a dividend and the total amount received by the shareholder is treated as consideration for the share sale.
It is viewed that the current off-market buy-back rules can be abused to stream franking credits, so aligning them with on-market rules will eliminate this.
Fuel tax credits — heavy vehicle road user charge increased
The Heavy Vehicle Road User Charge rate has been increased from 26.4 cents per litre to 27.2 cents per litre of diesel fuel, effective from 29 September 2022.
The previous rate of 26.4 cents per litre was announced in the 2021–22 Budget and commenced on 1 July 2021. The increased rate will reduce expenditure on the Fuel Tax Credit from the 2022–23 income year.
Providing certainty on unlegislated measures announced by previous Government
With any change in Government, uncertainty arises in relation to unlegislated proposed measures. The Government has announced it will not proceed with the following measures:
Intangible asset depreciation measure — not proceeding
The 2021–22 Budget measure to allow taxpayers to self-assess the effective life of intangible depreciating assets will not proceed. A Bill introduced to implement the measure lapsed upon the proroguing of parliament.
The statutory effective lives for intangible depreciating assets (eg patents, copyrights and registered designs) set out in the table under s 40-95(7) of ITAA 1997 will continue to apply (for example a statutory effective life of 25 years for copyright).
The measure has been discontinued to avoid potential integrity concerns and contribute to budget repair.
Debt/equity tax rules amendment — not proceeding
Proposed amendments to the debt/equity tax rules mentioned in the 2013–14 MYEFO will not proceed.
The amendments appear to refer to a measure first announced in the 2011–12 Budget which sought to limit the scope of an integrity provision in the debt/equity rules to prevent unintended outcomes. The then incoming Coalition government identified this measure as one that it intended to proceed with in the 2013–14 MYEFO, but it had since remained unenacted.
Reforms to simplify taxation of financial arrangements — not proceeding
Amendments to the simplify the taxation of financial arrangements (TOFA) rules proposed in the 2016–17 Budget will not proceed.
The government had proposed to reform the TOFA rules to reduce the scope, decrease compliance costs and increase certainty by redesigning the TOFA framework. The proposed changes included:
- a “closer link to accounting” to strengthen and simplify the existing link between tax and accounting in the TOFA rules
- simplified accruals and realisation rules to reduce the arrangements where spreading of gains and losses is required under TOFA and simplify required calculations
- a new tax hedging regime encompassing more types of risk management arrangements, and removing the direct link to financial accounting, and
- simplified rules for the taxation of gains and losses on foreign currency to preserve existing tax outcomes but streamline legislation.
Limit on cash payments to businesses — not proceeding
A proposed measure from the 2018–19 Budget to impose a limit of $10,000 for cash payments made to businesses for goods and services will not proceed.
Asset-backed financing arrangement changes — not proceeding
Proposed changes first announced in the 2016–17 Budget to amend the taxation of asset-backed financing arrangements will not proceed. The changes proposed that these type of arrangements, such as deferred payment arrangements and hire purchase arrangements, be amended to ensure they were treated in the same way as financing arrangements based on interest-bearing loans or investments and was due to commence from 1 July 2018.
Limited partnership CIV regime — not proceeding
The new tax and regulatory regime for limited partnership collective investment vehicles proposed in the 2016–17 Budget will not proceed.
This measure was first announced together with a new regime for corporate collective investment vehicles (CCIVs), which has since been enacted into legislation (Corporate Collective Investment Vehicle Framework and Other Measures Bill 2021, Act No 8 of 2022). This confirms the unenacted proposal for a partnership regime will not go ahead.
Technical amendments to taxation of financial arrangements — deferred
Technical amendments to the taxation of financial arrangements (TOFA) rules proposed in the 2021–22 Budget will be deferred.
The proposed amendments to the TOFA rules included facilitating access to hedging rules on a portfolio hedging basis. The start date for the measure will be deferred from 1 July 2022 to the income year commencing on or after assent of enabling legislation.
Extension for reportable transactions — deferred
The 2019–20 MYEFO in December 2019 announced an extension of the Taxable Payments Reporting System to the sharing economy. This reporting regime requires businesses providing online platforms within the sharing or gig economy to report identification and income information, of all sellers and providers using their platform, to the ATO for data-matching purposes. The implementation of the reporting requirements has generally been deferred by 12-months pending policy legislation and implementation as follows:
- ride-sharing and short-term accommodation platforms — deferred to income years commencing from 1 July 2023 (previously from 1 July 2022. In August 2018 the ATO gazetted notice to collect, from online accommodation platforms, data to identify individuals providing accommodation services through an online platform for the period 1 July 2016 to 30 June 2020).
- all other reportable transactions, including, but not limited to asset sharing, food delivery, task-based services — deferred to income years commencing from 1 July 2024 (previously from 1 July 2023).
What is still uncertain?
Two key measures announced by the previous Government which have not been clarified relate to the tax residency of individuals and companies. It is disappointing that the Government has not clarified whether it intends to proceed with these recommendations.
Multinationals
Thin capitalisation — earnings-based tests to replace ratio tests for non-ADIs
Australia’s tax law contains ‘Thin Capitalisation’ rules to prevent international investment funding with too much debt which erodes the tax base.
Thin capitalisation rules will be amended for non-authorised deposit-taking institutions (non ADIs) with the replacement of the safe harbour test (debt to asset ratio) and the worldwide gearing test (debt to equity ratio) with earnings-based tests, to limit debt deductions in line with an entity's activities (profits). ADIs will continue to apply the current thin capitalisation rules.
The safe harbour test is being replaced with an earnings-based test, which will limit the entities’ interest expense to 30% of profit. Profit will be defined as EBITDA, or earnings before interest, taxes, depreciation and amortisation. If a multinational entity wishes to use this entity-level EBITDA earnings-based test (interest expense amounts exceeding the 30% EBITDA ratio), any debt deductions denied may be carried forward and claimed in a subsequent year (up to 15 years).
A second option for a multinational entity would be to claim a debt deduction up to the level of their worldwide group’s net income expense as a percentage of earnings. This earnings-based group ratio will replace the worldwide gearing ratio.
The remaining arm’s length debt test will be retained as a substitute test, but will only apply to a multinational entity’s external (third party) debt, disallowing deductions for any related party debt under this test.
Multinational entities operating in Australia, and any inward or outward investor, must pass thin capitalisation rules in order to claim a deduction for interest expenses above $2 million.
This measure will apply to income years commencing on or after 1 July 2023.
This is a positive move as it will simplify the thin capitalisation rules for businesses and align rules with OECD best practice and many overseas countries, making investment decisions easier.
No deduction for related party payments for intangibles in low- or no-tax jurisdictions
A significant global entity will be denied a deduction for payments to related parties in relation to intangibles held in low- or no-tax jurisdictions. This anti-avoidance rule will apply to payments made on or after 1 July 2023.
Payments or fees are commonly made by multinational entities to a head company for their use of the head company’s intangibles. These payments can be made either directly or indirectly to a related entity. These payments reduce net profit from the Australian tax system, which has a corporate tax rate of 30% for large companies. The denial of a deduction reduces the effectiveness of utilising low taxing countries to hold intangible assets.
A significant global entity is defined as an entity with annual global revenue of at least $1 billion.
For the purposes of the new anti-avoidance measure, a low- or no-tax jurisdiction is a jurisdiction with:
- a tax rate of less than 15%, or
- a tax preferential patent box regime without sufficient economic substance.
More disclosure of tax information required for significant global entities and public companies
Certain tax information of significant global entities will be publicly disclosed by the ATO on a country-by-country basis. Significant global entities are currently required to lodge additional reports with the ATO, which includes a country-by-country report. The public disclosure may include new types of information not currently reported on, including a statement on their approach to taxation.
Public companies will be required to disclose to the public the number of subsidiaries they have and their tax domicile. This disclosure will apply to both listed and unlisted public companies.
To further improve tax transparency, government contract tenderers will be required to disclose their ultimate head entity’s country of tax residence for tenders above $200,000.
Australia-Iceland tax treaty
Australia has signed a new tax treaty with Iceland.
Once in force, the treaty will facilitate trade and investment between Australia and Iceland by relieving double taxation, reducing withholding tax rates and providing more certainty for taxpayers in both countries. It also contains integrity provisions consistent with the outcomes of the G20/OECD Base Erosion and Profit Shifting project for the prevention of tax evasion and avoidance through treaty abuse.
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 was signed on 12 October 2022.
Waiver of import duty on goods from Ukraine
Ukraine goods are exempted from import duties for a period of 12 months from 4 July 2022.
This measure applies a “Free” rate of duty to all goods that are the produce or manufacture of Ukraine except for excise-equivalent goods, such as certain alcohol, fuel, tobacco and petroleum products.
Tax administration
Penalty unit increase to $275 from 1 January 2023
From 1 January 2023 the value of a Commonwealth penalty unit will increase from $222 to $275. The amount will continue to be indexed in accordance with the triennial Consumer Price Index (CPI) indexation regime introduced from 1 July 2017, with the next indexation occurring on 1 July 2023.
Penalty units are used to calculate the penalties for various tax offences including making false statements and failing to lodge documents (such as Business Activity Statements or Tax Returns) on time. The increased penalty unit will apply to offences committed after the increase is given legislative effect.
Extension of shadow economy compliance program
The ATO Shadow Economy Program will be extended for a further 3 years from 1 July 2023. Measures to address the shadow economy were first announced as part of the 2018–19 Budget and in response to the Black Economy Taskforce’s Final Report.
Tax avoidance taskforce receives additional funding
The ATO Tax Avoidance Taskforce will receive additional funding and be extended to 30 June 2026 supporting a broadening of priority areas of observed business tax risks, complementing the ongoing focus on multinational enterprises and large public and private businesses. This taskforce initially received funding in 2016 to enhance then current compliance activities targeting large multinationals, private groups and high-wealth individual.
Increase in foreign investment penalties
Financial penalties for breaches that relate to foreign investment in residential land will double from 1 January 2023.
Fees paid by foreign persons for all applications made under the foreign investment framework were doubled from 29 July 2022. This announcement complements those increases by doubling the maximum financial penalties that can be applied for breaches in relation to residential land.
Tax agents
Increased funding for Tax Practitioners Board compliance investigations
The Tax Practitioners Board (TPB) will be given $30.4 million to increase compliance investigations into high-risk practitioners and unregistered preparers over 4 years from 1 July 2023.
The TPB will use new risk engines to better identify tax practitioners who engage in poor and unlawful tax advice, to improve tax compliance and raise industry standards.
Not-for-profit
Updates to deductible gift recipients list
Australians for Indigenous Constitutional Recognition will be specifically listed as a deductible gift recipient (DGR) for donations made from 1 July 2022 to 30 June 2025.
The listing of the Australian Women Donors Network as a DGR will also be extended for 5 years, for gifts made from 9 March 2023 to 8 March 2028.
Deductible gift recipient category for pastoral care providers measure — not proceeding
The 2021–22 MYEFO measure that proposed establishing a deductible gift recipient category for providers of pastoral care and analogous well-being services in schools will not proceed.
Superannuation
For the first time in recent budget history there were no new superannuation announcements. Budget items confirming existing super measures are noted below.
The bigger story for superannuation is about what is coming in the next 12 to 24 months. The clear government signal is that tax revenue must rise and although not specified, this is likely to include superannuation tax increases. Alert self-managed super fund members should consult with their advisors and understand how to sandbag their self-managed superfunds against the predictable rising tax waters that could target superannuation and death benefits. Recent changes significantly increase the ability of older super fund members to re-contribute to superannuation and fine tune fund balances to manage tax.
- The age at which members will become eligible for downsizer contributions will reduce from 60 to 55. The downsizer contribution allows an individual 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. Both members of a couple can contribute, and the contributions do not count towards non-concessional contribution caps. This change is already well progressed to becoming law and will take effect from the start of the first quarter after Royal Assent of the enabling legislation.
- The previous Budget measure that proposed relaxing residency requirements for SMSFs has been deferred. Currently members who are temporarily overseas can contribute to their superannuation fund for two years. The proposed change will extend that period to five years, and remove the active member test on contributions. It is encouraging that the government confirmed the sensible change, but disappointing that the implementation is still some time away.
- The Budget ruled out replacing annual SMSF audits with a three yearly cycle.
- Regarding Non-Arm’s Length Income & Expenses (NALI and NALE), there was no news on legislative changes required to address the dramatic unintended consequences of these rules.
If you have any questions please speak to your usual Mazars adviser or contact our Tax and Superannuation specialists via the form or contact details below:
Brisbane – +61 7 3218 3900 | Melbourne – +61 3 9252 0800 | Sydney – +61 2 9922 1166 |
Jamie Towers Clive Todd | Evan Beissel Michael Jones | Gaibrielle Cleary Jeremy Mortlock |
Published: 26 / 10 / 22
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