The Albanese Labor government handed down its federal budget on the evening of Tuesday 25 October 2022.
Our team of experts have collaborated to share their interpretation of what the budget means for you, your family, and your business.
If you have any questions as to how this budget impacts you and your business, please do not hesitate to contact your adviser.
We are here to assist you to navigate through the information, and help you get where you want to be.
The federal budget for Australian businesses
In contrast to the former government’s budget in March 2022, there were no targeted tax concessions for small and medium businesses. There were various measures designed to support small and medium businesses but the most significant tax measures for business related to multinationals.
Here we highlight some of the key tax measures affecting Australian businesses.
LARGE BUSINESSES
Multinationals
Multinationals continue to be in the spotlight as the government releases its Multinational Tax Integrity Package.
As previously announced, multinationals will be subject to ongoing tax integrity measures targeted at reducing tax arbitrage opportunities, raising revenue and increasing tax transparency. Three key measures have been announced by the government targeting Multinational Enterprises (MNEs).
The government has confirmed in the current budget, that the following measures are to be introduced under its Multinational Tax Integrity Package:
- Tightening the availability of tax deductions using debt
- Restricting the use of intangible assets in low tax jurisdictions
- Improving tax transparency measures
These measures are consistent with OECD recommendations to tackle international tax avoidance also referred to as “Base Erosion and Profit Shifting” (BEPS) by multinationals. Other BEPS measures such as the 15% Global Minimum Tax rules are still under consultation and we expect further announcements on these rules in the near future.
Debt gearing restrictions
The Labor government will be adopting OECD recommendations to limit debt deductions to counter artificial debt and repayment arrangements with related parties particularly where profits can be re-allocated using debt to lower taxed jurisdictions.
Under the announcements, the current thin capitalisation rules will be modified to limit deductions for interest expenses based on 30% of profits. In this regard, “profits” will be measured as EBITDA – earnings before interest, taxes, depreciation and amortisation.
The proposed change also means that the current thin capitalisation rules will be amended such that:
- The 30% of profit test will replace the current safe harbour test
- For deductions denied under the 30% of profits test, to be carried forward up to a maximum of 15 years
- The worldwide gearing ratio will be replaced by a new earnings-based group ratio that may allow an entity in certain circumstances to claim deduction exceeding the 30% of profits test
- Retain an arm’s length test as a substitute test but only applying to external (third party) debt but disallowing deductions for related party debt
- The thin capitalisation changes are to apply to all multinationals except for financial entities which will continue to be subject to the current thin capitalisation rules.
The thin capitalisation changes are to take effect for income years starting on or after 1 July 2023.
Use of offshore intangibles
For significant global entities (entities will global revenues of $1 billion or more) that make royalty or other payments that are connected with the use of related party intangibles located in low-tax jurisdictions, new anti-avoidance measures are to be introduced to deny deductions for such payments.
Low tax jurisdictions will include jurisdictions with a tax rate of less than 15% or a tax preferential patent box regime without a sufficient level of economic substance.
This integrity measure is intended to apply for related party payments relating to intangibles made on or after 1 July 2023.
Improving tax transparency
As part of ongoing tax transparency reporting, the government has announced the following new tax reporting requirements:
- For significant global entities (global revenues of $1 billion or more), certain country-by-country (CbC) tax information together with tax governance arrangements to be reported to the Tax Office for public disclosure
- Listed and unlisted Australian public companies will be required to disclose the number and tax jurisdiction of their subsidiaries
- Tenderers for Australian government contracts valued at more than $200,000 will be required to disclose their head entity’s country of tax residence
The above measures are intended to apply for income years starting on or after 1 July 2023.
With multinationals continuing to be under the spotlight and having to deal with an ever-increasing release of new revenue tax protection measures and tax reporting requirements there will be a number of important key areas that MNEs will need to be addressed under the government’s announcements. These include:
- Assessing current debt arrangements and whether the new thin capitalisation rules have any impact on debt deductions
- Reviewing current related party royalty arrangements relating to the use of intangibles located offshore and whether such arrangements are now at risk
- Reassessing adequacy of current tax governance arrangements and how they are documented
- Considering whether the additional disclosure requirements have any stakeholder impacts in terms of public disclosures, confidentiality and privacy
Tax Avoidance Taskforce
Additional government funding will be provided to the Tax Office of around $200 million per year over a four year period and extending the operation of the Tax Avoidance Taskforce for an additional year up to 30 June 2026.
The role of the Taskforce is to monitor tax compliance activities at the larger end of town. Such activities have included the Top 1000 Public Groups Performance Program and the next 5000 Private Groups Tax Performance Program.
With ongoing Tax Office scrutiny, it is expected that many larger businesses including multinationals operating in Australia will need to review and reassess their tax governance procedures and tax protocols in anticipation of ongoing Tax Office reviews.
New integrity measure on share buy-backs by listed companies
The government has announced that listed companies undertaking off-market share buy-backs can no longer classify any part of the buy-back as a dividend.
For investors, this will effectively mean that it will no longer be possible to receive franking credits from an off-market share buy-back. Such buy-backs have been particularly attractive for superannuation funds and certain other investors that are able to obtain tax refunds on franking credits attached to franked dividends paid from the off-market buy-back.
To achieve the above, the proposed integrity measure will treat off market share buy-backs undertaken by listed companies on the same tax basis as on-market share buy-backs.
The proposed buy-back changes are to take effect from Budget night on 25 October 2022.
This integrity measure appears to be a separate but significant measure to earlier announcements by the government regarding the use of capital raisings to fund the distribution of excess franking credits.
INDIRECT TAX
FBT and customs duty exemption for electric cars
These previously announced concessions should increase the attractiveness of packaging or providing electric vehicles that would otherwise be subject to FBT.
As previously announced, with effect from 1 July 2022, this measure will exempt certain electric cars from fringe benefits tax and customs duty if they have a first retail price below the luxury car tax threshold for fuel-efficient cars ($84,916 in 2022/23).
To be eligible for exemption the car must:
- Use one or more electric motors for propulsion; and
- Be fuelled by either an off-vehicle electrical power source, a battery, an electric generator, a hydrogen fuel cell, or a combination of these
A car that has an internal combustion engine will not qualify unless it is able to be fuelled by a battery that can be recharged by an off-vehicle power source, for example, a plug-in hybrid car.
The car must not have been held or used before 1 July 2022.
Whilst exempt from FBT, employers will still need to include the exempt benefits in an employee’s reportable fringe benefits amount.
The customs duty of 5% will also be removed with effect from 1 July 2022.
The measure will be reviewed after three years.
Employers should consider whether providing electric cars to employees is now a more cost-effective option after taking into account savings in FBT and running costs as well as any concessions in registration costs that may be available.
OTHER MEASURES FOR BUSINESS
Depreciation of intangible depreciating assets
There will be no self-assessment of the effective life of intangible depreciating assets.
The government announced it will not proceed with the measure to allow taxpayers to self-assess the effective life of intangible depreciating assets, which had been announced in the 2021–22 budget.
Reversing this decision will maintain the status quo – effective lives of intangible depreciating assets will continue to be set by statute.
This removes the potential integrity concerns that came with the previously announced measure and contribute to budget repair.
Taxation of digital currency to be set in law
There will be legal re-inforcement of the ATO’s position clarifying that digital currencies are not taxed as foreign currency.
The government will introduce legislation to clarify that digital currencies (such as Bitcoin) continue to be excluded from the Australian income tax treatment of foreign currency.
This maintains the current tax treatment of digital currencies, including the capital gains tax treatment where they are held as an investment and will be backdated to income years that include 1 July 2021.
The exclusion does not apply to digital currencies issued by, or under the authority of, a government agency, which continue to be taxed as foreign currency.
Making COVID-19 business grants non-assessable non-exempt
Payments from certain state and territory business grants, made prior to 30 June 2022, can be made non-assessable, non-exempt (NANE) for income tax purposes, subject to eligibility.
The government has made the following state and territory COVID-19 grant programs eligible for NANE treatment, which will exempt eligible businesses from paying tax on these grants:
- Victoria Business Costs Assistance Program Four – Construction
- Victoria Licenced Hospitality Venue Fund 2021 – July Extension
- Victoria License, Hospitality Venue Fund 2021 – Top Up Payments
- Victoria Business Costs Assistance Program Round Two – Top Up
- Victoria Business Costs Assistance Program Round Three
- Victoria Business Costs Assistance Program Round Four
- Victoria Business Costs Assistance Program Round Five
- Victoria Impacted Public Events Support Program Round Two
- Victoria Live Performance Support Program (Presenters) Round Two
- Victoria Live Performance Support Program (Suppliers) Round Two
- Victoria Commercial Landlord Hardship Fund 3
- Australian Capital Territory HOMEFRONT 3
- Australian Capital Territory Small Business Hardship Scheme
This tax treatment is only provided in exceptional circumstances, such as the severe economic consequences facing businesses during the COVID-19 pandemic.
Businesses should ensure that any of the above grants are identified so they can be treated correctly for tax purposes.
Other Coalition measures
Previously announced measures by the former government such as the corporate and individual residency changes and the patent box regime were not mentioned in the current federal budget and it remains to be seen as to whether these measures will proceed.
Other Coalition measures
Previously announced measures by the former government such as the corporate and individual residency changes and the patent box regime were not mentioned in the current federal budget and it remains to be seen as to whether these measures will proceed.
SMALL & MEDIUM BUSINESSES
Energy efficiency grants
The government will provide $62.6 million over three years from 2022–23 to support small to medium enterprises to fund energy efficient equipment upgrades.
The funding will support studies, planning, equipment, and facility upgrade projects that will improve energy efficiency, reduce emissions or improve the management of power demand.
New Energy Apprenticeships
The government will provide $95.6 million over nine years from 2022–23 to support 10,000 people to complete a New Energy Apprenticeship.
Eligible apprentices will be able to claim a New Energy Apprentice Support Payment of up to $10,000 over the duration of the apprenticeship, comprising $2,000 on commencement, $2,000 per year for up to three years, and $2,000 on completion.
Additional in-training support places will be made available for all New Energy Apprentices, with extra support for targeted groups including First Nations peoples, mature-age apprentices, regional and remote Australians, and people from culturally and linguistically diverse backgrounds.
Energy Efficiency Skills Program
The government will provide $9.6 million over five years from 2022–23 to support Australia’s workforce to transition to a clean energy economy.
This funding will support a new mentoring program to help train and support new energy apprentices, the development of fit-for-purpose training pathways, and a capacity study by Jobs and Skills Australia to evaluate Australia’s workforce needs to transition to a clean energy economy.
Workforce and other measures
The government has introduced various measures to assist businesses in creating and maintaining their workforce.
These measures include:
- Paid family and domestic violence leave – small business assistance
- Vocational education for skills shortages
- Migration and Pacific Australia Labour Mobility Scheme
- Support for travel and tourism sectors
- Support for healthcare and General Practitioners
- Pandemic Support Payment extensions
- Heavy Vehicle Road User Charge
- Supporting the arts
- Incentivising pensioners into the workforce
- Modernising Business Registers – program funding, director ID sustainment and registry stabilisation
- Supporting small business owners with Debt Helpline and financial and mental wellbeing programs
These measures focus on providing additional capacity within the existing workforce by increasing flexibility on temporary and skilled migration, addressing industry skills shortages with subsidised vocational training and apprenticeship opportunities, and incentivising older Australians to maintain connections with their employer without sacrificing their pension entitlements.
Insights for families and individuals
The government is supporting families by providing “responsible” cost-of-living relief to families.
The budget provides for targeted cost-of-living relief by delivering cheaper child care, cheaper medicines, expanding paid parental leave, and measures to support affordable housing.
As expected, there were no personal income tax changes including no changes to previously legislated personal income tax changes (stage 3 changes) that apply from 1 July 2024. There was no extension to the temporary reduction in fuel excise that ended on 28 September 2022.
There were also no new announcements in relation to proposed changes to individual tax residency rules (which are understood to be still under review by the Labor government).
Implementing a housing reform agenda is a key initiative in the budget.
The government has announced a new Housing Accord which aims to bring together all levels of government as well as market participants to unlock quality, affordable housing supply over the medium term. The new Housing Accord sets an initial, aspirational target of 1 million new, well-located homes over five years from 2024.
Under the Accord, the government is committing $350 million over five years to deliver 10,000 affordable dwellings. States and territories will also support up to an additional 10,000 affordable homes. Through the combination of a more secure pipeline of supply and government support through innovative financing, the government believes this will also facilitate cost-effective investment in housing by superannuation and institutional investors.
The budget also includes announcements to help people into home ownership including:
- Help to Buy shared equity scheme – this scheme will assist homebuyers to purchase a home with an equity contribution from the Australian Government so that eligible home buyers can buy a home with a smaller deposit and smaller mortgage
- Regional First Home Buyer Guarantee – from 1 October 2022, 10,000 places are available each financial year to support regional first homebuyers to purchase a home with a deposit of as little as 5%
- The government is also encouraging older homeowners to downsize their homes to free up homes for younger families by extending the exemption of home sale proceeds from pension asset testing from 12 months to 24 months. Also, by expanding access to downsizer superannuation contributions for people aged 55 to 59
The government is proposing to make changes to the Paid Parental Leave scheme, with the key focus being the extension of the scheme duration from its current 18 week period, to 26 weeks.
From 1 July 2024, the Paid Parental Leave scheme will extend by two additional weeks a year, reaching a full 26 weeks a year from 1 July 2026.
Other updates to the scheme include:
- 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 and to share the caring responsibilities more equally
- Single parents being allowed to access the full entitlement
- Subject to eligibility criteria, both birth parents and non-birth parents will be eligible for the scheme
- Weeks of the payment will be available for parents to access concurrently, allowing them to take paid leave on the same days
- Parents being able to take government-paid leave in blocks as small as a day at a time, with periods of work in between, so parents can use their weeks in a way that works best for them
- An extension to the means testing to include a household income threshold of $350,000
The government is proposing to provide age and veterans pensioners a once off credit of $4,000 to their Work Bonus income bank.
The temporary income bank top up will increase the amount pensioners can earn in 2022–23 from $7,800 to $11,800, before their pension is reduced, supporting pensioners who want to work or work more hours to do so without losing their pension.
The government has followed through on their election promise of no adverse changes to tax measures on superannuation. Individuals, retirees, SMSF trustees and their advisers can take comfort in the fact that their superannuation savings are not being restricted or challenged – at least this time around.
As previously announced, the legislation reducing the downsizer age further to 55 is currently before the Senate and will be available from the first quarter after Royal Assent. From 1 July 2022, eligible taxpayers over the age of 60 could contribute up to $300,000 of the proceeds from the sale of their home. This measure combined with the measure to extend the assets test exemption for principal home sale proceeds from 12 months to 24 months are intended to incentivise older Australians to downsize and free up properties for families.
There were also announcements regarding measures that were proposed by the former government. The three year audit proposal has been ruled out and changes to the residency requirements for SMSF trustees has been deferred until the income year commencing on or after the date of Royal Assent of the enabling legislation.
The income threshold for Commonwealth Seniors Health Card is to be increased from 1 July 2022 to $144,000 for couples (up from $98,054) and $90,000 for singles (up from $61,284) providing further support to older Australians to deal with cost-of-living pressures.
The budget also includes an additional $80.3 million for the ATO to extend Personal Income Taxation Compliance Programs for two years from 1 July 2023. The government expects this to increase tax receipts by $674.4 million.
The government is increasing Child Care Subsidy rates for families earning less than $530,000 with children in care.
From July 2023, Child Care Subsidy rates will lift from 85% to 90% for families earning less than $80,000. Subsidy rates will then taper down one percentage point for each additional $5,000 in income until it reaches 0% for families earning $530,000.
Families will continue to receive existing higher subsidy rates for their second and subsequent children aged five and under in care, up to 95%.
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A special thank you to the Bentley’s team for preparing this analysis and allowing us to share it with you. Special mention goes to Simon How, Dean Steer, Mike Burfield, Vicki Cremona, Darren Lee, Tomas Mackay, Sonia Mascolo, Shari Neagle, Ross Prosper, Michael Rica, Michael Senchenko and David Spurritt.
All material contained herein is written by way of general comment. No material should be accepted as authoritative advice and if you wish to act upon the material contain herein, you should contact The MBA Partnership for properly considered professional advice which will take into account your own specific conditions. No responsibility is accepted for any action taken without advice by readers of the material contained herein.