Federal Budget 2023-24 — Taxation measures

On 9 May 2023, Treasurer Jim Chalmers handed down the Federal Budget 2023-24.

Detailed below is a summary of the significant tax measures, and a consideration of the announced measures in greater detail.

Significant tax announcements

• Instant asset write-off: the government will temporarily increase the instant asset write-off threshold to $20,000, from 1 July 2023 until 30 June 2024 for businesses with aggregated annual turnover of less than $10 million.
• Build-to-rent Projects: the rate of the capital works deduction will be increased to 4 percent per year for projects where construction commences after 7:30 PM (AEST) on 9 May 2023.
• Small business energy incentive: small and medium businesses, with aggregated annual turnover of less than $50 million, will be able to deduct an additional 20 percent of the cost of eligible depreciating assets that support electrification and more efficient use of energy.
• Superannuation concessions: from 1 July 2025, the tax concessions available to individuals with a total superannuation balance exceeding $3 million will be reduced. Individuals with superannuation balances of less than $3 million will not be affected.
• Superannuation guarantee payments: from 1 July 2026, employers will be required to pay their employees’ superannuation guarantee entitlements on the same day that they pay salary and wages.

Tax measures in detail

Personal taxation

Exempting lump sum payments in arrears from the Medicare levy

From 1 July 2024, eligible lump sum payments in arrears will be exempted from the Medicare levy. This will ensure that low-income taxpayers do not pay higher amounts of Medicare levy as a result of receiving an eligible lump sum payment, for example as compensation for underpaid wages.

To qualify, taxpayers must:

• be eligible for a reduction in the Medicare levy in the two most recent years to which the lump sum accrues; and
• also satisfy the existing eligibility requirements of the existing lump sum payment in arrears tax offset, including that a lump sum accounts for at least 10 percent of the taxpayer’s income in the year of receipt.

Increasing the Medicare levy low-income thresholds

From 1 July 2022, the government will increase the Medicare levy low-income thresholds for singles, families and seniors and pensioners.

The increased thresholds are as follows:

• singles: from $23,365 to $24,276;
• families: from $39,402 to $40,939;
• single seniors and pensioners: from $36,925 to $38,365; and
• family threshold for seniors and pensioners: from $51,401 to $53,406.

For each dependent child or student, the family income thresholds will increase by a further $3,760 instead of the previous amount of $3,619.

Small business support

Helping small business manage tax instalments and improve cashflow

The government will amend the tax law to set the GDP adjustment factor for pay-as-you-go (PAYG) and GST instalments at 6 percent for the 2023-24 income year, a reduction from 12 percent under the statutory formula.

The 6 per cent GDP adjustment rate will apply to small businesses and individuals who are eligible to use the relevant instalment methods (up to $10 million aggregated annual turnover for GST instalments and $50 million annual aggregated turnover for PAYG instalments), in respect of instalments that relate to the 2023-24 income year and fall due after the enabling legislation receives Royal Assent.

$20,000 instant asset write-off

The government will temporarily increase the instant asset write-off threshold to $20,000, from 1 July 2023 until 30 June 2024.

Small businesses, with aggregated annual turnover of less than $10 million, will be able to immediately deduct the full cost of eligible assets costing less than $20,000 that are first used or installed ready for use between 1 July 2023 and 30 June 2024.

The $20,000 threshold will apply on a per asset basis, so businesses can instantly write off multiple assets. 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 percent in the first income year and 30 percent each income year thereafter.

Small business energy incentive

The government will support small and medium businesses to save on energy bills through incentivising the electrification of assets and improvements to energy efficiency.

Small and medium businesses, with aggregated annual turnover of less than $50 million, will be able to deduct an additional 20 percent of the cost of eligible depreciating assets that support electrification and more efficient use of energy. Up to $100,000 of total expenditure will be eligible for the Small Business Energy Incentive, with the maximum bonus deduction being $20,000.

A range of depreciating assets, as well as upgrades to existing assets, will be eligible for the incentive. These will include assets that upgrade to more efficient electrical goods such as energy-efficient fridges, assets that support electrification such as heat pumps and electric heating or cooling systems, and demand management assets such as batteries or thermal energy storage.

Eligible assets will need to be first used or installed ready for use between 1 July 2023 and 30 June 2024. Eligible upgrades will also need to be made in this period.

Certain exclusions will apply such as electric vehicles, renewable electricity generation assets, capital works, and assets that are not connected to the electricity grid and that use fossil fuels.

Corporate taxation

Franked distributions by capital raisings

The government will amend the start date of the measure announced in the 2016-17 Mid-Year Economic and Fiscal Outlook regarding the making of franked distributions funded by capital raisings. The previously announced start date will be amended from 19 December 2016 to 15 September 2022.

This announced measure will prevent a company from attaching franking credits to distributions to shareholders made outside of the company’s regular dividend cycle, where those distributions are funded directly or indirectly by capital raising activities that result in the issue of new equity interests.

This measure is intended to address issues raised by the Australian Taxation Office (ATO) in Taxpayer Alert 2015/2: Franked distributions funded by raising capital to release franking credits to shareholders. The ATO has expressed concern that such arrangements are being used by companies for the purpose of releasing franking credits or streaming dividends to shareholders.

Build-to-rent developments — Accelerating tax deductions and reducing managed investment trust withholding tax rate

With respect to eligible new build-to-rent projects where construction commences after 7:30 PM (AEST) on 9 May 2023, the government will:

• increase the rate for the capital works tax deduction (depreciation) to 4 percent per year; and
• reduce the final withholding tax rate on eligible fund payments from managed investment trust (MIT) investments from 30 percent to 15 percent.

Accelerating tax deductions

Division 43 of the Income Tax Assessment Act 1997 (ITAA 1997) permits a deduction for capital expenditure incurred in the construction of buildings and other capital works used to produce assessable income. For capital works commenced after 27 February 1992, the basic rate is 2.5%. This measure will increase the capital works tax deduction for eligible new build-to-rent projects from 2.5% to 4% per year.

The accelerated depreciation rate will apply to build-to-rent projects consisting of 50 or more apartments or dwellings made available for rent to the general public. The dwellings must be retained under single ownership for at least 10 years before being able to be sold, and landlords must offer a lease term of at least three years for each dwelling.

MIT withholding tax rate

The reduced MIT withholding tax rate of 15% for residential build-to-rent will apply from 1 July 2024. Currently, foreign residents from an information exchange country are subject to a final MIT withholding tax rate of 30% for income attributable to a residential property, including build-to-rent projects.

Extending the clean building MIT withholding tax concession

From 1 July 2025, the government will extend the clean building MIT withholding tax concession to data centres and warehouses that meet the relevant energy efficiency standard, where construction commences after 7:30 PM (AEST) on 9 May 2023.

This measure will also raise the minimum energy efficiency requirements for existing and new clean buildings to a 6-star rating from the Green Building Council Australia or under the National Australian Built Environment Rating System.

Superannuation

Superannuation concessions where super balances exceed $3 million

From 1 July 2025, the government will reduce the tax concessions available to individuals with a total superannuation balance exceeding $3 million. Individuals with superannuation balances of less than $3 million will not be affected.

This amendment will bring the headline tax rate to 30 percent, up from 15 percent, for earnings corresponding to the proportion of an individual’s total superannuation balance that is greater than $3 million.

Under this measure:

• earnings relating to assets below the $3 million threshold will continue to be taxed at 15 percent or zero percent if held in a retirement pension account; and
• interests in defined benefit schemes will be appropriately valued and will have earnings taxed in a similar way to other interests, to ensure commensurate treatment.

Increasing the payment frequency of the superannuation guarantee (SG)

From 1 July 2026, employers will be required to pay their employees’ SG entitlements on the same day that they pay salary and wages.

Currently, employers are only required to pay their employees’ SG on a quarterly basis. By increasing the payment frequency of superannuation to align with the payment of salary and wages, this measure is intended to ensure employees have greater visibility over whether their entitlements have been paid, and better enable the ATO to recover unpaid superannuation.

The government will consult with relevant stakeholders on the design of changes to the SG charge to align with increased payment frequency, with the final design to be considered as part of the 2024-25 Budget.

The government will also provide $27 million for the ATO to improve data matching capabilities to identify and act on cases of SG underpayment by employers.

Non-arm’s length income provisions

The government will amend the non-arm’s length income (NALI) provisions in section 295‑550 of the Income Tax Assessment Act 1997 to limit the income taxable as NALI to twice the level of general expenses for self-managed superannuation funds and small Australian Prudential Regulation Authority (APRA) regulated funds. Additionally, fund income taxable as NALI will exclude contributions.

Broadly, NALI of a complying SMSF includes income derived from a scheme in which the parties were not dealing at arm’s length, and the amount of the income is more than the amount the entity might have been expected to derive if the parties had been dealing at arm’s length in relation to the scheme.

The measures will also:

• exempt large APRA regulated funds from the NALI provisions for both general and specific expenses of the fund;
• exempt expenditure that occurred prior to the 2018-19 income year.

The government has not announced a start date for this measure. However, in January 2023, Treasury released a consultation paper considering proposed legislative amendments that would apply following expiry of the ATO’s transitional compliance approach (PCG 2020/5) which will occur on 30 June 2023. Accordingly, we understand this measure is intended to apply from 1 July 2023.

International

Foreign investment — interfunding exemption

The government will exempt passive or low-risk interfunding transactions from mandatory notification requirements and fees under the Foreign Acquisitions and Takeovers Act 1975. This change will apply from the date of commencement of the amendments to the legislation.

As a result of an interfunding exemption, qualifying interfunding investments will not require prior approval or attract fees.

Implementation of a global minimum tax and a domestic minimum tax

On 20 December 2021, the Organisation for Economic Co-operation and Development (OECD) published detailed rules (the ‘Pillar Two model rules’) to assist in the implementation of a reform to the international tax system, to ensure multinational enterprises will be subject to a minimum 15% tax rate from 2023.

The Pillar Two model rules are intended to provide governments a template for addressing the tax challenges arising from digitalisation and globalisation of the economy agreed in October 2021 by 137 countries and jurisdictions under the OECD/G20 Inclusive Framework on base erosion and profit-shifting.

The government has announced it will implement key aspects of Pillar Two:

• a 15 percent global minimum tax for large multinational enterprises with the *Income Inclusion Rule applying to income years starting on or after 1 January 2024, and the *Undertaxed Profits Rule applying to income years starting on or after 1 January 2025; and
• a 15 percent domestic minimum tax applying to income years starting on or after 1 January 2024.

The global minimum tax and domestic minimum tax will apply to large multinationals with annual global revenue of EUR750 million (approximately $1.2 billion) or more.

A global minimum corporate tax rate of 15 per cent is intended to protect Australia’s corporate tax base. The global minimum tax rules would allow Australia to apply a top-up tax on a resident multinational parent or subsidiary company where the group’s income is taxed below 15 percent overseas.

*Under the Income Inclusion Rule, the minimum tax is paid at the level of the parent entity, in proportion to its ownership interests in those entities that have low taxed income The Undertaxed profits Rule allows a country to increase taxes on a business that is part of a multinational enterprise which pays less than the proposed global minimum 15 percent in another jurisdiction.

Excise

Tobacco excise

The government will increase tobacco excise and excise-equivalent customs duty by 5 percent per year for three years from 1 September 2023, in addition to ordinary indexation.

The government will also align the tax treatment of tobacco products subject to the per kilogram excise and excise-equivalent customs duty (such as roll-your-own tobacco) with the manufactured per-stick rate, by progressively lowering the ‘equivalisation weight’ from 0.7 to 0.6 grams. These progressive decreases will occur on 1 September each year from 2023, with the new weight coming fully into effect from 1 September 2026.

Streamlining excise administration for fuel and alcohol

From 1 July 2024, excise administration for fuel and alcohol will be streamlined which will:

• streamline license application and renewal requirements;
• remove regulatory barriers for excise and excise equivalent customs goods (including lubricants, bunker fuels for commercial shipping industries, and vapour recovery units);
• the ATO will publish on its website a public register of entities that hold excise licences to store or manufacture excise and excise equivalent customs goods.

Petroleum resource rent tax (PRRT)

Tax treatment of ‘exploration’ and ‘mining, quarrying and prospecting rights’

The government will amend the PRRT legislation to clarify that ‘exploration for petroleum’ is limited to the ‘discovery and identification of the existence, extent and nature of the petroleum resource’ and does not extend to ‘activities and feasibility studies directed at evaluating whether the resource is commercially recoverable’. This amendment will apply to all expenditure incurred from 21 August 2013.

This measure will also clarify that mining, quarrying and prospecting rights cannot be depreciated for income tax purposes until they are used (not merely held), and will limit the circumstances in which the issue of new rights over areas covered by existing rights lead to tax adjustments. This amendment will apply in respect of all rights acquired or started to be used after the date of announcement (7:30 PM (AEST) on 9 May 2023).

Other measures

Extending the Personal Income Tax Compliance Program

The government will provide $89.6 million to the ATO and $1.2 million to Treasury to extend the Personal Income Tax Compliance Program for two years from 1 July 2025 and expand its scope from 1 July 2023.

This extension will enable the ATO to continue to deliver a combination of proactive, preventative and corrective activities in key areas of non-compliance, and to expand the scope of the program to address emerging areas of risk, such as ‘deductions relating to short-term rental properties to ensure they are genuinely available to rent.’

GST Compliance Program — four-year extension

The government will provide $588.8 million to the ATO over four years from 1 July 2023 to continue a range of activities that promote GST compliance. Funding through this extension will also help the ATO develop more sophisticated analytical tools to combat emerging risks to the GST system.

The Serious Financial Crime Taskforce and Serious Organised Crime program

The government will extend funding for the Serious Financial Crime Taskforce (SFCT) and Serious Organised Crime program (SOC) over four years to 30 June 2027 and merge the programs, with a merged SFCT to commence from 1 July 2023. Funding for both programs currently terminates on 30 June 2023.

The SFCT and SOC are currently separately funded ATO-led cross-agency collaborations between the ATO, national policing and other law enforcement and regulatory agencies, targeting serious and organised crime groups and serious financial crime and tax evasion.

Tax integrity — expanding the general anti-avoidance rule in the income tax law

The government will improve the integrity of the tax system by expanding the scope of the general anti-avoidance rule for income tax (Part IVA of the Income Tax Assessment Act 1936) so that it can apply to schemes that:

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

This measure will apply to income years commencing on or after 1 July 2024, regardless of whether the scheme was entered into before that date.

Tax integrity — improving engagement with taxpayers to ensure timely payment of tax and superannuation liabilities

The government will provide funding over four years from 1 July 2023 to enable the ATO to engage more effectively with businesses to address the growth of tax and superannuation liabilities.

The additional funding will facilitate ATO engagement with taxpayers who have high-value debts over $100,000 and aged debts older than two years where those taxpayers are either public and multinational groups with an aggregated turnover of greater than $10 million, or privately owned groups or individuals controlling over $5 million of net wealth.

A lodgment penalty amnesty program will be provided for small businesses with aggregate turnover of less than $10 million. The amnesty will remit failure-to-lodge penalties for outstanding tax statements lodged in the period from 1 June 2023 to 31 December 2023 that were originally due during the period from 1 December 2019 to 29 February 2022.

Reform to Australia’s System of Federal Administrative Review

The government will provide $89.5 million over 5 years from 2022–23 (and $1.5 million per year ongoing) to support the establishment of a new federal administrative review body in place of the Administrative Appeals Tribunal.

Amendment to the electric car discount

The government will sunset the eligibility of plug-in hybrid electric cars from the fringe benefits tax exemption for eligible electric cars. This change will apply from 1 April 2025.

Arrangements involving plug-in hybrid electric cars entered into between 1 July 2022 and 31 March 2025 remain eligible for the Electric Car Discount.

How can Rigby Cooke Lawyers help?

If you would like to discuss the announced tax measures in greater detail, please contact our Tax team.

_References:

^{Budget Measures: Budget Paper No.2}

^{OECD: Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two)}