In a quick turnaround from the last, out-of-cycle, Federal Budget in October 2022, the Treasurer handed down the 2023/24 Budget on 9 May 2023.
As anticipated, the Budget reflects a juggling act trying to balance inflationary pressures with targeted cost-of-living relief. Against this backdrop, the Government has announced several business tax-related measures, including those directed at multinationals (which should be considered in light of its existing program of multinational tax reform). Some of the other measures focus on taking advantage of the demand for Australia’s natural resources and more are designed to stimulate key sectors such as the burgeoning ‘build-to-rent’ (BTR) sector.
Set out below is a summary of the key business tax-related measures announced in the Budget.
‘Pillar Two’ implementation – a global minimum tax and a domestic minimum tax
The Government has announced that it will implement the following aspects of the OECD’s ‘Pillar Two’ which is aimed at addressing the tax challenges arising from the digitalisation of the economy:
- A 15% global minimum tax will be imposed on large multinational enterprises via a ‘top up tax’ mechanism. The objective is to ensure that these taxpayers pay a minimum level of tax in the jurisdictions in which they have operations.
Specifically, it is planned that an ‘income inclusion rule’ will apply to income years starting on or after 1 January 2024. Although the precise details of this measure are not yet available it is noted that the OECD considers income inclusion rules to require that the minimum tax rate (i.e. 15%) be paid at the level of the parent entity in proportion to its ownership interests in entities that have low taxed income.
From 1 January 2025 this income inclusion rule will be supplemented by an ‘undertaxed profits rule’. Again, the precise details of how these measures will operate are not yet known. However, the OECD provides that undertaxed profits rules are intended to act as a backstop to income inclusion rules by requiring an adjustment (such as a denial of a deduction) at the level of a subsidiary. The adjustment should be sufficient to result in the group entities paying their share of top-up tax liability remaining after the income inclusion rule is applied.
- A 15% domestic minimum tax will apply to income years starting on or after 1 January 2024. In essence, this would give Treasury a ‘first claim’ on top-up tax for any low-taxed domestic income that would otherwise be subject to top-up tax imposed on a parent entity located in a foreign jurisdiction.
These measures, which will only apply to large multinational groups with annual global revenue of €750 million or more, are to be based on the OECD Global Anti-Base Erosion Model Rules. The announcement of these latest measures is consistent with the existing trajectory of the OECD in relation to the taxation of multinational groups.
Other notable changes announced by Labor prior to this budget cycle include revisions to thin capitalisation rules and the denial of deductions for outgoings relating to intangibles held in low or no tax jurisdictions. These changes were announced in the October 2022 Budget and were summarised in our October Federal Budget: key takeaways insight article and have also been the subject of recent consultation. There are also proposed amendments for public companies to disclose certain information regarding the tax profile of their subsidiaries (e.g. tax residency) and others requiring country-by-country reporting entities to publicly disclose more detailed information from their reports. The amendments to thin capitalisation rules in particular will be front of mind for many multinationals this year, as the existing safe harbour test will shortly be removed and replaced with an earnings-based test alongside other changes to the worldwide gearing and arm’s length debt tests.
In a similar vein, the Government has announced its intention to expand the scope of the general anti-avoidance rule (Part IVA), 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
- schemes that achieve an Australian income tax benefit (even where the dominant purpose was to reduce foreign income tax).
These measures will apply to income years commencing on or after 1 July 2024, irrespective of whether the relevant scheme was entered into before that date.
Managed investment trusts and build-to-rent projects
A major focus of the Government, particularly in the current and near-term economic environment, is housing, including social and affordable housing. As expected, and as announced following the conclusion of the National Cabinet meeting on 28 April 2023, the Government has confirmed in the Budget the following measures:
- Accelerated BTR depreciation: the depreciation rate for eligible new BTR projects will be increased from 2.5% to 4% per annum, where construction commences after 9 May 2023. This will allow expenses to be depreciated over a 25-year span, rather than the usual 40 years.
- 15% BTR MIT withholding rate: the withholding rate will be reduced to 15% (down from 30%) on eligible fund payments from managed investment trusts (MITs) on income derived from eligible BTR properties. This measure will apply from 1 July 2024.
These concessions will only be available for BTR projects which consist of 50 or more apartments or dwellings, that are made available to the general public. Additionally, the dwellings must be retained under single ownership for at least 10 years before being sold, and landlords must offer a lease term of at least three years for each dwelling.
It is likely that further consultation material will be released in relation to these BTR measures in the coming months. It will be interesting to see whether amendments to the GST rules impacting the sector end up getting added to the reform package. This will be followed with interest by the sector given that specific eligibility requirements and transitional rules will be of critical importance to projects.
The BTR measures supplement the previous announcement of a fund to support development of new social and affordable dwellings (summarised in our October Federal Budget: key takeaways insight article).They are also being introduced at a time when various state governments are making their own changes to tax regimes to stimulate activity in the sector.
The Budget also contained changes affecting the MIT ‘clean building’ rules, which were revealed in addition to the aforementioned National Cabinet announcements:
- Data centres and warehouses now eligible: From 1 July 2025, the reduced 10% clean building MIT withholding rate will also be available to MITs that hold data centres and warehouses, provided construction commenced after 7.30 pm AEST on 9 May and provided those properties meet the relevant energy efficiency standards (discussed below).
- Increased minimum energy requirements: The minimum energy requirements for existing and new clean buildings will be increased to a 6-star rating from the Green Building Council Australia (previously a 5-star rating was required), or a 6-star rating under the National Australian Built Environmental Rating System (previously a 5.5-star rating was required).
Petroleum resource rent tax
The subject of much speculation in the lead-up to the Budget, the Government has confirmed its intention to amend the petroleum resource rent tax (PRRT) to introduce a cap on available deductions for LNG producers.
Specifically, deductible expenditure will be capped at 90% of each taxpayer’s assessable receipts in respect of each project interest they hold in a relevant income year (after mandatory transfers of exploration expenditure are factored in). These caps apply either seven years after the year of first production or from 1 July 2023, whichever date is later. Certain classes of expenditure will not be subject to the cap, however (for example, closing-down expenditure, starting base expenditure and resource tax expenditure).
The Government has also made several additional announcements which, in essence, tweak the operation and scope of the PRRT, including in response to the 2022 decision of the Full Federal Court in Shell Energy:
- Narrowing the meaning of petroleum exploration: The Government has announced its intention to introduce legislation which would clarify that ‘exploration for petroleum’ is limited to the ‘discovery and identification of the existence, extent and nature of the petroleum resource’, and that exploration would not extend to ‘activities and feasibility studies directed at evaluating whether the resource is commercially recoverable’.
This amendment, which will apply to all expenditure incurred from 21 August 2013, will have the effect of limiting an entity’s ‘eligible real expenditure’ (which will have bearing on the ability to uplift and carry forward un-deducted expenditure).
- Mining, quarrying and prospecting rights: The Government has also announced its intention to amend the PRRT regime so that mining, quarrying and prospecting rights cannot be depreciated for income tax purposes until they are used (as opposed to such rights merely being held) and to limit the circumstances in which the issue of new rights over areas covered by existing rights can lead to tax adjustments.
Feedback from industry thus far has seemingly been one of reluctant acceptance of what has been considered the ‘less-nuclear’ option compared to some previously tabled, potentially more punitive alternatives.
Amendments to former proposals
Labor has also revealed several amendments to previously announced, but not yet implemented measures. Key amendments include:
- Franked dividends funded by capital raises: In September 2022, the Government announced that it would introduce a specific measure previously flagged in 2016 by the former Liberal government, to prevent a company from attaching franking credits to distributions to shareholders made outside or additional to the company’s normal dividend cycle, to the extent the distributions were funded directly or indirectly by capital raising activities that resulted in the issue of new equity interests.
This announcement was particularly controversial at the time as it was initially intended to apply retroactively to distributions made from 19 December 2016. However, the most recent iteration of this measure would only apply to distributions made on or after 15 September 2022.
- Discontinuance of ‘patent box’ measures: The Government has also announced that it will not proceed with three separate patent box measures (announced in the 2021-22 and 2022-23 March Budgets).
This Budget has been handed down amid competing priorities, including constraints on introducing any domestic tax measures that may affect the cost of living. Targeted tax measures affecting multinationals have contributed to the first Budget surplus (however small) in several years. Still, the expectation is that this surplus will be temporary, given that much of the bottom-line turnaround can be attributed to inflation-induced income tax bracket-creep and increased GST receipts, together with above-trend commodity prices.
On the spending side, the focus on BTR tax concessions and social and affordable housing will be welcomed by that sector, however, as with most tax reform measures, the full impact of the measures will not be known until the specific details of legislative amendments are released.
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