26 October 2022

With Australia struggling through the trifecta of a devastating pandemic, a succession of natural disasters and extreme global volatility, the stage was set for the new Labor government’s first budget of 2022.

On 25 October 2022, the Treasurer, Dr Jim Chalmers delivered his Budget speech proposing measures to:

• Provide responsible cost-of-living relief in the form of cheaper childcare, expanded age care, cheaper medicines, more paid parental leave, more affordable housing and supporting wage increases.

• Build a stronger, more resilient and more modern economy through more fee-free TAFE and University places; supporting women’s workforce participation; investment in transport infrastructure and extending the NBN).

• Repair the Budget to pay for what’s important.

However, there was a deafening silence on tax reform and most tax changes proposed in the budget had been previously announced. Like the previous Budget, this was also a “safe Budget” with minimal proposed tax changes, no doubt because of the cost of living pressure and the Government not wanting to upset the status quo too much.

Besides the multinational tax integrity package with different measures to ensure Australia receives its fair share of taxes from multinationals and extra funding for the ATO for compliance activities, the rest of the Budget included measures that have previously been announced or measures proposed by the previous government that will not proceed or will proceed but with a deferred start date.

Multinational tax integrity package

1. Changes to thin capitalisation

Currently the thin capitalisation rules operate to limit debt deductions up to a maximum of either a safe harbour test, an arm’s length test or a worldwide gearing test.

From 1 July 2023, the Government plans to replace the safe harbour and worldwide gearing tests with earnings-based tests to:

• limit debt deductions to 30% of profits using EBITDA (i.e. earnings before interest, taxes, depreciation and amortisation) and allow deductions denied under the 30% rule to be carried forward and claimed in a subsequent income year up to 15 years (i.e. new earnings based test that will replace safe harbour test);

• allow an entity in the group to claim debt-related deductions up to the level of the worldwide group’s net interest expense as a share of earnings which may exceed the 30% ratio of the new earnings-based test (i.e. this new earnings based group ratio will replace the worldwide gearing ratio);

• retain an arm’s length debt test as a substitute test which will apply only to an entity’s external third party debt, disallowing deductions for related party debt under this test.

These changes will apply to multinationals operating in Australia and any inward or outward investor. The existing thin capitalisation rules will still apply to financial entities and authorised deposit-taking institutions.

2. No more deductions for payments relating to intangibles held in low or no tax jurisdictions

From 1 July 2023, the Government plans to prevent significant global entities (SGEs) (entities with global revenue of at least $1 billion) from claiming tax deductions for payments made (whether directly or indirectly) to related parties holding intangibles in low or no tax jurisdictions (i.e. if tax rate is less than 15% or there is a tax preferential patent box regime in that jurisdiction).

3. Improved tax transparency

From 1 July 2023, the Government plans to introduce measures whereby:

• SGEs must prepare certain tax information on a country-by-country basis;

• Australian public companies (listed and unlisted) must disclose information on the number of subsidiaries and their tax domicile; and

• Tenderers for Australian Government contracts worth more than $200,000 must disclose their country of tax domicile.

Extending compliance programs for tax avoidance, shadow economy and personal income tax

The Government plans to provide money to the ATO to extend their compliance program in the following areas:

• From 1 July 2023, the main areas of focus for personal income tax will be taxpayers that overclaim deductions or incorrectly report their income.

• From 1 July 2023, the main areas of focus for the shadow economy will be to target cash economy transactions, protect revenue and level the playing field for businesses that follow the rules

Measures previously announced and mentioned in the budget again

The following measures that have previously been announced and mentioned again in this Budget include:

• Digital currencies (e.g. bitcoin) will not be taxed as foreign currency.

• The electric car discount meaning battery, hydrogen fuel cell and plug-in hybrid electric cars will be exempt from Fringe Benefits Tax (FBT) and import tariffs if they have a first retail price below the luxury car threshold ($84,916) for fuel efficient cars and were not used before 1 July 2022.

• Reduce the minimum downsizer contribution age from 60 to 55 whereby such taxpayers who sell their home can make a one-off post-tax contribution to their superannuation fund of up to $300,000 per person from the proceeds of selling their home.

Measures proposed by previous Government that will proceed with a deferred start date

The Government will defer the start date of the proposed sharing economy regime to apply to ride sourcing and short-term accommodation from 1 July 2022 to 1 July 2023. Other transactions such as asset sharing, food delivery and tasking-based service will be deferred from 1 July 2023 to 1 July 2024.

Measures proposed by previous Government that will no longer proceed

The Government will not proceed with the following proposed measures announced by the previous government:

• Proposal to allow taxpayers to self-assess the effective life of intangible depreciating assets (therefore effective life of intangible depreciating assets will continue to be set by statute).

• Proposals to amend the debt/equity rules, taxation of financial arrangements (TOFA) rules and the taxation of asset-backed financing arrangements.

• Proposal to introduce new regulatory frameworks for limited partnership collective investment vehicles.

• Proposal to change the annual audit requirement for certain self-managed superfunds (SMSFs).

• Proposal to introduce a limit of $10,000 for cash payments made to businesses for goods and services.

Final thoughts

A notable absence from this Budget was the full expensing of depreciating assets (FEDA) measures and the loss carry back measures, which were not extended beyond 30 June 2023. Because decisions to invest in assets for a business are taken long in advance and can be very capital intensive, it is uncertain why the Government did not extend the FEDA measures in this 2022 Budget – especially because stimulating investment plays such an important part in growth of the economy.

There was a new proposal to align the tax treatment of off-market share buy-backs by listed public companies with the tax treatment of on-market share buy-backs from 25 October 2022.

With the budget announcement of additional funding for the ATO’s Tax Avoidance Taskforce, together with other ATO compliance initiatives, any sizeable business groups need to remain prepared for a visit from the ATO. For multinationals, adequate and contemporaneous transfer pricing documentation is essential. For all large businesses, having sound and well documented tax governance and risk policies and procedures will be a good investment to assist in streamlining any ATO review and supporting any tax positions taken.

Contrary to the previous Budget that predominantly focused on providing immediate relief to individuals and families to deal with the rising cost of living as well as to provide support for businesses, this Budget did not say much. Let’s hope that Australia’s economy will be able to survive any economic challenge we may face post COVID-19.

If you’d like to discuss any of the changes announced in the Federal Budget, get in touch with our Tax Advisory team.