Federal Budget 2023-2024 – Tax Measures

Federal Treasurer, The Hon Jim Chalmers MP delivered the 2023-2024 Federal Budget on Tuesday, 9 May 2023.

The Government’s Budget papers paint a sombre image of slowing global growth, high inflation, sharply rising interest rates, and a tightening in financial conditions, all of which are expected to more than offset the boost from the reopening of China’s economy.

As inflation returns to target and positive real wage growth continues, the Government expects the economy to expand by 2.25% in 2024-2025 and 2.75% in 2025-2026. The continued recovery in population growth and an associated increase in investment in new housing will reinforce the expected rebound.

Most tax measures proposed in the Budget seek to prevent tax leakage, improve compliance or increase tax collected from multinationals, with no major new tax reforms announced (other than implementation of OECD Global Anti-Base Erosion Model Rules). There are however, several new incentive measures aimed at boasting the housing and commercial real estate sectors and encouraging small businesses to “keep the good times going” (even if the Reserve Bank has other intentions). More funding will be provided to the ATO for income tax and GST compliance programs.

The Government will need the support of the Greens and crossbenchers to legislate its Budget measures.

Some of the more notable tax measures are outlined below.

Multinationals and the digital economy – minimum effective tax

The Government will implement a new global minimum tax and domestic minimum tax based on the OECD Global Anti-Base Erosion Model Rules. This is part of a global initiative to limit tax competition by introducing a globally uniform floor.

This measure targets the digital economy and comprises two components:

1 .First, there will be a new minimum effective global tax rate of at least 15% for large multinationals. Multinational groups with an effective tax rate below the minimum in any particular jurisdiction may be required to pay top-up tax.

The global minimum tax under the OECD’s Pillar Two tax reform consists of three main rules: the “income inclusion rule” (IIR), the “undertaxed payments rule” (UTPR), and the “subject to tax rule” (STTR).

The IIR shares common features with the controlled foreign company (CFC) rules and will be administered in the jurisdiction of the head office, but will apply in respect of each jurisdiction where the group has a subsidiary or branch. It is not expected that the IIR will apply to the head office jurisdiction itself. The effective tax rate of each jurisdiction (calculated in accordance with specific global minimum tax rules) will be determined based on the consolidated companies or branches in that jurisdiction. It will then be compared with a minimum tax rate of 15%. Top-up tax may be charged to make up for any shortfall.

The UTPR is a secondary rule, applying after the IIR and to complement the IIR. The IIR and the UTPR will reference a similar calculation methodology and both sets of rules will refer to the same minimum effective 15% tax rate. One possible situation where the UTPR may apply is where the headquarter jurisdiction of a multinational group has an effective tax rate below the 15% minimum tax rate – this is because the IIR itself does not apply to the head office jurisdiction. Any top-up tax may be collected under the UTPR by the jurisdictions where the other group companies or branches are located.

The IIR and UTPR are together referred to as the “Anti Global Base Erosion” or “GloBE” Rules.

The Government’s budget measure simply states that the IIR will apply to income years starting on or after 1 January 2024 and the UTPR will apply to income years starting on or after 1 January 2025.

The staggered commencement of the IIR in 2024 and the UTPR in 2025 is presumable intended to allow a brief transition for multinationals with headquarters in low tax jurisdictions.

2. Secondly, there will be a 15% domestic minimum tax applying from 1 January 2024. If a large multinational company’s effective Australian tax rate falls below 15%, the domestic minimum tax will apply so that Australia collects the revenue that would otherwise have been collected by another country’s global minimum tax.

Housing (Build-To-Rent Developments)

The Budget will include new incentives to encourage investment and construction in the build-to-rent sector by:

• increasing the rate for the capital works tax deduction; and
• reducing the withholding tax rate on eligible fund payments from managed investment trust (MIT) from 30% to 15%.

This measure 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 3 years for each dwelling.

There will be industry consultation on implementation details, including any minimum proportion of dwellings being offered as affordable tenancies and the length of time dwellings must be retained under single ownership.

Clean building managed investment trusts

The Government will modify the withholding tax concession for clean building managed investment trusts (MITs).

A Clean Building MIT is a MIT that must hold eligible assets (on behalf of its beneficiaries) and cannot derive assessable income from any other taxable Australia property (other than from those assets). The current rules limit a “clean building” to a commercial building that is an office building, hotel or shopping centre if the building meets and continues to maintain at least a 5 Star Green Star rating as certified by the Green Building Council of Australia or a 5.5 star energy rating as accredited by the National Australian Built Environment Rating System.

This measure will extend eligibility for the concession to data centres and warehouses (if construction commences after Budget night).

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

The Government will consult on transitional arrangements for existing buildings.

Petroleum Resource Rent Tax

Offshore gas producers will have their tax deductions capped and face tougher tax compliance measures.

The Government will amend the Petroleum Resource Rent Tax (PRRT) to introduce a cap on the use of deductions to offset assessable PRRT income of liquefied natural gas (LNG) producers under the PRRT. The cap will:

• bring forward PRRT receipts from LNG projects which are yet to pay PRRT and ensure a greater return to taxpayers from the offshore LNG industry; and
• limit deductible expenditure to the value of 90 per cent of each taxpayer’s PRRT assessable receipts in respect of each project interest in the relevant income year and apply after mandatory transfers of exploration expenditure.

Amounts that are unable to be deducted because of the cap may be carried forward and uplifted at the Government long-term bond rate.

The cap will only apply to PRRT projects that produce LNG.

Projects would not be subject to the cap until 7 years after the year of first production or from 1 July 2023, whichever is later.

However, the cap will not apply to certain classes of deductible expenditure in the PRRT (eg, closing-down expenditure, starting base expenditure and resource tax expenditure).

The Government will also 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”.

The Product Stewardship for Oil scheme will also be reformed.

Superannuation funds

The Government proposes to increase the tax rate on superannuation balances over $3 million, with effect from 1 July 2025.

The tax rate will increase from 15% to 30% for earnings corresponding to the proportion of an individual’s total superannuation balance that is greater than $3 million. Earnings relating to assets below the $3 million threshold will continue to be taxed at 15%, or 0% if held in a retirement pension account.

Small Business – $20,000 instant asset write-off

The Budget proposes to 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. The $20,000 threshold applies on a per asset basis, so small businesses can instantly write off multiple assets.