OCTOBER 2022
FEDERAL BUDGET

A summary of the key items released in last night’s Federal Budget

Jim Chalmers first Federal Budget announced a forecast budget deficit for the 2022-23 year of $36.9 billion (1.5% of GDP) which is a $41.1 billion improvement since Pre-election Economic and Fiscal Outlook statement and is expected to be in continued deficits over the following three years – $44 billion in 2023-24; $51.3 billion in 2024-25; and $49.6 billion in 2025-26. The economy’s real GDP (inflation adjusted) is now forecast to grow by 3.25% in 2022-23; 1.5% in 2023-24; 2.25% in 2024-25; and 2.5% 2025-26.

The unemployment rate is expected to be 3.75% by June quarter of 2023;  4.5% in 2024 and 2025 financial years; and 4.25% in the 2026 financial year. Inflation is expected to peak at 7.75% in late 2022 before moderating gradually to 3.5% by June 2024 and returning to the Reserve Bank’s inflation target of 2.5% by 2024-25.

Gross federal government debt is forecast for the 2022-23 year at $927 billion (37.3% of GDP) and will increase over the following four years – $1,004 billion in 2023-24 (40.8% of GDP), $1,091 billion in 2024-25 (42.5% of GDP) and $1,159 billion in 2025-26 (43.1% GDP).

It is important to remember that what follows is a series of proposals that must be passed by Federal Parliament before they become law.

PERSONAL MEASURES

Personal Income Tax Rates
There have been no changes to the income tax rates for resident individuals announced. The income tax rates for resident individuals will continue as follows for both the current 2021-22 financial year and the 2022-23 year:
 
  Taxable Incomes (T.I.)  Rate   Tax Payable
   Up to $18,200  0%   $Nil
   $18,201 to $45,000  19%   $Nil + 19% over $18,200
   $45,001 to $120,000    32.5%   $5,092 + 32.5% over $45,000
   $120,001 to $180,000   37%   $29,467 + 37% over $120,000
   $180,001 and above  45%   $51,667 + 45% over $180,000
 
There was also no announcement in respect of the previously legislated (Stage 3) resident individual income tax rates to apply from 1 July 2024, so they remain as follows:
 
  Taxable Incomes (T.I.)  Rate   Tax Payable
   Up to $18,200  0%   $Nil
   $18,201 to $45,000  19%   $Nil + 19% over $18,200
   $45,001 to $200,000    30%   $5,092 + 30% over $45,000
   $200,001 and above  45%   $51,592 + 45% over $200,000

Paid Parental Leave

The paid parental leave entitlement will be extended from the current 18 weeks up to 26 weeks progressively over the period starting 1 July 2024 to 1 July 2026. This measure will also make the scheme more flexible for families so that either parent is able to claim the payment and both birth parents and non-birth parents are allowed to receive the payment if they meet the eligibility criteria. Parents will also be able to claim weeks of the payment concurrently, so they can take leave at the same time.

Plan for Cheaper Child Care

The key announcements related to child care include an increase to the family income threshold for families to qualify for the Child Care Subsidy, up to $530,000, and an increase in the Child Care Subsidy rate from 85% to 90% for the first child in care, and up to 95% for families with multiple children under 5 in care.  These measures will commence from 1 July 2023.

Digital Currencies Tax Treatment

The Government will introduce legislation to clarify that digital currencies (such as Bitcoin) continue to be excluded from the definition of foreign currency under Australian income tax laws. This confirms that  digital currencies continue to be subject to capital gains tax if they are held as an investment.

BUSINESS AND CORPORATE TAX MEASURES

Electric Car Discount

The Government has incentivised the purchase of electric cars by cutting taxes on eligible vehicles.

From 1 July 2022, battery, hydrogen fuel cell and plug-in hybrid electric with a first retail price below the luxury car tax threshold for fuel-efficient cars, will be exempt from both fringe benefits tax and import tariffs. The car must not have been held or used before 1 July 2022.

The luxury car tax threshold for fuel efficient vehicles in the 2022-23 year is $84,916.

Employers will however need to include the value of the exempt electric car fringe benefits in an employee’s reportable fringe benefits amount.

Amending Thin Capitalisation Rules

The government proposed to replace the Thin Capitalisation safe harbour test and worldwide gearing tests with earnings-based tests to limit debt deductions in line with an entity’s activities (profits).

Under the current tax law, the amount of debt used to fund the Australian operations of both foreign entities investing into Australia and Australian entities investing overseas is limited. The debt deductions are subject to the following three tests:

  1. a safe harbour (debt to asset ratio) test allows gearing up to a debt-to-equity ratio of 1.5:1;
  2. an arm’s length debt test; and
  3. a worldwide gearing (debt to equity ratio) test.
The new measure includes the following changes:
  • Replace safe harbour test by limiting an entity’s debt-related deductions up to 30% of earnings before interest, taxes, depreciation and amortisation (EBITDA ratio). Any interest expense amounts in excess of the 30% EBITDA ratio would be denied. However, the amount denied can be carried forward and claimed in a subsequent income year (up to 15 years);
  • Replace the worldwide gearing ratio by the new earnings-based group ratio. An entity in a group can 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% EBITDA ratio);
  • Retain an arm’s length debt test as a substitute test. However, this test will only be available for external (third party) debt.
This measure is proposed to start from income years commencing on or after 1 July 2023. The changes will apply to multinational entities operating in Australia and any inward or outward investor, in line with the existing thin capitalisation regime. Financial entities will continue to be subject to the existing thin capitalisation rules.

Off-Market Share Buy-Backs

The Government will improve the integrity of the tax system by aligning the tax treatment of off-market share buy-backs undertaken by listed public companies with the treatment of on-market share buy-backs. This measure will apply from Budget (last) night.

Under the current law, when a company undertakes an off-market share buy-back, the payment is dissected into dividend component and capital component. However, if a company undertakes an on-market share buy-back, the whole amount is treated as capital only.

Reversal Of Previously Announced Measure – Self-assessment Of Effective Life Of Intangible Depreciating Assets

The Government will not proceed with the former government’s announcement to allow self- assessment of the effective life of intangible depreciating assets (previously announced in the 2021-22 Budget). The effective lives of intangible depreciating assets will therefore continue as currently legislated.

Denying Deductions For Payments Relating To Intangibles

The Government will introduce an anti-avoidance rule to prevent significant global entities (SGEs) from claiming tax deductions for payments made directly or indirectly to related parties in relation to intangibles held in low or no-tax jurisdictions (i.e. jurisdictions with a tax rate of less than 15% or a tax preferential patent box regime without sufficient economic substance). The measure will apply to payments made on or after 1 July 2023.

Improved Tax Transparency

The Government will introduce a number of reporting requirements for relevant companies to improve the public tax transparency of taxpayers, including:
  • SGEs are required to prepare public release of certain tax information on a country by country (CbC) basis and a statement on their approach to taxation, for disclosure by the ATO;
  • Australian public companies (listed and unlisted) to disclose information on the number of subsidiaries and their country of tax domicile; and
  • Tenderers for Australian Government contracts worth more than $200,000 to disclose their country of tax domicile (by supplying their ultimate head entity’s country of tax residence).
These new measures will take effect from income years commencing from 1 July 2023.

Non-Assessable Non-Exempt COVID-19 Grants

As part of the Budget, the Government has announced an additional 13 State and Territory COVID-19 grant programs that are eligible for non-assessable non-exempt treatment. The grants listed cover Victorian and ACT programs.

These are in addition to grants programs already eligible for such treatment as declared in various legislative instruments over the last two years.

This treatment applies to eligible grants received in the 2020-21 and 2021-22 income years.

SUPERANNUATION MEASURES

Expanding the Eligibility for Downsizer Contributions

The Government will allow more people to make downsizer contributions by reducing the eligibility from 60 to 55 years of age.

Under current law, an individual who is aged 60 or over can use the proceeds from a sale of their main residence to make downsizer contributions of up to $300,000 to their superannuation fund. The contributions do not count towards non-concessional contribution caps.

The proposed change will take effect from the start of the first quarter after Royal Assent of enabling legislation.

In tandem to this measure, the government has also provided incentives to pensioners to downsize by extending the asset test exemption on principal home sale proceeds from 12 to 24 months, and also lowering the deeming rate under the income tests to 0.25% on principal home proceeds for 24 months.

Relaxation Of The Residency Rules For Self-Managed Superannuation Funds

The 2021-22 Budget proposed to relax residency requirements for SMSFs from 1 July 2022.

Currently, to qualify as a complying superannuation fund, the fund must pass the following three tests:

  1. the fund is established in Australia or the assets of the fund are located in Australia; and
  2. the central management and control of the fund must be in Australia (In general, the fund will still meet this requirement even if its central management and control is temporarily outside Australia for up to 2 years); and
  3. the fund must pass the active member test.
The proposed changes to the first two tests are:
  1. extending the central management and control safe harbour test from two years to five years, and
  2. removing the active member test.
Although the new Government confirmed its commitment to this change, the start date will now be postponed to after the date of Royal Assent of the enabling legislation.

Reverse Previously Announced Measure – Annual Audit Requirements

The Government will not proceed with the proposed measure to relax the annual audit requirement for certain self-managed superannuation funds to a three yearly cycle.

COMPLIANCE MEASURES

The government announced additional funding to extend a number of compliance projects, including the Personal Income Taxation Compliance Program, the Shadow Economy Program, the Tax Avoidance Taskforce and compliance activities of the Tax Practitioners Board.
The government has also announced an increase to the amount of a Commonwealth penalty unit from the current $222 to $275.  Fines under many Commonwealth laws, including all tax legislation, are calculated by reference to multiples of the penalty unit.  The increase will take effect from 1 January 2023. Note that there is also a scheduled indexation of the penalty unit amount on 1 July 2023.

Disclaimer

The material contained in this newsletter is in the nature of general comment and information only and neither purports, nor is intended, to be advice on any particular matter. Readers should not act or rely upon any matter or information contained in or implied by this newsletter without taking appropriate professional advice.

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UHY Haines Norton · 11/1 York Street · Sydney, NSW 2000 · Australia