Federal Budget Update 2022-23

Taxation measures

The Budget does not contain major tax changes. It does seek to begin some “Budget repair work” via tax integrity measures particularly in international tax matters and in relation to debt funding by foreign controlled entities.

Briefly the taxation measures announced in the Budget are summarized as follows:

• Previously announced measures – the Government has announced that it will abandon 8 measures announced by the previous Government, and defer the start date of 3 others. While most of the measures relate to the heading of “Business Taxation” (and are finance related), note that the proposals include superannuation and personal tax measures.
• Digital currencies not a foreign currency – the Budget Papers confirm that the Government is to introduce legislation to clarify that digital currencies (such as Bitcoin) continue to be excluded from the Australian income tax treatment of foreign currency.
• Off-market share buy-backs – the Government intends to align the tax treatment of off-market share buy-backs undertaken by listed public companies with the treatment of on-market share buy-backs.
• COVID grants treated as NANE – the Budget Papers contain a listing of further State and Territory COVID-19 grant programs eligible for non-assessable, non-exempt treatment.
• Penalty unit increase – the Government will increase the amount of the Commonwealth penalty unit from $222 to $275 from 1 January 2023.
• Tax Practitioners Board funding – the TPB will get increased funding to investigate high-risk tax practitioners and unregistered preparers.
• In the Budget, the Government did not announce any personal tax rates changes. The Stage 3 tax changes commence from 1 July 2024, as previously legislated.
• The 2022-23 October Budget did not announce any extension of the low and middle income tax offset (LMITO) to the 2022-23 income year. The LMITO has now ceased and been fully replaced by the low income tax offset (LITO). The March 2022-23 Budget had increased the LMITO by $420 for the 2021-22 income year so that eligible individuals (with taxable incomes below $126,000) received a maximum LMITO up to $1,500 for 2021-22 (instead of $1,080).

Measures in relation to international and business taxation

Further to foregoing the key measures announced in the Budget in relation to Business and International Taxation are as follows:

• Thin Cap – the current measures impose a restriction on the deductibility of foreign held debt under a balance sheet approach. The proposed Thin Cap measures will replace the safe harbour test with a new earnings – based test under which an entity’s debt-related deductions will be limited to 30% of profits (using EBITDA as the measure of profit); allow deductions denied under the EBITDA test to be carried forward and claimed in a subsequent income year (up to 15 years) and replace the worldwide gearing test and allow an entity in a group to claim debt 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. These measures are proposed to commence 1 July 2023.
• The Government will introduce an anti-avoidance rule to prevent significant global entities (entities with global revenue of at least $1 billion) from claiming tax deductions for payments made directly or indirectly to related parties in relation to intangibles held in low – or no-tax jurisdictions. For the purposes of this measure, a low or no tax jurisdiction is a jurisdiction with a tax rate of less than 15%; or a tax preferential patent box regime without sufficient economic substance. The measures are proposed to commence 1 July 2023.
• The Government intends to align the tax treatment of off-market share buy-backs undertaken by listed public companies with the treatment of on-market share buy-backs. There is no detail in the Budget Papers nor in any associated media releases as to what precisely is intended.
• The Government will not proceed with the proposal to allow taxpayers to self-assess the effective life of intangible depreciating assets. This is the reversal of the previously announced option to self-assess effective life for certain intangible assets (eg intellectual property and in-house software). The effective lives of such assets will continue to be set by statute.

Superannuation measures

• SMSF residency changes delayed – the proposal to extend the central management and control test safe harbour from 2 to 5 years, and remove the active member test, will now start from the income year commencing on or after assent to the enabling legislation (previously 1 July 2022).
• SMSF audits every 3 years – the Government will not proceed with the former government’s proposal to allow a 3-yearly audit cycle for SMSFs with a good compliance history.
• Standardised disclosure for retirement income products – the Government will not proceed with the proposal to report standardised metrics in product disclosure statements.
• Reducing downsizer contribution age to 55 – the Government has confirmed that the minimum eligibility age for making superannuation downsizer contributions will be lowered to age 55 (from age 60).

Previous proposals not to be enacted 

The following finance-related proposed changes have been abandoned by the current Government.

• The 2013-14 MYEFO measure that proposed to amend the debt/equity tax rules.
• The 2016-17 Budget measure that proposed changes to the taxation of financial arrangements (TOFA) rules (a delayed start date was announced in 2018-19 Budget).
• The 2016-17 Budget measure that proposed changes to the taxation of asset-backed financing arrangements.
• The 2016-17 Budget measure that proposed introducing a new tax and regulatory framework for limited partnership collective investment vehicles.