Removed Self-assessment of intangible assets

Announced in the 2021-22 Budget and due to commence on 1 July 2023, the measure enabling taxpayers to self-assess the effective life of certain intangible assets, rather than being required to use the effective life currently prescribed by statute, has been removed.

The measure was to apply to assets acquired from 1 July 2023 including patents, registered designs, copyrights and in-house software.

Dramatic jump in penalties for competition and consumer law breaches

From 2022-23 financial year

From the 2022-23 year, the penalties for a corporation breaching competition and consumer laws will increase sharply from a maximum of $10m to a maximum of $50m per breach, and from 10% of annual turnover to 30% of turnover (whichever is greater) during the period the breach took place.

Energy efficiency grants for SMEs

From 2022-23 financial year

The Government will provide $62.6m over 3 years from 2022-23 to help small and medium business fund energy efficient equipment upgrades. The funding will support studies, planning, equipment and facility upgrade projects that will improve energy efficiency, reduce emissions or improve the management of power demand. No details of the grants are currently available.

Delayed Ridesharing reporting requirements

In the 2019-20 Mid Year Economic and Fiscal Outlook (MYEFO), new reporting measures were announced requiring sharing economy online platforms to report identification and income information on participating sellers to the ATO for data matching purposes. These measures have now been delayed from:

· 1 July 2022 to 1 July 2023 for transactions relating to the supply of ride sourcing and short-term
accommodation, and

· 1 July 2023 to 1 July 2024 for all other reportable transactions (including but not limited to asset sharing,
food delivery and tasking-based services).

Thin cap rules introduce earnings based test

From 1 July 2023

The thin capitalisation rules, which can potentially limit the amount that can be claimed for debt deductions such as interest, will be amended. The Government will replace the current safe harbour and worldwide gearing tests with earnings-based tests to limit debt deductions in line with an entity’s profits.

Applying to multinational entities operating in Australia and any inward or outward investor, in line with the existing thin capitalisation regime, the measures will:

· Limit an entity’s debt-related deductions to 30 per cent of profits (using EBITDA as the measure of
profit). This new earnings-based test will replace the safe harbour test.

· Allow deductions denied under the entity-level EBITDA test (interest expense amounts exceeding the
3% EBITDA ratio) to be carried forward and claimed in a subsequent income year (up to 15 years).

· Allow an entity in a 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% EBITDA ratio). 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.

Financial entities will continue to be subject to the existing thin capitalisation rules.

The current thin capitalisation regime limits debt deductions up to the maximum of three different tests:

· A safe harbour (debt to asset ratio) test;

· An arm’s length debt test; and

· A worldwide gearing (debt to equity ratio) test.

Companies to declare their subsidiaries

From 1 July 2023

New reporting requirements from 1 July 2023 will require:

· Australian public companies (listed and unlisted) to disclose information on the number of subsidiaries
and their country of tax domicile;

· 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); and

· Large multinationals, defined as significant global entities, to prepare for 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.

Global entities denied deductions for intangibles

From Payment made on or after 1 July 2023

Significant global entities (at least $1bn global revenue) will no longer be able to claim a tax deduction for payments made, directly or indirectly, to related parties for intangibles held in low or no tax jurisdictions. This could include royalties paid for the use of trademarks and other intellectual property items.

A low or no tax jurisdiction is one with:

· A tax rate of less than 15%, or

· A tax preferential patent box regime without significant substance.

The measure is anticipated to apply to payments made on or after 1 July 2023.

This measure could impact on Australian entities that are subsidiaries of a foreign parent entity where the global revenue of the consolidated group for accounting purposes is $1bn or more.

ATO targets in sharp focus

Personal income tax deductions and incorrect reporting

The ATO will receive an additional $80.3 to crackdown on non-compliance including:

· Overclaiming deductions; and

· Incorrect reporting of income

The spend is expected to increase tax receipts by $674.4m and payment by $80.3m over 4 years.

Cash payments and tax evasion by business

The ‘shadow economy’, cash-in-hand payments including underpayment of wages, visa fraud, and other nefarious activity that deprives the economy of the income from tax receipts, will come under scrutiny with the extension of the ATO’s Shadow Economy Program for a further 3 years from 1 July 2023. Over this period, the program is estimated to increase tax receipts by $2.1bn and payments by $685.2m over the 4 years from 2022-23.

Multinational business and the Tax Avoidance Taskforce

The ATO’s Tax Avoidance Taskforce will receive an additional $200m over 4 years from 1 July 2022 primarily to pursue multinational enterprises and large public and private businesses. This taskforce is expected to deliver a whopping $2.8bn in additional tax receipts and $1.1bn in payments over the 4 year period.

$3.6bn cut from external labour, advertising, travel and legal expenses

The Government has committed to saving $3.6bn by cutting what it spends on external labour, advertising, travel and legal expenses.

Other

Working with our Pacific Neighbours

Australia’s relationship in the Pacific has come into sharp focus of late. The Budget implements a series of initiatives to support development and labour mobility in the region:

· Additional infrastructure investment of $500m over 10 years in the Pacific and Timor-Leste will be provided through the Australian Infrastructure Financing Facility for the Pacific including an additional $50m for the establishment of a Pacific Climate Infrastructure Financing Partnership Facility.

· As previously announced, the Pacific Australia Labour Mobility scheme will be expanded to improve the benefits of the program for employers and workers including:

o underwriting employers’ investment in upfront travel costs for seasonal workers by covering costs that cannot be recouped from workers

o improvements to workplace standards for PALM visa holders, including increased workplace compliance activities

o allowing primary visa holders on long-term placements to bring partners and children to Australia, where sponsored by employers, with additional
social support including providing relevant minimum family assistance payments, with an initial rollout of 200 families

o the expansion of the existing aged care skills pilot programs for aged care workers.

· A new Pacific Engagement Visa for nationals of Pacific Island countries and Timor-Leste. Up to 3,000 additional places will be made available in addition to those provided through the existing permanent Migration Program.

Electric vehicle and hydrogen refuelling

As part of its Driving the Nation Fund, the Government will commit:

· $146.1m over 5 years from 2023-24 for the Australian Renewable Energy Agency to co-invest in projects to reduce emissions from Australia’s road transport sector

· $89.5m over 6 years from 2022-23 for the Hydrogen Highways initiative to fund the creation of hydrogen refuelling stations on Australia’s busiest freight routes, in partnership with states and territories, including $5.5m to LINE Hydrogen Pty Ltd for its George Town green hydrogen heavy transport project

· $39.8m over 5 years from 2022-23 to establish a National Electric Vehicle Charging Network to deliver 117 fast charging stations on highways across Australia, in partnership with the NRMA.

Broadband & mobile improvements for regional Australia

Almost $758m will be spent improving mobile and broadband connectivity in rural and regional Australia.

Foreign investment review board fees increase

The Government has increased foreign investment fees and will increase financial penalties for breaches that relate to residential land. Fees doubled on 29 July 2022 for all applications made under the foreign investment framework. The maximum financial penalties that can be applied for breaches in relation to residential land will also double on 1 January 2023.

Community sector organisations funding boost

An additional $560m over 4 years will be provided to community sector organisations ($140m pa). 46% of the funding will come from the Department of Social Services and around 34% to the National Indigenous Australians Agency.

Extension of Tariffs on Russian goods

The Government has extended the temporary additional tariff on goods imported from Russia and Belarus until 24 October 2023. The additional 35% tariff applies to goods that are the produce or manufacture of Russia and Belarus shipped to Australia on or after 25 April 2022.

Note that Ukrainian goods have previously been exempted from import duty for 12 months until 4 July 2022.

Infrastructure projects

The Budget has reallocated infrastructure projects, “reprofiling” $6.5bn in funding for existing projects. An additional $8.1bn over the next 10 years has been earmarked for priority projects including:

ACT

· $85.9m for the Canberra Light Rail Stage 2A project

New South Wales

· $1.4bn including $500m for planning, corridor acquisition and early works for the Sydney to Newcastle High Speed Rail, $268.8m for the New England Highway – Muswellbrook Bypass and $110m for the Epping Bridge

Northern Territory

· $550m including $350m to seal the Tanami Road and Central Arnhem Road

Queensland

· $2.1bn including $866.4m for the Bruce Highway, $400.0m for the Inland Freight Route (Mungindi to Charters Towers) upgrades, $400.0m for Beef Corridors and $210.0m for the Kuranda Range Road upgrade

South Australia

· $460m including $400m for the South Australian component of the Freight Highway Upgrade Program.

Tasmania

· $78m for projects in Tasmania, including $48.0 million for the Tasmanian Roads Package

Victoria

· $2.6bn including $2.2bn for the Suburban Rail Loop East

Western Australia

· $634.8m including $400.0 million for the Alice Springs to Halls Creek Corridor upgrade and $125m for electric bus charging infrastructure in Perth

National

· $18m to establish the High Speed Rail Authority to plan, develop, coordinate, oversee and monitor the construction and operation of the high speed rail network.

The economy

The Government appear keenly aware of the economic balancing act taking place, keeping the budget predominantly to election promises and redirecting existing initiatives to avoid exacerbating inflationary pressures. As the Treasurer said “Australians know this is a time of great challenge and change.”

The global economic environment has sharply deteriorated. Inflation has risen rapidly across advanced economies. The Russian invasion of Ukraine has significantly driven up global energy costs and exacerbated the impact of poor weather on global food prices. All of this impacts on Australia. Here are the highlights:

GDP – Real GDP is forecast to grow by 3¼ per cent in 2022-23 before slowing to 1½ per cent in 2023-24, as cost of living pressures and rising interest rates increasingly weigh on household disposable income and consumption.

The Government warn that with the highly uncertain global economic outlook, there are significant risks that could cause a sharper slowdown in domestic activity. Globally, key risks include a ‘hard landing’ or recession across major advanced economies, a sharper-than-expected downturn in China due to COVID-19 outbreaks and the property market downturn, a sudden tightening in financial market conditions and further energy price shocks stemming from the Russian invasion of Ukraine, which could drive inflation even higher.

And domestically, the full impact of recent floods is highly uncertain as the situation continues to develop.

Inflation – forecast to peak at 7¾ per cent in the December quarter of 2022. Supply disruptions have resulted in large price increases in home building, fuel and energy. Food prices remain elevated and have been further exacerbated by recent floods. Some of these pressures are expected to persist into 2023. Inflation is expected to remain elevated at 5¾ per cent over 2022-23 and 3½ per cent over 2023–24 before gradually easing and returning to within the Reserve Bank’s inflation target by 2024-25.

Deficit – lower the originally estimated at $36.9bn. However, the deficit is expected to climb to over $51bn by 2024-25 with the impact of higher inflation on indexed payments for services, the NDIS in particular.

Gross debt – is close to one trillion dollars and is at the highest level as a share of GDP in over 70 years.

Tax receipts – revised up by $54.4bn in 2022-23 and $142.0 billion over the 4 years to 2025-26.

Unemployment and wages growth – labour market conditions are expected to remain tight. The unemployment rate is forecast to rise to 4½ per cent by the June quarter of 2024.

Tight labour market conditions are expected to see annual wage growth pick up to 3¾ per cent by June 2023. However, high inflation is expected to see real wages fall over 2022-23 before rising slightly over 2023-24.

Energy – Electricity and gas prices are expected to rise sharply over the next 2 years, as the cost of energy market disruptions are passed through to households. Treasury has assumed retail electricity prices will increase by an average of 20% nationally in late 2022. Retail electricity prices are expected to rise by a further 30% in 2023-24.

Domestic gas prices remain more than double their average prior to Russia’s invasion of Ukraine. Retail prices are expected to increase by up to 20% in 2022-23 and 2023-24.