Introduction
For the second year in a row, the Australian Government has delivered a surplus which this year is projected to be $9.3b. As with last year's Budget, the 2024 Budget was delivered against a continued backdrop of inflation (albeit moderation), cost of living pressures, high interest rates, and increasing geopolitical instability. It has tried to walk a fine line of providing incentives in nationally strategic areas (particularly in relation to the energy transition) without fuelling demand pressures which threaten to increase inflation and interest rates. Time will tell whether this will be successful.
What is clear is that, as is traditional, there are changes which could have some perhaps unforeseen consequences, or at least throw up some technical uncertainty, particularly for overseas investors.
In our budget analysis, we cover the key business-related tax measures which may broadly be categorized as "big P" policy (in relation to the Future Made in Australia measures), various enforcement measures, as well as some significant technical changes to legislation (particularly in relation to the taxation of non-residents).
Strengthening the foreign resident capital gains tax regime – and its effect on M&A
In yet another measure focusing on the taxation of non-residents (and ensuring that they comply with the law), the Government has announced a strengthening of the foreign resident capital gains tax regime. Specifically, the proposed amendments will apply to CGT events commencing on or after 1 July 2025 to:
- clarify and broaden the types of assets that foreign residents are subject to CGT on;
- amend the point-in-time principal asset test to a 365-day testing period; and
- require foreign residents disposing of shares and other membership interests exceeding $20 million in value to notify the ATO, prior to the transaction being executed.
The measures are significant with the amendments expected to increase receipts by $600 million over the five years from 2023-24. That estimate is more remarkable given that the measures are not expected to take effect before 1 July 2025. Despite the significance of these proposals, there is a great deal of detail which needs to be provided.
Technical changes bring practical uncertainty
The first two measures appear to draw, at least in part, from Article 9 of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) which allocates a right to tax foreign residents on gains from the sale of shares or interests in entities where those gains are derived principally from immovable property (ie. land). As set out in the Explanatory Statement, the MLI was amended to effect two changes:
"(i) to introduce a testing period for determining whether the condition on the value threshold is met; and (ii) to expand the scope of interests covered by that paragraph to include interests comparable to shares, such as interests in a partnership or trust."
The current foreign capital gains tax regime already covers interests in companies or trusts by applying capital gains tax to the disposal of "membership interests". Taxpayers will be keen to understand whether the expansion of the asset categories looks to capture additional types of interests referable to companies and trusts (for example convertible notes, synthetic instruments etc), and if the expansion also seeks to cover categories of assets which are treated in the same way as land or interests in land. This might include other assets which are not interests in land (such as licences). There is a reference in this regard to "assets with a close economic connection to Australian land".
As to the extended 365-day testing period, there is no indication as to how such a measure would be implemented and its alignment with the overall policy of Division 855. It will be important to understand whether there is a potential for gain duplication (at the Australian entity level and then again at the level of the foreign resident shareholder).
Notification requirements to build tax profiles
As to the notification requirements, this is part of a pattern of statutory and regulatory developments that endeavour to provide the ATO with information as to the tax profile of foreign investors and their Australian investees, with a view to identifying risks to the Australian revenue base.
Developments to the FIRB framework have been designed to provide information at the time of acquisition and this measure appears to supplement that approach albeit at disposal. While it is common for FIRB to condition its approval on certain tax conditions being complied with, including a general obligation to comply with the law, these conditions can in some situations extend to a positive obligation to notify the ATO of any proposal to dispose. This proposed measure imposes a more codified obligation, providing the ATO with significant information which may enable it to take pre-emptive action in circumstances where it considers there to be a risk to the revenue. The data obtained will also provide the ATO with real-time perspectives on the positions being taken by taxpayers on the application (or non-application) of the foreign resident CGT rules.
The $20 million threshold is very low, and may be difficult to administer (our expectation is that the ATO would be provided with an immense amount of information which would add a significant administrative burden on the regulator). It will also create additional steps in implementing M&A transactions and introduce further regulatory risks (particularly addressing the risk of potential ATO garnishee notices). While it is proposed that this is a "notification" requirement, we query whether the final form of legislation will expand this to something beyond a mere notification.
It is surprising that such a significant measure has been included without warning and with an absence of any real insight into its content. That said, it would seem that the Government has not yet determined the precise form or mechanics of these measures as indicated both by a start date on or after 1 July 2025 and the statement that it will "consult on the implementation details of the measure".
Tough new penalties for underpayment of royalty withholding tax
From 1 July 2026, penalties will apply to significant global entities with over AU$1 billion in global group annual turnover (SGEs) which avoid royalty withholding tax by mischaracterising or undervaluing royalty payments.
This measure is interesting in the context of the current Pepsi litigation with the ATO, for which the Full Federal Court appeal was heard last week. In that case, the ATO argues that Pepsi is liable to royalty withholding tax or the diverted profits tax.
To date in Australia, withholding tax has not been subject to the same penalty regime as most underpayments of corporate tax. Generally, companies are penalised based on their level of culpability in taking an incorrect position, such as a 25% penalty for a failure to take reasonable care or a 50% penalty for recklessness. These penalty rates are doubled for SGEs, meaning that Australia may well have the highest tax penalties in the world for multinationals. For underpaid withholding tax, the ATO can currently seek to simply recover the underpaid tax from the Australian payor or from the foreign recipient, but without the standard penalty regime applying.
The upshot of the measure is that SGEs which use IP in Australia will need to take additional care to ensure that the correct amount of withholding tax is being paid. The Pepsi litigation shows that this is not easy. Even where there is clearly a liability, debates will ensue about the correct amount of royalty withholding tax to pay. Many scenarios will involve a combined payment being made for goods, services and IP use, meaning disagreements will arise about apportioning a payment between the different items in an agreement. Perhaps SGEs will want to seek to agree their treatment earlier with the ATO to avoid the penalty possibilities. We will be paying close attention to how this plays out.
Deferred start date for GAAR extensions
The Government has delayed to the start date for the extensions to Australia's general anti-avoidance rule (GAAR). The extensions, announced in last year's Budget, are to capture schemes which:
- obtain a lower Australian withholding tax rate (at present, the GAAR can only apply where withholding tax is avoided entirely); and
- achieve an Australian income tax benefit but have the dominant purpose of reducing foreign tax (at present, the GAAR can only apply where the dominant purpose was to avoid Australian income tax).
Last year the Government announced that the changes were to apply to income years commencing from 1 July 2024. However, the measure will now only apply to income years which start after the legislation has received Royal Assent, with no indication as to when that will occur. Treasury has not yet released any draft law for public consultation, so query whether this law will be finalised during 2024 or slip into next year.
The announcement does not alter the previously announced extensions, which are still proposed to apply to schemes which existed before the legislation becomes effective. For example, if a restructure undertaken in FY20 is still in place once the new rules commence, any Australian tax benefits which arise after the new law passes are within scope and can be cancelled if the GAAR extensions apply. Organisations which have previously obtained advice or otherwise considered whether the GAAR applied to their circumstances will need to reassess if their structures remain in place. Stay tuned for further analysis when the draft law on this measure is published by Treasury.
Delaying the start date until the legislation has passed Parliament is a welcome development. In contrast, the Pillar 2 measure has a proposed start date of 1 January 2024 even though the draft legislation has only been released recently and not yet introduced to Parliament. Also on that topic…
Minor win for multinationals: Proposed intangibles rule dropped
The Government has dropped its proposed measure to deny deductions for payments relating to intangibles held in jurisdictions with a corporate tax rate below 15%. This measure had been proposed to apply to payments from July 2023, having left taxpayers in the lurch for the last 11 months.
Taxpayers had been angling for this measure to be dropped for some time. It was announced in the Albanese Government's first Budget, which was an off-cycle mini-Budget on Halloween in October 2022. However, in the same Budget the Government pledged its support for the Two Pillar solution being led by the OECD, which includes the 15% global minimum tax under Pillar 2. Corporates were left to wonder what additional mischief this measure was set to achieve beyond commencing six months earlier. Ultimately, the Government has decided against it.
$1.2 billion funding extension for ATO Tax Avoidance Taskforce
The ATO's Tax Avoidance Taskforce has received another funding round, this time being extended for another two years (FY27 and FY28). The Taskforce will continue its broad focus across multinationals, large public and private businesses, and high-wealth individuals.
The additional two years have a funding cost of around $600m per year, with an estimated total return to the Government across the two years of $2.4 billion. There are two interesting points about the estimated increased tax take:
- Since the Taskforce commenced in FY17, it has collected an average of $4.5B per year. The funding levels and revenue estimates have been broadly similar to what is contained in this year's Budget, and the ATO has eclipsed those revenue forecasts many times over in every year, providing the Government with a 10x return on investment in some years.
- The revenue forecast in these numbers is very lumpy. Despite the Government's expenditure being roughly the same in both years, the forecast revenue is almost double in the second year ($829M in FY27, $1.602B in FY28). It is unclear why this is the case, but query whether the ATO will be moving to new focus areas where it expects to fare well.
It is unsurprising that the Taskforce remains well-funded. Taxpayers should expect a continued focus from the ATO, particularly in relation to hot topics which the ATO has publicised as arising in Combined Assurance Reviews which the Taskforce conducts. These include transfer pricing for financing and sales of goods, hybrid mismatches and withholding tax avoidance.
Continued superannuation compliance and enforcement
Superannuation compliance continues to be a focus area for Government following last year's announcements on Payday Superannuation and data-matching programs.
The new compliance measures include:
- pursuing unpaid superannuation entitlements owed by employers in liquidation or bankruptcy under the Fair Entitlements Guarantee Recovery Program; and
- additional funding to Australian Taxation Office (ATO) to strengthen compliance and mitigate fraud in the tax and superannuation systems.
Employers should be making wage and superannuation compliance a high priority. The Government has been making steps towards empowering employees to pursue underpayments, through classification of superannuation as wage theft and broadening avenues via the ATO and Fair Work.
Enhancing Government-funded Paid Parental Leave through superannuation
On 7 March 2024, the Government announced that it will pay superannuation on the Government-funded Paid Parental Leave (PPL) scheme from 1 July 2025. If passed by Parliament, the Government will pay a contribution to recipients' superannuation funds based on the Superannuation Guarantee (SG) rate (ie., 12%) in addition to the Government PPL payment to eligible parents of babies born or adopted after 1 July 2025.
Currently, SG contributions are specifically excluded from the salary or wages paid to an employee for a period of parental leave (including maternity, paternity and adoption leave) under Australian superannuation legislation.
The measure aims to reduce the gap between men's and women's superannuation balances at retirement. The Government expects this measure to cost $1.1B over four years from 1 July 2024.
These proposed changes only impact eligible parents receiving PPL payments under the Government PPL scheme. Employers are still not required to make SG contributions on payments for individuals that take a period of parental leave, although many employers chose to do so through their own private parental leave schemes. It is presently unclear whether these contributions will be counted as concessional pre-tax contributions (which attract a lower 15% tax rate in the fund).
This is also a timely reminder that the statutory SG rate and caps will increase from 1 July 2024:
- SG rate: 11.5% from 1 July 2024 and 12% from 1 July 2025 onwards;
- concessional contribution cap: $30,000;
- non-concessional contribution cap: $120,000; and
- maximum contributions base: $65,070 (or $7,483.05 in SG contributions per quarter).
Revised stage 3 tax cuts and considerations for certain salary sacrifice arrangements
The Government previously announced modifications to the Stage 3 tax cuts. From 1 July 2024, the following taxable income thresholds and individual tax rates (excluding the 2% Medicare levy) will apply:
Employers should be well across this early announcement from a Pay as you go withholding perspective. Additionally, FBT exempt or rebatable employers (eg., not-for-profits and PBIs) may wish to consider the impact of these changes on employee salary sacrifice arrangements.
Salary sacrifice arrangements typically involve an employee entering into an agreement with their employer to forego some of their future salary or wages in return for other benefits such as additional SG contributions, gym memberships or the use of vehicles. Employees of FBT exempt and rebatable employers are eligible for higher-level tax concessions that are not available to private sector employees, provided the value of these benefits does not exceed the FBT exemption limit (eg., $17,000 or $30,000).
For most employees, the revised Stage 3 tax cuts will deliver a tax saving by reducing the amount of income tax they will need to pay and increasing their after-tax income. However, FBT exempt and rebatable employers may wish to remodel their salary packaging arrangements to ensure that their employees are still able to access beneficial tax outcomes under the revised rates.
Future Made in Australia tax incentives
Critical minerals production tax incentive
For 31 critical minerals listed on the Government's Critical Minerals List (including lithium, graphite, cobalt and rare earths), the Government has announced a Critical Minerals Production Tax Incentive valued at 10% of relevant processing and refining costs.
The incentive will serve several purposes chief among which will be diversifying global critical minerals supply chains away from dependence on other countries in favour of Australia and in the process, positioning Australia to take the lead on preparing the global economy for a net zero transformation. The targeted nature of the incentive to processing and refining (and not mining generally) should also stoke investments in the construction of new processing plants and allow Australia to capture more value where, but for the incentive, raw materials might otherwise be shipped for processing offshore in lower cost jurisdictions.
The incentive will be available in respect of critical minerals processed and refined between 2027-28 to 2039-40 for up to 10 years per project, provided the project reaches a final investment decision by 2030. The lead time reflects the fact that details in respect of how the incentive will operate are subject to consultation.
On its face this incentive seems to be a big win for critical minerals miners that in recent times have been struggling to bank their projects. As with all tax measures, how effective the incentive is at achieving its policy objectives will come down to the detail. We expect miners will be very keen to get an idea of whether the incentive will operate on a refund / offset basis (similar to R&D) and understand the boundaries of relevant processing and refining costs. However, it is a long time to wait for those taxpayers who seek to benefit from the incentive. Also, a great deal can change in three years both in the economy and politically (domestically and internationally). Accordingly, the precise form of those measures may ultimately be influenced by issues which are yet to emerge.
To date, the Government has been selective in providing financing to key critical minerals projects where private sector finance is unavailable or insufficient through the Critical Minerals Facility and the Northern Australian Infrastructure Facility (to companies including Arafura Rare Earths Limited, Alpha HPA Limited, and Renascor Resources Limited). This incentive marks a welcome policy shift toward broader industry support for the critical minerals sector.
Hydrogen Production Tax Incentive
The Hydrogen Production Tax Incentive will provide an incentive of $2 per kilogram of renewable hydrogen produced for up to ten years per project, between the 2027-28 and 2040-41 financial years. The incentive will operate alongside an expanded Hydrogen Headstart program, which provides revenue support as a production credit, to some large Australian-based renewable hydrogen projects which are selected on a competitive basis. This program intends to cover the gap between the cost of producing renewable hydrogen and its market price. However, details of these programs are subject to consultation which will occur with other proposals to incentivise efficient production of metals used in clean energy production (such as lithium, nickel and copper – see above) and low carbon liquid fuels (such as renewable diesel and biofuels).
The incentive will be available in respect of hydrogen produced between 2027-28 to 2039-40 for up to 10 years per project, provided the project reaches a final investment decision by 2030. The lead time reflects the fact that details in respect of how the incentive will operate are subject to consultation.
It is often stated (and was previous government policy) that hydrogen needs to be produced for at or below $2 per kilogram to be commercially viable. On this estimated breakeven figure, by creating the $2 per kilogram incentive the Government is effectively providing a safety net for hydrogen projects in the pipeline, but other estimated breakeven figures are higher (Australian Renewable Energy Agency in January 2024 estimated $3 per kilogram was more appropriate while in 2023 the Department of Climate Change, Energy, the Environment and Water's State of Hydrogen Report noted that production costs could vary from a projected $2.83 to significantly higher figures leading to sale costs of $10-15 for small projects). For large producers, the incentive may be enough to make an otherwise uncommercial project commercially viable. While the support for the sector will be welcomed, the $2 per kilogram support lags behind the United States offering of $3 USD per kilogram for low-carbon intensity hydrogen over the same period. Also, as noted above, the delay in implementing these new rules may mean that their precise form will be influenced by domestic and global political and economic developments.