October Budget | Let’s Talk Tax

While a lot has been written on the recent Budget announcement, these are the issues that we consider will be most relevant to our clients.

Personal income tax rates

The Budget has preserved the previously announced Stage 3 tax cuts, which were originally announced in 2018.  From 1 July 2024, the 37% bracket will be removed and the 32.5% bracket will be reduced to 30%.  In addition, the threshold above which the top marginal tax rate of 45% applies will increase from $180,000 to 200,000.

Personal income tax compliance program

The Government’s focus on non compliance by individual taxpayers will continue with further funding for the next 2 years to support the ATOs activities targeted at overclaiming deductions and omitting income.

 Thin capitalisation changes

Consistent with its election commitments, the Government will amend the thin capitalisation rules from income years commencing on or after 1 July 2023.

The measures include:

• replacement of the existing safe harbour test with a 30% of EBITDA (earnings before interest, taxes, depreciation, and amortisation) test. Deductions denied under this test may be carried forward up to 15 years.  These rules align with UK rules but differences exist, including there are no industry based carve outs which do exist in the US (for real estate/infrastructure) and UK (for certain infrastructure).

Replacing the safe harbour test with an EBITDA rule will mean that volatile earnings will affect the amount that can be deducted for interest;

• replacement of the worldwide gearing ratio with a new earnings based group ratio to allow 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);
• limiting the Arm’s Length Debt Test to an entity’s external (third party) debt.

The announcement is light on detail.  This measure is likely to have a significant impact on business in an environment where demand for goods are decreasing with increasing interest rates.

Off market share buybacks

From 25 October 2022, the tax treatment of off market share buybacks undertaken by listed public companies will be aligned with the treatment of on market share buybacks (in which no part of the buyback proceeds is treated as a dividend).  This means that these distributions will not carry with them franking credits which will reduce the return to these investors.

This measure has led to a strong response from self funded retirees, fund managers and the superannuation sector.  It is likely we will hear more about this issue in the short term.

Announced but unenacted measures

The Government will not proceed with the following previously announced measures:

• allow the self-assessment of effective lives of intangible depreciating assets.
• amendments in relation to debt/equity (which appear to be the section 974-80 proposals) and the Taxation of Financial Arrangements (TOFA) hedging rules.

• new framework for limited partnership collective investment vehicles
• audit requirements for SMSFs
• $10,000 cash limit

No guidance was provided to small businesses as to what will happen in relation to Division 7A tax changes that were originally announced in the 2016-17 Federal Budget. Corporates are waiting to see what will happen to patent boxes and digital games offset.

The status of the Board of Taxation’s proposals regarding the residency of companies and individual are also unclear.

Measures aimed at multinationals

The Government has proposed several measures targeted at multinationals with an annual global income of more than $A1 billion including:

• Denying deductions for direct and indirect payments relating to intangibles held in jurisdictions with a tax rate of less than 15% or a tax preferential patent box regime with insufficient substance.

Taxpayers already need to navigate a number of tax rules when it comes to deductions for intangibles and royalties, including withholding tax, transfer pricing, Part IVA, multinational anti avoidance law (MAAL), CFC provisions and the diverted profits tax (DPT).

• Enhanced tax transparency reporting requirements, including public country by country reporting.

As with a number of measures announced in the Budget, this is light on detail with key issues such as the definition of intangibles and indirect payments not clear.

This measure is not aligned with other established anti-avoidance rules.

Australian Taxation Office (ATO) activities

• Extension of ATO Tax Avoidance Taskforce (Taskforce)

The Government has continued to support the Taskforce, in addition to extending the Taskforce by a further year to 2025-26.

This will mean the likely increase in ATO reviews and audits, together with a focus on recovery of tax debts.

The Taskforce will focus on multinationals and large public, as well as private businesses.

It is now the time, if not already done so, to be prepared for ongoing and targeted ATO review activity, with a focus on high wealth individuals, trust structures, private and large public groups and multinationals.

The ATOs compliance activities which have focused on Justified Trust, have tested both private and public groups on their Tax governance, and identified new and emerging issues.

This will mean that it is important for businesses to proactively engage with stakeholders, including the ATO, in order to manage any liabilities.

Take home messages

1. Review debt funding structures considering the proposed changes to the thin capitalisation regime (for non-financial entities) and consider any refinancing before the start of the income year commencing on or after 1 July 2023.
2. Identify any payments to related parties that could relate to intangibles held in low or no tax jurisdictions and assess the impact of proposed anti-avoidance rule under the multinational tax integrity package.
3. Consider the reputational impact of, and prepare for, the proposed public country-by-country reporting requirements.
4. Considering the extension of funding for ATO’s Tax Avoidance Taskforce, seek advice early to prepare for future ATO scrutiny. Review Tax Governance procedures and identify any potential weaknesses.
5. Where relevant, consider the impact of changes to the tax treatment of off market share buybacks undertaken by listed companies.
6. Assess the impact of the reversal of previously announced measures, such as the self-assessment of effective lives of intangible assets.