Below is a summary of the 2022-23 federal budget for business as delivered on 25 October 2022.
Thin cap: new earnings-based tests for limiting debt deductions
Under the current thin capitalisation rules, a non-financial entity’s allowable debt (interest) deductions in relation to its cross-border investments are limited by the application of a number of statutory tests under which its maximum allowable debt is the greatest of:
• the safe harbour debt amount (60% of the average value of the entity’s Australian assets)
• the arm’s length debt amount, or
• the worldwide gearing debt amount which allows the entity to gear its Australian operations up to 100% of the actual gearing of its worldwide group.
The Government will replace the safe harbour and worldwide gearing tests with earnings-based tests to limit debt deductions in line with an entity’s profits. More specifically, the thin cap rules will be amended to:
• replace the safe harbour test with a new earnings-based test which 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)
• 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).
The arm’s length debt test will be retained 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.
The changes will apply to multinational entities operating in Australia and any inward or outward investor. Financial entities and ADIs will continue to be subject to the existing thin capitalisation rules.
The new tests will apply to income years commencing on or after 1 July 2023.
Intangible assets depreciation: option to self-assess effective life dropped
The Government will not proceed with the proposal to allow taxpayers to self-assess the effective life of intangible depreciating assets.The measure was announced in the 2021-22 Budget and was to apply to assets acquired from 1 July 2023. This means that effective lives of intangible depreciating assets will continue to be set by statute, i.e., reversing this decision will maintain the status quo. The change is estimated to increase receipts by $550 million over the 4 years from 2022-23.
Anti-avoidance: denial of SGE deductions for payments for intangibles
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 per cent, or
• a tax preferential patent box regime without sufficient economic substance. The measure will apply to payments made on or after 1 July 2023.
Off-market share buy-backs: proposed integrity rules
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 further detail in the Budget Papers nor in any associated media releases as to what precisely is intended.
By way of background, the share buyback provisions are found in Div 16K of Pt III of the ITAA 1936. A distinction is drawn between buybacks made in the ordinary course of trading on an official stock exchange (“on-market purchases”) and all other buybacks (“off-market purchases”).
For CGT purposes the buyback is to be ignored when determining whether a capital gain or loss accrues to or is incurred by a company in respect of the buyback (or on the subsequent cancellation of the shares).
From the shareholder’s point of view, an off-market purchase needs to be distinguished from an on-market purchase. Where the buyback is an on-market purchase, the whole of the purchase price is taken into account as the capital proceeds for the disposal.
For off-market share buybacks, the full buyback price is treated as capital proceeds for CGT purposes if debited against amounts standing to the credit of the purchaser’s “share capital account”. Otherwise, any relief from double taxation is provided by reducing the amount of the capital gain that is a dividend.
If the amount of the purchase price exceeds the part of the purchase price that is debited to the share capital account, then the excess is taken to be a dividend paid to the seller as a shareholder out of profits of the company. This causes it to be assessable under s 44. The remainder of the purchase price (i.e., the amount debited to the share capital account) is not taken to be a dividend.
This measure will take effect from Budget night, i.e., 7:30pm AEDT, 25 October 2022. It is expected to increase receipts by $550 million over the four years from 2022-23.
Tax transparency: new reporting requirements
The Government will introduce reporting requirements to enhance the tax information made available to the public. The Government will require:
• significant global entities to prepare for public release 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 reporting requirements will apply for income years commencing from 1 July 2023.
COVID grants declared as NANE
The Government has made the following State and Territory COVID-19 grant programs eligible for non-assessable, non-exempt (NANE) treatment, which will exempt eligible businesses from paying tax on these grants.
• Business Costs Assistance Program Four – Construction (Victoria)
• Licenced Hospitality Venue Fund 2021 – July Extension (Victoria)
• License, Hospitality Venue Fund 2021 – Top Up Payments (Victoria)
• Business Costs Assistance Program Round Two – Top Up (Victoria)
• Business Costs Assistance Program Round Three (Victoria)
• Business Costs Assistance Program Round Four (Victoria)
• Business Costs Assistance Program Round Five (Victoria)
• Impacted Public Events Support Program Round Two (Victoria)
• Live Performance Support Program (Presenters) Round Two (Victoria)
• Live Performance Support Program (Suppliers) Round Two (Victoria)
• Commercial Landlord Hardship Fund 3 (Victoria)
• HOMEFRONT 3 (ACT), and
• Small Business Hardship Scheme (ACT).
Digital currencies not 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. The measure has already been released in draft legislation.
By way of background and as a reminder, this will maintain the current tax treatment of digital currencies, including the CGT treatment where they are held as an investment. This measure removes uncertainty following the decision of the Government of El Salvador to adopt Bitcoin as legal tender and will be backdated to income years that include 1 July 2021.
The exclusion does not apply to digital currencies issued by, or under the authority of, a government agency, which continue to be taxed as foreign currency.
This measure is estimated to have no impact on receipts over the four years from 2022-23.
Modernising Business Registers
In a slightly different category to the above, the Government will provide additional funding of $166.2 million over four years from 2022-23 to continue delivery of the Modernising Business Registers program that will consolidate over 30 business registers onto a modernised registry platform. Funding includes:
• $80.0 million in 2022-23 for the ATO and ASIC to continue design and delivery of the modernised registry platform
• $86.2 million over 4 years from 2022-23 ($119.5 million over 6 years from 2022-23 and $15.9 million per year ongoing) for ATO and ASIC to operate and regulate the Director Identification Numbers regime and maintain ASIC’s registry systems.
Previously announced measures: 8 abandoned, 3 deferred
The Government has reviewed a number of tax and superannuation related measures that had been announced by the previous Government, but not enacted. It states in the Budget papers that it will abandon eight of these, while three will have deferred start dates.
While most of the measures relate to the heading of “Business Taxation”, note that the proposals listed below include superannuation and personal tax measures.
The following finance-related proposed changes have been abandoned.
• 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.
TOFA technical amendments: start date deferred
The 2021-22 Budget measure that proposed making technical amendments to the TOFA rules has deferred from 1 July 2022 to the income year commencing on or after the date of assent of the enabling legislation.
Superannuation and retirement
The following proposed superannuation and retirement related measures have been abandoned.
• The 2018-19 Budget measure that proposed changing the annual audit requirement for certain SMSFs.
• The 2018-19 Budget measure that proposed introducing a requirement for retirement income product providers to report standardised metrics in product disclosure statements.
Residency requirements for certain SMSFs: start date deferred
The 2021-22 Budget measure that proposed relaxing residency requirements for SMSFs will be deferred from 1 July 2022 to the income year commencing on or after the date of assent of the enabling legislation.
More information and background on these superannuation proposals can be found under the “Superannuation” heading.
Tax compliance: third-party reporting rules for EDPs, cash payments
The Government intends to defer the start date for the following proposed third-party reporting rules:
• transactions relating to the supply of ride sourcing and short-term accommodation – from 1 July 2022 to 1 July 2023; and
• all other reportable transactions (including but not limited to asset sharing, food delivery and tasking-based services) – from Â1 July 2023 to 1 July 2024.
The measures implementing these changes are contained in the Treasury Laws Amendment (2022 Measures No 2) Bill 2022. It proposes to extend the third-party reporting regime to the operators of electronic distribution platforms that facilitate supplies from one entity to another entity. It will cover platforms operating over the internet, including through applications, websites or other software. However, a service will not be considered to be an electronic distribution platform if it only advertises or creates awareness of possible supplies, operates as a payment platform or serves a communications function.
Transactions will need to be reported to the ATO if they involve the provision of consideration by a buyer to a seller for a supply made through the platform by the seller. Transactions that only involve the sale of goods or real property (the transfer of legal title to the goods or real property) or financial supplies will not be captured. The supply must also be connected to the indirect tax zone (i.e., Australia).
Cash payments proposal abandoned.
In addition, the 2018-19 Budget measure that proposed introducing a limit of $10,000 for cash payments made to businesses for goods and services (and for which a delayed start date was announced in 2018-19 MYEFO) has been abandoned.
Deductible gifts: pastoral care in schools
The 2021-22 MYEFO measure that proposed establishing a deductible gift recipient category for providers of pastoral care and analogous well-being services in schools has been abandoned.
Source: CPA Australia
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Disclcaimer: The information provided within this article is general information only. None of the comments in these notes are intended to be advice, whether legal, financial product or professional. You should obtain specific advice regarding your particular circumstances from a tax or legal professional.
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