Australia - 2023 federal budget released and other proposals affecting multinationals

Australia’s 2023 federal budget, delivered by the Treasurer on 9 May 2023 against a background characterised by acute cost of living pressures, puts the spotlight on easing the impacts of rising inflation and driving wage growth. The government is committed to achieving responsible and targeted relief for the Australian community at large by building a stronger and more sustainable care economy.

A range of measures were announced to provide timely benefits for individuals. For businesses—large and small, domestic and multinational (MNE)—it is time to expect many more visits from the Australian Taxation Office (ATO), as the emphasis is clearly on a compliance push. The benefits to small businesses are relatively immaterial or outweighed by an additional administrative burden. For large corporates, certainty has been provided around the 1 January 2024 start date for a 15% minimum tax rate and proposed amendments to the general anti-avoidance rules will pack more of a punch.

This article takes a closer look at the proposals affecting businesses (for a comprehensive analysis of the budget measures, see the tax alert prepared by BDO in Australia), as well as several other recent proposals that would affect MNEs and are not mentioned in the budget.

Global minimum tax / Domestic minimum tax

The government has announced the adoption of rules aligned with Pillar Two of the international corporate tax reforms, which follow a two-pillar solution (Pillar One and Pillar Two) as developed by the OECD. At present, the budget has remained silent on the adoption of Pillar One.

The announcement states the government will implement “key aspects of Pillar Two of the OECD/G20 Two-Pillar solution to address the tax challenges arising from digitalisation of the economy.” The initiative will include both a 15% global minimum tax and a domestic minimum tax designed to “give Australia first claim on top-up tax for any low-taxed domestic income.” The rules will apply to large MNEs with annual global revenue of EUR 750 million (approximately AUD 1.2 billion) or more. The global minimum tax will apply to large MNEs with Australian operations, with the Income Inclusion Rule applicable for income years starting on or after 1 January 2024 and the Undertaxed Profits Rule applicable for income years starting on or after 1 July 2025.

The government also proposes to introduce a 15% domestic minimum tax that will apply for income years starting on or after 1 July 2024.

The OECD Pillar Two solution, which the rules are derived from, intends to address the challenges arising from the digitalisation of the economy, with the reforms intended to ensure MNEs pay their fair share of tax in the jurisdictions in which they operate. The aim of this change is to align Australian legislation with the changes to the global tax regime already implemented, and to be implemented, by other OECD member countries.

BDO comment

The 1 January 2024 start date for Pillar Two legislation seems exceedingly optimistic from

an ATO and MNE readiness point of view. This expedited timeline does not give MNEs operating in Australia sufficient time to understand and implement the required processes to comply with the proposed Pillar Two rules and gain an understanding of the anticipated impacts. This is especially concerning when taking into consideration that many areas of the rules have yet to achieve common alignment by other key jurisdictions and an understanding of the anticipated impacts are yet to be understood.

While Australia may collect some additional tax from select MNEs, the compliance costs to MNEs involved in these measures may substantially outweigh the additional tax revenue. The only real upside is that Australia is seen to be supporting the 15% tax floor that Pillar Two is attempting to impose on a global basis. As Australia’s base corporate tax rate is above the 15% tax floor, those measures will level the playing field with lower tax countries by reducing the tax differences between the countries for select MNEs.

Uncertainty remains around the interaction between the Pillar Two regime and the existing Australian tax rules (e.g., loss carry forward, R&D tax offsets), and we anticipate more guidance in this area.
 

Related proposals for MNEs that are not yet factored into the federal budget

Disallowance of deductions for payments relating to intangibles connected with low tax jurisdictions

On 31 March 2023, Treasury released Exposure Draft legislation that would introduce a new anti-avoidance provision to disallow deductions for payments made by Significant Global Entities (SGEs) in relation to intangible assets connected with low or no tax jurisdictions. The following conditions would have to be satisfied for a deduction to be disallowed:

  • The taxpayer is an SGE for the income year (an SGE is an entity that has or is part of a global group with more than AUD 1 billion in annual turnover);
  • As a result of the arrangement under which the taxpayer makes the payment, or a related arrangement, the taxpayer or an associate acquires the intangible asset, acquires a right to exploit the intangible asset or exploits the intangible asset; and
  • Entering into the arrangement results in the recipient entity or other associate deriving income in a low corporate tax jurisdiction (directly or indirectly) from exploiting the intangible asset or a related intangible asset.

If enacted, the measures would apply to amounts paid, incurred or credited on or after 1 July 2023. For more details on the proposed measures, please see BDO in Australia’s Technical Update.

Changes to the interest limitation (thin capitalisation) tests 

On 16 March 2023, Treasury released Exposure Draft legislation in relation to changes to the interest limitation (thin capitalisation) rules. The draft would introduce new earnings-based tests in determining an entity’s allowable debt deductions for an income year based on the entity’s earnings or profits, replacing the existing asset-based tests. In summary, the changes would be as follows:

  • Replacement of the existing safe harbour debt test with an earnings-based fixed ratio method that would limit interest deductions to 30% of tax EBITDA (i.e., earnings before interest, taxes, depreciation and amortisation) and allow a 15-year carry forward period for disallowed interest deductions.
  • Replacement of the existing worldwide gearing test (effectively 30% of group EBITDA based on audited financial statements) with a group ratio test; and
  • Replacement of the existing arm’s length debt test for general investors and financial entities that are not authorised deposit-taking institutions with an external third-party debt test.

For further information on the proposed measures, see BDO in Australia’s Technical Update.

Proposed new multinational tax (country-by-country) transparency reporting 

On 6 April 2023, Treasury released Exposure Draft legislation introducing new requirements for country-by-country reporting entities to publish publicly certain information on the group’s tax affairs. The proposed measures are generally consistent with broader global sentiment seeking greater transparency in relation to activities undertaken and tax paid by MNEs in the jurisdictions in which they operate. 

If enacted, these measures would apply to income years commencing on or after 1 July 2023.

For further information on the proposed changes, see BDO in Australia’s Technical Update.


Anti-avoidance rule

The government is expanding the scope of the general anti-avoidance rule for income tax (Part IVA of the Income Tax Assessment Act 1936) so that it will apply to:

  • Schemes that reduce tax paid in Australia by accessing a lower withholding tax rate on income paid to nonresidents; and
  • Schemes that achieve an Australian income tax benefit, even where the dominant purpose was to reduce foreign income tax.

The amendment in the first bullet expands the scope of the rule in a way that is consistent with the recent decision of the Full Federal Court in the Guardian case, as well as targeting MNEs, The proposed change may have implications for variable tax and withholding tax rates such as those enjoyed by base rate entities and managed investment trusts. The second amendment expands the dominant purpose of tax avoidance to include the avoidance of foreign tax obligations and clarifies that these schemes are not acceptable commercial arrangements even where the Australian tax saving is a collateral benefit of the scheme.

The expanded scope will apply from 1 July 2024, regardless of the scheme’s original commencement date.

BDO comment

Whilst BDO understands the requirement for robust anti-avoidance measures, there is concern around the scope of amendments regarding the dominant purpose test where avoidance of Australian tax is merely a collateral benefit of a much larger scheme. The details of the draft legislation will be heavily scrutinised when released for public consultation.

Fringe benefits tax rules for electric vehicles

The Treasury Laws Amendment (Electric Car Discount) Bill 2022, which received Royal Assent on 12 December 2022, provides exemptions from Fringe Benefits Tax (FBT) for fringe benefits relating to electric cars, subject to certain requirements being met.

The government is sunsetting the FBT exemption for plug-in hybrid electric cars. This change will apply from 1 April 2025; arrangements involving plug-in hybrid electric cars entered into between 1 July 2022 to 31 March 2025 will remain eligible for the electric car discount.

BDO comment

The proposed amendments make no changes beyond the bill passed in December 2022 and BDO is pleased there will be no further changes.

Petroleum resource rent tax

On 7 May 2023, the Treasurer announced significant modifications to the Petroleum Resource Rent Tax (PRRT) based on the finalisation of the Treasury Gas Transfer Pricing (GTP) Review.

The current regime imposes a 40% tax on offshore oil and gas projects after they become cash-flow positive, which often takes years or even decades because of the high costs of exploration and infrastructure. Additionally, operation costs are fully deductible and indexed each year.

Effective 1 July 2023, the proposed changes, which have been under consideration since 2019 by the former government, aim to limit the proportion of PRRT assessable income that can be offset by deductions to 90%.

Whilst the cap will not apply until seven years after a project reaches production, these changes bring forward the date at which liquified natural gas projects are expected to pay PRRT. In addition to the deductions cap, other modifications to the GTP rules will be legislated to clearly determine the taxing point and the types of expenditure that are deductible. Additionally, the anti-avoidance rules will be tightened to prevent potential exploitation.

The government plans to consult on the final design and implementation regarding the deductions cap and draft GTP rules in late 2023, while consultation on other policy changes, including the anti-avoidance rules, will occur in early 2024.

BDO comment

BDO is relieved the government adopted the logical recommendation of implementing the deduction cap, a more reasonable recommendation compared to the complicated “netback only” or “modified profit split” approaches. We do, however, have reservations regarding Treasury’s assertion that this change will not discourage growth in the industry.

When considering the proposed changes to the PRRT, accounting issues may not immediately come to mind. However, organisations that have had to deal with PRRT accounting are familiar with the challenges related to accounting policy choices concerning augmentation and the associated modelling required to recognise deferred tax assets. The proposed changes may affect the timing and sequence of PRRT credits utilisation, potentially requiring adjustments to recognised deferred tax balances. This exercise will require skills beyond taxation, so it may be necessary to seek advice from accounting, modelling and tax professionals.

Extension to the GST compliance program

The ATO will receive AUD 588.8 million in funding from the federal government for four years as from 1 July 2023 in order to promote GST compliance. The funding will contribute to the development of more advanced analytical tools for the ATO to identify and address GST risks in the current system, as well as ensuring businesses are accurately reporting and remitting GST as part of their tax obligations. Importantly, the funding will also result in measures that ensure that entities are not overclaiming GST refunds.

To ensure taxpayers are reporting and paying correct amounts of GST, the ATO has and will continue to employ methods such as data-matching and sourcing information from other government agencies to address areas of GST risk.

BDO comment

BDO generally welcomes the government’s increased focus on ensuring taxpayers are accurately meeting their GST obligations. Ensuring the integrity of the GST means there is a level playing field for businesses. The use of automated checking systems is also to be applauded for its efficiency. However, the ATO must acknowledge that the GST provisions are complex and smaller taxpayers may be subject to greater challenges in meeting their tax obligations. Small businesses should be on notice that these measures will result in the ATO identifying greater rates of noncompliance.

Tax liability lodgement taskforce and amnesty program

The ATO will receive additional funding over a four-year period from 1 July 2023 to assist with effectively engaging businesses to address outstanding tax and superannuation liabilities.

The additional funding will allow the ATO to target taxpayers with high-value debts greater than AUD 100,000 and debts older than two years where those taxpayers are either public and multinational groups with an aggregated turnover of more than AUD 10 million, or privately owned groups or individuals controlling more than AUD 5 million of net wealth.

Alongside the additional funding, the government has announced a lodgement penalty amnesty program that will allow small businesses with an aggregate turnover of less than AUD 10 million to re-engage with the ATO regarding their overdue lodgements. Under this program, the ATO will remit failure-to-lodge penalties associated with outstanding tax statements lodged in the period 1 June 2023 to 31 December 2023 that were originally due during the period 1 December 2019 to 29 February 2022.

BDO comment

Disappointedly, the amnesty approach appears narrowly targeted, but BDO agrees with the importance of improving compliance with tax lodgement obligations. We support the amnesty program aimed at encouraging small businesses with outstanding lodgements, as the payment of outstanding superannuation liabilities directly benefits Australian employees. There is an open question why the amnesty only applies to lodgements that should have been made up to 29 February 2022, rather than the current date. Further to the announced measures, BDO would have liked to have seen additional funds directed to the ATO to help improve efficiencies associated with processing returns and refunds for taxpayers that are compliant with lodgement deadlines.
 

Mark Molesworth
BDO in Australia

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