Budget 2022-23 measures affecting businesses
30 March 2022
Australia’s Federal Budget 2022-23, delivered by the Treasurer on 29 March 2022, focuses more on short-term cost of living relief for individuals rather than longer-term measures.From a corporate tax perspective, the budget appears light on the tax reform agenda; other than delivering an expansion of the patent box regime, the budget is notable for what it does not include. In particular, many of the COVID-19 incentives, such as the temporary full expensing and loss carryback measures, have not been extended beyond their announced sunset date of 30 June 2023. However, other items in the budget—including the expansion of the ATO anti-avoidance taskforce, providing skills and training and investment support for small businesses, and the streamlining of certain reporting requirements—also will affect businesses.
The absence of tax reform measures may be understandable in light of the upcoming election, coupled with global challenges impacting Australia and the ongoing COVID-19 pandemic. However, this does beg the question when will we see meaningful tax reform in Australia?
Expansion of the patent box regime
The only significant tax reform measure for corporates is the expansion of the patent box regime announced in the 2021-22 budget (for prior coverage, see the article in the March 2022 issue of Transfer Pricing News).
The proposed patent box regime (which still must be passed by both houses of the Australian parliament) would effectively result in a concessional tax rate of 17% (instead of the standard corporate rate of 25% or 30%, depending on the taxpayer’s size) for ordinary and statutory income derived directly from medical or biotechnology patents for income years commencing on or after 1 July 2022. This represents a reduction in the corporate tax rate of 13% for large businesses and 8% for small and medium-sized enterprises.
The 2022-23 budget would expand the scope of the patent box for corporate taxpayers undertaking research and development (R&D) in Australia to include certain agricultural sector innovations relating to the commercialization of listed and registered agricultural and veterinary chemical products or plant breeders’ rights and to low emissions technology innovations.
In addition, the patent box regime for medical and biotechnology innovations granted or issued after 11 May 2021 will include standard patents granted by IP Australia, utility patents issued by the U.S. Patent and Trademarks Office (USPTO) and European Patents granted under the European Patent Convention (EPC). This will provide concessional tax treatment under the patent tax regime at a rate of 17% to the extent R&D of the innovation is undertaken in Australia.
It is important to note that, unlike the medical and biotechnology sectors for which the regime will apply from 1 July 2022, the expanded application to the agricultural sector and low emissions technology innovations will apply as from 1 July 2023. In addition, details of the expansion of the patent box regime are yet to be finalised, pending consultation with industry experts.
BDO welcomes the extension of the patent box regime to include agricultural and low emissions technology innovations. This extension will continue to incentivise the international commercialization of Australian-developed technology to be retained in Australia, resulting in numerous flow-on benefits such as further investment and development activities. However, to be truly competitive with other jurisdictions, the paten box regime should be further extended to be industry agnostic and the concessional rate should be made more competitive.
Extension of the ATO tax avoidance taskforce
The government announced an extension of the Tax Avoidance Taskforce, which focuses on multinationals, large corporates and high-wealth individuals. It will further extend the operation of these investigations by two years to 30 June 2025 and provide funding of AUD 325 million in 2023-24 and AUD 327.6 million in 2024-25.
The taskforce was established in 2016 to undertake compliance activities, detect tax avoidance and protect the integrity of the tax system for all Australians. It also scrutinises specialist tax advisers that promote tax avoidance schemes. As of June 2021, the Tax Avoidance Taskforce has helped the ATO raise nearly AUD 23 billion in tax liabilities. By extending the initiative, the ATO is estimated to increase receipts by AUD 2.1 billion.
BDO agrees with the approach to increase transparency in the administration of the tax system by extending the measures for large businesses and high-wealth individuals. From BDO’s experience with these assurance reviews, the ATO has worked collaboratively with taxpayers to improve their tax governance procedures. However, the extent to which the compliance revenue is a result of the budget measure is uncertain.
An Australian National Audit Office review of the Taskforce in 2019 found the ATO could not conclusively demonstrate the Taskforce met the revenue and resourcing commitments set out in the 2016–17 budget. There is no indication this will change for the current budget cycle. Further, the ATO’s estimated receipts, as a result of these measures are considerably less, and the related expense is higher in this budget compared to the government’s estimate in the 2019-20 budget.
Skills and training and technology investment boost for small entities
The government is continuing its support of small businesses by introducing boosts for both skills and training and technology investment:
- Skills and training boost: Small businesses with aggregated annual turnover of less than AUD 50 million will be able to deduct an additional 20% of expenditure incurred on external training courses provided to their employees. The external training courses must be delivered by entities registered in Australia and be provided to employees either in Australia or online. Expenditure incurred between 7:30 pm (AEDT) on 29 March 2022 and 30 June 2022 will be eligible to have the boost claimed on the 2023 income tax return and expenditure incurred between 1 July 2022 and 30 June 2024 will have the boost included in the income year in which the expenditure was incurred.
- Technology investment boost: Small businesses with an aggregated annual turnover of less than AUD 50 million will be able to deduct an additional 20% of expenditure incurred to support digital adoption, including on the purchase of depreciable assets. Eligible expenditure includes that for portable payments devices, cyber security systems and subscriptions to cloud-based services. An annual cap of AUD 100,000 will apply in each qualifying income year. Expenditure incurred between 7:30 pm (AEDT) on 29 March 2022 and 30 June 2022 will be eligible to have the boost claimed on the 2023 income tax return, and expenditure incurred between 1 July 2022 and 30 June 2023 will have the boost included in the income year in which the expenditure was incurred.
BDO welcomes the government’s support of small businesses and hopes it will assist in upskilling the workforce and providing advanced technological infrastructure as we begin to navigate life in a post-COVID economy. While the caps are somewhat arbitrary, setting the turnover requirement at AUD 50 million will allow a large number of businesses to benefit.
Smarter reporting of taxable payments
Many Australian businesses are currently required to complete a taxable payments annual report (TPAR) by 28 August of each year. TPARs capture payments made to contractors for services provided to the business. The TPAR is an industry-specific reporting requirement, and only includes payments made for contractor services in building and construction, cleaning, road freight, courier, information technology and security, investigation or surveillance industries. The ATO uses the data from TPARs to match the annual income declared by contractors.
From 1 January 2024, the government will allow businesses to align their taxable payments report with their activity statement reporting cycle through the businesses accounting software. The government hopes this will result in more accurate and timely reporting, while lowering compliance costs for taxpayers.
The government is hoping to streamline the reporting requirements of taxpayers through the use of improved software services. BDO welcomes any change that will reduce the compliance requirements for taxpayers, particularly through the use of accounting software.
We also note that once TPARs in these industries can be made in a streamlined manner, there is nothing to prevent the extension of the regime to all industries and all recipients of payments.
Digitalisation of reporting
A key talking point preceding the federal government’s 2022-2023 Budget was the continued modernisation of the Australian tax reporting system. A step forward has been taken through the proposed digitalisation of trust and beneficiary income reporting and processing. However, the government has taken a surprising step back with the 12-month deferral of the start date of the black economy measures.
- Electronic filing of trust returns: All parties required to file a trust tax return will now be permitted to file electronically from 1 July 2024. Currently, electronic filing is available for trust tax returns filed by tax agents but not where the return is filed directly by the trustees, which is the case for most trust tax returns for large managed investment trusts and public unit trusts, as they are currently excluded from the electronic filing requirement. The continued digitalisation of this process will assist with reporting, as increased pre-filling will lessen the compliance burden on taxpayers and reduce processing times and this measure is expected to enhance ATO assurance processes.
- Black economy measures: Conversely, the government has deferred the start date of the black economy system measure announced in the 2019-2020 federal budget. Under current law, income tax compliance does not impact the ability to hold an Australian Business Number (ABN). ABN holders can be stripped of their ABN through the discretion of the ABR Registrar if they fail to meet income tax filing requirements. Additionally, they will be required to confirm the accuracy of their details on the ABR annually. Accordingly, these measures have been deferred by a further 12 months:
- From 1 July 2022, ABN holders are required to comply with income tax obligations to maintain their ABN; and
- From 1 July 2023, ABN holders must confirm the accuracy of their details on the ABR annually.
The continued digitalisation of tax reporting is welcomed by taxpayers and practitioners alike. The current exclusion of some trust entities from electronic filing is an archaic oversight that ought to be resolved. The black economy measures have faced significant delay in their implementation by the government and taxpayers should ensure they are compliant with tax obligations before the ATO finally pull the enforcement trigger.
The Government has made various minor amendments to legislation in an attempt to clarify the law and ensure its clear operation. The two minor amendments of note are the tax-records education direction and amendments to intangible asset depreciation:
- Tax records education: Under the current law, an entity is liable for an administrative penalty where it fails to comply with its record-keeping obligations under a tax law. The proposed new law will offer an alternative to the payment of administrative penalties in certain situations. It empowers the Commissioner to issue a tax-records education direction that will require an entity to complete an approved record-keeping course, where the Commissioner reasonably believes the entity has failed to comply with one or more specified record-keeping obligations. This measure seeks to address instances of non-compliance and knowledge gaps with record-keeping obligations, by assisting businesses to better understand their obligations under the tax law. The Commissioner may only issue a direction to an entity it reasonably believes is not disengaged or deliberately avoiding its record-keeping obligations.
- Intangible asset depreciation: Taxpayers will be permitted to choose to self-assess the effective life of intangible depreciating assets rather than using the statutory effective life specified under the law. This choice can be made in relation to intangible assets the taxpayer starts to hold on or after 1 July 2023. Examples of covered intangible assets include standard patents, innovation patents, registered designs, copyrights, licenses, in-house software and telecommunications site access. Taxpayers will be able to recalculate the effective life in later income years if the effective life the taxpayer has been using is no longer accurate because of changed circumstances relating to the nature of the asset’s use. If the cost of the asset increases by at least 10% in a later income year, the taxpayer must recalculate the effective life of the asset.
While these measures relate to very separate issues, both attempt to align the application of the law, with the intent behind the law. BDO welcomes the education amendment as education is always better than a penalty. BDO also welcomes the ability for a taxpayer to choose to self-assess the effective life of intangible depreciating assets, as it provides more flexibility for taxpayers to take into account their commercial circumstances.
Click here for a comprehensive analysis of the Australian 2022-23 budget.