Federal budget 2023 for Australian businesses

The government will remove the eligibility of plug-in hybrid electric cars from the fringe benefits tax exemption for eligible cars from 1 April 2025.

Arrangements involving plug-in hybrid electric cars entered between 1 July 2022 and 31 March 2025 remain eligible for the Electric Car Discount.

Arrangements for other electric vehicles continue beyond this date.  It will be important to factor in these sunset dates in calculating the FBT contribution for employees who take up electric vehicles as part of their salary package.

Currently, employers are only required to pay their employees’ superannuation guarantee on a quarterly basis.

From 1 July 2026, employers will be required to pay their employees’ superannuation at the same time as their salary and wages.

This change will require small business payroll payment systems to be able to cope with concurrent payments to an employee superannuation fund with their wage payments.

The government will reduce the GDP adjustment factor for PAYG and GST instalments from 12% to 6% for the 2023-24 income year.

The 6% GDP adjustment rate will apply to small businesses and individuals who are eligible to use the relevant instalment methods (up to $10 million aggregated turnover for GST instalments and $50 million annual aggregate turnover for PAYG instalments) in respect of instalment that relate to the 2023-24 income year.

Small businesses with aggregated annual turnover of less than $10 million will be able to deduct immediately the full cost of eligible assets costing less than $20,000 that are first used or installed ready for use between 1 July 2023 and 30 June 2024.  The $20,000 threshold will apply on a per asset basis.  It will therefore allow for the instant write-off of multiple assets.

Assets costing $20,000 or more can continue to be added into the small business simplified depreciation pool and depreciated at 15% in the first income year and 30% each subsequent income year.

The provisions that prevent small businesses from re-entering the simplified depreciation regime for 5 years if they opt-out will continue to be suspended until 30 June 2024.

Depending on how this provision is drafted it may not apply to internal asset leasing entities.  You should seek advice where you are looking to acquire assets from 1 July 2023 to ensure they are acquired in the right entity to benefit from the concession.  We will review and advise on these rules once we see the legislation.

Small and medium businesses, with aggregated annual turnover of less than $50 million, will be able to deduct an additional 20% of the cost of eligible depreciating assets that support electrification and more efficient use of energy. Up to $100,000 of total expenditure will be eligible for the Small Business Energy Incentive, with the maximum bonus deduction being $20,000.

A range of depreciating assets, as well as upgrades to existing assets, will be eligible for the Small Business Energy Incentive. These will include assets that upgrade to more efficient electrical goods such as energy-efficient fridges, assets that support electrification such as heat pumps and electric heating or cooling systems, and demand management assets such as batteries or thermal energy storage. Full details of eligibility criteria will be finalised in consultation with stakeholders.

Eligible assets will need to be first used or installed ready for use between 1 July 2023 and 30 June 2024. Eligible upgrades will also need to be made in this period.

Certain exclusions will apply such as electric vehicles, renewable electricity generation assets, capital works, and assets that are not connected to the electricity grid and use fossil fuels.

The timing of this concession coincides with the removal of the temporary full expensing provisions from 1 July 2023.  This, together with the $20,000 small business asset write-off should provide some relief for taxpayers who are unable to acquire these assets before this date.

The government will establish a national Net Zero Authority to:

• Support workers in emissions-intensive sectors to access new employment, skills and support as Australia transitions to net zero
• Support regions and communities to attract and take advantage of new clean energy industries
• Help investors and companies to transition to renewable energy

As the government looks to achieve its emissions reduction targets it will become more important for small and medium businesses to implement systems to measure their emissions baseline and reduction strategies to help get to a net zero position.  This will likely be demanded from other businesses in the supply chain who have mandatory emissions reduction targets.

Bentleys is already working closely with clients to help establish baseline reporting to help them kickstart this process and help them move to a net zero position.

The budget provides for $12.8 million over three years from 2023-24 to trial an expansion of the ATO independent review process to small businesses (with aggregate turnover from $10 million to $50 million).

It also provides $9 million for five new tax clinics from 1 January 2025 to improve access to tax advice and assistance for 2.3 million small businesses.

These measures also deliver reforms to cut paperwork and reduce the time small business spend doing taxes:

• From 1 July 2024, small business will be permitted to authorise their tax agent to lodge multiple STP forms on their behalf
• From 1 July 2025, small business will be permitted up to four years to amend their income tax returns

Additional funding will facilitate ATO engagement with taxpayers who have high value debts of over $100,000 and aged debts older than two years where the taxpayers are either public and multinational groups with an aggregated turnover of greater than $10 million or privately owned groups or individuals controlling over $5 million of net wealth.

There will also be a lodgement penalty amnesty program for small businesses with aggregate turnover of less than $10 million to encourage them to re-engage with the tax system.  The amnesty will remit failure to lodge penalties for outstanding tax statements lodged in the period 1 June 2023 to 31 December 2023 that were originally due between 1 December 2019 to 29 February 2022.

The government will grant an extra two years of post-study work rights to international higher education graduates of Australian institutions with eligible qualifications to strengthen the pipeline of skilled labour.  This will apply from 1 July 2023.

The work cap for international student visa holders will be reinstated from 1 July 2023, following the COVID-19 pandemic. This has increased by eight hours to 48 hours per fortnight.  There is an exemption for international students who work in the aged care sector until 31 December 2023.

Additionally, the government will increase the Temporary Skilled Migration Income Threshold (TSMIT) from the current rate of $53,900 to $70,000. This will apply from 1 July 2023.  It is the first time that the income level has been adjusted in 10 years.

To encourage investment and construction in the build-to-rent sector, the government has proposed an increased rate of deduction for capital works as well as concessional withholding tax treatment for Managed Investment Trusts (MITs).

One of the ongoing key challenges facing the government is housing affordability and in particular availability of rental housing. To address these issues, the government has proposed two key concessions to increase investment and construction in the build-to-rent housing sector:

• Increasing the depreciation rate for capital works from 2.5% per annum to 4% per annum
• Reducing the withholding tax rate on fund payments from MITs from 30% to 15% (see below for further details)

To qualify, the build-to-rent projects must satisfy the following conditions:

• Consist of 50 or more apartments or dwellings made available to rent to the general public
• The dwellings must be retained and held by the landlord for at least 10 years
• Landlords must offer a minimum three-year lease term for each dwelling

The proposed measures are intended to apply to new build-to-rent projects where construction commences after 9 May 2023.

Given the concessions are targeted at large scale projects (50 or more dwellings) it remains to be seen whether developers and property investors will find them attractive enough to help address the rental housing supply market.

Two concessions have been announced for Managed Investment Trusts (MITs). Broadly, MITs are trusts that hold passive type investments in assets such as property, shares or fixed interest assets.

The proposed measures for MITs are designed to attract greater investment into rental housing and certain energy efficiency buildings.

The new concessions targeting MITs are as follows:

Build-to-rent MITs

Under the build-to-rent measures, MITs that invest in build-to-rent housing projects will qualify for an increased rate of 4% capital works deprecation deduction, and a reduced final withholding tax rate on eligible fund payments from 30% to 15%.

For further details and application date, refer above.

Clean building MITs

An extension of the clean building MIT withholding tax concession to data centres and warehouses. In particular the concession will apply where the data centre or warehouse meets particular energy efficiency standards and where construction starts after 9 May 2023. This measure will apply from 1 July 2025. It is expected that once the proposals become law, foreign investors in qualifying jurisdictions such as the US, UK, Singapore, Canada, Germany and Japan will be eligible for the reduced 15% withholding tax in respect of investment returns relating to investments in build-to-rent projects and a 10% concessional withholding rate in MITs that invest in energy efficient buildings that now include data centres and warehouses.

These changes also support investment in energy efficient buildings, which, should reduce energy bills for tenants.

The Labor government is continuing to implement key aspects of the OECD’s recommendations in combating tax minimisation and tax leakages from large multinationals. The latest measure introduces a 15% global minimum tax aimed at the big end of town.

To ensure large multinationals pay an effective minimal level of tax from jurisdictions where they operate and that they are consistent with the OECD’s “Two-Pillar” recommendations, a “top-up” tax to a minimum 15% tax rate is to be introduced.  In particular, the government will introduce two limbs to the minimum tax – a 15% minimum global tax as well as a 15% domestic tax payable.

The 15% global minimum tax

Under the 15% global minimum tax measures, a resident multinational parent or its subsidiary will be required to pay a “top-up” tax where the group’s income is taxed offshore at a rate below 15%.

The 15% domestic minimum tax

The 15% domestic tax is to address situations where Australia has first taxing rights should Australia’s tax effective rate fall below 15%. The government however notes such a scenario is expected to be less common when compared to the 15% global minimum tax mentioned above.

The above measures are to apply to multinationals with annual global revenue over EUR750 million (approximately $1.2 billion).

The start date for the minimum global tax measures will broadly apply to income years starting on or after 1 January 2024 with certain specific aspects of the measures (referred to as the “undertaxed profits rule”) to apply for income years starting on or after 1 January 2025.

The government has targeted both the gas and mining sector in terms of making technical amendments to legislation relating to the treatment of “exploration” and “mining, quarrying and prospecting rights”, as well as capping deductions for gas producers.

In respect of the gas sector, the Petroleum Resource Rent Tax (PRRT) rules are to be amended. Broadly, the PRRT is a tax on profits generated from the sale of marketable petroleum commodities. The government is to amend the PRRT legislation to clarify the classification of exploration expenditure in respect of petroleum exploration.

In respect of the mining sector, the proposed measures also seek to restrict the availability of tax depreciation on “mining, quarrying and prospecting rights”. In particular, the measures will restrict the start time of when such rights can be depreciated for income tax purposes to when the rights are actually used, rather ready for use. In addition, the measures will also clarify the tax treatment of new rights issued over mining areas covered by existing rights.

The PRRT will also be amended for liquified natural gas (LNG) producers, who will have a cap on the use of deductions to offset assessable PRRT income. The government will consult on the final design of these changes, and, will need to pass legislation to effect the change.

From 1 July 2023, both the PRRT general anti-avoidance rule and the arm’s length rule will be updated.

The government has indicated that these measures are intended to reflect policy intent following a recent Full Federal Court’s decision in Commissioner of Taxation vs Shell Energy Holdings Australia Limited [2022] FCAF 2.

Taxpayers in the gas and mining industry should consider the impact of these rules, if any, on their operations.

The ATO is expanding the scope of Part IVA to have it apply to:

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

This measure will apply to income tax years commencing on or after 1 July 2024. It will apply regardless of when the scheme was entered into.

This measure is introduced to cover technical issues with applying the existing provisions and should not affect ordinary commercial transactions

As expected, it was announced that the government would not be proceeding with the patent box measures proposed by the previous government. There were however several new or expanded initiatives were announced that will impact the Australian innovation sector.

A new Industry Growth Program will provide funding to help SMEs and startups commercialise ideas and grow operations. This will include funding for the Industry Growth Program, targeting businesses operating in priority areas of the National Reconstruction Fund such as renewables, low emissions technologies, medical science, transport, value-added agriculture, forestry, fisheries, resources, defence capabilities, and enabling capabilities together with a continuation of the Single Business Service, designed to assist SMEs engage with all levels of government.

Other initiatives will support the development of critical technologies in Australia including:

• Assistance to help businesses integrate quantum and AI technologies into their operations through the Critical Technologies Challenge Program
• Extending the National AI Centre’s role
• Establishing the Australian Centre for Quantum Growth
• Supporting SMEs’ adoption of AI technologies
• Establishing the Powering Australia Industry Growth Centre as part of the government’s Australian Made Battery Plan

The ATO will be provided with almost $600 million over the next four years to continue a range of activities promoting GST compliance including the development of more sophisticated analytical tools to combat emerging risks to the GST system. This measure is expected to increase GST receipts by $3.8 billion, and other tax receipts by $3.8 billion, over the next five years.

The government is also proposing to increase the excise on tobacco by 5% for three years from 1 September 2023 in addition to ordinary inflation.