Australian Federal Budget 2023-24

The Australian Treasurer, the Hon Dr Jim Chalmers MP, delivered the Federal Budget 2023—24 on 9 May 2023 with the theme "Stronger foundations for a better future." Please see below for an overview of the key tax proposals.

1. Implementation of a global minimum tax and a domestic minimum tax

Australia has announced the implementation of the Organisation for Economic Co-operation and Development (OECD)/Group of Twenty (G20) Pillar Two global minimum tax. Pillar Two will establish a global minimum tax rate of at least 15% under a globally agreed set of rules that will require groups to undertake annual calculations on a country-by-country basis. The Government has confirmed Australia’s intention to implement Pillar Two in line with the OECD timeline, consistent with the United Kingdom and European Union states.

Australia will implement a domestic minimum tax for income years beginning on or after 1 January 2024, so that they will retain taxing rights over undertaxed Australian profits. Furthermore, the following measures will also be introduced:

• The income inclusion rule (IIR) will apply to income years beginning on or after 1 January 2024; and
• The undertaxed profits rule (UTPR) will be effective 12 months later (income years beginning on or after 1 January 2025).

The measures will apply to multinational enterprises with a global turnover above €750 million (i.e., approximately AU$1.2 billion) and will apply to Australian headquartered multinational enterprises as well as Australian subsidiaries of foreign parent companies. These measures will greatly increase the compliance burden on in-scope Australian groups and Australian subsidiaries of multinationals.

The measure is forecasted to increase revenue by AU$370 million and increase payments by AU$110 million over the five years from 2022–23.

2. Expanding the general anti-avoidance rule in the income tax law

The Government will expand and strengthen Part IVA (the general anti-avoidance rule) for income years commencing on or after 1 July 2024, regardless of when schemes were entered into. This measure appears to relate only to the general provisions of part IVA, rather than other measures such as the multinational anti-avoidance law or the diverted profits tax.

Part IVA will also be expanded to include the following:

• Schemes that reduce tax paid in Australia by accessing a lower withholding tax rate on income paid to foreign residents. It is expected that the measure is aiming for part IVA to be applied in a case where the liability to withholding tax is reduced but not eliminated, as well as a case where the liability to withholding tax is eliminated (reduced to nil); and
• Schemes that achieve an Australian income tax benefit, even where the dominant purpose was to reduce foreign income tax. To date, the general provisions of part IVA have been premised upon, there being a sole or dominant purpose to obtain a relevant Australian tax benefit. This is proposed with the aim that part IVA can apply where there is an Australian tax benefit even where the sole or dominant purpose was to obtain a foreign tax advantage. It is not yet clear what purpose threshold will apply to the Australian tax benefit.

3. Reduce compliance costs for general insurers

The insurance industry has been concerned to see that the current tax legislation for insurance companies is updated to reflect changes under the new accounting standard, AASB 17 Insurance Contracts (AASB 17), which applies for income years commencing on or after 1 January 2023. The new accounting standards apply to all insurance entities and align to the global accounting standard IFRS 17.

The Government announced that it will introduce legislation to amend the tax law under division 321 to minimise the regulatory burden facing the general insurance industry, so that the tax laws will align to the new accounting standards, and hence enable the continued use of audited financial reporting information under AASB 17 as the basis for their tax returns. The measure will impact the income years commencing on or after 1 January 2023.

It is not yet clear as to the effect of this announcement for life insurance companies under division 320, and whether any transitional measures will be introduced in respect to any tax impacts on transition from the current to the new accounting standard.

4. Tax incentives to increase the supply of rental housing

The Government will offer incentives to increase the supply of rental housing by changing arrangements for investments in build-to-rent accommodation.

For eligible new build-to-rent projects where construction commences after 7.30 pm (AEST) on 9 May 2023 (the night when the Budget was delivered), the Government will:

• Increase the depreciation rate from 2.5% to 4% per year; and
• Reduce the withholding tax rate for eligible fund payments from managed investment trusts (MITs) to foreign residents on income from newly constructed residential build-to-rent properties after 1 July 2024 from 30% to 15%, subject to further consultation on eligibility criteria.

This measure will apply to build-to-rent projects consisting of 50 or more apartments or dwellings made available for rent to the general public. The dwellings must be retained under single ownership for at least 10 years before being able to be sold, and landlords must offer a lease term of at least three years for each dwelling. The reduced MIT withholding tax rate for residential build-to-rent will apply as from 1 July 2024.

Consultation will be undertaken on implementation details, including any minimum proportion of dwellings being offered as affordable tenancies and the length of time dwellings must be retained under single ownership.

5. Extending the clean building MIT withholding tax concession

The government will extend the clean building MIT withholding tax concession to data centers and warehouses. This measure will extend eligibility for the concession to data centers and warehouses that meet the relevant energy efficiency standard, where construction commences after 7.30 pm (AEST) on 9 May 2023 (the night when the Budget was delivered). This measure will apply from 1 July 2025.

This measure will also raise the minimum energy efficiency requirements for existing and new clean buildings to a six-star rating from the Green Building Council of Australia or a six-star rating under the National Australian Built Environment Rating System. The Government will consult on transitional arrangements for existing buildings. These changes will support investment in energy efficient commercial buildings, and in turn, reduce energy usage and energy bills for commercial tenants.

For further information, please contact Meghan Speers.