In their weekly email: TaxVine [16, 12.5.23], The Tax Institute announced their Federal Budget Report and provided a shorter summary. The Budget contained a greater number of measures compared with the budgets of recent years. However, most of these measures are limited in their scope and commonly lack the level of detail needed to better understand their impact on taxpayers and tax practitioners.

Supporting small business

The Budget saw a range of measures aimed at assisting small businesses. Some of the key measures include:

  • Temporary instant asset write-off – temporarily increasing the instant asset write-off (IAWO) to $20,000. The temporary threshold will be in place from 1 July 2023 to 30 June 2024. Without this measure, the IAWO threshold would have reverted to $1,000.
  • Small business energy incentive – allowing small businesses with an aggregated turnover of less than $50 million to claim an additional 20% of the cost of eligible depreciable assets that support electrification, up to a maximum bonus deduction of $20,000.
  • Amending instalments to assist cash flow – setting the uplift factor for pay as you go (PAYG) and GST instalment at 6% for the 2023–24 income year. Under the statutory formula, the uplift factor would otherwise have been 12%.

We look forward to these measures being expediently legislated so impacted taxpayers have certainty and confidence to plan and spend to invest in their future.

Pillar 2 changes

The Budget also saw the Government announce measures that progress its election promises regarding multinational tax integrity. Through this announcement, the Government has reaffirmed its commitment to implement key aspects of Pillar Two of the Organisation for Economic Co-operation and Development’s (OECD’s) Two Pillar solution (a minimum 15% tax on worldwide profits).

The announcement follows the release of a consultation paper in October 2022 which sought input from the community regarding core aspects of Australia’s adoption of the Two Pillar solution. Our submission to the consultation paper identified a number of challenges with the Government’s proposed approach. One of our key concerns, shared by many stakeholders, was the proposed start date of the measures.

We are pleased to see that the proposed commencement date of the Income Inclusion Rule and Domestic Minimum Tax is 1 January 2024, and the Undertaxed Profits Rule is 1 January 2025, and not earlier. However, and as highlighted in our submission, there is significant complexity to be resolved before Pillar Two can be implemented (noting that the viability of Pillar One remains uncertain).

These challenges need to be worked through thoroughly, and, once adequately resolved, the enabling bills should be introduced promptly, to ensure that affected taxpayers have sufficient time to adapt their reporting systems and internal frameworks so they can comply with their obligations. Given we are already in May 2023 and no draft legislation is yet available for public comment, time is of the essence.

We note that these changes are proposed among a raft of multinational tax measures in progress, some of which are due to take effect within a matter of weeks.  While announced initially as part of the Government’s election commitments, consultation on these matters took several months to commence and was not given adequate time.  This has shown in the exposure draft materials and, given that legislation has not yet been enacted, raises the question whether the proposed commencement dates for the Pillar Two measures are realistic.

This exacerbates the challenges for taxpayers in this space to comprehend and comply with many new obligations under these regimes, and highlights the importance of adequate consultation and lead in time.

Additional 15% tax on superannuation balances above $3 million

Following on from its previous announcement and consultation, the Government re-announced the proposed additional 15% tax on earnings on superannuation balances above $3 million. Although not unexpected, the measure sees the Government committing to proceeding with this policy.

However, some key concerns persist with the proposed measure and what it means for our tax and superannuation systems overall. Key among these is that the proposed measure will tax unrealised gains. The Tax Institute remains concerned that the taxation of unrealised gains will set a worrying precedent, and if this feature is legislated, it should be confined to this measure and not be used more broadly across the tax law.

The proposed measure also raises concerns about:

  • what will form part of the contributions and payments components, which are effectively exempt from or subject to the additional tax;
  • how the compliance burden on taxpayers and superannuation funds can be minimised; and
  • ensuring parity in outcome between the treatment of defined benefit schemes and non-defined benefit schemes.

For more information, refer to TaxVine 2023 Edition 12, published on 14 April 2023, and our submission to Treasury’s consultation. This measure highlights the importance of the Government working with professional bodies, industry and experts when designing and implementing policy decisions. Without a meaningful collaborative approach, it is difficult to accurately identify and minimise the impacts of potentially poorly-designed precedents.

Expanding the scope of the general anti-avoidance rule

A measure that caught many by surprise is the proposed amendments to Part IVA of the Income Tax Assessment Act 1936 (Part IVA). Broadly, the measure will expand the scope of Part IVA so that it applies to schemes that:

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

The proposed measure will commence on 1 July 2024 and will apply regardless of whether the scheme is entered into before or after that date.

Although not expected, the announcement is consistent with the Government’s approach to creating new anti-avoidance provisions and strengthening existing ones, seeking to improve the integrity of our tax system. The Tax Institute looks forward to working with the Government to:

  • better understand the perceived risks;
  • assess the need for this measure and potential administrative solutions that the Commissioner may employ to achieve the same impact; and
  • ensure any potential legislative changes appropriately balance integrity with other factors such as the amount of the perceived harm and impact on economic performance.

The beginning of tax reform … right?

Aside from a lack of commitment, from the Government, on the long list of previously announced but unenacted, measures (ABUMs), nothing in the Budget even touched on a possible pathway to holistic tax reform. Given the current economic conditions, this is not unexpected, but a commitment, to reforming our tax and superannuation systems, would have shown political courage. As we’ve noted many times across our many publications, including our Case for Change and Federal Budget Report, Australia’s tax and superannuation systems are not fit for purpose, not sustainable and in obvious need of reform so they can support current and future Australians and our economy.

We continue to urge the Government to begin the reform discussion and explain the need for reform to the public. To this end, the professional associations and the media should desist from the simplistic analysis of highlighting ‘winners and losers’ from the Budget and instead focus on why we need urgent and fundamental change. As long as the process of reform does not forge ahead, it could be argued that all Australians are losing out.

With the next Federal election due in or before May 2025, a mature conversation about the scope and start date of the reform process must begin now … but that will take political courage.



[Tax Month – May 2023, previous month] 12.5.23