Legal development

2024 – 2025 Australia Federal Budget Update

By Costa Koutsis, Sanjay Wavde, Steve Whittington, Vivian Chang, Ian Kellock, Elke Bremner, Colin Little and Vanja Podinic

14 May 2024

The key tax measures in the 2024-2025 Australia Federal Budget are summarised below.

Overview

Labor's third Budget in a row has been structured to walk the tightrope between easing cost of living pressures without fuelling inflation. Of course every taxpayer gets a Stage 3 tax cut (totalling $107 billion) and every household will save $300 on their energy bill this year (totalling $3.5 billion), which should go down well with the electorate.

An estimated $9 billion surplus (predominantly driven by increases in tax revenues) masks a very large increase in planned spending (eg, on individual tax cuts, energy savings, aged care and childcare pay rises, defence, production tax credits for critical mineral extraction and clean hydrogen production) which will lead to very significant deficits for at least the next decade.

Much of the Budget announcements were old news or strategically leaked but there were a few (small) surprises. These included a tightening of the foreign resident capital gains tax regime and a further enhancement of the Producer Tax Offset film incentive (which was only recently proposed to be amended). More resources are also being given to the ATO to strengthen tax compliance initiatives.

The Treasurer asserts that the Budget will have an overall deflationary impact and could facilitate an interest rate cut this side of 2025. We should all cross our fingers and toes and hope that the Government have got their numbers (and economics) right.

General Measures

CGT changes for foreign residents

The Government has proposed a number of measures to ensure that foreign residents are taxed on direct and indirect sales of assets with a close economic connection to Australian land.

For capital gains tax (CGT) events on or after 1 July 2025:

The types of assets that foreign residents are subject to CGT in respect of will be clarified and broadened – however, there are no details released as to what this covers;
The "principal asset test" will be amended to apply a 365-day testing period. The principal asset test is used to determine whether membership interests in an entity (eg, shares in a company or units in a unit trust) held by foreign residents are within the ambit of the Australian CGT regime. It applies broadly where the market value of the test entity's assets that are taxable Australian real property exceeds 50% of the aggregate market value of all its assets. Currently, this test is applied at the time of the CGT event. The proposal extends the testing period to a 365-day testing period, though there is no detail on how that period may be applied. There is a 365-day testing period in some of Australia's newer tax treaties and in the OECD Multilateral Instrument which provides that the condition is met if the relevant 50% is exceeded at any time during the 365-day testing period. Presumably, the amendments will apply in a similar way;
Foreign residents disposing of more than $20 million worth of shares and other membership interests will be required to notify the ATO of the disposal prior to the execution of the transaction. This new notification process is intended to improve ATO oversight and compliance with the foreign resident CGT withholding rules. The information required to be notified is not yet known and there could be a number of implementation and design issues that will need to be considered, such as financial market stability issues if the upcoming sale is conducted on-market and continuous disclosure issues for sellers who are publicly listed.

The Government will consult on the implementation details of these measures.

The above measures follow the announcements in the 2023-24 Mid-Year Economic and Fiscal Outlook (MYEFO) (released on 13 December 2023) that the foreign resident capital gains withholding tax rate will increase from 12.5% to 15% for contracts entered into from 1 January 2025 and that the de-minimis threshold of $750,000 for real property will also be removed from that time.

Intangibles Payments

The Government will not proceed with the measure announced in the 2022/23 October "Mini Budget" to deny deductions to "significant global entities" (entities with global revenue of at least $1 billion) for payments relating to intangibles made directly or indirectly to related parties in low or no tax jurisdictions. A summary of these proposed measures is available here. These measures had previously formed part of Labor's commitments that it took to the last Federal Election, and exposure draft legislation had been released, but was ultimately not enacted, while the Government considered the interaction between this measure and the OECD's Pillar 2 global minimum tax initiative. Very broadly, Pillar 2 aims to ensure that multinational enterprises (MNEs) that meet a consolidated revenue threshold of EUR750 million pay a minimum effective tax rate (ETR) of at least 15% in each jurisdiction where they operate.

In tonight's Budget, the Government has confirmed that the issues that this intangibles measure were intended to address will now be dealt with through the Pillar 2 Global Minimum Tax and Domestic Minimum Tax currently being implemented by the Government, and as a result, this measure will not proceed. In this regard, on 21 March 2024, the Commonwealth Treasury released the exposure draft materials to implement in Australia the Pillar 2 "Income Inclusion Rule" and "Domestic Minimum Tax" (applying to years starting on or after 1 January 2024), with the materials to implement the "Undertaxed Profits Rule" (applying to years starting on or after 1 January 2025) to follow at a later date.

While it will be a relief for taxpayers that these intangibles measures have been shelved, the process with the proposed amendments is disappointing. The policy underpinning and rationale for these measures was never adequately explained and it is disappointing that the measures reached exposure draft legislation that was subject to extensive consultation before the decision was made that they were unnecessary.

Royalty Payments

In a new announcement, the Government has said that it will also introduce a new provision from 1 July 2026 that applies a penalty to taxpayers who are part of a group with more than $1 billion in global turnover annually that are found to have mischaracterised or undervalued royalty payments, to which royalty withholding tax would otherwise apply. While details around this measure are scant, it is likely to be directed towards cases of "embedded royalties", where valuable rights to use intellectual property are provided on a royalty free basis together with goods or services. An example of this is provided by the recent decision in PepsiCo, Inc v Commissioner of Taxation [2023] FCA 1490, where, broadly, rights to use the Pepsi brand were provided to Schweppes Australia on a royalty free basis by PepsiCo Inc (Pepsi Inc), in circumstances where Schweppes Australia also bought Pepsi concentrate from an affiliate of Pepsi Inc. The Federal Court found that a portion of the payments for the concentrate were for the use of the Pepsi brand, and a royalty that was subject to withholding tax.

However, given that the rate of royalty withholding tax on payments to the US is only 5%, the total royalty withholding tax payable by Pepsi Inc was modest – some $2.4m. It is likely that this measure is intended to increase the financial impost of arrangements similar to those considered in PepsiCo where a portion of a payment for goods or services is found to be a royalty.

Small Business Support

The Government has announced an extension of the $20,000 instant asset write-off, from 1 July 2024 to 30 June 2025, for small businesses with aggregated turnover of less than $10 million. The measure is primarily aimed at continuing to support small businesses by improving their cash flow.

Qualifying taxpayers will continue to be able to immediately deduct (on a per asset basis) the full cost of eligible assets costing less than $20,000 that are first used or installed ready for use by 30 June 2025. Assets valued at $20,000 or more cannot be immediately deducted, but can continue to be placed in the small business simplified depreciation pool and depreciated at 15 per cent in the first income year and 30% each income year thereafter.

By way of background, the original measure was announced as part of the 2023-24 Budget (discussed here), where the Government temporarily increased the instant asset write-off from $1,000 to $20,000. The measure relating to the 2023-24 income year is not yet law and is contained within the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2023 (the Bill). The Bill is currently before the House of Representatives.

Future Made in Australia Tax Measures

Critical Minerals and Hydrogen

As part of the Future Made in Australia plan, the Government has announced specific tax incentives that will apply to critical minerals production and renewable hydrogen. Australia's 31 critical minerals are important in respect of clean energy technologies and improving the resilience of Australia's supply chain in key areas. The two key tax measures are a Critical Minerals Production Tax Incentive to support downstream refining and processing of Australia’s critical minerals and a Hydrogen Production Tax Incentive for producers of renewable hydrogen to support the growth of a competitive hydrogen industry and Australia’s decarbonisation.

Details of the measures have not been provided but a Press Release from the Prime Minister indicates that:

The Critical Minerals Production Tax Incentive is intended to provide a production incentive valued at ten per cent of relevant processing and refining costs for critical minerals processed and refined between 2027-28 to 2039-40, for up to ten years per project, at an estimated cost to the Budget of $7 billion over the medium term; and
The Hydrogen Production Tax Incentive is intended to provide a $2 incentive per kilogram of renewable hydrogen produced between 2027-28 to 2039-40, for up to ten years per project, at an estimated cost to the Budget of $6.7 billion over the medium term.

The above tax incentives align with other measures announced in relation to priority industries including renewable hydrogen, green metals, low carbon liquid fuels and renewables. The proposals build on previous measures announced in the 2022-2023 October Budget (discussed here) and 2023-2024 MYEFO measures.

Investment Front Door

More generally, as part of the Future Made in Australia package, the Government will establish a "front door" for investors with major, transformational investment proposals to make it simpler to invest in Australia and attract more global and domestic capital. The purpose of the front door is to:

Provide a single point of contact for investors and companies with major investment proposals;
Deliver a joined up approach to investment attraction and facilitation;
Identify priority projects related to the Government’s Future Made in Australia agenda;
Support accelerated and coordinated approvals decisions, and
Connect investors with the Government’s specialist investment vehicles.

This front door may be a useful mechanism to obtain certain pre-existing tax incentives, such as the approved economic infrastructure concession.

Producer Tax Offset

The Government will expand the Producer Tax Offset regime for certain film productions, by removing:

1. The minimum length requirements for content

Under the current Producer Tax Offset regime, there are minimum duration requirements for the various formats, for example, 60 minutes for non-IMAX feature films, 45 minutes for IMAX feature films, 1 commercial hour for single episode non-feature programs and commercial ½ hour per episode for a season of a television series (with a minimum of 2 episodes). It appears that all of these duration requirements are to be removed.

2. The above-the-line cap of 20% of total qualifying production expenditure (QAPE)

QAPE is the amount of qualifying production expenditure to which the relevant Producer Offset rate (40% for eligible feature films and 30% for other eligible projects) is applied. "Above-the-line" expenditure is development expenditure and the remuneration provided to the principal director, producers and principal cast associated with the project. Such expenditure can only be QAPE where it is not in excess of 20% of the total film expenditure (except for documentaries).

Both of these changes should presumably be positively viewed by the film industry as they should expand the range of projects that are eligible for the Producer Tax Offset and, in particular, may permit filmmakers to utilise bigger name directors, producers and talent in Australian productions. The changes are estimated to increase Tax Offset payments by $0.4 million over three years from 2025–26 (and $0.2 million per year ongoing).

Personal tax

Cost of living measures

The Government has announced two personal income tax measures to address the rising cost of living.

1. Personal Income Tax – Cost of Living Tax Cuts

The Budget includes a re-announcement of the personal income tax cut measures that were passed into law on 5 March 2024 by the Treasury Laws Amendment (Cost of Living Tax Cuts) Act 2024 (Cth). To summarise, with effect from 1 July 2024, the following rates and thresholds will apply to individuals:

$	Tax rate
$0 - $18,201	0%
$18,201 - $45,000	16%
$45,001 - $135,000	30%
$135,001 - $190,000	37%
$190,001 +	45%

This measure is forecast to decrease receipts by $1.3 billion over the four years from 2024–25.

2. Medicare levy relief

The Government has increased the Medicare levy low-income thresholds by 7.1% for singles, families, seniors and pensioners. This change, introduced to combat the rising cost of living, means that low-income earners will remain exempt from paying the levy, or will pay the levy at a reduced rate. To this end, the threshold for singles has been increased to $26,000, the family threshold has been increased to $43,846, the threshold for single seniors and pensioners has been increased to $41,089, and the family threshold for seniors and pensioners has been increased to $57,198. Furthermore, the family income thresholds will increase by $4,027 for each independent child. These changes are estimated to decrease Treasury receipts by $640 million over the following four financial years.

Tax compliance measures

Funding for compliance programs

The ATO will receive $3.1 billion in funding over the next five years intended to strengthen compliance activities focusing on fraud, domestic and multinational tax avoidance, the shadow economy and personal income tax.

The Government has announced measures to strengthen tax compliance by:

1. Extending the Personal Income Tax Compliance Program

The Government will extend the ATO Personal Income Tax Compliance Program to continue to target key areas of non-compliance for one year from 1 July 2027. The key issues identified in the Budget include incorrect income reporting, inappropriate influence from tax agents and excessive deductions, particularly concerning short-term rental properties.

2. Introduce an ATO Counter Fraud Strategy

$187.4 million has been allocated to better protect taxpayer data and Commonwealth revenue against fraudulent attacks on the tax and superannuation systems. Funding will upgrade the ATO's information and communications technologies and increase their fraud prevention capabilities. This will ensure the ATO has dedicated resources to manage increasing risk, prevent revenue loss, and support victims of fraud and cybercrime.

3. Extending the Shadow Economy Compliance Program

The Government has announced an extension to the ATO Shadow Economy Compliance Program for two years from 1 July 2026. The extension is estimated to increase receipts by $1.9 billion.

4. Extending the Tax Avoidance Taskforce

The ATO Tax Avoidance Taskforce has proven to be successful and the Government will extend the program for two years from 1 July 2026, with a focus on multinationals, large public and private businesses, and high-wealth individuals. This measure is estimated to increase receipts by $2.4 billion.

Research and Development

Payments related to the Research and Development Tax Incentive are expected to increase by $499 million in 2024–25 and $2.6 billion over five years from 2023–24 to 2027–28. This is due to increases in the overall number and value of expected claims, with higher-than-expected growth in claims by companies in the ‘Professional, Scientific and Technical Services’ sector. As a result, the Government will complete an examination of Australia’s research and development system to strengthen its alignment with Australia’s priorities and improve innovation and research and development outcomes.

Funding for the Administrative Review Tribunal

Building on last year's Budget and the 2022-23 MYEFO measures, the Government has pledged $1 billion to establish the Administrative Review Tribunal (ART). The ART is intended to replace the Administrative Appeal Tribunal (AAT) as a new, fit-for purpose administrative review body.

ATO tax disputes – Contingent liabilities

The Government has estimated a total aggregate value of $9.7 billion as a contingent liability pending the outcome of disputes as at 29 February 2024. This includes a range of dispute resolution processes, including litigation.

Discarding the Black Economy measure

The Government has decided not to proceed with the Black Economy – Strengthening the Australian Business Number measure previously announced in the 2019–20 Budget. The integrity measure was intended to disrupt black economy behaviour by requiring ABN holders to lodge income tax returns and annually confirm their details on the Australian Business Register (ABR). The annual 'check in' was intended to improve the accuracy of the ABR data. The Government has comfort that the issues which were intended to be dealt with by this prior measure are addressed through the enhanced ATO administrative processes.

BAS Refunds

In order to arm the ATO to interrogate suspected fraudulent activities with respect to Business Activity Statement (BAS) refunds, the Government will extend the time the ATO has to notify a taxpayer if it intends to retain a BAS refund for further investigation from 14 days to 30 days to align with time limits for non-BAS refunds. In the wake of Operation Protego, the ATO will now be provided with further time to investigate and verify the reasonableness of BAS refunds where the ATO considers that there has been a likelihood of fraud (in particular, in instances where individuals invent fake businesses, obtain an ABN, and submit fictitious BASs in an attempt to gain a false GST refund). Any legitimate refunds retained by the ATO for over 14 days will continue to result in the ATO paying interest to the taxpayer.

Housing and Build-to-Rent (BTR)

The Government has announced a range of spending measures to address housing pressures, including an additional $1 billion for States and Territories to deliver new housing, a $1.9 billion increase in Commonwealth Rent Assistance, and a funding increase for the National Agreement on Social Housing and Homelessness. In addition, the Government announced it will allow foreign investors to purchase established Build to Rent developments with a lower foreign investment (i.e., FIRB) fee, conditional on the property continuing to be operated as a BTR development. What is lacking from the Government's announcements were any changes to and an expansion of the proposed BTR tax concessions that were released for public consultation on 9 April 2024.

In particular, the proposed tax concessions provide for accelerated depreciation for capital works (at 4% per annum rather than 2.5% per annum, under current law), and a reduced rate of MIT withholding for distributions to certain non-residents that consist of rental income, for a 15 year period. In order to qualify for these proposed concessions, there are a range of restrictions on the use of the asset, including a requirement to have 10% of the dwellings satisfy certain affordability requirements. Unfortunately, these proposed tax concessions would still result in tax settings that are less favourable than, for example, student accommodation, retail, office, and many other real estate asset classes. Accordingly, and given the other announcements on housing and BTR, it is disappointing that the Government has not made further changes to the proposed concessions in line with industry submissions on changes that would materially incentivise foreign investment in the BTR sector.

Other Measures

Thin capitalisation reform

The Government has also announced that Australian plantation forestry entities will be exempted from the recent reforms to Australia's thin capitalisation regime, and will be able to apply the former thin capitalisation regime. This change was included in the enacted Treasury Laws Amendment (Making Multinationals Pay Their Fair Share—Integrity and Transparency) Act 2024 (Cth), which received Royal Assent on 8 April 2024. A summary of the thin capitalisation regime reform, and critical tax issues for taxpayers, is available as follows: 1 December 2023, here; 24 October 2023, here; 23 June 2023, here; and 21 March 2023, here.

General Anti-Avoidance

The Government has confirmed that it will amend the start date of the previously announced expansion of the general anti-avoidance rule to income years commencing on or after the day the amending legislation receives Royal Assent, regardless of when the scheme was entered into.

By way of background, the Government announced its intention to expand the general anti-avoidance rule in the 2023-24 Federal Budget. A summary of these measures is available here. Broadly, the expansion will apply to schemes:

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

The measure when announced was to apply to income years on or after 1 July 2024.

Draft legislation has yet to be released in respect of the proposed expansion of the general anti-avoidance rule.

Miscellaneous Amendments

The Government has confirmed that it will make minor amendments to clarify the law in accordance with the consultation process for the Miscellaneous Amendments to Treasury Portfolio Laws 2024, which closed on 12 February 2024. The exposure draft materials released in this consultation process proposed to make a number of miscellaneous and technical amendments to the legislation, including a retrospective amendment to the indirect value shifting rules to exclude indirect value shifts that arise from non-assessable non-exempt income distributions, and updating references in the transfer pricing provisions to the most recent OECD guidance material.

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Authors: Costa Koutsis, Partner; Sanjay Wavde, Partner; Steve Whittington, Partner; Vivian Chang, Partner; Ian Kellock, Partner; Elke Bremner, Partner; Colin Little, Partner; Vanja Podinic, Partner and Madeleine Bosler, Associate.