Key tax-related changes in the Australian Federal Budget 2024–25
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Key tax-related changes in the Australian Federal Budget 2024–25

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The discontinuation of a proposed measure to deny deductions for certain payments relating to intangibles is among several taxation updates in Australia’s federal budget, as summarised by senior tax practitioners from DLA Piper Australia

The Australian treasurer, the Hon. Jim Chalmers, delivered the 2024–25 Federal Budget (the Budget) on May 14 2024. The Budget contained several key tax initiatives, which are explained below. However, there were no further details regarding the previously proposed reforms regarding the managed investment trust withholding tax concession for build-to-rent housing projects and ‘clean building’ data centres.

Multinationals

Discontinuation of intangibles deduction measures

The Australian government has announced that the proposed measure to deny tax deductions for payments relating to intangibles connected with low-tax jurisdictions will be discontinued and will instead be addressed through Australia’s pillar two rules.

This measure was announced in the 2022–23 Federal Budget and had a proposed start date of July 1 2023. The Australian Treasury had released exposure draft legislation for these rules on March 21 2023, which were broadly drafted to capture arrangements where income from the use or exploitation of an intangible asset was derived, directly or indirectly, by an associate of an Australian entity in a low-tax jurisdiction.

There was some uncertainty how this proposed measure would interact with the OECD pillar two rules and the US Treasury was quite critical of this proposed measure. Noting that the Australian government announced in last year’s federal budget that it would implement key aspects of pillar two, the government has now confirmed that such arrangements involving low-tax jurisdictions are intended to be covered by those rules, such that the proposed tax deduction denial measures were considered to no longer be necessary.

Taxpayers that have restructured their intangible asset arrangements in anticipation of the proposed measures taking effect from July 1 2023 may therefore wish to revisit their arrangements.

Cross-border royalty arrangements – proposed penalty measures

The Australian government has also announced it will be introducing a penalty provision from July 1 2026 that will apply to arrangements that involve a mischaracterisation or undervaluation of royalty payments that would otherwise be subject to royalty withholding tax in Australia. This measure will only apply to significant global entities (those with annual global group turnover of more than A$1 billion).

GAAR broadened to schemes that reduce Australian withholding taxes or foreign taxes

The Budget reaffirmed the government’s proposed amendments to Australia’s general anti-avoidance rule, which will be broadened to apply to:

  • Schemes that reduce tax paid in Australia by accessing a lower withholding tax rate on income paid to foreign residents (e.g., under tax treaties); and

  • Schemes that achieve an Australian income tax benefit, even where the dominant purpose was to reduce foreign income tax.

The amendments would apply to income years commencing on or after the day the amending legislation receives royal assent, regardless of whether the scheme was entered into before that date.

Thin capitalisation – exemption for Australian plantation forestry entities

Australia’s thin capitalisation rules, which limit the amount of tax deductions available for interest expenses for multinational enterprises, were recently amended with effect from July 1 2023. The Budget announced that the thin capitalisation rules will be further amended, to exempt Australian plantation forestry entities from the new earnings-based rules. This would allow Australian plantation forestry entities to continue to apply the asset-based thin capitalisation rules.

Strengthening the foreign resident CGT regime

The Australian government will strengthen the foreign resident capital gains tax (CGT) rules in Australia, to broaden the scope of the taxation of capital gains made by foreign residents. The proposed amendments will apply to CGT events commencing on or after July 1 2025, with the following intentions:

  • To clarify and broaden the types of assets that foreign residents are subject to CGT on – under the current rules, foreign residents are subject to CGT in Australia on taxable Australia property (TAP), which includes direct and indirect interests (e.g., shares and other membership interests in holding entities) in land; a lease of land; and mining, quarrying, or prospecting rights situated in Australia. It is not yet known what other assets the government intends to capture under the proposed changes.

  • To amend the ‘point-in-time’ principal asset test to a 365-day testing period – the principal asset test is used to determine if an indirect interest in land is TAP, in which case any capital gains made from disposal of the indirect interest would be subject to CGT in Australia. The test is satisfied if more than 50% of the market value of the entity’s assets are attributable to taxable Australian real property. This test is currently determined at the time that the interest is disposed of. It is not yet known how the proposed 365-day testing period will be legislated and implemented in practice.

  • To require foreign residents disposing of shares and other membership interests exceeding A$20 million in value to notify the Australian Taxation Office (ATO), prior to the transaction being executed – this new notification requirement is intended to improve the ATO’s oversight of the foreign resident CGT withholding rules.

The government will consult on the implementation details of this measure.

Energy and resources

One of the key features of the Future Made in Australia strategy announced in the Budget is to make Australia a “renewable energy superpower”. As part of this strategy, two key incentives have been announced:

  • A hydrogen production tax incentive for producers of renewable hydrogen, to be introduced from 2027–28 and worth A$6.7 billion over a decade; and

  • A critical minerals production tax incentive, to be introduced from 2027–28 and worth A$7 billion over a decade.

Funding ATO compliance activities

The Budget also announced measures relating to the ATO, including:

  • An extension of the ATO Tax Avoidance Taskforce for two years from July 1 2026, with a focus on multinationals, large public and private businesses, and high-wealth individuals;

  • An extension of the ATO Shadow Economy Compliance Program for two years from July 1 2026, thereby protecting revenue and preventing non-compliant businesses from undercutting competition;

  • The provision of A$187 million over four years from July 1 2024 to the ATO, to strengthen its ability to detect, prevent, and mitigate fraud against the tax and superannuation systems; and

  • An extension of the time the ATO has to notify a taxpayer if it intends to retain a business activity statement (BAS) refund for further investigation from 14 days to 30 days, to align with the time limits for non-BAS refunds.

Support for small businesses

The A$20,000 instant asset write-off, as announced in the 2023–24 Federal Budget, has been extended by 12 months until June 30 2025.

Thus, small businesses (i.e., those with an aggregated annual turnover of less than A$10 million) will continue to be able to immediately deduct the full cost of eligible assets costing less than A$20,000 that are first used or installed ready for use by June 30 2025. The asset threshold applies on a per asset basis, so small businesses can instantly write off multiple assets.

Assets valued at $A20,000 or more (which cannot be immediately deducted) can continue to be placed into the small business simplified depreciation pool and depreciated at 15% in the first income year and 30% each income year thereafter.

The provisions – which prevent small businesses from re-entering the simplified depreciation regime for five years if they opt out – will continue to be suspended until June 30 2025.

The full version of this article can be read here.

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