2024-25 Federal Budget Tax Measures

On Tuesday 14 May 2024 the Albanese-Chalmers Government released its third Budget since being elected, and forecasts a headline grabbing ‘back-to-back’ surplus. This Budget is an exercise in providing costs-of-living relief to taxpayers, incentivising investment in chosen sectors and keeping a check on – and even reducing – inflation.

As expected, the most significant tax reform, at least so far as the Budget’s bottom line is concerned, were the already announced changes to the ‘stage 3 tax cuts’ that apply to individuals.

However, there were also taxation and expenditure measures which will be relevant to business. From the promise of tax incentives for the critical minerals and hydrogen sectors under the Government’s ‘Future Made in Australia’ program, to significant funding directed towards the housing and development sectors. Taxpayers should also be conscious of proposed changes to anti-avoidance measures, and the expansion of Australia’s tax base in respect of non-residents.

Set out below is a summary of the key business taxation measures which were announced.

Future made in Australia

A significant area of focus is the Future Made in Australia agenda, which amongst other things reflects the Government’s plan to make Australia a ‘Renewable Energy Superpower' as part of the global energy transition and the drive to net zero emissions by 2050.

There are a number of Budget announcements directed towards supporting this ambition, namely those forming part of the introduction of the Future Made in Australia Act to facilitate investment in renewable energy and related sectors.

In addition to the Budget announcements, the Treasury has published the Future Made in Australia – National Interest Framework Supporting Paper, which outlines the principles for Government investment in priority industries. The Paper references the strategies used by other jurisdictions to incentivise clean energy manufacturing (including the U.S., Canada, Europe and France).

What are the measures?

As part of this broader initiative, the Government intends to introduce two tax incentives:

• A Critical Minerals Production Tax Incentive, with an estimated cost of $7.0 billion over 11 years. The incentive is intended to support downstream refining and processing of Australia’s 31 critical minerals to improve supply chain resilience. The types of minerals expected to fall within the scope of these measures include lithium, cobalt, nickel and rare earths. This incentive will be provided at 10% of relevant processing and refining costs; and
  
  
• A Hydrogen Production Tax Incentive with an estimated cost of $6.7 billion over 10 years. The incentive will apply to producers of renewable hydrogen to support the growth of a competitive hydrogen industry and decarbonisation. The incentive will be provided at a rate of $2 per kilogram of renewable hydrogen that is produced.

When does it apply from? 

The production tax incentives will apply from 2027-28 to 2040-41, meaning that there will not be any immediate support for the players in these sectors. This indicates that there will be a long gestation period in which the measures will be designed, presumably with consultation with the sectors most impacted by them.

What will be the implications?

The long period that has been allowed to design the above tax incentives might suggest that there is an expectation that there will be a fair degree of complexity to the rules. It is not clear from the Budget announcement what form these tax incentives will take (for example, whether they will be in the form of a tax credit or offset and if so, whether the incentive would be able to be offset against particular types of income or be refundable), which taxpayers are expected to qualify, and the eligibility conditions.

Housing Support

In addition to proposed increases to Commonwealth Rental Assistance payments, the Budget also announced several new measures relevant to the housing sector. These measures are consistent with the Government’s broader response that seeks to address housing undersupply and rising rental costs.

What are the measures? 

Notable new expenditure measures include:

• Subject to agreement on a new National Agreement on Social Housing and Homelessness between the States and Commonwealth:
  
  
  • $1.0 billion in 2023–24 for States and Territories to support enabling infrastructure for new housing through a new Housing Support Program – Priority Works Stream; and
    
    
  • $423.1 million over five years from 2024-25 in additional funding to support the provision of social housing and homelessness services.

• Additional finance through the Affordable Housing Bond Aggregator, facilitated by increasing the cap on the Government’s guarantee of Housing Australia’s liabilities by $2.5 billion to $10.0 billion. The Government states that this will result in an increase in the line of credit that supports the Affordable Housing Bond Aggregator of $3.0 billion to $4.0 billion.

• $1.0 billion for social housing under the National Housing Infrastructure Facility. This funding will be targeted towards crisis and transitional accommodation for women and children fleeing domestic violence, and youth.

• A ten-year $4 billion joint investment between the Australian and NT Governments in relation to remote Northern Territory Housing to reduce overcrowding, support delivery of housing and deliver repairs and maintenance to existing housing.
  
  
• The Department of Education will develop and implement regulation to require universities to establish a new supply of purpose-built student accommodation (for both domestic and international students) to support any increase in international student enrolments over an initial international student allocation, to be set in consultation with the sector.

The Government will also provide $1.9 billion in concessional finance to support community housing providers to deliver social and affordable housing under the Housing Australia Future Fund (“HAFF”) and the National Housing Accord. This follows a long effort to establish the HAFF, a key Commonwealth housing measure that was held up in the Senate until late 2023.

What will be the implications?

These new measures also build on previously announced changes in the build-to-rent sector outlined in our recent article in which the Government has proposed to introduce minimum levels of affordable housing in new projects as a condition of accessing reduced withholding rates (for the rental income only) and accelerated capital works deductions. 

The measure also follows the recent announcement in the Victorian State Budget of an additional land tax exemption for social and emergency housing. 

The measures in this year’s Budget should be welcomed by those in the affordable and social housing sectors, however appropriate structuring of new projects (including in relation to Commonwealth income tax, withholding tax, States taxes and GST consequences) remains a key consideration as it becomes increasingly necessary to consider a variety of exemptions and concessional tax rates (including eligibility criteria) which may apply across Commonwealth and State and Territory jurisdictions.

Paying their fair share

In what now seems standard in the Budget, there are a number of measures targeting foreign residents and multinationals, along with ATO funding to extend the Tax Anti Avoidance Taskforce.

Amendments to the non-resident CGT provisions

What are the measures?

The Budget announced that the current non-resident CGT provisions in Division 855 – which are the key rules that govern Australia’s taxing rights over non-residents disposing of assets – will be amended in three key ways:

1. ‘Clarify and broaden’ the type of assets that are covered by the provisions.
   
   The key concept in the provisions is that of taxable Australian real property (or “TARP”), which is key in determining whether a non-resident is subject to Australian capital gains tax.
   
   Currently, TARP is real property located in Australia (including a lease of land) or a mining, quarrying or prospecting right in respect of mining and petroleum reserves located in Australia.
   
   An interest of 10% or more in an entity where (broadly) the market value of the TARP assets exceeds the value of the non-TARP assets is also subject to the non-resident CGT provisions as a “TARP rich entity”.
   
   Determining whether an asset is TARP or not – and the asset’s market value – is often a contested area, that in extreme cases can result in freezing orders on the sale proceeds being sought by the ATO at an exit event: see State Grid in relation to the divestment of AusNet securities.
   
   Amendments were proposed (but not pursued) over 10 years ago, focussing on the mining sector in response to the RCF litigation. These amendments would have included the value of mining, quarrying or prospecting information and goodwill with the TARP mining rights to which they relate.
   
   The announced measure focusses on assets with a ‘close economic connection to Australian land’, such that it is likely the proposed amendments will go beyond the mining sector and go, for example, to whether chattels (whether at common law or under statute) located on Australian real estate should also be TARP assets.
   
   
2. Amend the ‘point in time’ principal asset test to a 365 day testing period.
   
   Currently, the question of whether an interest in an entity is ‘TARP rich’ is determined at a ‘point in time’, i.e. the CGT event. This will be changed to a (presumably) 365 day backward looking testing period, similar to the OECD Model Treaty.
   
   
3. Mandatory reporting to the Australian Taxation Office on notification requirements.
   
   Currently, purchasers are required to withhold and remit to the ATO 12.5% of the purchase price from non-resident vendors who hold TARP assets or interests in TARP rich entities.
   
   For vendors disposing direct interests in TARP assets, a clearance system is in place with the ATO. For interests in TARP rich entities, self-assessed declarations can be provided by vendors.
   
   Going forward, a compulsory ATO notification will apply to non-residents selling shares or units that have a $20 million+ value prior to the transaction being executed. This is a significant change to the current system which does not require formal ATO engagement (albeit the Foreign Investment Review Board can impose ATO notification requirements).
   
   The scope of this change, and the detail, will be important: does it apply to all assets, or just CGT assets held as capital assets; when is the value determined and how; is the ATO just notified or is a ‘clearance’ required as to whether withholding applies (which would affect transaction times); for public M&A transactions, how will custodial and other nominee shareholder arrangements be dealt with; for all M&A transactions, is notification before execution of the contract?

When does it apply from?

The changes will apply to CGT events commencing on or after 1 July 2025.

What will be the implications?

• The likely expansion of the Australia’s tax base for non-residents will be significant – given the start date is just over 13 months away, it will be imperative that consultation and exposure draft legislation is released ASAP.
  
  
• The details on the mandatory notification will be important – and how this will impact M&A transactions will have to be considered.

The ‘PepsiCo’ Penalty

What is the measure?

A penalty for taxpayers who are part of a group with global annual turnover exceeding $1 billion that mischaracterise or undervalue royalty payments that would otherwise be subject to royalty withholding tax. This is a continuation of the focus of the ATO on applying royalty withholding tax to so-called embedded royalties (i.e. where an amount paid for goods or services is really also for use of copyright).

When does it apply from?

1 July 2026.

What will be the implications?

Buoyed by the recent PepsiCo decision handed down by the Federal Court (albeit the decision is being appealed), the Government appears to be incentivising significant taxpayers to fall in line in respect of their intra-group royalty arrangements in the short term, or be faced with a new penalty regime from 1 July 2026. When coupled with the ATO’s expansive position regarding royalties in respect of software and intellectual property in Draft Taxation Ruling TR 2024/D1, this measure is a statement that the pressure on significant taxpayers that are party to intra-group royalty arrangements to pay their ‘fair share’ of Australian tax will not let up.

Details on how this penalty will apply have not been released.

Other matters

The Government has previously released draft legislation making a number of miscellaneous amendments to the tax provisions.

There are two changes of interest:

1. Amendments to the indirect value shifting provisions to ensure that a dividend that is non-assessable non-exempt (“NANE”) income under the dividend participation exemption is appropriately excluded. The technical glitch related to the exemption referring to ‘exempt income’ rather than NANE income; and
   
   
2. Updating the transfer pricing provisions to refer to the most recent OECD guidance on transfer pricing, which must be taken into account in interpreting the provisions.

The Government also deferred the start date of the 2023-24 Budget measure expanding the general anti-avoidance rule (Part IVA), so that it can apply to schemes that reduce tax paid in Australia by accessing a lower withholding tax rate on income paid to foreign residents, and schemes that achieve an Australian income tax benefit where the dominant purpose was to reduce foreign income tax. This measure will now commence after the date the amending legislation receives Royal Assent (regardless of whether the scheme was entered into before that date), rather than from 1 July 2024.

Finally, the previously announced measures denying deductions for payments relating to intangibles held in low-or no-tax jurisdictions will no longer proceed. The intangibles measure has been superseded by the Global Minimum Tax and Domestic Minimum Tax (OECD Pillar 2 measures) being implemented by the Government, in respect of which draft legislation has been released.

Reforms stuck in a ‘holding pattern’

The Budget was also notable for those measures it did not place an emphasis on. Key corporate tax measures which have been previously announced by successive Governments, but which have not progressed significantly since include:

• Division 7A integrity measures: Announced in the 2016-17 Budget, Division 7A was to be amended to improve its integrity and operation by including safe-harbour rules and a self-correction mechanism for inadvertent breaches. No significant progress has been made towards implementing these measures since the release of a 2018 Consultation Paper;

• changes to residency requirements: In the 2020-21 Budget, the Morrison Government announced they were looking to amend the corporate residency test, such that a foreign incorporated company would only be treated as an Australian tax resident if it had a ‘significant economic connection to Australia’. At the same time, the introduction of a ‘bright line’ test was introduced, whereby a person would be deemed an Australian tax resident if they were present in Australia for 183 days or more in any given income year; and
  
  
• extension of the ‘clean building MIT’ withholding credit: In last year’s Budget, the Government announced that, from 1 July 2025, the reduced 10% clean building MIT withholding rate would also be available to MITs that hold data centres and warehouses, provided construction commenced after 9 May 2023, and provided those properties met the relevant energy efficiency standards.

Given these measures were not accounted for in this year’s Budget, and considering the broad range of tax reforms currently sitting before Treasury, naturally one queries whether these measures, particularly the oldest of them, are likely to be implemented.

Key takeaways

Once again, the Government found itself having to hand down a Budget amid competing priorities. On one hand inflationary pressures are still front of mind. On the other, there is a clear demand from the electorate for cost-of-living relief, which the Government has predominantly delivered through personal income tax cuts, together with measures such as increased funding to the affordable housing sector which should have an impact over the longer term.

There is still an expectation that the recent run of surpluses will be temporary, with the Budget forecasting a dip back into the red again next year. This is unsurprising given much of the ongoing turnaround can be attributed to inflation-induced bracket-creep and above-trend commodity prices. Expect a continued focus on compliance and anti-avoidance measures to stem any future bleeding. One also suspects this is why significant taxation outlays – in the form of the Future Made in Australia production incentives – are only scheduled to commence in the 2027-28 financial year.

As always, the devil will be in the detail.