As expected, the Australia 2023 Budget demonstrates an effort to balance inflationary pressures with specific measures aimed at providing relief for the cost of living. In consideration of the existing programme of multinational tax reform, the Government has introduced various business tax-related measures, specifically targeting multinationals. Several measures aim to capitalise on Australia's natural resources demand, while others aim to boost key sectors like the growing build-to-rent (BTR) industry.
The following is a brief overview of the significant business tax-related initiatives disclosed in the Budget.
Implementation of Pillar Two in Australia
As per the official announcement, multinational enterprises operating in Australia have been given a final countdown to prepare for significant changes to the global tax system. The Australian government has announced its intention to adopt the Global Anti-Base Erosion (GloBE) Rules, which are a crucial aspect of the OECD's 'Pillar Two' framework. The implementation of these rules will take effect for certain income years starting on or after 1 January 2024.
The GloBE Rules refer to the Global Anti-Base Erosion Rules proposed by the Organisation for Economic Co-operation and Development (OECD) to address the issue of multinational corporations shifting profits to low-tax jurisdictions.
With the addition of new taxing rights over undertaxed profits of any entity within a multinational group with global revenue of at least €750 million per year (roughly $1.2 billion), the GloBE Rules aim to ensure that large multinational enterprises pay a minimum level of tax in the jurisdictions in which they operate at a globally agreed minimum tax rate of 15%. The threshold in question differs from the current definition of a "significant global entity," which generally pertains to a group that earns $1 billion or more in annual global income.
Although not explicitly mentioned in the Budget declaration, the Organisation for Economic Cooperation and Development (OECD) has stated that the computation of a group's worldwide income under the Global Anti-Base Erosion (GloBE) Rules will be based on the group's consolidated financial statements.
The GloBE Rules are a set of regulations that will levy an additional tax on the variance between the effective tax rate of a jurisdiction and the minimum rate of 15%.
The rules include:
Two new tax rules will be implemented in Australia for income years starting on or after January 1, 2024. The first is the Income Inclusion Rule (IIR), which allows Australia to collect additional tax if the group's ultimate parent entity, or sometimes an intermediate parent entity, is located in Australia. The second rule is the Undertaxed Profits Rule (UTPR), which was previously known as the Undertaxed Payments Rule. The UTPR will be effective for income years starting on or after January 1, 2025, and will be used as a backup if low-taxed income is not fully collected under the IIR. The UTPR can be applied in the jurisdictions of fellow group members.
A domestic minimum tax of 15% will be implemented by the Government, as per their announcement. The tax in question will be imposed on the Australian operations of multinational corporations. Its purpose is to guarantee that Australia maintains its authority to tax Australian profits that have been insufficiently taxed. The domestic minimum tax is designed to generate franking credits, which are subject to OECD peer review. This is in contrast to the taxes collected under the IIR and UTPR.
The government has announced its intention to release draught legislation and accompanying explanatory materials for public review and feedback. The final legislation will undergo an OECD peer review process in accordance with OECD requirements to determine its compliance with the GloBE Model Rules.
Although the domestic Pillar Two legislation of each country will be founded on the Model Rules developed by the OECD, it is expected that there will be some differences between countries. As a result, Australian taxpayers who earn revenue above or close to the threshold will need to at least take into account the Australian domestic minimum tax and complete an Australian 'GloBE Information Return'.
During the implementation phase, the Government will take into account the interactions between the proposed measures and Australia's current tax laws. Additionally, the Government will consider the supplementary measures that were announced in the October 2022-23 Budget.
The modification made to Australia's tax law is not a simple update, but rather a significant change. The implementation of the new international tax system will require a substantial effort from the taxpayers who will be affected.
With the GloBE Rules nearing substantial enactment, taxpayers who will be affected must take into account the financial statement disclosure requirements. These requirements may need to be met as early as 2023. It is important to note that the first GloBE calculations may be necessary well before any filing obligation.
The implementation of Pillar Two will have a noteworthy effect on the tax department's end-to-end operations. In order to comply with the new rules, taxpayers must gather and analyse necessary data to predict and simulate their effects during the transitional period. Additionally, they must continue to fulfil their reporting and compliance obligations after the rules are implemented. Apart from taxation, an organisation comprises various significant stakeholder groups such as Controllership, Financial Planning & Analysis, legal, and IT that will be affected by the upcoming modifications.
In light of the limited timeframe, it is imperative for the groups that fall under the purview of Pillar Two regulations to carry out a preliminary evaluation of the impact, arrange for the necessary resources to meet the new compliance obligations, disseminate the resultant effects to relevant stakeholders, and provide training to the concerned teams.
It is crucial for taxpayers who are affected to have a clear understanding of the data requirements of Pillar Two in order to adequately prepare for the forthcoming changes. Taxpayers, regardless of their level of maturity and administration, are advised not to postpone the process due to the substantial amount of data required, as the effective date is set for 1 January 2024.
Anti-avoidance Updates in the 2023 Australia Budget
The Government has declared its plan to broaden the range of the general anti-avoidance rule (Part IVA) to encompass the following:
There are two types of tax reduction schemes in Australia. The first type involves accessing a lower withholding tax rate on income paid to foreign residents. The second type involves obtaining an Australian income tax benefit, even if the primary intention was to reduce foreign income tax.
The aforementioned provisions will be effective for income years that commence on or after 1 July 2024, regardless of whether the corresponding scheme was established prior to the aforementioned date.
Updates on Managed investment trusts and build-to-rent projects.
Housing, specifically social and affordable housing, is a significant priority for the Government, particularly in the current economic climate and in the near future. As previously stated and in accordance with the National Cabinet meeting on April 28th, 2023, the Government has officially affirmed the subsequent actions in the Budget:
The accelerated BTR depreciation policy will raise the depreciation rate for qualified new BTR projects from 2.5% to 4% per year. This policy will only apply to projects that begin construction after May 9, 2023. The proposed measure will enable the depreciation of expenses over a period of 25 years, which is shorter than the standard 40-year period.
The Managed Investment Trusts (MITs) will now apply a reduced withholding rate of 15% instead of the previous 30% on eligible fund payments. This reduction will be applicable to the income derived from eligible BTR properties. The aforementioned measure will become effective as of July 1st, 2024.
The aforementioned concessions are exclusively applicable to Build-to-Rent (BTR) projects that comprise a minimum of 50 apartments or dwellings and are accessible to the general public. Furthermore, it is required that the residential properties remain under the ownership of a single entity for a minimum of 10 years prior to being sold. Additionally, landlords are obligated to provide a lease agreement with a minimum term of three years for each individual dwelling.
Additional consultation material regarding the BTR measures is expected to be released in the upcoming months. The potential inclusion of amendments to the GST regulations affecting the sector in the reform package is a matter of interest. The sector will closely monitor this matter as the eligibility requirements and transitional rules will be crucial for projects.
The BTR metrics are an addition to the previously disclosed funding initiative aimed at promoting the construction of novel social and economical housing units (outlined in our October Federal Budget: key takeaways insight article).These are being introduced amidst the implementation of diverse tax regimes by state governments to encourage growth in the industry.
The Budget included modifications that impact the MIT "clean building" regulations. These changes were disclosed along with the previously mentioned National Cabinet declarations.
As of July 1, 2025, MITs that possess data centres and warehouses will be eligible for the reduced 10% clean building MIT withholding rate, provided that the construction of these properties began after 7:30 pm AEST on May 9th. However, these properties must meet the relevant energy efficiency standards, which will be discussed below.
The minimum energy requirements for both new and existing clean buildings will now be raised to a 6-star rating, as per the Green Building Council Australia. Previously, a 5-star rating was mandatory. Alternatively, a 6-star rating under the National Australian Built Environmental Rating System will also be accepted. The previous requirement was a 5.5-star rating.