Australian Federal Budget 2024-25

Introduction

The Australian Treasurer, the Hon. Jim Chalmers, delivered the 2024/25 Federal Budget (Budget) on Tuesday, 14 May 2024. Whilst describing his third Budget as a responsible budget, it is relatively lean and modest on significant international and related tax reforms.

The key initiatives from the Budget include:

• Introduce a new provision from 1 July 2026 that will apply a penalty to Significant Global Entities (with annual global group turnover of greater than AUD1 billion) that are considered to have mischaracterised or undervalued royalty payments, to which royalty withholding tax would otherwise apply – noting the recent PepsiCo (November 2023) Federal Court decision.
• Discontinue the proposed initiative to deny tax deductions for payments relating to intangibles held in low tax jurisdictions – noting that this proposed integrity measure will be addressed in the Pillar II reforms.
• Strengthen the foreign resident capital gains tax (CGT) regime to firstly, ensure taxation applies foreign residents on direct and indirect sales of assets with a close economic connection to Australian land and, to secondly, introduce an advance ATO notification process to improve oversight and compliance with the foreign resident CGT withholding tax rules.
• Introduce a green hydrogen production tax incentive and comparable tax incentive for certain critical minerals production.
• Delay the start date for certain reforms to the general anti-avoidance provision, Part IVA, dealing with schemes to reduce withholding tax rates and/or reduce foreign income taxes until the years of income commencing on or after the day the amending legislation receives Royal Assent.
• Exempting Australian plantation forestry entities from the new earnings-based thin capitalization rules and preserving the existing asset-based thin capitalisation rules.
• Various other initiatives including extending the “instant asset write off” concessions until 30 June 2025 and the ATO Tax Avoidance Taskforce for a further two years from 1 July 2026.

It is noted that the Budget did not provide further details regarding the previously proposed reforms relating to the Managed Investment Trust withholding tax concession for build-to-rent housing projects and “clean building” data centres.

We provide further details on these key tax initiatives in the Budget below.

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 now be discontinued and will instead be addressed through Australia’s Pillar II rules.

This measure was previously announced in the 2022-2023 Federal Budget and had a proposed start date of 1 July 2023. The Australian Treasury had released Exposure Draft legislation for these rules in March 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 II rules and we are aware that the US Treasury was also 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 II, with exposure draft legislation recently released on 21 March 2024, the Government has now confirmed that such arrangements involving low tax jurisdictions are intended to be covered by the Pillar II rules, such that the proposed tax deduction denial measures were considered to no longer be necessary.

Certain taxpayers may have already restructured their intangible asset arrangements in anticipation of the proposed measures taking effect from 1 July 2023. If so, such taxpayers may wish to revisit their arrangements in light of the discontinuation of these measures.

Cross-border royalty arrangements – proposed penalty measures

The Australian Government has also announced it will be introducing a new penalty provision from 1 July 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” (SGEs), being entities that are part of a group with more than AUD 1 billion in global turnover annually.

Whilst specific details of this measure have not yet been released, it appears that this measure is designed at targeting, amongst other things, the concerns raised by the Australian Taxation Office (ATO) relating to the identification of royalties for withholding tax purposes in draft Taxation Ruling TR 2024/D1 (which concerned software arrangements) and in the recent PepsiCo case (which concerned the treatment of payments made under a distribution arrangement). At the time of this update, TR 2024/D1 remains in draft and the PepsiCo case remains on appeal. Any Australian taxpayers that are SGEs and have cross border arrangements involving intellectual property rights should carefully monitor the progress of these developments and consider their impact on their arrangements.

GAAR broadened to schemes that reduce Australian withholding taxes or foreign taxes (previously announced) – deferred application date

The 2024-25 Federal Budget reaffirmed the Government’s proposed amendments to Australia’s general anti-avoidance rule (GAAR), 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, rather than Australian income tax.

The proposed amendments will now 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.

For context, when previously announced in last year’s 2023-24 Federal Budget, the proposed amendments were to apply to income years commencing on or after 1 July 2024. For further information regarding this measure, please refer to our insights on last year’s 2023-24 Federal Budget.

Thin capitalisation (previously announced) – exemption for Australian plantation forestry entities

Australia’s thin capitalisation were recently amended with effect from 1 July 2023. For context, Australia’s thin capitalisation rules limit the amount of tax deductions available for interest expenses for multinational enterprises. The key amendments to the thin capitalisation rules included:

• a 30% ‘tax EBITDA’ limit to replace the current 60% LVR limit, with any denied deductions being able to be carried forward for 15 years;
• an external third-party debt limit (with specific recourse and debt funding usage requirements, conduit financier concessions and tightened associates testing) to replace the current arm’s length debt limit;
• a group EBITDA ratio test to replace the current worldwide gearing test.

The 2024-25 Federal Budget announced that the thin capitalisation rules will be further amended, to exempt Australian plantation forestry entities from the new earnings-based rules. In effect, this would allow Australian plantation forestry entities to continue to apply the former asset-based thin capitalisation rules.

Strengthening the foreign resident capital gains tax 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 1 July 2025 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 include direct and indirect interests (e.g. shares and other membership interests in holding entities) in land, a lease of land, mining, quarrying or prospecting rights that are situated in Australia. It is not yet known what other assets the Government intends to capture under the proposed changes. However, the measures are said to ensure Australia can tax foreign residents on direct and indirect sales of assets where there is a close economic connection to Australian land, more in line with the tax treatment that already applies to Australian residents.
• 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 as at the time that the interest is disposed of (i.e. a ‘point-in-time’ test). It is not yet known how the proposed 365 day testing period will be legislated and implemented in practice (e.g. would it be based on the average market value of the assets based on a 365 period or whether it needs to be satisfied throughout the 365 day period).
• require foreign residents disposing of shares and other membership interests exceeding AUD20 million in value to notify the ATO, prior to the transaction being executed: this new and further 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

Renewable energy and related minerals incentives

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

• the Hydrogen Production Tax Incentive, worth AUD6.7 billion over a decade; and
• Critical Minerals Production Tax Incentive, worth AUD7 billion over a decade.

Hydrogen Production Tax Incentive: The Hydrogen Production Tax Incentive is set to be introduced from 2027-28 and will be provided to producers of renewable hydrogen to support the growth of a competitive hydrogen industry and Australia’s decarbonisation. The Incentive will provide a $2 incentive per kilogram of renewable hydrogen produced between 2027–28 to 2039–40, for up to ten years per project.

Critical Minerals Production Tax Incentive: The Critical Minerals Production Tax Incentive is also set to be introduced from 2027-28 and will be targeted at supporting downstream refining and processing of Australia’s critical minerals to improve supply chain resilience. This production incentive will be valued at ten per cent of relevant processing and refining costs for Australia’s 31 critical minerals, for critical minerals processed and refined between 2027–28 to 2039–40, for up to ten years per project.

OTHER MEASURES

Funding Australian Taxation Office (ATO) compliance activities

The 2024-25 Federal Budget also announced measures relating to the ATO, including:

• Extension of the ATO Tax Avoidance Taskforce for two years from 1 July 2026, to ensure that the ATO continues to be well resourced to pursue key tax avoidance risks, with a focus on multinationals, large public and private businesses, and high wealth individuals;
• Extension of the ATO Shadow Economy Compliance Program for two years from 1 July 2026, to enable the ATO to continue to reduce shadow economy activity, thereby protecting revenue and preventing non-compliant businesses from undercutting competition;
• Provision of AUD187.0 million over four years from 1 July 2024 to the ATO, to strengthen its ability to detect, prevent and mitigate fraud against the tax and superannuation systems; and
• Strengthening the ATO’s ability to combat fraud, by extending the time the ATO has to notify a taxpayer if it intends to retain a business activity statement (BAS) refund for further investigation. The ATO’s mandatory notification period for BAS refund retention will be increased from 14 days to 30 days to align with time limits for non BAS refunds.

Support For Small Businesses

The AUD20,000 instant asset write off, as previously announced in last year’s 2023-24 Federal Budget, has been extended by 12 months until 30 June 2025.

Thus, small businesses (i.e. those with an aggregated annual turnover of less than AUD10 million) will continue to be able to immediately deduct the full cost of eligible assets costing less than AUD20,000 that are first used or installed ready for use by 30 June 2025. The asset threshold applies on a per asset basis – this means that small businesses can instantly write off multiple assets.

Assets valued at AUD20,000 or more (which cannot be immediately deducted) can continue to be placed into the small business simplified depreciation pool and depreciated at 15 per cent in the first income year and 30 per cent each income year thereafter.

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