The Australian Federal Government has just released its budget
for 2023-24. The K&L Gatestax team outlines the key announced
tax measures and our instant insights into what they mean for you
|Key Announced Tax Measures
K&L Gates Instant Insights
Build to Rent (BTR) Managed Investment Trust (MIT)
withholding tax reduction - a reduction in withholding tax for
foreign investors from 30% to 15% on distributions from eligible
residential BTR projects, starting 1 July 2024. Eligibility
criteria still to be determined, but likely to focus on minimum
levels of affordable rental housing and minimum ownership periods
(such as 10 years for the depreciation changes below).
- Potentially unlocks significant offshore capital for investment
into the residential BTR sector - allowing foreign capital to
partner willing Australian capital (e.g. super funds) that has been
looking to de-risk.
- Evens up the treatment with commercial real estate investment,
making it easier to compete for BTR capital.
- Key issue will be the eligibility criteria, and whether the
Government can resist casting it too narrowly to actually be
BTR accelerated capital works deduction - an increase
in the rate of capital works deductions (i.e. depreciation of
construction costs) from 2.5% to 4%, for construction commencing
after 9 May 2023. Applies to buildings with 50
apartments/dwellings, with leases of a minimum term of three years,
and single ownership of project for 10 years.
- BTR projects will be able to make higher early-stage tax-free
returns of capital to investors (allowing it to be reinvested or
- May also support greater debt capacity through improved
cashflows / reduced tax leakage (although this is tempered by the
debt deduction limitations discussed below). Again, this may help
to unlock capital for the BTR sector.
Clean building MIT withholding tax concession extended to
energy efficient data centres and warehouses - this reduces
the existing MIT withholding tax rate from 15% to 10% for clean
buildings that are data centres/warehouses.
- This is billed as a clean energy measure, but will deliver very
attractive withholding tax rates for foreign capital investing in
data centres and warehouses that meet minimum energy efficiency
requirements (including below the rate offered to BTR), and so may
see greater foreign investment in this type of infrastructure.
Implementation of global minimum tax - Australia will
implement the Organisation for Economic Co-operation and
DevelopmentPillar 2 Global Anti-Base Erosion Rules 15% 'global
minimum tax' from 1 January 2024. This affects groups with
global accounting revenue of ~AU$1.2 billion (€750 million) or more, and broadly
- Income Inclusion Rule (IIR), so Australian parent companies
will be subject to 'top up tax' on accounting profits in
jurisdictions with a less than 15% effective tax rate on broadly
accounting profits in that jurisdiction.
- 15% Qualifying Domestic Minimum Top-Up Tax (QMDTT), where
Australian accounting profits are subject to a less than 15%
effective tax rate.
- Undertaxed Payments Rule, which seeks to apply top up tax (to
15%) on accounting profits where no IIR in parent jurisdiction and
no QMDTT - i.e. to make sure profits are taxed at a minimum of 15%
by some jurisdiction to apply from 1 January 2025.
- Australian headquartered groups required to lodge annual return
covering jurisdiction-by-jurisdiction global profits, tax rates and
- Targeted at large multinational groups and follows
implementation by other countries (United Kingdom, the European
Union, Canada, Singapore etc.)
- Represents a massive compliance
challenge for multinationals, irrespective of whether they will
incur further tax - they will have to calculate the 'effective
tax rate' jurisdiction-by-jurisdiction and file a return with
the Australian Taxation Office (ATO) even if no tax.
- On the tax itself, multinational groups will need to review
their global operations and work out where, if it all, they may
have accounting profits taxed at <15%.
- Australian headquartered groups will also need to pay a top up
tax in Australia under the IIR for accounting profits in
jurisdictions with <15% effective tax. However, QMDTT is
unlikely to have significant application to Australian operations
due to the high tax rates (although entities with tax credit
shelters will need to consider their position carefully).
- Whilst it may either collect some modest additional tax and/or
prompt other traditionally 'low-tax' jurisdictions to
impose local tax, given the beneficial treatment of certain tax
credits (which mean they don't reduce the effective tax rate)
it is likely we will see jurisdictions moving to implement tax
credit arrangements to provide a less than 15% effective tax
Expansion of Part IVA anti-avoidance rules to foreign
residents reducing Australian withholding tax or reducing foreign
tax - expansion of the Part IVA rules to cover foreign
residents entering into schemes to reduce Australian withholding
tax and to schemes with a purpose of reducing foreign tax (that
also reduce Australian tax).
- This will be an important consideration for foreign investors
and multinationals going forward.
- Query whether we will see the ATO applying the rule to attack
structures that use debt rather than equity to access lower tax
- The extension of the anti-avoidance regime to schemes that
result in a lower rate of withholding tax (rather than just
avoidance of withholding tax, which is already subject to the
anti-avoidance rules) has presumably resulted from schemes of the
sort flagged by the ATO in Taxpayer Alert TA 2022/2: treaty
shopping arrangements, where an entity is established in a
favourable treaty jurisdiction and inserted between an Australian
dividend or royalty payer and the ultimate recipient, to take
advantage of a lower treaty withholding tax rate.
Petroleum Resource Rent Tax changes to bring forward LNG tax
- For offshore liquefied natural gas (LNG), changes to the
'super profits' tax to bring forward revenue by (a) after
seven years, limiting deductions to 90% of revenue, (b) reducing
the way carried forward deductions are annually 'indexed'
from ~8.4% per annum to ~3.4% per annum (based on current bond
rates, but variable over time) and (c) limiting allocations of
losses to upstream extraction.
- More broadly, introducing updated anti-avoidance rules,
allowing the ATO to have greater discretion over whether multiple
fields are considered one project or multiple projects, introducing
limitations on initial exploration deductions (backdated to 2013)
and introducing administrative efficiencies.
- Mainly affects a small number of offshore LNG operations in
Western Australia and the Northern Territory.
- Brings forward tax revenue not expected to be paid until
- No longer a 'super profits' tax - although the 90%
limit on deductions and reduced indexation appear to have been the
'least worst' outcome for the LNG industry (which appears
to have accepted the changes) and are softened by a seven-year
grace period, it is much more likely to capture what might be
considered the 'ordinary profits'.
- Moreover, the focus on LNG continues following moves on caps on
gas pricing, flagged costs for carbon abatement, difficulties in
project approvals etc.
Confirming tougher restrictions on debt deductions - no
substantive updates on the already announced restrictions to debt
deductions that will commence from 1 July 2023, despite the rapidly
approaching commencement - as a reminder, the key measures
- Net debt deductions limited to 30% tax earnings before
interest, taxes, depreciation, and amortization.
- Arm's length debt test limited to third party debt, and
requires election and satisfaction of strict criteria to
- Requirement to demonstrate debt levels (not just interest rate)
are consistent with arm's length amounts for transfer pricing
- Removal of deduction for interest used to fund foreign
- Not applicable to financial entities (i.e. banks).
- Represents substantial overhaul and tightening of the rules on
interest deductibility - and with no transition and still no final
legislation or updates in the budget before commencement on 1 July
2023, it is also extremely difficult for groups to plan - but
groups will need to be ready to act quickly.
- There will be plenty of groups experiencing significant denied
interest deductions based on structures set up well before the
current rules were contemplated (and relying on the old supposed
'safe harbour' provisions).
- Groups subject to thin capitalization need to urgently review
their debt portfolios and model potential denied deductions -
particularly where they have been relying in the past on the
arm's length rule.
- There are particular implications for naturally high debt
industries (real estate, infrastructure etc.) as well as for
structures involving multiple layers of trusts, where the new rules
can have significant impacts that can affect the anticipated
- The requirement to transfer price debt quantum (and just not
rates) also means needing to support cross-border debt by a
detailed transfer pricing study.
No update on corporate tax residency changes - there
has been no update on the previously proposed changes to corporate
tax residency under which foreign companies would only be an
Australian tax resident if their core commercial activities were in
Australia AND central management and control was in Australia.
- Very disappointing that no update was provided, particularly
given the ATO will remove its COVID-19 inspired administrative
concessions designed to prevent inadvertent residency and the
ATO's continuing position on residency (where they consider the
central management and control is taken to be carrying on a
Confirming denial of deductions for payments relating to
intangibles to low tax jurisdictions - no update on measures
to deny deductions for payments made to associates attributable to
an arrangement involving the acquisition or right to use an
intangible asset (defined broadly) made to a low tax jurisdiction
(tax rate of less than 15%). Only applies to significant global
entities' (SGE) (global group turnover of AU$1 billion+).
- Targeted at SGEs but a very broad measure that goes well beyond
traditional definition of royalty payments (including covering
broader arrangements which do not directly relate to intangible
- SGEs will need to carefully consider any offshore low tax
jurisdictions which are receiving intangible related payments.
- Although badged as an integrity measure, there is also no
requirement for a purpose to obtain a tax advantage.
Abandonment of patent box measures previously announced
- the previous Federal Government had announced a patent box regime
to support medical and biotech sectors with a concessional tax
rate, but the current Government has announced it is not proceeding
with the measure.
- Patent boxes are widely used in Europe to incentivize
in-country research, with the reduced tax rates provided under the
patent box regimes ranging from 0% to 12.5%.
- Australia's research and development tax credit regime is
competitive globally but is not leading edge and so the expectation
was that the patent box regime would make Australia a more
compelling destination for locating investment in science and
innovation. It is disappointing that this initiative is not being
Small business incentive for expenditure on
electrification - small-and-medium-sized businesses, with an
aggregated annual -turnover of less than AU$50 million, which spend
on electrification of assets and improvements will be able to
access a 20% tax deduction up to AU$20,000.
- Reduces effective cost of electrification of assets for small
business, including upgrades and installation of heating and
cooling systems, energy efficient appliances, batteries, and heat
pumps. Small business will still need to find cash for upgrades in
an uncertain economic environment.
- To be eligible, the relevant eligible electricity asset (or
upgrade) will need to be first used (or installed ready for use)
between 1 July 2023 and 30 June 2024.
Small businesses granted a temporary increase to instant
asset write off threshold - the Federal Government will grant
small businesses a temporary increase to the instant asset
write-off threshold to AU$20,000. The measure will apply for assets
first used or installed ready for use in the income year 1 July
2023 to 30 June 2024.
- Incentives for small businesses are always welcome, although
query in the uncertain economic climate whether small businesses
will be in a position to spend the money with or without the tax
Bringing forward payment of employer superannuation
contributions - from 1 July 2026, employers will be required
to pay employees' superannuation contributions at the same time
as they pay salary and wages, rather than quarterly.
- This may have cashflow implications for businesses,
particularly those struggling in the current environment - however
superannuation was never intended to be a cashflow tool and so this
is a welcome measure to ensure employees get paid superannuation on