How an unpredictable year left a lot undone

We emerged from 2021 with high hopes for a better year but for those who were confident that the recent uncertainty would continue, 2022 did not disappoint. The year was certainly unpredictable in terms of tax policy, with an early federal budget and a federal election. The change of government has, not unexpectedly, been accompanied by a change in fiscal policy. The array of consultation papers and exposure drafts released since mid-year are considerably different to the direction in which the former government was heading.

Below, I revisit some of the key tax policy and administrative areas of focus during 2022 and consider the tax measures we hope to see addressed in 2023.

Focus on multinationals

The content of both this year’s federal budgets was predictable, with the October statement delivering on Labor’s election promises of a focus on cost-of-living and multinational tax avoidance. Treasury has released for consultation its Multinational Tax Integrity and Tax Transparency consultation paper, however the amending bill is yet to be introduced into Parliament. The changes are proposed to apply from 1 July 2023.

These measures propose to target multinational tax avoidance. This is particularly interesting considering the large corporate groups’ income tax gap is one of the smallest, at $4.6 billion or 4.2 per cent (for 2019–20). If collecting tax revenue is a priority – with gross debt expected to be $927 billion for 2022–23 – then it will be intriguing to see how these measures will assist.

We anticipate the release of the multinational consultation exposure draft legislation early in the new year ahead of the 1 July 2023 commencement date.

Treasury has also released for comment:

• Franked distributions and capital raising exposure draft legislation.
• Improving the integrity of off-market share buy-backs exposure draft legislation.
• Public beneficial ownership register consultation paper.
• Addressing the tax challenges arising from the digitalisation of the economy consultation paper.

The digital age

This year may not have witnessed major tax reform, however it was pleasing to see several steps taken to address the tax treatment of digital assets and improve Australia’s digital systems.

Throughout the year, the Board of Taxation conducted a review of the Tax Treatment of Digital Assets and Transactions in Australia and Treasury released exposure draft legislation for clarifying that crypto is not taxed as a foreign currency. We welcome the government’s action to address the tax treatment of digital assets and look forward to the eventual public release of the BoT’s recommendations to the government.

Another key focus this year has been director identification numbers. On 23 November 2022, based on the estimates from the ABRS, it was expected that approximately 1 million directors still needed to apply for a director ID. Directors were provided with an extension until 14 December 2022 to apply without the ATO applying compliance resources.

This year also saw the implementation of several other technological advancements, including Single Touch Payroll Phase 2 and piloting the Client-Agent linking interface. The Optus and Medibank breaches served as timely reminders of the importance of digital security, and the ATO continues to implement safeguards to protect taxpayers’ information. The Client-Agent linking project will be expanded to include larger businesses that were outside the pilot and smaller businesses in the months ahead. The Tax Institute, other professional associations and some volunteer practitioners continue to work closely with the ATO to co-design the implementation processes and communications. We recognise that there may be some hiccups as the ATO digitalises more of its interactions, but we continue to have concerns about the design of the implementation of Client-Agent linking for smaller businesses and, in time, individuals. The importance of progressing and bolstering cyber security in line with our collective reliance on data and digital systems cannot be overstated, but this must be balanced with practical and workable solutions that can be readily administered by taxpayers and practitioners.

ATO guidance

Following years of uncertainty, the start of the year saw the release of the ATO’s draft guidance materials on section 100A (of the ITAA 1936), with the release of draft Taxation Ruling TR 2022/D1, draft Practical Compliance Guideline PCG 2022/D1 and Taxpayer Alert TA 2022/1 Parents benefiting from the trust entitlements of their children over 18 years of age.

On 8 December 2022, the ATO released the finalised guidance — Taxation Ruling TR 2022/4 Income tax: section 100A reimbursement agreements and Practical Compliance Guideline PCG 2022/2 Section 100A reimbursement agreements — ATO compliance approach. The final guidance is an improvement on the draft package, but the need for legislative change remains, particularly around the unlimited amendment period, the extent of “purpose” for entering into an arrangement and the scope of the term “ordinary”.

During the year, the ATO also published the following key guidance:

• Taxation Determination TD 2022/11 Income tax: Division 7A: when will an unpaid present entitlement or amount held on sub-trust become the provision of “financial accommodation”? — this provides the ATO’s revised view on the application and operation of Division 7A of Part III of the ITAA 1936 to unpaid present entitlements.
• Taxation Ruling TR 2022/3 Income tax: personal services income and personal services businesses — this ruling was updated for recent case law, including the Full Federal Court’s reasoning in Commissioner of Taxation v Fortunatow [2020] FCAFC 139.
• Practical Compliance Guideline PCG 2021/4 Allocation of professional firm profits – ATO compliance approach — this guidance sets out the ATO’s compliance approach to the allocation of professional firm profits by providing a risk assessment framework to professional practitioners.

In 2023, we look forward to the ATO finalising its compliance approach to taxpayers claiming working from home deductions using the revised fixed-rate method, and guidance on the income tax treatment of the use of an individual’s fame by a related entity and the residency tests for individuals (based on the current law).

What else has 2022 seen?

Rapidly rising interest rates and inflation will not be fond memories from 2022. This month, few were surprised when the RBA again increased the underlying cash rate by 25 basis points, the eighth consecutive increase.

It is evident the government is mindful of the cost-of-living pressures facing taxpayers, families and businesses from the following measures that have been introduced into parliament and, in some cases, enacted:

• Cheaper child care.
• Lowering the eligibility age for making downsizer contributions.
• Incentivising pensioners to downsize.
• Lifting the income limit for the Commonwealth Seniors Health card.
• Making the Paid Parental Leave scheme more flexible.

What do we hope to see in 2023?

Conspicuously missing from the list of bills enacted in 2022 is the Treasury Laws Amendment (2022 Measures No. 4) Bill 2022, which contains the small business Skills and Training Boost and Technology Investment Boost. This bill was introduced into Parliament on 23 November 2022, and it is hoped it passes into law in early 2023 to ensure taxpayers and practitioners have certainty on these measures that were proposed to apply from 7.30pm AEDT on 29 March 2022.

We also hope to see progression of the following announced but unenacted measures referable to the former government:

• Non-arm’s length income (NALI).

The NALI rules were amended in 2019 to deter superannuation funds from entering into schemes to increase member balances through non-arm’s length arrangements. However, the rules have a significant and disproportionate impact that may be triggered by otherwise minor or inconsequential breaches of the NALI provisions. In March 2022, the former government announced that it would amend the law to ensure it operates as it should. However, we are yet to understand the current government’s position on this issue.

• Division 7A.

The former government announced as part of federal budget 2016–17 that it would make legislative reforms to improve the integrity and operation of Division 7A. This was followed by the release of the BoT’s Consultation Paper in October 2018. Years later, taxpayers and practitioners remain in limbo as to whether and when all or part of the BoT’s recommendations will be implemented. Further consultation is paramount before any legislative amendments are progressed.

• Corporate tax residency.

The former government announced as part of federal budget 2020–21 that it would adopt the recommendations of the BoT. Corporate entities operating in Australia continue to face uncertainty in determining their tax residency and the legislative changes recommended will help address this issue.

• Individual tax residency.

The former government announced in federal budget 2020–21 plans to introduce a 183-day bright line test and a secondary (four-factor) test. We have publicly shared concerns regarding the announced reforms that we believe would lead to unintended outcomes while unnecessarily increasing the compliance burden for many taxpayers. We believe further consultation is required, prior to introducing any legislative reforms, to ensure that any changes to the individual tax residency rules do not create new complexities.

This is not a complete list of announced measures to be addressed, however it provides a snapshot of some key areas of uncertainty that taxpayers and practitioners will face when returning to work in 2023.

More information on each of these measures can be found in the Tax Institute’s Incoming Government Brief.

Final comment

The government is gradually addressing the announced but unenacted measures with several introduced into parliament this month. However, with parliament adjourned we will see no movement in the introduction and passage of bills until February. The Tax Institute remains committed to holistic tax reform and will continue to encourage the government to tackle the long list of outstanding measures and broaden its scope to address the key areas of concerns faced by taxpayers and practitioners.

Robyn Jacobson is the senior advocate at the Tax Institute.