Why 2023 was a year of living taxingly

The end of another working year provides an opportunity to relax over the festive break, reflect on the events of the year and regroup ahead of embarking on goals and objectives for 2024 with renewed vigour.

Ongoing economic uncertainty created by global events continued into 2023, fuelled by persistently high inflation, repeated interest rate hikes, tight labour markets and geopolitical shocks. These and other factors have compounded cost of living pressures.

From a tax policy perspective, 2023 was yet another significant year with sweeping tax changes including landmark case decisions. In this first part of a two-part series, some of the key developments that marked the tax landscape are discussed below.

Note that not all the government’s proposed legislative measures completed their passage through parliament by the last sitting day on 7 December, so the government will resume its progression of these measures when the 2024 Parliamentary sittings commence on 6 February.

Small and medium enterprises

Following years of tweaks (and changes of a more substantial nature) to the full expensing measures for depreciating assets of SMEs, the next variant remains to be legislated. The standard instant asset write-off threshold is proposed to be temporarily increased from $1,000 to $20,000 (for eligible depreciating assets costing less than $20,000) for small business entities (aggregated turnover of less than $10 million) where those assets are first used or installed ready for use in 2023-24.

Eligible business entities (aggregated turnover of less than $50 million) will be allowed to claim an additional 20 per cent deduction on spending that supports electrification and more efficient use of energy. Eligible assets or upgrades need to be first used or installed ready for use in 2023–24.

These measures are contained in Schedules 1 and 2, respectively, to the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2023, which remains before Parliament.

On the case law front, the focus of SME advisers will be firmly on the appeal to the Federal Court of the Administrative Appeals Tribunal’s decision in Bendel v Commissioner of Taxation [2023] AATA 3074. In that case, an unpaid present entitlement (UPE) arising from an entitlement to income (or capital) of a trust was held not to be a loan under Division 7A of Part III of the Income Tax Assessment Act 1936. This decision has generated widespread interest because it departs from the Commissioner’s long-held views in TR 2010/3 (withdrawn), PS LA 2010/4 (withdrawn), PCG 2017/3 and TD 2022/11. In response, the Commissioner released an interim decision impact statement on 15 November 2023. We keenly await the Federal Court’s take on the vexing question of whether a UPE constitutes a loan for Division 7A purposes.

Superannuation

Division 296 tax

In a major change for those with substantial superannuation balances, the Treasury Laws Amendment (Better Targeted Superannuation Concessions Bill) 2023 proposes to introduce new Division 296 into the ITAA 1997 to levy an additional tax on individuals at the rate of 15 per cent on earnings on total superannuation balances above $3 million. The measure is proposed to start on 1 July 2025. On 7 December 2023, the Senate referred the Bill to the Senate Economics and Legislation Committee for inquiry and report by 19 April 2024.

Unquestionably, the primary concern of stakeholders, including the Tax Institute (see our submission to the Treasury) is the establishment of a new precedent of taxing unrealised gains. Historically, taxing unrealised gains has been used only in the context of anti-avoidance provisions and it should not be a feature in the design of this, or future, general taxation measures.

The inability to carry back unrealised losses, the non-indexation of the $3 million threshold and liquidity issues relating to the payment of the new tax are among the other concerns stakeholders have with the new measure.

Payday super

In October 2023, Treasury released a consultation paper on payday super which will require employers from 1 July 2026 to pay their employees’ superannuation guarantee contributions at the same time they pay salary and wages. The measure is to be applauded for its objective to better secure the superannuation entitlements of millions of workers. However, a range of design and implementation issues must be considered, as set out in the joint submission on the consultation paper lodged with the Treasury by the Tax Institute and other professional associations.

Pleasingly, Treasury and the ATO have engaged in numerous targeted consultations with key stakeholders this year. Through this collaboration, bright minds have come together to identity and work through the optimum design of the regime, so it has the best chance of success when it comes to its implementation. Further announcements regarding the policy are expected in the federal budget in May 2024, with legislation to follow later in the year.

The proposed regime presents a golden opportunity to redesign the archaic, draconian and disproportionate SG charge penalty to make it fairer, proportional and more streamlined. This should reduce complexity for all stakeholders and increase compliance, which advances the overarching objective of securing Australians’ superannuation entitlements.

According to the ATO’s tax gap figures for 2020-21, the net SG gap is 5.1 per cent. While this may be interpreted as a positive outcome that nearly 95 per cent of employers are complying with their SG obligations, it also means that $3.619 billion of superannuation entitlements were not paid in that period (being the difference between the estimated theoretical SG liability and what is collected). This gap is the impetus for the payday super reform.

NALI and NALE

The well-trodden path of amending the non-arm’s length income (NALI) and non-arm’s length expense (NALE) provisions continued in 2023. Schedule 7 to the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2023 proposes to amend the NALE provisions by limiting the amount of NALI arising from a general NALE for self-managed superannuation funds and small APRA-regulated funds to twice the level of a general expense.

These changes are proposed to apply retrospectively from 1 July 2018. This bill was referred by the Senate to the Senate Committee for inquiry and report and, on 24 November, the Senate Committee released its report. Concerns regarding these proposed amendments are set out in the joint submission lodged by the Tax Institute and other professional associations.

Multinationals

As part of its election commitments, the government announced a Multinational Tax Integrity and Tax Transparency Package, proposed to apply from 1 July 2023, aimed at:

• Strengthening thin capitalisation rules to address risks to the corporate tax base arising from the use of excessive debt deductions.

• Introducing reporting requirements for certain companies to enhance the tax information they disclose to the public.

• Introducing an anti-avoidance rule to deny deductions for payments made to related parties in relation to intangible assets connected with low or no tax jurisdictions.

The tax transparency measures and thin cap measures are contained in the Treasury Laws Amendment (Making Multinationals Pay Their Fair Share Integrity and Transparency) Bill 2023, which is yet to be enacted, despite almost six months having passed since its proposed start date. The intangibles measure has not yet been introduced into parliament. It is not clear at this stage whether the proposed intangibles measure will proceed and if so, whether it will be subject to further consultation.

Also, as part of the federal budget 2023-24, the government announced the implementation of the OECD’s Pillar 2 rules, effective for income years starting on or after 1 January 2024. Exposure draft legislation for the implementation of Pillar 2 in Australia has not yet been released for consultation, despite the looming start date.

On the case law front, significantly, the decision of the Federal Court in PepsiCo, Inc. v Commissioner of Taxation [2023] FCA 1490 is the first diverted profits tax case considered by the court. The decision was made in favour of the Commissioner.

Dispute resolution

The proposed reform and replacement of the AAT with the new Administrative Review Tribunal (ART) will be given effect by the Administrative Review Tribunal Bill 2023 and Administrative Review Tribunal (Consequential and Transitional Provisions No. 1) Bill 2023 which were recently introduced into parliament. The bills have been referred to the House of Representatives Standing Committee on Social Policy and Legal Affairs. Arrangements will be made to transition existing matters from AAT to ART.

On reflection

Reflecting on the measures introduced and consulted on during 2023, and those that were not consulted on, it will be important for stewards of the tax system like the Tax Institute and other professional associations to continue to work with government to direct greater attention to improving consultation processes — including the time provided to stakeholders — and reducing the government’s use of retrospective legislation as a priority for an effective taxation system.

The second and final part of this series will be published next Friday, 5 January, and focuses on changes to the regulation of the tax profession, the key measures announced as part of the Mid-Year Economic and Fiscal Outlook 2023-24 and some state tax issues.

Robyn Jacobson is the senior advocate at the Tax Institute.