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Australian Federal Budget 2024-2025 - Key Tax Measures and Instant Insights
Tuesday, May 14, 2024

The Australian Federal Government (the Government) has just released its budget for 2024-25. The K&L Gates tax team outlines the key announced tax measures and our instant insights into what they mean for you in practice.

Key Announced Tax Measures K&L Gates Instant Insights

Production tax credits for Australian critical minerals processing (Critical Minerals Production Tax Incentive)

  • In a measure to compete with the US Inflation Reduction Act advanced manufacturing tax credit, the Government is to introduce a tax credit for downstream mineral processing activities in Australia for minerals processed and refined between 2027-2028 to 2039-2040 income years.
  • Tax offset equal to 10% of eligible expenditure incurred in relation to processing in Australia of critical minerals (with the list said to include 31 critical minerals) appears available to both existing and new projects based on when the production occurs.
  • Applies to processing and refining undertaken in Australia.
  • Eligible expenditure is not defined in the budget papers. In the US measures, it focuses on expenditure on production inputs such as electricity and utilities, labour costs, consumables (e.g. chemicals), but not the costs of input raw materials, transportation, decommissioning, waste treatment and disposal etc.
  • The tax credits will be available for 10 years per project.
  • The Government will consult on further details.
  • The US Inflation Reduction Act provided similar tax credits for on-shore US processing - including of materials mined in Australia (encouraging the raw ore to be exported to the US - see our alert on the US measures). However, the US tax credits are refundable, which is a key incentive.
  • It is not clear whether the Australian production tax credit is refundable, but given the anticipated cost to the budget of AU$7 billion over 10 years it seems possible that it will be. This will be a key issue for industry.
  • Although announced this year, it doesn’t commence until 1 July 2027 (more than three years into the future).
  • Whether this is enough to actually incentivise Australian production remains to be seen in competition with the US (particularly given that US credits may be available for Australian minerals) - labour, energy and other input costs are still significantly higher in Australia.
  • As always, the key elements will be in the detailed implementation. The Government has a long history of announcing positive changes that become mired in technical complexity.

Amendments to foreign resident capital gains tax regime

  • In an expansion of the taxation of foreign residents on capital gains, it is proposed foreign residents will now be taxed on direct and indirect sales of assets with a "close economic connection to Australian land".
  • The amendments will apply to Capital Gains Tax (CGT) events occurring on or after 1 July 2025, and seek to:
    • Clarify and broaden the types of assets that foreign residents are subject to CGT for foreign residents (i.e. by expanding them);
    • Amend the current point-in-time "principal asset test" (which looks to whether broadly more than 50% of the market value of assets are interests in Australian real property) to a 365-day test (presumably requiring looking at the average values over 365 days); and
    • Require foreign residents disposing of shares and other membership interests exceeding AU$20 million in value to notify the Australian Taxation Office prior to the transaction being executed. 
  • The Government will issue a consultation paper to further outline the proposed measures.
  • It remains to be seen what the reference to "close economic connection to Australian land" refers to, but it will clearly result in an expansion of the instances where foreign residents are subject to tax on disposal of assets beyond the current scenarios of entities with a permanent establishment in Australia or interests in Australian real property itself (or in entities with a majority value attributable to Australian real property interests).
  • Whilst the measure argues it is to make the provisions consistent with an Organisation for Economic Co-operation and Development (OECD) approach, it remains unclear what this entails and there does not appear to be an OECD-standard approach.
  • The requirement to pre-notify the Australian Taxation Office of disposals over AU$20 million is likely to complicate deal execution and completion, and is presumably designed to target disposals which the Australian Taxation Office currently think are escaping the tax net (particularly given this is intended to raise revenue).
  • It is another measure that is likely to disincentivise foreign investment into Australia, and is consistent with other measures (such as using the Foreign Investment Review Board tax conditions) to target disposals of assets by foreign residents.

Hydrogen Production Tax Incentive - tax credits for producing "renewable" hydrogen

  • The Government has also announced an additional tax incentive for the production of renewable hydrogen to compete with similar US and other tax incentives.
  • Tax credit is for AU$2 per kilogram of hydrogen produced between 2027-2028 and 2039-2040.
  • Applies to hydrogen produced using renewable energy, although it is unclear on the qualification requirements or how this will be determined in practice. 
  • The tax credits will be available for 10 years per project. 
  • The Government will consult on further details. 
  • With estimates that currently hydrogen produced with renewable energy has a cost of AU$4-AU$6 per kilogram, a AU$2 per kilogram incentive is quite significant (although the equivalent US measure offers up to AU$3/kg if it meets all of the relevant criteria).
  • As before, it remains unclear if the credit is refundable or not. The US equivalent is subject to refundability and will likely be a key determinant of its success.
  • Again, although announced this year, it doesn’t commence until 1 July 2027 (more than three years into the future), and the key details remain to be established.

Discontinuance of intangibles deduction denial measures

  • The Government will discontinue the measure denying deductions for payments relating to intangibles held in low- or no- tax jurisdictions that was announced in the 2022-23 Federal Budget. This was 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%).
  • These integrity issues will now be addressed through the Global Minimum Tax (see below). 
  • This is a welcome but unexpected change from the Government, given it was targeted at the same types of entities as covered by the global minimum tax proposal.
  • However, the introduction of a new penalty related to royalties (see below) tempers this, and maintains the Government's and Australian Taxation Office's focus on cross-border intangible arrangements.

New penalties for royalty withholding tax mischaracterisation arrangements

  • In a continued effort to target arrangements that the Government consider should give rise to Australian royalty withholding tax, the Government will impose a penalty on taxpayers who are found to have "mischaracterised" or undervalued their royalty payments.
  • Specifically, the penalty will apply to taxpayers who are part of a group with more than AU$1 billion in annual global turnover (the same targets for the previous denial of deduction measures).
  • The measure will be implemented from 1 July 2026.
  • This measure is in line with the Government's continued focus on cross-border arrangements that give rise to royalty payments. 
  • It remains unclear as to what exactly a mischaracterised or undervalued royalty payment will be – there are no details in the budget, and expect that this will be the subject of consultation.
  • The breadth of the measure however raised concerns that it may be utilised to target currently quite common intangibles arrangements (in the same way as the denial of deduction measures previously raised similar concerns).

Small business instant asset write-off "extended"

  • Extend ability for small businesses to fully write off for tax purposes (i.e. deduct) cost of each asset with a cost of up to AU$20,000 – now applies to assets acquired (and installed for use or ready for use) until 30 June 2025. 
  • Only available for small businesses with turnover (when aggregated with other controlled / controlling entities) of less than AU$10 million (current year or previous year) – provided business applies small business simplified depreciation rules.
  • Given the legislation for the existing instant asset write-off announced in Budget 2023-24 has still not yet been passed into law, this is substantially a re-do of the previous policy. 
  • Extension may be designed to stop the rush to qualify under existing law before 30 June 2024. 
  • This measure effectively brings forward tax deduction (instead of being deductible over about four-five years).

Changes to the Producer Tax Offset requirements for film and television production in Australia

  • The minimum length requirements (i.e. as to the length of the television or film) content will be removed.
  • The above-the-line cap (ATL Cap) of 20% of total qualifying production expenditure for the Producer Tax Offset will also be removed.
  • The removal of minimum duration requirements for different formats of projects will encourage shorter format producers to access the Producer Offset and allow greater flexibility. 
  • The ATL Cap of 20%, which can be included in the qualifying Australian production expenditure, will be removed. We expect this should allow greater access to film incentives in Australia and allow a higher refundable tax offset to a broader range of production expenditure.

Domestic Global Minimum Tax

  • In a measure already foreshadowed in the last budget and announced in detail in March this year, the Government released for consultation draft proposed legislation for the 15% global minimum tax. 

    This implements:

    • A 15% income inclusion rule (IIR) for “parent” entities on global group income, and a 15% qualifying minimum domestic top-up tax (which may never apply in Australia given rates and base, but which is designed to ensure any possible leakage is taxed in Australia) which will both apply from 1 January 2024; and
    • The Undertaxed Profits Rule (UTPR) which will apply from 1 January 2025. The UTPR imposes tax in Australia, however it appears the rules do not cover the UTPR yet, presumably given its commencement date.
  • This applies to global groups with at least EU£750 million turnover in two of last four income years and applies broadly on an accounting basis. Broadly, the rules apply Australian law first (including CFC rules, foreign hybrid rules, and hybrid mismatch rules) then apply these as an overlay. 
  • The imposition mechanics of these rules are embedded in regulations (not law / primary legislation) and so can be varied without parliament (within certain safeguards but which leave wide discretion). 
  • The measures are very complex and will create significant compliance burdens even where additional tax is not payable in Australia or globally.

Lower foreign investment fee for Build-to-Rent (BTR) properties

  • Foreign investors can expect lower foreign investment fees for BTR developments.
  • This incentive will be conditional on the affected property continuing to be operated as a BTR development.
  • A lower foreign investment fee may provide support at the margins for BTR developments.
  • There remain a number of issues with the main BTR tax incentives, as covered in our recent alert.
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