Federal Budget May 2023-24: Corporate tax

The Government has included in this year’s Budget very significant changes to the general anti-avoidance rule in Part IVA to specifically cover schemes to lower withholding taxes for foreigners and where the reduction of Australian tax occurs in the context of a broader scheme to limit foreign tax. The Government has also announced that previously announced patent box measures will not proceed. Interestingly, the very significant thin capitalisation and intangibles measures slated to have effect from 1 July 2023 are not referred to in the Budget at all. 

Expanding the general anti-avoidance rule (Pt IVA)

In a previously unannounced measure, the Government has included significant changes to the general anti-avoidance rule in Pt IVA of the Income Tax Assessment Act 1936. These changes will expand the scope of Pt IVA so that it can apply to:

• schemes that reduce tax paid in Australia by accessing a lower withholding tax rate on income paid to foreign residents; and
• schemes that achieve an Australian income tax benefit, even where the dominant purpose was to reduce foreign income tax.

This measure will apply to income years commencing on or after 1 July 2024, regardless of whether the scheme was entered into before that date.

Pt IVA is Australia’s general anti-avoidance rule. Broadly, it can apply to schemes carried out for the ‘dominant purpose’ of obtaining a ‘tax benefit’. Where Pt IVA applies, the Commissioner can make a determination to deny the ‘tax benefit’.

Patent box measures dropped

The Government will not proceed with patent box measures announced by the Former Government in the 2021–22 and 2022–23 March Budgets. Briefly, these changes were as follows:

• 2021-22 Budget – these measures included the introduction of concessional tax treatment for eligible corporate income associated with ‘patent box income’ from new patents in the medical and biotechnology sectors (see our Alert here). Such income was to be taxed at a concessional rate of 17%, with effect for income years starting on or after 1 July 2022.
• March 2022 Budget (here) – these measures included extensions of the patent box income measures to provide the same concessional tax treatment for corporate taxpayers in relation to patents linked to certain agricultural and veterinary chemical products and technologies which have the potential to lower emissions.

Other announcements / non-announcements

Pillar 2 and PRTT

See the International and Energy & Resources sections for details of the announcements in relation to the Pillar 2 BEPS measures and the PRRT changes.

Equity funded special dividend rules

The Budget includes confirmation that the start date for the equity funded special dividend rules first announced in the 2016–17 Mid-Year Economic and Fiscal Outlook will be extended from 19 December 2016 to 15 September 2022. This is not a new announcement. The Bill introducing these measures was introduced to Parliament on 16 February 2023 (see our update here). The Bill has been referred to the Senate Economics Legislation Committee, which is due to provide its report on 26 May 2023.

Thin capitalisation and intangibles measures not mentioned

Interestingly, two very significant recently announced measures in relation capitalisation and intangibles are not referred to in the Budget. These changes are slated to have effect from 1 July 2023, but the outcome of the consultation processes is yet to be announced. The changes are:

• In March 2023, Treasury released for consultation exposure draft legislation to introduce dramatic changes to Australia’s capitalisation regime (see our update here). These changes are slated to have effect from 1 July 2023, but the outcome of the consultation process is yet to be announced.
• Also in March 2023, Treasury released for consultation exposure draft legislation to introduce a new regime for the denial of deductions for offshore payments in respect of intangibles (see our Alert here).

Amendment to the Electric Car Discount

The Government will sunset the eligibility of plug-in hybrid electric cars from the fringe benefits tax exemption for eligible electric cars. This change will apply from 1 April 2025. Arrangements involving plug-in hybrid electric cars entered into between 1 July 2022 and 31 March 2025 remain eligible for the Electric Car Discount.