Recent Budgets have seen the Government attempt to perform a delicate balancing act between spending on essential goods and services and transfer payments while seeking to rein in inflation, and this latest Budget is no exception. In walking this inflation tightrope, the Government’s challenges have been further compounded by a weakening economy as Australian households, confronted with higher interest rates and rising costs of living, curb their spending. The Government has also pointed to the risks posed to the Australian economy with softening growth in China translating to weaker commodity prices, and ongoing geopolitical tensions with the potential to deliver shocks to the global economy.

Against this backdrop, the Budget is nevertheless expected to deliver a $9.3 billion surplus for 2023-2024 following on from a surplus of $22 billion last year. The surplus, the first consecutive one since 2007-2008, is no doubt welcomed by the Government to fund some of its spending measures. In particular, the ‘A Future Made in Australia’ plan is intended to invest in targeted industries with a view to making Australia an indispensable part of the global net zero economy. The Government has flagged that the spending in this Budget is projected to result in deficits over the next two years which will be larger compared to those initially forecasted in its December economic update.

Despite the spending measures contained in the Budget, Treasurer Jim Chalmers has optimistically predicted that the Budget will drive a reduction in inflation to under 3% by the end of 2024 through measures such as energy relief payments and rent assistance.

With the Government’s focus firmly on these challenges, no substantive reform of Australia’s tax system was expected even though the last comprehensive review was undertaken more than 15 years ago. It is not clear why the Government has again ignored the advocacy of economists, business leaders and academics alike of the need for genuine tax reform which would also present a possible solution to the cost-of-living crisis faced by many Australians, and the growing wealth divide that is becoming an increasingly disruptive societal issue. One must also question how long any incumbent Government can ‘kick the can down the road’ on the issue of tax reform, particularly given the imbalance in Australia compared to other OECD countries with its reliance on direct rather than indirect taxes, and in particular on salary and wages as a critical source of revenue.

However, the Budget did see the Government announce a range of targeted tax incentives in line with its attempts to counter slowing economic growth and to encourage private investment in specific industries as part of its ‘A Future Made in Australia’ plan. The Government also highlighted its revamped personal tax cuts, tailored to deliver greater relief to low and middle income earning Australians.

Only time will tell whether the Government has struck the right balance between spending and inflation and whether its personal tax cuts, targeted cost-of-living relief measures, and plan to invest in particular industries will, in the Treasurer’s own words, ‘forge a new economy and a new generation of prosperity’ in Australia. 

A centrepiece of the Budget was the Government’s plan for ‘A Future Made in Australia’. The Budget flagged an investment of $22.7 billion over the next decade to implement this plan which is about maximising the economic and industrial benefits of the move to net zero and securing Australia’s place in a changing global economic and strategic landscape. 

Put simply, the Government believes that new opportunities in clean energy industries are emerging and they will play a substantial role in shaping the global economy and the intention is to capitalise on Australia’s natural resources and skilled workforce to ensure that it becomes an indispensable part of this net zero global economy.

The plan will involve the enactment of the A Future Made in Australia Act which will establish a National Interest Framework to identify priority industries for investment. These industries will be in two streams:

• the net zero transformation stream, consisting of industries that can make a significant contribution to achieving net zero and in which Australia has the means to build an enduring competitive advantage; and
• the economic security and resilience stream, which will comprise sectors that are critical to Australia’s resilience and which are vulnerable to supply disruptions.

At the moment, five industries have been identified by the government as falling within the National Interest Framework – renewable hydrogen, critical minerals processing, green metals, low carbon liquid fuels, and clean energy manufacturing (including solar and battery supply chains).

It’s not clear on what basis these industries have been selected by the Government as priority industries. In fact, some commentators and academics have raised concerns with this interventionist approach querying whether the Government has adequately explained the strategic or security reasons for investment in, say, quantum computing or the manufacture of solar panels. Australia’s own Productivity Commissioner is also not convinced and made the following point in the lead up to the Budget:

“We need some kind of process for independent assessment otherwise we risk sort of a giant pork-barrelling scheme or lobbying dictating where these big pots of government money are going to go."

Perhaps these concerns will be addressed when further detail on the National Interest Framework becomes available as the Government has stated that this framework will impose rigour on the Government’s decision making on significant public investments, particularly those used to incentivise private investment at scale. The Government has also indicated it will regularly review the list of priority industries against that framework.

Some of the key elements of the Government’s plan are summarised below.

Attracting investment in key industries

The Government recognises that private sector investment will be critical to its plan. In this regard, the Government proposes to reform its investment settings and regulatory processes to attract the investment Australia needs. For example, a new front door will provide a single point of contact for investors and companies with major investment proposals, will support accelerated and coordinated approval decisions, and will connect investors with the government’s specialist investment vehicles.

Making Australia a renewable energy superpower

Another element of the Government’s plan is to make Australia a renewable energy superpower which, amongst other things, will involve the Government investing $19.7 billion over 10 years from 2024-2025 to accelerate investment in the priority industries identified above. This will include:

• $3.2 billion through the Australian Renewable Energy Agency to support the commercialisation of technologies critical to net zero; and
• $8.0 billion over 10 years from 2024-2025 to support the production of renewable hydrogen including a Hydrogen Production Tax Incentive which will provide a $2 incentive per kilogram of renewable hydrogen produced for up to 10 years per project, between 2027-2028 and 2039-2040 for projects that reach final investment decisions by 2030. 

By providing a tax incentive for renewable hydrogen producers, the Government is aiming to make renewable hydrogen more competitive with conventional energy sources. This measure is anticipated to unlock significant private sector investment, driving innovation and large-scale production of renewable hydrogen, thereby contributing to Australia's commitment to achieving net zero emissions by 2050. The initiative is also expected to strengthen Australia's position as a global leader in hydrogen production and export.

This investment aims to drive significant private sector engagement and innovation, bolstering Australia's industrial capabilities and global competitiveness in clean energy technologies. The proposed approach will integrate various aspects of the clean energy sector, ensuring that Australia not only meets its domestic energy needs but also becomes a major exporter of renewable energy and related technologies. 

Value-adding to Australia’s resources and strengthening economic security

This element of the plan involves boosting economic resilience and security including by shoring up and diversifying supply chains. It does this by value-adding to Australia’s resources, investing in critical minerals projects, supporting clean energy manufacturing and advancing trade initiatives. One measure proposed here is a Critical Minerals Production Tax Incentive, which will provide a production incentive valued at 10% of relevant processing and refining costs for Australia’s 31 critical minerals. This incentive will be applicable for up to 10 years per project, for production between 2027-2028 and 2039-2040 by projects that reach final investment decisions by 2030.

Investing in innovation, science and digital capabilities

The Government considers that modern science, innovation and investments in technology will be critical to maximising the opportunities of a changing global economic and strategic landscape, including the net zero transformation. To that end, the Government will invest $1.7 billion over 10 years from 2024-2025 including on mapping Australia’s endowments of critical minerals and national groundwater systems and to support the construction and operation of quantum computing capabilities.

Current landscape

When a foreign resident disposes of shares in a company (or an interest in another type of entity – such as units in a trust), they will generally only be required to pay Australian capital gains tax (CGT) if the shares are classified as an ‘indirect Australian real property interest’ (IARPI). 

Shares will be an IARPI if two tests are satisfied:

1. the foreign resident must hold an interest of 10% or more in the entity being sold. This must be the case either at the time the interest is sold or throughout a 12-month period within the last 24 months; and
2. the entity the foreign resident is selling must satisfy ‘the principal asset test’. The principal asset test will be satisfied if (broadly) the total asset value of the entity being sold is principally (i.e. more than 50%) referrable to Australian real property assets, interests in Australian ‘land rich’ entities, specified Australian mining rights and options or rights to acquire such assets. This is currently tested at the time of disposal (i.e. the valuation work is conducted at a particular point-in-time). 

As a means of preventing foreign residents from escaping Australian taxation, since 1 July 2016 Australia has also generally required purchasers of IARPIs (among other assets) to withhold and remit 12.5% of the purchase price to the ATO if the vendor is a foreign resident. 

What’s changing? 

With effect from 1 July 2025, the Government has announced that it will be strengthening the foreign resident CGT regime. Specifically, amendments will:

• clarify and broaden the types of assets in respect of which foreign residents are subject to CGT;
• amend the above mentioned ‘point-in-time’ principal asset test to a 365-day testing period; and
• require foreign residents disposing of shares and other membership interests exceeding $20 million in value to notify the ATO, prior to the transaction being executed.

While there is limited detail on the changes, the proposed measures raise the following questions:

1. Under the new 365-day testing period for the principal asset test, will this test be passed if an entity’s ‘Australian land’ assets exceed 50% of total asset values at any time in the last 12-months, or will an averaging exercise be required over a 12-month period? Invariably, this measure will be expected to greatly increase compliance costs. 
2. Will these measures also expand the range of assets that attract withholding obligations for taxpayers purchasing assets from foreign residents? One can only speculate, but it may be that purchasers of all shares and other interests exceeding $20 million in value will, from 1 July 2025, attract withholding unless the vendor can demonstrate (by declaration or otherwise) (1) that they are not a foreign resident, or (2) that they have provided an appropriate notice to the ATO. 

Only time will tell, but these measures certainly stand to increase compliance (and valuation) costs and may give rise to delays (or additional hurdles) for transactions involving assets that exceed $20 million in value.  

The Government will consult on the implementation details of the measures.

A number of measures have been introduced to support small business. These include:

The instant asset write-off measure allows eligible businesses to immediately deduct the cost of depreciating assets.

In the 2023-2024 Budget, the Government announced it would increase the instant asset write-off for small businesses (i.e. those with an aggregated annual turnover of less than $10 million) from $1,000 to $20,000 from 1 July 2023 until 30 June 2024. This measure is now extended by 12 months until 30 June 2025, meaning that eligible businesses will be able to deduct the full cost of eligible assets costing less than $20,000 that are first used or installed ready for use by 30 June 2025. The $20,000 threshold applies on a per asset basis so small businesses can instantly write off multiple assets.

Small businesses can continue to place assets valued at $20,000 or more (which cannot be immediately deducted) into a small business simplified depreciation pool, meaning that these assets can be depreciated at 15 per cent in the first income year and 30 per cent each income year thereafter.

The provisions that prevent small businesses from re-entering the simplified depreciation regime for five years if they opt-out will continue to be suspended until 30 June 2025.

To support small businesses, the Government will provide $41.7 million of funding over four years from 2024-2025, including: 

• $25.3 million over four years from 2024-2025 to support the Payment Times Reporting Regulator, including increased resourcing for the Regulator and upgrading the Regulator’s ICT infrastructure;
• $10.8 million over two years from 2024-2025 to extend the Small Business Debt Helpline and the NewAccess for Small Business Owners program to continue to provide financial counselling and mental health support for small business owners; 
• $3.0 million over two years from 2024-2025 to implement the Government’s response to the Review of the Franchising Code of Conduct; and
• $2.6 million over four years from 2024-2025 (and $0.7 million per year ongoing) for the Australian Small Business and Family Enterprise Ombudsman to support unrepresented small businesses to navigate business-to-business disputes through alternative dispute resolution.

Various measures were introduced with the view of strengthening tax compliance in Australia, a common theme in recent Budgets.

Following the 2023-2024 Budget, the Government will extend the ATO Personal Income Tax Compliance Program for one year from 1 July 2027. 

This extension enables the ATO to continue to deliver proactive, preventative and corrective activities in key areas of non-compliance such as:

• overclaiming deductions;
• incorrect reporting of income; and 
• inappropriate tax agent influence.  

This measure is expected to increase tax receipts by $180.3 million and increase payments by $44.3 million over the five years from 2023-2024. 

• upgrading information and communication technologies that will equip the ATO to identify and block suspicious activity in real time;
• formation of a new compliance taskforce to recover lost revenue and intervene when attempts to obtain fraudulent refunds are made;
• improvement of the ATO’s management and governance of its counter-fraud activities, including how the ATO assists individuals harmed by fraud. 

Additionally, the Government will also extend the time the ATO has to notify a taxpayer if it intends to retain a business activity statement (BAS) refund for further investigation. This will increase the ATO’s mandatory notification period for BAS refund retention from 14 days to 30 days to align with time limits for non-BAS refunds. The extended period is intended to strengthen the ATO’s ability to detect and combat fraud, particularly during peak fraud events. 

However, legitimate refunds will be largely unaffected. Any legitimate refunds retained for over 14 days would result in the ATO paying interest to the taxpayer, as is currently the case. The updates to the BAS processing times will be published online. 

These changes will take effect from the start of the first financial year after Royal Assent of the enabling legislation. 

This measure is estimated to increase receipts by $302.2 million and increase payments by $187.4 million over the five years from 2023-2024.

The Government will extend the ATO Shadow Economy Compliance Program for two years from 1 July 2026. The Shadow Economy Compliance Program is targeted at dishonest and criminal activities that operate outside the tax and regulatory systems. 

The extension of this Compliance Program enables the ATO to continue to work towards reducing shadow economy activity, to protect the revenue funding for essential community services such as health care, disaster response, education, and transport and infrastructure. 

This measure is estimated to increase receipts by $1.9 billion and increase payments by $610.2 million over the five years from 2023-2024. This includes an increase in GST payments to states and territories of $429.6 million. 

The Government will extend the ATO Tax Avoidance Taskforce for two years from 1 July 2026. The Taskforce aims to prevent, detect and address tax avoidance to ensure the largest and wealthiest taxpayers pay the right amount of tax in Australia. 

The extension of the Taskforce ensures that the ATO is sufficiently resourced to pursue key tax avoidance risks, with a focus on multinationals, large public and private businesses and high-wealth individuals. 

This measure is estimated to increase receipts by $2.4 billion and increase payments by $1.2 billion over the five years from 2023-2024. 

In line with legislation that was enacted earlier this year, the Budget contained details of income tax cuts and increases to the Medicare levy low-income threshold:

From 1 July 2024, the highly anticipated Stage 3 personal income tax rate cuts will kick in for 13.6 million Australian taxpayers, with the measure geared to benefit low and middle income earners the most. The rates and thresholds for Australian residents are:

Bold items show changes within the table.

From the 2023-2024 income year, the Medicare levy low-income threshold will be increased, in line with movements in the Consumer Price Index (CPI), for singles, families, and seniors and pensioners, ensuring that low-income individuals continue to be exempt from paying the Medicare levy or pay a reduced levy rate (that is, the amount paid in addition to the tax paid on taxable income). For singles, this means that those who earn equal to or less than $26,000 will be exempt from the Medicare levy from 1 July 2023.

The Government also announced a handful of amendments to existing measures. Relevantly:

In the 2023-2024 Federal Budget, the Government proposed to expand the scope of the general anti-avoidance rule contained in Part IVA of the Income Tax Assessment Act 1936 (Cth) such that it applies 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.

Exposure draft legislation has not yet been released and the measure is not yet law. However, the Government will amend the start date from 1 July 2024 to income years commencing on or after the day the amending legislation receives Royal Assent and the amendments will apply retrospectively (i.e. the legislation will apply regardless of whether the scheme was entered into before that date). 

In the 2022-2023 October Budget, the Government announced an anti-avoidance rule targeted at significant global entities, which would prevent them from claiming tax deductions for payments made directly or indirectly in relation to intangibles held in low-tax or no-tax jurisdictions.

This measure will be discontinued, as the integrity issues will now be addressed through Pillar Two reforms (Global Minimum Tax and Domestic Minimum Tax measures). Exposure draft legislation on Pillar Two measures was released for consultation on 21 March 2024.

New rules will apply from 1 July 2026 penalising significant global entities (taxpayers part of a group with more than $1 billion in annual global turnover) that are found to have mischaracterised or undervalued royalty payments, to which royalty withholding tax would otherwise apply. This is a topical matter, following the ATO’s Taxpayer Alert TA 2018/2 and recent litigation (including PepsiCo Inc v. Commissioner of Taxation [2023] FCA 1490, which was found in favour of the Commissioner of Taxation (Commissioner)).

This measure reiterates increased scrutiny in Australia on the taxation of payments relating to intangible assets owned offshore. 

Global groups with intangible property (including software, trademarks and brand names) used in Australia should review and consider restructuring existing arrangements as soon as possible (and in any event, before 1 July 2026) to avoid potentially significant penalties.

The Commissioner will be granted a discretion to not use a tax refund of an individual, small business or not-for-profit to offset their old tax debt, where the old tax debt was placed on hold prior to 1 January 2017. This simply maintains the Commissioner’s existing administrative approach.

Following from our previous article ‘Thin capitalisation – the final round?’, the Treasury Laws Amendment (Making Multinationals Pay Their Fair Share – Integrity and Transparency) Bill 2023 received Royal Assent on 8 April 2024. The Bill contained a major overhaul to Australia’s thin capitalisation regime, the key change being the replacement of the calculation of the safe harbour debt amount from 60% of the value of Australian assets (or a debt-to-equity ratio of 1.5:1) to a cap on annual interest deductions at 30% of EBITDA (which is based on the concept of ‘tax EBITDA’), with effect for income years commencing on or after 1 July 2023. 

In line with the recommendation in the Senate Economics Legislation Committee’s report to support the expansion of the plantation forestry sector, Australian plantation forestry entities will now be exempt from the new earnings-based rules, and can continue to apply the former thin capitalisation provisions. We note that this change is currently law.

A number of announcements were made in relation to cyber, privacy, digitalisation, technology and climate change matters. In particular:

The Government made several cyber, privacy, and online safety funding announcements, notably, it committed to spending of:

• $4.2 million over four years from 2024-2025 (and $0.9 million per year ongoing) to establish a Technology Foreign Interference Taskforce, led by the Department of Home Affairs, to work with Australia’s technology sector to protect sensitive and proprietary information from espionage, sabotage, and foreign interference;
• $7.9 million over two years from 2024-2025 to support online safety including:
  • $6.5 million in 2024-2025 to develop a pilot of age assurance technologies to protect children from harmful online content; and
  • $1.4 million over two years from 2024-2025 for the Office of the eSafety Commissioner to support legal and compliance functions under the Online Safety Act 2021 (see our article on online safety here); and
• $67.5 million over four years from 2024-2025 (and $8.6 million per year ongoing) to continue to combat scams and online fraud through the introduction of mandatory industry codes to be established under a Scams Code Framework and increased use of the secure eInvoicing network. The mandatory industry codes will initially target telcos, banks and digital platforms relating to social media, paid search engine advertising and direct messaging. This measure builds on the 2023-2024 Budget measure to fight scams. years from 2024-2025 (and $8.6 million per year ongoing) to continue to combat scams and online fraud through the introduction of mandatory industry codes to be established under a Scams Code Framework and increased use of the secure eInvoicing network. The mandatory industry codes will initially target telcos, banks and digital platforms relating to social media, paid search engine advertising and direct messaging. This measure builds on the 2023-2024 Budget measure to fight scams.

The Government announced a number of ongoing and new funding measures for digitisation initiatives and to support new strategies and data, technology and innovation capabilities, including the following initiatives with proposed funding over $100 million:

• $288.1 million over four years from 2024-2025 to support the initial delivery of the Digital ID system and support more Australians to realise the economic, security and privacy benefits of Digital ID. The Digital ID Bill 2024, which puts in place the legislative framework to create the Digital ID system in Australia, was passed by the Senate in March 2024 and was introduced to the House of Representatives on the same day as the release of the Federal Budget on 14 May 2024; 
• $448.7 million over 11 years from 2023–2024 (and an average of $43.2 million per year ongoing from 2034-2035) to establish Australia’s partnership with the United States on the Landsat satellite earth observation program (Landsat Next) to provide access to critical data to monitor the earth’s climate, agriculture, and natural disasters. See our coverage of Low Earth Orbit innovation and update on the Aus-US Technology Safeguards Agreement impacting the Australian space industry;
• $466.4 million into PsiQuantum and the Queensland Government to support construction and operation of quantum computing capabilities (building the world's first commercial-scale quantum computer) and associated investment in industry and research development in Brisbane; and
• $580.3 million over four years from 2024-2025 (and $139.6 million per year ongoing) to sustain the myGov platform and ensure the continued development of its capability, including continuing an independent advisory board to provide guidance and advice to Government on potential myGov enhancements until 2027-2028. This funding commitment follows through on recommendations for long-term myGov funding, where last year’s Budget only committed to sustaining the myGov platform for an additional year.

In addition to various initiatives under the ‘A Future Made in Australia’ plan to secure Australia’s place in the global net zero economy as summarised earlier, the Budget contained a range of other announcements on measures designed to tackle climate change. These include the following (where the proposed funding is over $100 million):

• $1.4 billion directed towards domestic efforts to reduce greenhouse gas emissions including the introduction of a New Vehicle Efficiency Standard, which will be significant for car manufacturers and will set new standards for vehicles that will have flow-on effects for consumers and vehicle and fuel prices, and the establishment of the Carbon Abatement Integrity Committee to oversee the new proponent led method development process and strengthen integrity, provide enhanced transparency measures, and support First Nations participation including in supporting consent processes for projects on Native Title land; and
• in a bid to fulfil Australia’s international commitments under the Paris Agreement, significant funding is being committed to scaling up international and regional cooperation on climate change. This extends to significant new contributions to international climate financing funds, including $100.0 million for the Pacific Resilience Facility to fund small scale climate and disaster resilience projects in the Pacific and $50.0 million to the United Nations Framework Convention on Climate Change Green Climate Fund to assist developing countries in adaptation and mitigation practices to counter climate change.

Additionally, a variety of other spending measures have been introduced, with a key focus on alleviating cost-of-living pressures. Measures introduced include: