Author: Vic Stevens

The Treasurer released the Government’s Mid-Year Economic and Fiscal Outlook (MYEFO) on 13 December 2023.

The MYEFO updates the economic and fiscal outlook from the 2023–24 Federal Budget. It takes into account the decisions made since the release of the Federal Budget, and therefore revises the Budget aggregates.

The MYEFO also contains a number of tax, superannuation and related policy announcements, including proposals to:

• increase the foreign resident capital gains withholding tax rate from 12.5 per cent to 15 per cent and reduce the withholding threshold from $750,000 to $0 from 1 January 2025
• deny deductions for GIC and SIC from 1 July 2025
• triple foreign investment fees for foreign investors who apply to purchase established dwellings
• double vacancy fees for foreign investors who have purchased residential dwellings since 9 May 2017.

Budget aggregates and major economic parameters

The MYEFO states that:

• The Australian economy has slowed in expected ways in the face of high but moderating inflation, higher interest rates and global economic uncertainty.
• Inflation is still too high, but is continuing to moderate — the headline rate is projected to return to target within 2024–25 and forecast to be 2³/₄ per cent in the June quarter 2025.
• Real wages are beginning to grow — after two consecutive quarters of positive real wage growth, annual real wage growth is expected to return in early 2024.
• The labour market remains strong — the unemployment rate is low and the participation rate remains at a record high.
• The fiscal position has improved with lower deficits and gross debt now forecast across the forward estimates compared to the 2023–24 Budget.
• A deficit of $1.1 billion is forecast in 2023–24.
• Tax receipts have been revised up by $64.4 billion over four years to 2026–27, primarily reflecting near-term strength in commodity prices, higher non-mining corporate profits and recent strong employment growth.
• The underlying cash balance has improved over the four years to 2026–27 by a cumulative $39.5 billion.
• Gross debt as a share of GDP is expected to peak 1.1 percentage points lower than forecast at the 2023–24 Federal Budget at 35.4 per cent of GDP in 2027–28.
• The economy is expected to expand by 1³/₄ per cent in 2023–24 before regaining momentum in 2024–25.

Real GDP and nominal GDP are percentage change on preceding year. The consumer price index, employment, and the wage price index are through the year growth to the June quarter. The unemployment rate is the rate for the June quarter.

Key tax measures announced

Key tax policy decisions taken since the 2023–24 Federal Budget include the following:

Increasing the integrity of the foreign resident capital gains withholding regime

The Government will increase the foreign resident capital gains withholding tax rate from 12.5 per cent to 15 per cent and reduce the withholding threshold from $750,000 to $0.

The changes will apply to real property disposals with contracts entered into from 1 January 2025.

Denying deductions for ATO interest charges

The Government will deny deductions for ATO interest charges, specifically the GIC and SIC, incurred in income years starting on or after 1 July 2025.

Global Infrastructure Hub — extension of income tax exemption

The Government will extend the existing income tax exemption of the G20 organisation, the Global Infrastructure Hub (the Hub), for an additional year, from 30 June 2023 to 30 June 2024.

The Hub is a company limited by guarantee governed by Australian law, and is funded by contributions provided by G20 members. The current policy approach is to not tax contributions provided to the Hub by other G20 economies.

International Tax — signing of the Australia-Portugal Tax Treaty

The Government signed the Convention between Australia and the Portuguese Republic for the Elimination of Double Taxation with respect to Taxes on Income and the Prevention of Tax Evasion and Avoidance on 30 November 2023.

Luxury Car Tax — modernising the luxury car tax (LCT) for fuel-efficient vehicles

The Government will modernise the LCT by tightening the definition of a fuel-efficient vehicle and updating the indexation rate for the LCT value threshold for all-other luxury vehicles, from 1 July 2025.

This measure will tighten the definition of a fuel-efficient vehicle for the LCT by reducing the maximum fuel consumption from 7 litres per 100 km to 3.5 litres per 100 km and will update the indexation rate of the LCT value threshold for all-other luxury vehicles from headline CPI to the motor vehicle purchase sub-group of the CPI, aligning it with the indexation of the LCT value threshold for fuel-efficient vehicles.

Start date deferrals

The Government has deferred the start date of the following measures:

• The 2022–23 October Budget measure Multinational Tax Integrity Package — improved tax transparency related to public country by country reporting from 1 July 2023 to 1 July 2024, with further consultation on specific parameters, including the appropriate level of disaggregated reporting.
• The 2016–17 MYEFO measure Tax integrity — franked distributions funded by capital raisings from 15 September 2022 to the date of Royal Assent (27 November 2023).
• The 2022–23 October Budget measure Improving the integrity of off-market share buy-backs as it relates to the taxation of selective reduction of capital from 25 October 2022 to 18 November 2022 (Royal Assent received on 27 November 2023).

Key superannuation measures announced

Key superannuation policy decisions taken since the 2023–24 Federal Budget include the following:

Adviser fees from superannuation

The Government will provide a clear legal basis for superannuation trustees to pay advice fees agreed between a member and their financial adviser from the member’s superannuation account and prescribe that such fees are a tax-deductible expense of the fund retrospectively from 2019–20.

Reforming the treatment of the transfer balance cap for successor fund transfers

The Government will amend legislation to ensure the superannuation transfer balance cap of individuals with a capped defined benefit income stream is not adversely impacted in the event of a merger or successor fund transfer between superannuation funds.

Under current legislation, a member’s transfer balance cap may be impacted due to the original income stream being treated as ceasing and a new one beginning. This means a new valuation of the capped defined benefit income stream is required which can result in a higher valuation for the transfer balance cap and lead to adverse outcomes for some members.

This measure will apply retrospectively from 1 July 2017.

Other key measures announced

Other key policy decisions which have been taken since the 2023–24 Federal Budget include the following:

Commonwealth penalty unit — increase in value

The Government will increase the amount of the Commonwealth penalty unit by 5.4 per cent from $313 to $330, commencing four weeks after passage of legislation.

The increase will apply to offences committed after the relevant legislative amendment comes into force.

Administrative Appeals Tribunal funding

The Government will provide $21.8 million over two years from 2023–24 for the Administrative Appeals Tribunal to support transition to the new Administrative Review Tribunal.

Ceasing the Modernising Business Registers Program

The Government will transfer responsibility for business registers from the ATO to the ASIC following the decision to cease the Modernising Business Registers program.

Responding to the PricewaterhouseCoopers matter

The Government will provide $22.2 million over four years from 2023–24 (and $1.1 million per year ongoing) to the Treasury, the Department of Finance, the ATO and the Attorney-General’s Department to strengthen the integrity of the tax system, increase the powers of regulators and strengthen regulatory arrangements to ensure they are fit-for-purpose.

Foreign investment — lower fees for Build to Rent projects

The Government will apply the lower commercial foreign investment application fee to foreign investments in Build to Rent projects where investors are proposing to acquire residential land or agricultural land.

The difference in fees will depend on the consideration paid by the investor and the kind of land involved. However, once implemented, investors will be able to make investments of up to $50 million for Build to Rent projects on residential land for a fee of $14,100 (subject to indexation) on the commercial fee schedule. Under current settings that application fee could be as much as $1,119,100.

Foreign investment — raising fees for established dwellings

The Government will, from the day after Royal Assent to the enabling legislation:

• triple foreign investment fees for foreign investors who apply to purchase established dwellings from the day after the date of Royal Assent of the enabling legislation
• double vacancy fees for foreign investors who have purchased residential dwellings (new and established) since 9 May 2017.

The Government will also provide $3.5 million to enhance the ATO’s compliance regime to ensure foreign investor compliance.

Fair Work Commission funding — ‘closing loopholes’ in relation to employees and contractors

The Government will provide $94.6 million over four years from 2023–24 (and $22.7 million per year ongoing) to close loopholes to safeguard workers’ wages and conditions and to provide clarity. Proposed measures include:

• a new jurisdiction in the Fair Work Commission (FWC) to make orders setting minimum standards and provide deactivation protections for employee-like workers engaged in digital platform work
• a new jurisdiction in the FWC to handle disputes between independent contractors and principals about unfair contractual terms
• legislating a fair, objective test to determine when an employee is classified as a casual employee.

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Last week the ATO issued TR 2023/4 (Ruling) and PCG 2023/2 (Guideline), which respectively set out the Commissioner’s view on when an individual is an ‘employee’ of an entity for PAYG withholding purposes and compliance approach for businesses that engage workers and classify them as employee or independent contractors.

The Ruling replaces TR 2005/16, which was withdrawn with effect from 15 December 2022 when the draft of the Ruling was issued. The Ruling takes into account developments in case law — most notably the High Court decisions in Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2.

Application of the guidance

The Ruling only considers the ordinary meaning of an ‘employee’.

The Ruling is a binding ruling only for the purposes of the PAYG withholding rules in s. 12-35 of Schedule 1 to the TAA.

The Ruling applies both before and after its date of issue (6 December 2023).

To the extent that the Ruling aids in understanding the ordinary meaning of an ‘employee’ for the purposes of the superannuation guarantee (SG) rules in s. 12(1) of the SGA Act, it is not binding on the Commissioner. However, if the Commissioner later takes the view that s. 12(1) applies less favourably to the taxpayer than the Ruling indicates, the fact that the taxpayer acted in accordance with the Ruling would be a relevant factor in your favour in the Commissioner’s exercise of any discretion in regard to the imposition of SG penalties. Note that the Commissioner’s view of the extended definition of ‘employee’ for SG purposes is outlined in SGR 2005/1.

The Guideline applies more broadly than the Ruling — it is relevant for a variety of tax and superannuation obligations. That is, the Commissioner’s compliance approach set out in the Guideline applies for both PAYG withholding and SG — including the extended definition of employee for SG purposes (as well as other laws administered by the Commissioner including Single Touch Payroll reporting, FBT etc).

The Guideline applies in respect of the application of the Commissioner’s resources from its date of issue (6 December 2023).

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What does the Ruling say?

Whether a person is an employee — under the ordinary meaning of the term — of an entity is a question of fact to be determined by reference to an objective assessment of the totality of the relationship between the parties, having regard only to the legal rights and obligations which constitute that relationship.

The task is to construe and characterise the contract at the time of entry into it. Recourse may be had to events, circumstances and things external to the contract which are objective, known to the parties at the time of contracting and assist in identifying the purpose or object of the contract.

It is the legal rights and obligations in the contract alone that are relevant, where the validity of that contract has not been challenged as a sham, nor have the terms of the contract otherwise been varied, waived, discharged or the subject of an estoppel or any equitable, legal or statutory right or remedy.

A contract will be a sham if it is not a legitimate record of the intended legal relationship between two parties, but instead is ‘a mere piece of machinery’ serving some other purpose (often to act as a façade and deliberately obscure the true legal relationship for third parties).

Important

Evidence of how the contract was performed, including subsequent conduct and work practices, cannot be considered for the purpose of determining the nature of the legal relationship between the parties.

Notwithstanding the above, evidence of how a contract was actually performed may be considered to establish the contractual terms or to challenge the validity of a written contract.

A useful approach for establishing whether or not a worker is an employee of an engaging entity when analysing and weighing up each of the indicia of employment identified in the case law is to consider whether the worker is working in the business of the engaging entity, based on the construction of the terms of the contract. However this should not be approached as a ‘checklist’ exercise. Further, The label which parties choose to describe their relationship is not relevant to the characterisation of the relationship.

The case law indicia noted in the Explanation to the Ruling are:

• presenting as an emanation of the business
• control and the right to control
• the ability to delegate, subcontract or assign work
• whether the substance of a contract is to achieve a specified result
• provision of tools and equipment
• risk
• generation of goodwill.

Query — What if the worker has an ABN?

The fact that the worker is conducting their own business, including having an ABN, is not determinative — they may separately be an employee in the business of another entity.

The ATO’s compliance approach — the Guideline

The Guideline will be most relevant for situations where a worker’s correct classification is less obvious. If the arrangement is clearly one of employment or independent contracting, the parties may choose not to rely on the Guideline but self-assess based on their confidence that the correct classification has been applied.

The Guideline outlines the ATO’s risk framework for worker classification arrangements, based on the actions taken by the parties when entering into the arrangement. Parties can self-assess against this risk framework to understand the likelihood of the ATO applying compliance resources to review their arrangement.

A review may be the result of proactive case selection based on particular risk factors and information known to the ATO, or the result of an unpaid superannuation query received from a worker (including where they believe they satisfy the extended definition of employee).

The risk zones

Criteria in each risk zone

An arrangement can also fall into the very low-risk category if the entity voluntarily meets employer obligations regardless of their view of the worker’s classification.

Where there has been a ‘significant deviation’ of the arrangement, the party will need to reassess their risk rating. This may include:

• ensuring that both parties understand the impact of the changes on their working arrangement and classification
• ensuring the contractual rights and obligations agreed by the parties reflect the changes in the working arrangement
• ensuring that, if the classification has changed, all parties understand the tax, superannuation and reporting consequences of the new classification, and
• ensuring that new client-specific advice (whether from the ATO, the engaging entities’ in-house counsel or an appropriately qualified third party) has been obtained to confirm the classification in light of the new circumstances.

Refer to the Guideline for six practical examples.

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The ATO has released its report for the Next 5,000 tax performance program, which looks at the tax obligations of privately owned and wealthy groups.

The Next 5,000 program began on 1 July 2019. It engages with taxpayers on a one-to-one basis, through streamlined assurance reviews. The findings in the report are based on the outcomes of 1,078 reviews covering 7,198 transactions, activities and events.

The data and findings in the report are current as at 31 August 2023.

Advisers to private groups should take heed of the common errors and tax risks raised in the report when reviewing their clients’ tax affairs – including the observation that poor governance and documentation processes is correlated to compliance errors. 

The below is a short summary of key findings. For more detail refer here.

Key observations

Key observations include that:

• A high proportion have governance processes and procedures, but most are not documented.
• Clearly documented roles and responsibilities lead to good tax governance.
• Documentation of the tax return preparation, review process and identification of material transactions helps groups to recognise tax risks and issues to avoid errors.
• Private groups that seek tax advice for material risks and issues are more likely to make correct disclosures and adopt correct tax treatments.

There is a correlation between no documented tax governance processes and procedures, and

• disclosure errors
• late lodgment
• no lodgment of accompanying schedules to the income tax return.

ATO recommendation

Documenting tax return procedures, including a tax return review process, which could also include a lodgment calendar.

Common tax issues

The common issues where the ATO was unable to obtain assurance include the following.

Business as usual — expenditure

The ATO was not able to obtain assurance in relation to tax deductions in certain circumstances due to a lack of governance processes, procedures and poor recording keeping. Certain expenditure could not be substantiated and a nexus between the expense and assessable income could not be evidenced. A high proportion of these expenses are related party transactions where the reported income derived by a related party was less than the deductions claimed by the other related party.

ATO recommendation

Having clear processes and procedures setting out record keeping requirements for related party transactions.

Intra-group transactions — loans or payments to shareholders and their associates

The ATO found a correlation between poor record keeping, lack of documented governance processes and procedures and not taking enough steps to satisfy Div 7A rules. In these reviews, the ATO identified no written loan agreements or minimum yearly repayments and a lack of appropriate record keeping.

ATO recommendation

• • review the group’s Div 7A compliance
  • create a Div 7A annual end of year checklist to ensure accurate and consistent reporting of these loans in ledger accounts, financial statements and tax returns.

Sale of significant assets

The ATO was unable to obtain assurance over a range of property disposals for the following reasons:

• Insufficient evidence supporting the valuation of capital proceeds and elements of the cost base.
• Miscalculation of cost base including amounts omitted or inclusion of amounts that do not form part of the cost base such as development costs.
• Timing of disclosure of CGT events resulting in the capital gain being reported in the wrong year.
• Mischaracterisations of the sale of property as revenue or capital.
• Incomplete documentation provided to the tax agent resulting in miscalculation of the CGT event.

ATO recommendation

Implementing processes and procedures to identify material transactions and ensure that these transactions are communicated to the tax agent where applicable.

Trust distributions

The ATO was unable to obtain assurance over trust distributions where there were concerns over beneficiary entitlement to trust distributions, such as distributions paid to the incorrect beneficiary and s. 100A.

In relation to family trusts the ATO was unable to obtain assurance in the following circumstances:

• distributions made outside of the family group
• inconsistency of documentation regarding individuals set out in the family trust deed and the interposed entity election forms.

In some cases a lack of governance processes and procedures resulted in omitted trust distributions for some beneficiaries.

Related party transactions

The ATO was unable to obtain assurance over revenue recognition relating to related party transactions. A lack of governance processes and procedures potentially resulted in poor record keeping. Some examples include:

• No documented management service agreement.
• Omitted or understated income where incomplete records were provided.
• Aggregate of related party deductions claimed by one related party exceeded income returned by the other related party.
• No formal lease agreement between related parties.
• Unable to assure related party rent as no lease agreement in place and no rental valuation conducted.

GST

From the GST integrated streamline assurance reviews undertaken to date, ATO observations include:

• Significant omissions or errors at BAS disclosure labels typically relate to export sales, input taxed supplies, related party recharges and GST-free items.
• A strong correlation between the BAS disclosure errors and a lack of or insufficient governance processes.
• Sales reported in BAS were materially higher than sales reported in income tax returns and insufficient explanations provided for the variance.
• Incorrect reporting of GST on related party transactions and charges such as management fees

Tax risks flagged to market

The most common tax risks flagged to market arising for review as part of streamlined assurance reviews include those related to:

• cross-border related party financing arrangements and transactions — PCG 2017/4
• Div 7A — unpaid present entitlements and amounts held on sub-trusts — the provision of ‘financial accommodation’ — TD 2022/11
• simplified transfer pricing record-keeping options — PCG 2017/2
• tax loss or net capital loss — record retention — TD 2007/2
• long term construction contracts — TR 2018/3

About the Next 5,000 groups

Within the Next 5,000 sub-population there are about 7,899 private groups with net wealth of over $50 million. These groups hold around $1 trillion in net assets. Most are well established, multigenerational businesses.

A typical Next 5,000 group:

The industries in which the Next 5,000 groups operate:

For more information about the Next 5,000 demographic, refer here.

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On 20 September 2023 the Government released for consultation a package of exposure draft legislation (the EDs) in relation to the tax adviser misconduct reforms initially announced on 6 August.

The four EDs can be accessed here:

• Response to PwC — reform of promoter penalty laws
• Response to PwC — whistleblower protections
• Response to PwC — Tax Practitioners Board reforms
• Response to PwC — information sharing
• Treasury fact sheet — Government response to PwC tax leaks scandal

Consultation closes on 4 October 2023.

1. Proposed reform of promoter penalty laws

Proposal to increase maximum penalties

The proposed maximum penalty is the greater of:

(i) three times the benefits received or receivable by the entity or its associates — directly or indirectly — in respect of the scheme, or

(ii) for a body corporate or significant global entity (SGE) — 10 per cent of its aggregated turnover for the most recent income year to end before the entity engaged in the relevant conduct — capped at 5 million penalty units (currently equal to $782,500,000), or

(iii) per the following table:

* Based on the current value of a penalty unit ($313 from 1 July 2023).

Key differences to current law:

• extending the body corporate maximum penalties to SGEs
• for (i) — increasing and changing twice the consideration received/receivable to three times the benefits received/receivable
• introducing new (ii) — for a body corporate/SGE with aggregated turnover over $156,500,000 (based on current penalty unit value), (ii) will provide the maximum penalty applicable
• for (iii) — the penalty for a body corporate/SGE has doubled from 25,000 penalty units, currently $7,825,000 (no change for an individual).

Proposal to expand the scope of the promoter penalty laws

An entity will be a ‘promoter’ of a tax exploitation scheme if it, or an associate, receives a benefit in respect of the scheme — currently the rules look at whether the entity or an associate receives consideration. A benefit will be more broadly defined than consideration, and includes less obvious, intangible or disguised benefits, such as increasing client base.

The meaning of a ‘tax exploitation scheme’ will be expanded to cover schemes that would breach, or would breach, the multinational anti-avoidance law or diverted profit tax laws.

The limb of the promoter penalty rules that currently covers the misrepresentation of a scheme’s conformance with a product ruling will be expanded to cover all types of rulings — private, public and oral rulings.

Proposal to increase the time limit for the ATO to bring proceedings

The time limit for the ATO to bring Federal Court proceedings on promoter penalties will be increased from four years to six years after the conduct occurred.

There is no time limit where the scheme involves tax evasion.

Proposed commencement date

The later of:

• 1 July 2024
• The first 1 January, 1 April, 1 July or 1 October after the date of Royal Assent.

2. Proposed reform of whistleblower protections laws

The tax law secrecy rules in Div 355 of Schedule 1 to the TAA provide that it is an offence for an ATO offcer to disclose ‘protected information’. There are exceptions for certain disclosures made to eligible recipients, which currently include:

• the Commissioner to assist the Commissioner with their functions or duties under the tax law
• a legal practitioner for the purposes of obtaining legal advice or representation about disclosures made to the Commissioner or an eligible recipient.

The Government proposes to include in the list of disclosures qualifying for protection a disclosure made to the Commissioner or to the Tax Practitioners Board (TPB) to assist the TPB to perform its functions or duties under the Tax Agent Services Act 2009 (TASA).

A disclosure will also qualify for protection if made to certain entities (e.g. professional associations and unions) for the purposes of obtaining assistance in relation to a disclosure, or to a medical practitioner or psychologist.

Proposed commencement date

The later of:

• 1 July 2024
• The first 1 January, 1 April, 1 July or 1 October after the day of Royal Assent.

3. Proposed TPB reforms

The final report of the independent Review of the Tax Practitioners Board was released on 27 November 2020. The ED proposes to implement three of the recommendations in the report by amending the TASA and introducing the Tax Agent Services Amendment (Register Information) Regulations 2023 (Regulations).

The Register

The proposed amendments to the Regulations to ensure:

• additional information is published on the Register, making information about the conduct of registered and formerly registered tax professionals transparent to the public
• further detail is given about the how long certain information must be kept on the Register, securing the availability of that information to the public
• greater transparency of accountable individuals who form the sufficient number of tax practitioners within a registered company or partnership.

Timeframe for investigations

The Government proposes to extend the period of time that the TPB has in which to conclude investigations into potential breaches of the TASA from six months to 24 months. The timeframe can be extended if the TPB is satisfied that for reasons beyond its control, a decision cannot be made in 24 months.

The proposed amendment also creates a new option for the TPB following the conclusion of an investigation, by allowing it not to pursue administrative sanctions or civil penalties, and instead to publish the findings of the investigation on the Register.

The TPB’s delegation powers

The amendments propose to permit delegation by the TPB and enables the decision to terminate registration due to death or surrender to be delegated widely to ensure more timely decision-making and better use of resources.

Proposed commencement date

The later of:

• 1 July 2024
• The first 1 January, 1 April, 1 July or 1 October after the day of Royal Assent.

In some cases the proposed changes will apply to investigations commenced on or after 1 July 2022.

4. Proposed information sharing reforms

It is proposed that the ATO and TPB will be able to share protected information with Treasury about misconduct arising out of suspected breaches of confidence by intermediaries engaging with the Commonwealth.

Currently, the ATO and TPB can share protected information with a professional association in relation to suspected misconduct by members where the disclosure relates to the administration of the tax law. It is proposed that the ATO and TPB will be able to share protected information with prescribed disciplinary bodies where they reasonably believe a person’s actions may constitute a breach of the body’s code of conduct or professional standards.

Further, the Treasury will be able to on-disclose protected information to the Treasurer or Finance Minister.

Proposed commencement date

In relation to disclosures of information made on or after the day after Royal Assent.

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The 2023 Intergenerational Report provides a 40-year projection of the outlook of the economy and the Government’s budget to 2062–63.

The five major forces that will shape the Australian economy over the coming decades are population ageing, expanded use of digital and data technology, climate change and the net zero transformation, rising demand for care and support services and increased geopolitical risk and fragmentation.

The economy in 40 years

It is projected that the economy will be around two and a half times larger but it will grow at a slower rate than in the past, at an average of 2.2 per cent a year. Real incomes will be around 50 per cent higher.

Population in 40 years

Australia’s population is projected to grow more slowly at an average of 1.1 per cent per year, compared to 1.4 per cent over the past 40 years. It is projected to reach 40.5 million.

The population will continue to age — the number of people aged 65 and over will more than double and the number aged 85 and over will more than triple, while the number of centenarians will increase six-fold.

Participation in 40 years

As the population continues to age, the overall participation rate is projected to decline from 66.6 per cent to 63.8 per cent.

The gender gap in participation is expected to continue to narrow.

Productivity in 40 years

Productivity growth is assumed to grow at 1.2 per cent a year, around the average of the past 20 years.

Changing industrial base over the next 40 years

The ageing population will reinforce the trend towards a services-based economy, with the care and support sector potentially doubling.

Digitalisation will change how we work, raising productivity, improving workplace safety and providing agility.

The net zero transformation will see global demand for some exports decline, while creating new markets and opportunities. Critical minerals could become key exports as the world transitions to net zero. Australia is already the world’s largest producer of lithium, supplying more than half of all global production. Global demand for lithium could be more than eight times higher in 40 years time.

Climate change will have profound impacts on the economy and society. It will affect where and how Australians choose to live and work, food and energy security and our environment.

The budget in 40 years

Long-term spending pressures

The five main spending pressures are health, aged care, the NDIS, defence and debt interest payments. They are projected to rise from around one-third to one-half of all government spending.

Total government spending is projected to rise by 3.8 percentage points of GDP, with the ageing population causing around 40 per cent of the increase.

Despite the ageing population, spending on age and service pensions is projected to fall as a share of GDP, with superannuation increasingly funding retirements.

Changing revenue base

Tax as a share of the economy is assumed to be constant over the long run.

Structural changes to the economy will put pressure on the revenue base. Reliance on the following is expected to decrease:

• revenue from fuel and tobacco excise — due to the decarbonisation of the transport industry and changing consumer preferences
• emissions-intensive commodities — due to declining global demand.

Non-tax receipts are projected to decline as a share of the economy, reflecting lower earnings from the Australian Government Future Fund as assets are anticipated to be drawn down to fund public superannuation liabilities.

The budget balance

The underlying cash balance was in surplus in 2022–23 for the first time since 2007–08, but projected to return to deficit for the remainder of the projection period, reaching 2.6 per cent of GDP in 2062–63. Gross debt as a share of GDP is projected to decline over the coming decades.

Growing spending pressures are projected to result in deficits remaining, with gross debt projected to reach 32.1 per cent of GDP by 2062–63.

The tax system over the next 40 years

Tax receipts were expected to comprise 92.5 per cent of total receipts in 2022–23 — this is projected to rise to 93.9 per cent by 2062–63.

Tax projections in the Intergenerational Report reflect the assumption that tax as a share of the economy remains constant at 24.4 per cent of GPD — this is a feature of every intergenerational report.

Structural changes in the economy will narrow the tax base

Changing consumer preferences, rapid technological advances, efforts to decarbonise and a more complex global strategic outlook are projected to directly impact the tax system.

In particular:

• tax receipts from traditional sources, such as fuel excise and tobacco excise, are expected to decline over time
• global demand for bulk commodities, and reliance on them as a source of company tax revenue, is expected to fall
• personal income tax receipts are projected to increase due to income and wages growth and population growth.

Total tax projections

After falling to a recent low of 21.8 per cent of GDP in 2019–20, the tax-to-GDP ration is now forecast to reach 23.9 per cent in 2023–24, and 24.4 per cent in 2033–34.

A significant difference between Australia and most other OECD countries is that Australia’s tax mix does not include social security contributions (similar in many respects to compulsory superannuation contributions).

Personal income tax is projected to increase from 13.5 per cent of GDP in 2033–34 to 14.3 per cent in 2062–63.

Composition of taxes

Longer-run economic trends will influence the composition of tax receipts. These include increased take up of electric vehicles and reduced smoking rates.

In the absence of policy change, the following changes over the next 40 years are projected:

• personal income tax receipts to grow from 50.5 per cent of total tax receipts to 58.4 per cent
• company tax receipts to fall from 23.5 per cent of total tax receipts to 18 per cent
• GST receipts to stay broadly level, from 13.9 per cent to 14 per cent
• other indirect taxes to decline from 8.6 per cent to 5.6 per cent.

Further info and training

Join us at the beginning of each month as we review the current tax landscape. Our monthly Online Tax Updates and Public Sessions are excellent and cost effective options to stay on top of your CPD requirements. We present these monthly online, and also offer face-to-face Public Sessions at 14 locations across Australia.

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The Albanese Government has released its plans for what it calls the ‘biggest crackdown on tax adviser misconduct in Australian history’, to address tax adviser misconduct and perceived shortcomings in regulatory frameworks in the wake of the PwC tax leaks scandal.

The Government will introduce legislation later this year.

The Government’s proposed reforms

The proposed reforms focus on three priority areas:

• Strengthening the integrity of the tax system
• Increasing the powers of the regulators
• Strengthening regulatory arrangements to ensure they are fit for purpose.

1.             Strengthening the integrity of the tax system

The Government proposes to reform elements of the promoter penalty laws.

Background

The promoter penalty laws — found in Div 290 of Schedule 1 to the TAA — provide that an entity must not engage in conduct that results in:

• that or another entity being a promoter of a tax exploitation scheme, or
• a scheme that has been promoted on the basis of conformity with a product ruling being implemented in a way that is materially different from that described in the product ruling.

Exclusions and exceptions include:

• employees or other entities that have only minor involvement
• conduct that occurred by reasonable mistake or accident
• something outside an entity’s control and the entity took reasonable precautions.

Proposal — increasing maximum penalties

To increase maximum penalties for advisers and firms who promote tax exploitation schemes from $7.8 million to over $780 million.

Current law

The ATO must apply to the Federal Court of Australia to impose a civil penalty. (The ATO may also consider various forms of corrective action.)

From 1 July 2023, a penalty unit is equal to $313 (previously $275 from 1 January to 30 June 2023).

Currently the maximum penalty is the greater of:

• twice the consideration received or receivable by the entity or its associates — directly or indirectly — in respect of the scheme, or
• per the following table

While the media release does not provide details of the proposed new penalty regime, it is clear that the number of penalty units imposed will increase 100-fold for a body corporate, which is $782,300,000 at the current penalty unit value (i.e. the ‘over $780 million’ per the media release). The announcement is silent as to how much — and whether — the maximum penalty for individuals will increase.

Proposal — expanding the scope

To expand their scope so they are easier for the ATO to apply to advisers and firms who promote tax avoidance.

Current law

An entity is a promoter of a tax exploitation scheme if:

• the entity markets the scheme or otherwise encourages the growth of the scheme or interest in it; and
• the entity or an associate of the entity receives (directly or indirectly) consideration in respect of that marketing or encouragement; and
• having regard to all relevant matters, it is reasonable to conclude that the entity has had a substantial role in respect of that marketing or encouragement.

An entity is not a promoter of a scheme merely because it provides advice about the scheme.

An employee is not taken to have had a substantial role in respect of the marketing or encouragement merely because they distributed information or material prepared by another entity.

It is currently unclear as to which elements will be amended to expand the scope of the promoter penalty regime.

Proposal — increasing time limit

To increase the time limit for the ATO to bring Federal Court proceedings on promoter penalties from four years to six years after the conduct occurred.

Current law

The Commissioner must apply to the Federal Court no later than four years after the entity last engaged in the relevant conduct. However, there is no time limit where the scheme involves tax evasion.

2.             Increasing the powers of the regulators

The below is a summary of the proposed reforms (what we know so far) compared to the current rules:

Proposal — tax secrecy laws

To remove limitations in the tax secrecy laws that were a barrier to regulators acting in response to PwC’s breach of confidence.

Current law

The tax law secrecy rules in Div 355 of Schedule 1 to the TAA provide that it is an offence for an ATO officer to disclose ‘protected information’. There are existing exceptions for certain disclosures made to a law enforcement agency, court or tribunal for the purposes of law enforcement.

Proposal — referral of ethical misconduct

To enable the ATO and Tax Practitioners Board (TPB) to refer ethical misconduct by advisers — including but not limited to confidentiality breaches — to professional associations for disciplinary action.

Current law

Where the TPB finds that a practitioner’s conduct breaches the Tax Agent Services Act 2009 (TASA), the TPB is required to notify any recognised professional association of which the practitioner is a member.

Proposal — whistleblower protection

To protect whistleblowers when they provide the TPB with evidence of tax agent misconduct.

Current law

There are existing whistleblower protection laws for eligible disclosures under Part IVD of the TAA. To qualify for protection the disclosure must be made to an eligible recipient, which includes the ATO and certain entities associated with the entity the subject of the disclosure, but does not include the TPB.

Proposal — more time for TPB investigations

To give the TPB more time — up to 24 months — to complete complex investigations.

Current law

The TPB has the power to investigate breaches of the Code of Professional Conduct (which is codified in the TASA) but it must make a decision about the outcome of an investigation within six months after the investigation commences.

Proposal — improving public register

To improve the TPB’s public register of practitioners, so that people have more transparency over agent and firm misconduct.

Current law

The register discloses any conditions of registration, period of and reasons for suspension, sanctions imposed, and date of and reason for termination. The TASA requires the TPB to maintain a register. Regulations prescribe the details disclosed.

3.             Strengthening regulatory arrangements

Treasury will be co-ordinating a whole of Government response to the PwC matter and the systemic issues raised. This work will deliver options to Government progressively over the next two years.

Consultation on the following options will begin in the coming months:

• implementing remaining recommendations from the independent review of the TPB, including strengthening the range of sanctions available to the TPB (see the final report of Treasury’s Review of the Tax Practitioners Board)
• a Treasury review of the promoter penalty laws to ensure that they address the types of promoter activity prevalent today — including schemes that are bespoke, complex, and/or operate across jurisdictional boundaries
• a Treasury review of emerging fraud and threats to clamp down on systemic abuse of our tax system perpetrated by tax agents and other bad actors
• a Treasury and Attorney‑General’s Department joint review of the use of legal professional privilege in Commonwealth investigations, with options for Government to respond to concerns that some claims of privilege are being used to obstruct or frustrate investigations
• a Treasury examination of the regulation of consulting, accounting and auditing firms to consider whether reforms are needed. This work will require collaboration with states and territories, given cross‑jurisdictional regulation of partnerships, as well as engagement with ongoing Parliamentary committee inquiries
• a Treasury review of the compulsory information gathering powers of the ATO to ensure it has the right tools to perform its role effectively and enable it to assist law enforcement agencies to investigate serious criminal offences perpetrated against the tax and superannuation systems
• a Treasury review of the secrecy provisions that apply to the ATO and TPB to consider whether there are further circumstances in which it is in the broad public interest for information obtained by these regulators to be shared with other regulatory agencies
• a Department of Finance review into the use of confidentiality arrangements across all Government agencies to ensure they are fit for purpose, legally binding and enforceable. The review will also identify opportunities to strengthen the management of conflicts of interest in contracts
• a Department of Finance review to explore options to increase the transparency and visibility of where Commonwealth contracts have been terminated for material breach.

Further info and training

Join us at the beginning of each month as we review the current tax landscape. Our monthly Online Tax Updates and Public Sessions are excellent and cost effective options to stay on top of your CPD requirements. We present these monthly online, and also offer face-to-face Public Sessions at 14 locations across Australia.

Join us online
Upcoming webinars >

Register for a workshop
Upcoming workshops by state >

Outsource your L&D

We can also present tax updates or specialty topics at your firm or through a private online session, with content tailored to your client base. Call our friendly staff on 03 9660 3500 to have a chat about your specific needs and how we can assist.

Learn more about in-house training >
Email us to have a chat >