Finalisation of Measures for Small Businesses

In our October 2023 update, we addressed the Government’s proposal of a modified version of the Instant Asset Write Off and the Small Business Energy Incentive. These measures have been delayed in Parliament due to last minute amendments to the Instant Asset Write Off, although we are hopeful that they’ll be passed in time to apply to the 2024 financial year. 

Instant Asset Write Off

As a consolation for the Temporary Full Expensing measure which ended on 30 June 2023, a modified version of the Instant Asset Write Off (“IAWO”) for the 2023-24 financial year was announced in the 2023 Federal Budget, allowing small businesses to claim an IAWO for assets costing up to $20,000.

However, the following favourable amendments have since been proposed:

• Increase in the IAWO threshold to $30,000.
• IAWO now available to businesses with an aggregated turnover of up to $50 million (up from $10 million).

While these rules are yet to be legislated, if you’re a small business with aggregated turnover of less than $50 million and acquired depreciating assets between 1 July 2023 – 30 June 2024 for $30,000 or less, you may be able to benefit from instantly writing off the cost of the asset to reduce your tax bill.

Small Business Energy Incentive

Small businesses may be able to claim a bonus 20% tax deduction on the cost of depreciating assets or improvements which support electrification or more efficient energy use.

If you are running a small business and have invested in (or are considering investing in) assets that improve the energy efficiency of your operations between 1 July 2023 – 30 June 2024, this incentive may be relevant for you.

Further information on the eligibility criteria can be found in our October 2023 update.

Victorian Property Tax Updates

As most property owners would be aware, the Victorian government has targeted properties as a source of revenue, with significant increases to Land Tax and the expansion of the Vacant Residential Land Tax (“VRLT”), as well as the introduction of other various measures in the property space.  

Vacant Residential Land Tax – No Update on Holiday Home Exemption

As discussed in our October 2023 newsletter, Vacant Residential Land Tax (“VRLT”) is to be expanded to all Victorian residential properties from 1 January 2025. This means that if you own a residential property in Victoria that is vacant for more than 6 months from 1 January – 31 December 2024, you may be subject to an additional tax of 1% of the Capital Improved Value (“CIV”) of your property in 2025.

For a property valued at $1,000,000, this equates to an additional $10,000 in tax.

Additionally, the government subsequently announced that the VRLT rate will increase to 2% of the CIV in the second year of vacancy, and to 3% in each year after that.

There are various exemptions to VRLT, including an exemption for holiday homes that are used for more than 4 weeks of the year. However, the legislation was drafted such that the exemption doesn’t apply to holiday homes held in a trust or a company. Given the impact on family structures which hold genuine holiday homes within a trust, this has raised concerns.

As a result, there were murmurs towards the end of 2023 that the rules may be amended to extend the holiday home exemption to include properties already held in a trust. Unfortunately, no such announcements have been made, however we are hopeful that this may still yet happen before the commencement of the VRLT extension on 1 January 2025.

Stamp Duty to be Abolished on Commercial and Industrial Properties

As announced in last year’s Victorian State Budget, draft legislation has been released that would see stamp duty replaced with an annual Commercial & Industrial Property Tax (“CIPT”) on the sale of eligible commercial and industrial properties.

The key features of the proposal include:

• From 1 July 2024, sales of land with a qualifying use will enter the scheme.
• Broadly, at this point stamp duty will be payable on the land one final time by the purchaser. After 10 years from the date of entering the scheme (or sooner if the property is sold/subject to a dutiable transaction), the annual CIPT will begin to apply at a rate of 1% of the taxable land value.
• The land must have a qualifying commercial or industrial use under the Australia Valuation Property Classification Code (“AVPCC”). This excludes owners of residential, primary production, community services, sport, heritage or cultural properties, which should not be affected by the change.
• Should the land subsequently switch from a qualifying use to a non-qualifying use in the future, stamp duty may again become payable upon a dutiable transaction.
• The CIPT is in addition to regular land tax. However, land that is exempt from land tax will also be exempt from CIPT.

While the change may improve cash flow and free up capital for acquisitions, it is worth considering the following:

• The overall costs for purchasers with the intention of holding the property long-term may outweigh the initial benefit (especially while the SRO continues to inflate taxable land values).
• The scheme should result in an income tax benefit, as rather than capitalising the stamp duty costs, businesses should be able to claim an income tax deduction for the annual CIPT.
• If purchasing commercial property after 1 July 2024, it will be necessary to determine whether the land has already entered into the CIPT regime.

Other Property Tax Matters

• As of 1 January 2024, vendors are no longer able to enter into a contract of sale of land that apportions any of the Land Tax liability, existing Windfall Gains Tax liability and/or CIPT (where the sale price is less than $10 million) to the purchaser on the statement of adjustments. This means that vendors will be liable for the full Land Tax amount regardless of when throughout the year they sell their property.
• As of 1 January 2024, the absentee owner surcharge has increased from 2% to 4% of the taxable value of the land, on top of the increases to regular Land Tax. Owners of land in Victoria are absentee owners where broadly, they are a foreign resident that owns the property, or a foreign resident controls the entity that owns the property.
• As announced in the 2023 Federal Budget, Treasury has released draft legislation containing concessions for build-to-rent (“BTR”) projects to encourage investment in the sector. The current proposal includes:
  • Increase in the capital works deduction rate from 2.5% to 4% per year.
  • Reduction in the final withholding tax rate on eligible fund payments from managed investment trusts from 30% to 15% (for non-resident investors).
  • BTR developments must meet the eligibility criteria, such as:
    • The development containing a minimum of 50 dwellings that are made available for rent;
    • All dwellings continuing to be owned by a single entity for 15 years; and
    • At least 10% of the dwellings offered as affordable tenancies.

New Reporting Requirements for Non-Charitable NFPs

The ATO is encouraging non-charitable not-for-profits (“NFPs”) to prepare for new reporting requirements coming into effect as of 1 July 2024. Under the new system, non-charitable NFPs with an active Australian Business Number (“ABN”) will be required to lodge an annual NFP self-review return to the ATO to confirm their income tax exemption status.

Charities registered with the Australian Charities and Not-For-Profit Commission (“ACNC”) are automatically treated as income tax exempt. However, NFPs which are not ACNC registered charities (i.e. non-charitable NFPs) are required to self-assess whether income tax exempt status applies to them.

From 1 July 2024, all non-charitable NFPs with an active ABN will be required to lodge an annual self-review return to self-assess as income tax exempt. The self-review return will ask questions relevant to assessing their income tax exempt status and can be lodged through the ATO’s online services. This does not impact on ACNC registered charities that are endorsed as income tax exempt.

The ATO is encouraging non-charitable NFPs not to wait until it is time to lodge the self-review return in October, but rather to start preparing now, by:

• Conducting an early review of their eligibility by using the ATO’s guide.
• Checking all details are up to date, including authorised associates, contacts and addresses.
• Reviewing their purpose and governing documents to understand the type of NFP they are.
• Setting up myGovID and linking it to the organisation’s ABN.

For more information about the upcoming changes and how organisations can get ready, go to the ATO website at ato.gov.au/NFPtaxexempt.

Other Tax Updates

We have noted some other developments in the tax world with respect to Part IVA (the general anti-avoidance rules), charging costs for electric vehicles and some potential big changes for large multinationals.

Recent ATO Focus on Part IVA

• Part IVA of the Income Tax legislation contains the general anti-avoidance provisions which act as a ‘catch-all’ measure for tax avoidance arrangements that aren’t dealt with by any other specific tax provision.
• Broadly, an arrangement may be caught under these rules if it is a scheme that is entered into for the dominant purpose of obtaining a tax benefit. Where any of these 3 elements aren’t present, Part IVA won’t apply.
• There has been a recent run of Part IVA cases, such as the Minerva case, the Mylan case and the Grant case, indicating the ATO’s willingness to seek to apply these anti-avoidance rules where they feel tax avoidance may be present.
• Part IVA is dependent on the facts in each case, and no factor alone will be determinative. Therefore, when restructuring or entering an arrangement it is always necessary to consider the potential application of Part IVA.

Shortcut Method for Claiming Costs of Electric Vehicle Home Charging

• The ATO has published guidance in the form of PCG 2024/2 for calculating electricity costs associated with the home charging of electric vehicles (“EV”).
• This applies in the following contexts:
  • From 1 July 2022 for individuals working out income tax deductions using the logbook method if using an EV for work purposes (this doesn’t apply if using the regular cents per kilometre method); and
  • From 1 April 2022 for employers with FBT obligations (although the EV may be eligible for the FBT exemption, the reportable fringe benefit amount may still be required to be calculated).
• Under the ATO’s shortcut method, you can use a rate of 4.20 cents per relevant kilometre when calculating the cost of electricity from charging an EV at your home.
• Charging costs at commercial charging stations will generally be disregarded if using the shortcut method (except in limited circumstances).
• The shortcut method doesn’t apply to plug-in hybrid electric vehicles, meaning that if you have a plug-in hybrid, you will need to segregate the home charging station’s electricity costs from your total household consumption (unless using the regular cents per kilometre method).

New Tax Measures for Multinationals

• In line with the recommendations and guidance from the Organisation for Economic Cooperation and Development (“OECD”) and G20, Treasury has released draft materials that would apply a 15% global minimum tax rate for multinational enterprises (“MNE”). The rules aim to ensure that all eligible MNE groups are subject to a minimum of 15% effective tax rate in the jurisdictions in which they operate.
• The proposed changes to the Thin Capitalisation rules are now law. Thin Cap is relevant for taxpayers with foreign ownership or overseas operations and can limit interest deductions where entities are too highly geared with debt. The key changes include:
  • Replacing the existing asset-based tests (safe harbour test and worldwide gearing test) with new earnings-based tests (a fixed ratio test and a group ratio test). Broadly, the fixed ratio test will allow an entity to claim up to 30% of earnings as debt deductions.
  • The provisions will generally apply to income years commencing on or after 1 July 2023.
  • Importantly, the $2 million de minimis test still applies, so if interest deductions are less than $2 million, you should be entitled to a full deduction.
  • Introduction of new ‘debt deduction creation rules’ which disallow deductions if considered to be incurred in relation to ‘debt creation schemes’. Broadly, these rules aim to disallow interest deductions where related party debt is used to fund the acquisition of a CGT asset from an associate or to make various payments to an associate, such as a dividend or other capital related amounts.

* * * * * * * *

The above tax summary is intended to be general in nature. Should you believe that any of the above matters may be relevant to you or your Group’s particular circumstances, please discuss the specific details with your Slomoi Immerman Partners advisor.