Industry Analysis

As widely anticipated, the Budget focuses on the Albanese Government’s pre-election promises and initiatives to mitigate against increasing pressures on the cost of living. It includes announcements on cheaper childcare reforms, and a funding to support future industries through the National Reconstruction Fund.

Disappointingly for Australia’s private capital industry, the implementation of a Limited Partnership Collective Investment Vehicle (LP CIV) announced in 2016 by the Coalition Government will be scrapped, and changes to the thin capitalisation rules will be implemented including abandoning the arm’s length debt test (ALDT) for related party debt financing, as well as the worldwide gearing test, without the provision of any grandfathering.

The Budget forecasts GDP growth more than halving from 3.25% in the current financial year to 1.5% in 2023-24, a full percentage point lower than forecast before the May election.

Tonight’s Budget includes a number of important measures which will be relevant to Australia’s private capital investment industry, led by:

  • International tax –thin capitalisation rules, dealing with deductibility of interest deductions, by Australian businesses controlled by or doing business offshore will be capped by reference to 30% of EBITDA or the alternative arm’s length debt test (now only available to third-party debt financing).
  • Foreign Investment Review Board (FIRB) – fees relating to FIRB will be doubled.
  • A $15 billion National Reconstruction Fund will be established to invest in and guarantee industrial projects and develop existing and emerging industries such as primary production, transport, science and renewable energy.
  • Jobs and Skills – initiatives from the Jobs and Skills Summit will be progressed including an increase of the immigration intake to 195,000 per annum, as well as a review of immigration levels.
  • Affordable housing – commitment to a new fund for 30,000 affordable homes.
  • Upgrading the NBN - Full-fibre access will be provided to 1.5 million premises by 2025 including 660,000 premises in regional Australia. The government anticipates this expansion and upgrading of NBN infrastructure will give around 10 million homes and businesses access to speeds of up to one gigabit per second in late 2025.

Further details on these and other announcements in the October Federal Budget 2022-23 which are relevant to the private capital industry and the business sector are detailed below.

Tonight’s budget announced a number of measures to address the cost of living for many Australians.

Childcare - To enable greater workforce participation, more than $5 billion will be spent to reduce childcare costs by extending subsidies. From FY2023, families with a combined income of less than $530,000 will be rebated 90% of childcare costs.

Paid Parental Leave - Will be extended from 18 to 26 weeks over a 2-year transition period to 2026.

Limited Partnership Collective Investment Vehicles (LP CIVs) - The Government has announced its decision not to proceed with an LPCIV which was announced in the 2016 Federal Budget.

Foreign Investment Review Board (FIRB) - The Government plans to increase fees relating to the FIRB. Current projections estimate the increases will amount to approximately $420 million between 2023 and 2026.

Thin Capitalisation - Previously announced changes to the thin capitalisation ruleswill ne implemented. These deal with deductibility of interest deductions by Australian businesses controlled by or doing business offshore. The deductions will be capped from FY23 by reference to 30% of EBITDA or the alternative arm’s length debt test available only for unrelated party debt. Denied deductions will be able to be carried forward for a period of 15 years.

Previous Coalition Government announcements - Tax and superannuation measures made by the previous Coalition Governments, including changes to the debt/equity rules, Taxation of Financial Arrangements (TOFA), asset backed financing arrangements, and the LPCIV will not proceed.

Self-assessment of intangible assets - The Governement will not proceed with the measure which would have enabled businesses to self-assess the effective life of their intangible assets for tax depreciation purposes. This means that the current statutory rates will remain in place.

Treatment of off-market share buy backs - The Government will move to align the treatment of off-market share buybacks with that of on-market buy-backs by listed public companies with effect from 7.30pm 25 October 2022. This will result in a pure capital gains tax treatment for shareholders and there will be no opportunity for companies to pay a franked dividend component as part of the share buy-back proceeds. This will likely impact superannuation fund and other investors who benefit from franking credits attached to company dividends.

Tax Avoidance Taskforce - The Australian Taxation Office will be provided with an additional $200 million per year to extend the taskforce’s activities for a further two years to June 30 2025. The tax avoidance taskforce was established in 2016 to undertake activities targeted at multinationals, large public and private groups, trusts and high net worth individuals. Additional compliance activities are expected to increase tax receipts by $2.1 billion two-year period.

Tax Transparency - Large multinational companies will be compelled to publish certain tax information on a Country by Country (CbC) basis.

Limiting deductions for royalties paid to low-tax jurisdictions - The Government will move to prevent significant global entities claiming tax deductions in Australia where they are paid to countries with a tax rate lower than 15% or where they have a “no substance” patent box regimes.

National Reconstruction Fund - A $15 billion national reconstruction fund will be established to support, diversify and transform Australian businesses through co-investment in areas such as primary production, transport, defence and renewable energy.

Buy Australia Plan - A 10-point Buy Australian Plan will be introduced to support Australian businesses and jobs. The plan includes changes to the Commonwealth Procurement Rules.

Pacific Labour Scheme - The Government aims to strengthen Australia’s partnerships with Pacific island nations by delivering new programs, including the establishment of a new Australia Pacific Defence School.

The 2018-19 Budget measure which sought to introduce retirement metrics disclosure in product disclosure statements will not proceed.

The key announcements include:

  • establishment of the $10 billion Housing Australia Future Fund to generate returns to fund the delivery of 30,000 social and affordable homes and remedy acute housing needs for Indigenous communities and domestic and family violence victims
  • an initial $350 million in federal funding over five years from 2024-25 to deliver an additional 10,000 affordable homes
  • support from states and territories to deliver up to an additional 10,000 affordable homes

Expansion of the remit of the National Housing Infrastructure Facility to more flexibly deploy up to $575 million in unallocated funding, potentially delivering up to 5,500 new social and affordable dwellings and attract more institutional capital to the sector.

A number of other measures were included under the Accord including $324.6 million to establish the Help to Buy Scheme, $15.2 million to establish a National Housing Supply and Affordability Council, $0.5 million to establish Housing Australia and $8.3 million to administer the Housing Australia Future Fund.

Housing - The Government will commit $10 billion to the new Housing Australia Future Fund which will be managed by the Future Fund and will aim to generate returns to fund the delivery of 30,000 social and affordable homes. The Government with work with state governments, superannuation funds, private capital and public investors to build one million homes across the country.

The 2018-19 Budget measure which sought to introduce retirement metrics disclosure in product disclosure statements will not proceed.

Jobs and Skills Summit - The Budget will progress initiatives from the Jobs and Skills Summit with further consultation on key areas.

Startup Year - The Government will provide $15.4 million over the Budget period to establish the Startup Year program to enable 2000 students to work in a business focussed accelerator.

More university places - 20,000 new university places will be offered (including 4,000 for teaching), as well as engineering, IT and healthcare. These places will be prioritised in favour of universities offering more opportunities for under-represented groups. The 10% upfront discount for university fees will also be abolished.

Fee Free TAFE - 465,000 fee-free TAFE places will be offered. These places will focus on courses relating to industries most affected during the pandemic with a skills gap including hospitality, tourism, childcare, aged care, disability care, nursing and community services.

Teacher shortages - The Government will adopt a plan to double the number of high-achieving students who select teaching as a career. This includes providing bursaries for high-achieving students to study teaching.

Migration Review - A comprehensive review of Australia’s migration system will be undertaken with a report due by the end of February 2023. This review will outline the objectives of our immigration system and guide future reform with a focus on Australian productivity, unlocking the potential of all migrants, the need for a streamlined and internationally competitive visa process, and sponsorship opportunities for emerging jobs and industries.

More Permanent Migration Visas - The Permanent Migration Program ceiling will be increased from 160,000 to 195,000 in 2022-23. Within the Skill stream there will be 34,000 permanent visas to address sectors of the Australian economy currently experiencing severe shortages and 500 additional staff to support visa processing until mid-2023.

Upgrading the NBN - Full-fibre access will be provided to 1.5 million premises by 2025 including 660,000 premises in regional Australia. The government anticipates this expansion and upgrading of NBN infrastructure will give around 10 million homes and businesses access to speeds of up to one gigabit per second in late 2025.

Rewiring the nation - $20 billion will be invested to re-wire and upgrade existing electricity infrastructure to accommodate renewable energy under various initiatives aimed at unlocking new renewables and driving down prices.

Driving the Nation Fund - The Government will invest a further $276 million (up to $500 million) to invest in cheaper and cleaner transport.

Energy Efficiency Upgrades - The Government will provide $62.6 over 3 years to enable small to medium enterprises fund energy efficiency upgrades,

Electric car discount - Discounts on tariffs and a Fringe Benefits Tax exemption will apply to imported vehicles electric cars from 2023 which are below the luxury tax threshold.

Community Batteries - The Government will fund community batteries across Australia to capture and store energy.

The Council has reviewed the Budget Papers and disappointingly the outcome of the Venture Capital Limited Partnerships (VCLPs) and Early Stage Venture Capital Limited Partnership (ESVCLP) remains outstanding.