Over the last two years, multinationals have been battered with a variety of new taxing measures under the guise of "ensuring multinationals are paying their fair share of tax". The multinational anti-avoidance law (MAAL), the Australian diverted profits tax, incorporation of the latest OECD transfer pricing guidelines, GST laws on low value imported goods and a variety of other measures ensured that Australia remained on the radar as a hot spot for international tax reform.
This year's Federal Budget has shown a change of focus with a mixed bag of reform measures:
- the company tax rate will be reduced for all companies to 25% by 2026-27;
- foreign property investors can look forward to a range of change designed to manage the continued and (we assume) unsustainable growth in the property market;
- various measures are being introduced to support Australians wishing to acquire property;
- banks are being targeted with a new 0.015% levy on an ADI’s licensed entity liabilities; and
- more funds are being invested in tax compliance (including tax crime).
Foreign multinational also need to take stock of proposed amendments to measures already announced. In particular:
- the proposed scheme for the payment of GST on low value importations will be delayed until 1 July 2018 pending a further review;
- the MAAL will be amended to negate the use of foreign trusts and partnerships in corporate structures to circumvent the MAAL;
- there are proposed amendments to the application to the foreign resident CGT exemption; and
- the Foreign Resident Capital Gains Withholding tax on the disposal of taxable Australian property will be increased from 10% to 12.5%, along with a reduction in the threshold from A$ 2 million to A$ 750,000.
Each of these measures are discussed below.
2. Banks targeted
Levy on liabilities of major banks
From 1 July 2017, the Government will introduce a bank levy for Authorised Deposit-taking Institutions (ADI), with licensed entity liabilities of at least A$ 100 billion (to be indexed in line with nominal GDP).
This levy will be calculated quarterly as 0.015% of an ADI’s licensed entity liabilities as at each Australian Prudential Regulation Authority mandated quarterly reporting date.
Liabilities such as corporate bonds, commercial paper, certificates of deposit, and Tier 2 capital instruments will be subject to the levy. The levy will not apply to liabilities such as additional Tier 1 capital and deposits of individuals, businesses and other entities protected by the Financial Claims Scheme.
This measure is estimated to raise A$ 6.2 billion over the forward estimates period.
OECD hybrid mismatch rules to be applied to regulatory capital
In last year's Federal Budget, the Government committed to the implementation of OECD recommendations aimed at neutralising hybrid mismatch arrangements that seek to exploit the different treatment of an entity or instrument, under the laws of two or more tax jurisdictions.
In an effort to address aggressive tax minimising structures used by some banks and financial institutions, the Government will take specific measures to eliminate hybrid tax mismatches that occur in cross-border transactions relating to regulatory capital known as AT1 capital. This will be addressed by:
- preventing returns on AT1 capital from carrying franking credits where such returns are tax deductible in a foreign jurisdiction; and
- where the AT1 capital is not wholly used in the offshore operations of the issuer, requiring the franking account of the issuer to be debited as if the returns were to be franked.
The new rules are to apply to returns on AT1 instruments paid from the later of 1 January 2018 or six months after Royal Assent of the enabling legislation. Transitional arrangements will apply to AT1 instruments issued before 8 May 2017.
3. Capital Gains regime extended for foreign residents
CGT withholding rate increases to 12.5%
Foreign residents are typically assessed on capital gains made from the disposal of certain CGT assets. As a result of low compliance with these laws by foreign residents, from 1 July last year a Foreign Resident Capital Gains Withholding Regime has applied to the disposal of taxable Australian property where certain conditions are satisfied.
As enacted, the existing regime imposes an obligation on purchasers (including foreign purchasers) to withhold and remit to the ATO 10% of the purchase price on the sale of relevant assets. From 1 July 2017, this rate would be increased to 12.5%, along with a reduction in the CGT withholding threshold from A$ 2 million to A$ 750,000 for acquisitions of Australian real property from foreign tax residents.
Amendments to the principal asset test
Under the existing law, foreign residents are typically assessed on capital gains made from the disposal of interests of 10% or more in an entity (including a foreign entity) whose underlying value is principally derived from taxable Australian real property as determined by the "principal asset test".
The test focuses on whether the market values of the entity's assets that are Australian real property and certain related assets exceed the market values of its other assets. As currently drafted, this test does not generally take associate interests into account.
The Government will introduce measures to include associate entities when applying the principal asset test. If enacted, this proposal will apply from today (9 May 2017). The stated purpose of this measure is to prevent non-residents from avoiding CGT liabilities by disaggregating indirect interests in Australian real property. However, the changes could have far reaching effects, potentially subjecting foreign residents to CGT on non-real property investments due to their interests in other investments. It also remains to be seen how this will fit with similar tests in Australia's tax treaties that generally do not refer to associates. No further details of this proposed measure have been published.
4. Extension of Multinational Anti-Avoidance Law
The MAAL came into effect on 1 January 2016 to counter the erosion of the Australian tax base by multinationals using artificial or contrived arrangements to avoid the attribution of business profits to Australia through a taxable presence in Australia. Some advisors have been advising their clients to use foreign trusts and partnerships in corporate structures in an attempt to circumvent the MAAL. To address this practice, the Government has proposed broadening the scope of the entities the MAAL applies to.
The Budget states that the application of the MAAL will be extended to:
- corporate structures that involve the interposition of partnerships that have any foreign resident partners;
- trusts that have any foreign resident trustees; and
- foreign trusts that temporarily have their central management and control in Australia.
If enacted, this extension will apply from 1 January 2016.
5. Stapled trust consultation extended
Since March this year, Treasury has been undertaking a consultation process on the use of stapled or split trust structures. These structures typically involve the use of a flow-through trust to hold certain passive investments, such as land, leases, and improvements to land, and the leasing of these assets to a company (or taxable trust) that uses those assets. Particular attention has been paid to an emerging use of stapled structures to divide up businesses into land and non-land assets where the business is not capable of division in any commercially meaningful way or where it would not normally be divided in this way by independent parties acting at arm’s length.
The Treasurer announced that this consultation period will be extended until the end of July to allow more time to formulate relevant options that minimise unintended consequences. The Treasurer also noted that it is a complex and sensitive issue of economic significance to the Australian economy. Given the Government's recent focus on infrastructure, a sector where foreign investors commonly rely on stapled structures, the delay may be to allow time to assess the impact on infrastructure investment.
6. Company tax rates
In last year's Federal Budget the Government announced a staged reduction in the corporate tax rate from the current 30% (28.5% for small businesses) to 25% for all companies over the next 10 years. This proposal was recently curtailed by Senate amendments to the legislation so that it will only apply to companies with a turnover of less than A$ 50 million. The Senate amendments should be approved by the House of Representatives over the next sitting sessions.
As amended by the Senate, the corporate tax rate changes are as follows:
In a statement accompanying the Budget, the Treasurer announced that the Government is committed to cutting the company tax rate for all companies to 25% by 2026-27
7. Personal income tax rates
The Budget does not make any changes to Australian resident personal income tax rates or thresholds for 2017-18.
The Temporary Budget Repair Levy (2% on taxable income exceeding A$ 180,000) ends on 30 June 2017.
The Medicare Levy will increase by half a percentage point (to 2.5%) from 1 July 2019 to ensure the National Disability Insurance Scheme is fully funded. This increase will also impact other tax rates that are linked to the top personal tax rate (e.g. the tax rate applicable to fringe benefits and employment termination payments that exceed the relevant cap).
Low value imports
The Budget foreshadows the imposition of GST on low value importations where the relevant value is less than AUD 1,000. The Senate Economics Legislation Committee has handed down its report into the proposed scheme for taxing low value importations of goods. The report recommends that the change be delayed until 1 July 2018 pending a further review.
From 1 July 2018, the Government will require purchasers of newly constructed residential properties or new subdivisions to remit GST on the sale directly to the ATO as part of the property settlement. Under the current law (where the GST is included in the purchase price and the developer remits the GST to the ATO), it is understood that some developers are failing to remit the GST to the ATO despite having claimed GST credits on their construction costs.
The GST treatment of digital currency (such as Bitcoin) will be aligned with the GST treatment for money from 1 July 2017.
Digital currency is currently treated as intangible property for GST purposes. Consequently, consumers who use digital currencies as payment can effectively bear GST twice: once on the purchase of the digital currency and again on its use in exchange for other goods and services subject to GST.
This measure is intended to ensure purchases of digital currency are no longer subject to the GST. Removing double taxation on digital currencies is intended to remove an obstacle for the Financial Technology (Fintech) sector to grow in Australia.
The GST law is to be amended to give effect to changes that were announced on 31 March 2017 and take effect from 1 April 2017 for dealings in precious metals.
The changes will provide that entities buying gold, silver and platinum that have been supplied as a taxable supply for GST purposes will be required to apply a "reverse charge", that is, they will remit the GST to the ATO instead of the seller.
Changes are also to be made to clarify that gold, silver and platinum are not second-hand goods.
The Government has introduced several measures aimed at improving access to secure and affordable housing:
Extension of managed investment trusts (MIT) concessions to investments in affordable housing
Australia's existing MIT withholding tax regime enables certain foreign resident investors to achieve a reduced withholding tax rate, generally of 15%, on certain fund payments made by the MIT. The ATO has generally taken the view that income from investment in residential property is not eligible for the MIT concessions.
The proposed changes, which are to apply from 1 July 2017, would allow certain MITs to invest in affordable housing. The housing must be provided to low to moderate income tenants at a discounted rent and must be available for rent for at least 10 years. Affordable housing MITs will be able to acquire, construct or redevelop a property, but must derive at least 80% of their assessable income from affordable housing.
Non-resident investors in an affordable housing MIT should be eligible for the 15% withholding tax rate on MIT fund payments if they are tax resident in a country with which Australia has an exchange of information treaty. Individual resident investors will be taxed on investment returns at their marginal tax rates and will be eligible for the increased CGT discount in relation to any capital gains (discussed below).
- Foreign and temporary tax residents will no longer have access to the CGT main residence exemption from 7:30 pm on 9 May 2017. The measure will be grandfathered until 30 June 2019 for existing properties held prior to this date.
- A new charge will be levied on foreign owners of residential property, if their property is not occupied or genuinely available on the rental market for at least six months per year. This charge will be levied annually, and will apply from 7:30 pm on 9 May 2017 to all foreign persons making a foreign investment application for residential property. The charge will be equivalent to the relevant fee charged by the Foreign Investment Review Board for residential real estate applications.
- Foreign ownership in new developments to be capped at 50%. Developers can now only sell a maximum of 50% of total dwellings in a new development to foreign persons. This condition applies to all New Dwelling Exemption Certificate applications made after 7:30 pm on 9 May 2017.
- CGT discount will be increased from 50% to 60% for resident individuals who invest in qualifying affordable housing from 1 January 2018. Qualifying housing must be provided to low to moderate income tenants at a discounted rent and must be managed through a registered community housing provider. The investment must be held for at least 3 years.
10. Tax crime and the black economy
Increased measures relating to the black economy
An extension of funding in the amount of A$ 320 million will be provided to the ATO's audit and compliance programs to better target the black economy. The funds will be provided for the "Strengthening Foundations" and "Level Playing Field" programs which are targeted at changing black economy and related behaviours such as the non-lodgement, omission of income and non-payment of employer obligations.
The Government will act to prohibit the manufacture, distribution, possession, use or sale of electronic point of sale sales suppression technology and software. Such technology allows businesses to understate their incomes and as a result, pay lower tax. The Budget notes the risks of such technologies have been highlighted by the OECD and this measure is in line with responses in other jurisdictions.
The taxable payments reporting system (TPRS) is an existing transparency measure operating in the building and construction industry. The TPRS will be extended to contractors in the courier and cleaning industries. Under this system, businesses are required to report payments they make to contractors to the ATO. Businesses in these industries will need to ensure that they collect information from 1 July 2018, with the first annual report required in August 2019.
Funding to fight serious and organised crime in the tax system
The Government will provide A$ 28.2 million to the ATO to target serious and organised crime in the tax system. This extends an existing measure by a further four years to 30 June 2021.
Development of new laws to protect tax whistleblowers
The Government has announced that it is developing new laws to protect those who come forward to report tax misconduct. The Government noted it is being informed by submissions received in a consultation process.
11. Other measures
Small business - instant asset write off
The current instant asset write-off (A$ 20,000 threshold) for small business entities (SBEs) with an aggregated turnover of less than A$ 10 million will be extended by 12 months to 30 June 2018.
SBEs will be able to immediately deduct purchases of eligible depreciating assets costing less than A$ 20,000 that are acquired between 1 July 2017 and 30 June 2018, and are first used or installed ready for use by 30 June 2018 for a taxable purpose. A few assets are not eligible for the instant asset write-off (or other simplified depreciation rules), for example horticultural plants and in‑house software.
Assets valued at A$ 20,000 or more (which cannot be immediately deducted) can continue to be placed into the general small business pool (the pool) and depreciated at 15% in the first income year and 30% each income year thereafter. The pool can also be immediately deducted if the balance is less than A$ 20,000 over this period (including existing pools).
The current "lock out" laws for the simplified depreciation rules (which prevent SBEs from re-entering the simplified depreciation regime for five years if they opt out) will continue to be suspended until 30 June 2018.
The instant asset write-off threshold and the threshold for immediate deductibility of the balance of the pool will revert to A$ 1,000 on 1 July 2018.
Small businesses- CGT concessions
The four small business CGT concessions (the 15-year exemption, the 50% reduction exemption, the retirement exemption, and the roll-over concession) will be amended to ensure that the concessions can only be used in relation to assets used in a small business or ownership interests in a small business.
These integrity measures are meant to prevent the abuse of the small business CGT concessions, whereby some taxpayers have been accessing these concessions for assets which are unrelated to their small business, e.g. through arranging their affairs so that their ownership interests in larger businesses do not count towards the tests for determining eligibility for the concessions.
Skilling Australians Fund Levy
From 1 March 2018, businesses that employ foreign workers on certain skilled visas will pay a levy (which replaces current training benchmark financial obligations) to provide revenue for a new Skilling Australians Fund: