Despite 99% of Australia's international trade being facilitated by ships, our ports managing 10% of the world's shipping and Australia having the fourth largest shipping task in the world, the Australian shipping industry has been in decline for many years.
Inferior tax, regulatory and employment conditions relative to other major shipping countries have led to Australia's shipping industry falling behind its overseas counterparts. Indeed, the number of Australian-registered trading ships has more than halved in the last 15 years, with 99.5% of Australia's international trade now being carried by vessels registered in foreign jurisdictions.
The Federal Government believes that the shipping industry in Australia has reached a tipping point and has predicted that without immediate intervention, Australia's shipping industry will be 'lost forever' in five years
Accordingly, last Friday 9 September 2011, the Government announced 'the most far-reaching overhaul of our shipping industry ever undertaken'. The package, set to commence on 1 July 2012, has four key elements:
1) Tax reforms to remove barriers to investment in Australian shipping and to foster global competitiveness (the focus of this bulletin).
2) A simplified three-tier licensing framework for participation in coastal trade.
3) Establishment of an Australian International Shipping Register to put Australian companies on a level footing with their international competitors.
4) Establishment of a Maritime Workforce Development Forum to progress key maritime skills and training priorities.
Qualifying income from shipping - exempt from tax
At present, shipping companies operating Australianregistered ships are subject to our standard corporate tax rate of 30%. This puts them at a disadvantage with companies with ships registered in countries like Singapore, Hong Kong and Canada that offer zero or substantially lower tax rates, and European countries that have differential corporate tax arrangements for shipping companies. While major Australian importers have been calling for the introduction of a tonnage tax in Australia (which would allow companies the option of paying tax based on the tonnage of their ships rather than on the profits of their trade), the Government has gone a step further by announcing that 'qualifying income from shipping' will be exempt from Australian income tax. Exactly what constitutes 'qualifying income' is not yet known. However, the Government has announced that it must be income from 'seagoing commercial trading activities that carry cargo or passengers' and that this will be interpreted liberally.
Accelerated depreciation and deferral/ roll-over relief
The Government also announced that it will reintroduce an accelerated depreciation scheme for Australian ships. The current depreciation rates allow a write-off of most trading ships over 20 years. Under the Government's proposal, from 1 July 2012 companies may elect to benefit from accelerated depreciation by depreciating their Australian registered ships over a shorter effective life of ten years or less. Similar measures in the early 1990s resulted in 36 new and more efficient vessels being introduced into the Australian fleet, an investment worth $1.6 billion to the Australian economy. To complement the accelerated depreciation scheme, the Government is also introducing roll-over relief or a balancing charge deferral system whereby any gain or profit made on the sale of old vessels is deferred when they are being replaced with new vessels.
Exemption for seaferers
Under the Government's proposals, a refundable tax offset will be available to Australian employers of Australian resident seaferers engaged in international shipping trade. The offset will be equivalent to the amount of income tax withheld from pay and allowances of Australian resident seaferers who spend more than 90 days on international voyages on qualifying vessels in an income year. Although there are no details at this stage, it is anticipated that the exemption will provide flexibility for seaferers, allowing them to accumulate qualifying days over the course of an income year, rather than in one consecutive period. To make this attractive to individual seaferers, this benefit would need to be passed on to them.
Royalty withholding tax exemption
The state of Australia's domestic tax laws combined with international tax agreements make it more tax-efficient for a foreign owner of a vessel to provide it for use under a time charter rather than a bareboat charter arrangement. In many instances, payment to the owner under a bareboat charter will trigger a royalty withholding tax impost of up to 30%. Conversely, payment received under certain time charters can trigger income tax at a lower rate. These arrangements have for some time worked against the employment of Australian crew on vessels chartered by Australian companies. The Government now proposes to exempt bareboat charters from royalty withholding tax, thereby removing the disincentive for the use of bareboat charters and promoting the use of Australian crew.
The above tax exemptions will be subject to several conditions, most notably:
- Vessels entering the regime must be Australian flagged.
- To rejuvenate and skill-up an ageing workforce and attract new recruits, there will be a minimum obligation to train seaferers.
- To reduce opportunities for tax avoidance, companies wishing to be part of this concessional tax regime must remain in the regime for a minimum of ten years.
To further encourage the growth of Australia's fleet and in line with overseas best practice, the Government proposes to establish an Australian International Shipping Register. The same environmental, safety and OH&S standards will apply to vessels on the International Register as apply to first register vessels. International vessels will also have to employ at least two Australian crew and all crew (regardless of nationality) will be covered by the Fair Work Act and the Maritime Labour Convention.
A new three-tier licensing regime will be introduced to set clear boundaries around the role of foreign vessels in Australia's coastal trade. A General Licence will provide Australian-flagged vessels unrestricted access to Australian coastal trades for five years at a time. A Temporary Licence will enable foreign-flagged vessels to operate the coastal trades for up to 12 months and subject to certain conditions. An Emergency Licence valid for a single voyage will facilitate cargo or passenger movements in emergency situations (eg natural disasters). Supplementing the regime will be new reporting arrangements and a transitional period for currently licenced foreign-flagged vessels to become Australian-flagged.
During the Government's 2008 inquiry into coastal shipping policy and regulation, it was stated that the shortage of skilled maritime workforce in Australia had reached a critical point and was one of the biggest issues facing the industry. In response, the Government is setting up a Maritime Workforce Development Forum with experienced people from industry, unions and the training sector (in conjunction with the National Workforce and Productivity Agency, AMSA and training providers) to spearhead programs to tackle the challenges of an ageing workforce, costly and complicated training systems and the inevitable erosion of skills in the industry. More details on the precise structure and objective of the forum should be announced in the foreseeable future.
Industry saving reform
The Government's 2008 inquiry into shipping regulation clearly identified that the potential benefits of a revitalised shipping industry in Australia could have positive flowon effects for the economy and local employment, the environment, road safety and congestion, Australian defence and maritime safety.
The Government package represents a significant step towards reforming the shipping industry to the levels of sustained growth and productivity commensurate with Australia's $200 billion international trade industry and Australia's status as the biggest single island nation in the world.
The incentives and investments announced seem to be in line with world's best practice. This should please many of Australia's largest exporters, some of which (we understand) have already commenced the construction of new vessels in anticipation of the Government's announcement.
The process to form this package involved public consultation with interested parties and the Government has committed itself to providing a similar level of transparency and communication as the legislation implementing the package is drafted.
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