On 20 February 2012 the Federal Treasury released draft legislation to enact the tax reforms for the Australian Shipping Industry. The reforms are part of a package intended to stimulate the industry and create an internationally competitive industry.
The package of reforms comprises:
- tax concessions for qualifying activities by Australian shipping companies (refer below);
- simplified licensing for shipping activities;
- establishment of an Australian International Shipping register; and
- establishment of a Maritime Workforce Development Forum.
These reforms build on the discussion paper and consultation process referred to in Shipping Matters dated 13 September 2011.
You should note that the Government intends to finalize the discussion process by 9 March 2012 and send the final Bills to the printer on that day as the reforms are slated for introduction into Parliament in the current term and to take effect on 1 July 2012.
The Tax Concessions
If a company meets the conditions and receives the necessary certification from the Minister for Infrastructure and Transport, the following tax concessions may be available:
- A tax exemption for certain core and incidental shipping activities;
- Accelerated depreciation for vessels – capped to a maximum effective life of 10 years;
- A deferral of the assessable balancing adjustment that can arise on the disposal of a vessel and the ability to roll-over any balancing adjustment to a new vessel;
- A refundable tax offset based on wages paid to Australian resident seafarers while on international voyages; and
- An exemption from royalty withholding tax ("RWT") in relation to bareboat payments made from an Australian resident company lessee to a foreign resident lessor/owner.
A more detailed explanation of these tax concessions can be found at Shipping Matters dated 22 February 2012.
Moore Stephens has taken the opportunity, provided by Treasury, to prepare a submission in response to the draft legislation. A copy of the Moore Stephens submission, which outlines a number of significant issues and shortcomings of the draft legislation, can be accessed here.
In summary our key concerns with the draft legislation are as follows:
- The tax saving from the proposed shipping profits exemption is lost when a distribution of shipping profits is made to shareholders – this makes the draft legislation uncompetitive when compared to the tax regimes of other more prominent shipping countries.
- The exempt shipping income will give rise to a wastage of a company's tax losses, this is notwithstanding the wastage will be limited to 10% of the net exempt shipping income.
- The exemption for shipping profits has the unintended consequence of creating a bias against owning a vessel in comparison to leasing a vessel.
- Companies that derive exempt shipping income may still be subject to income tax if they make a tax profit on the disposal of a vessel used to carry on shipping operations.
- The threshold for income arising from incidental shipping activities is too low and will likely result in shipping business still being subject to income tax.
- The basis on which the seafarer tax offset is calculated is too narrow and does not take into account the actual cost of employing Australian seafarers.
- The voyage timing rules that apply in working out the eligibility and quantum of the seafarer tax offset does not take into account either:
- time spent on ballast voyages; or
- leave accrued while in international voyages.
- The exemption for Australian RWT that can otherwise arise on bareboat payments has the unintended consequence of disadvantaging foreign resident from certain double tax agreement countries (when compared to foreign resident from non-double tax agreement countries).
- The exemption for RWT only applies when paid by an Australian resident lessee and does not apply if the bareboat payments are made from a foreign resident carrying on a business in Australia.
- Some of the terminology in relation to exempt vessels required clarification, particularly around what is the meaning of a barge.
- The parameters for the crewing and management requirements (in order achieve tax exempt status) are vague and require explanation.
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