Australia: Australian tax update for China

Australia-Asia Update
Last Updated: 4 July 2012
Article by Ken Spence

In this Australian tax update we briefly outline two recent developments in Australian tax.

  1. The key taxation proposals relevant to foreign investors announced in the Australian federal budget delivered on 8 May 2012.
  2. Two major new taxes to commence in Australia on 1 July 2012 – the mining tax and the carbon tax.

Key budget announcements

We set out brief highlights of key announcements relevant to foreign investors below. For more detailed analysis of the budget, please refer to our Tax Briefs in both English and Chinese (in abbreviated form).

Managed Investment Trust withholding rate

Australian collective investment trusts which qualify as Managed Investment Trusts under the tax law are entitled to concessional tax treatment. One of these concessions is that distributions made by a Managed Investment Trust to a foreign resident beneficiary is currently subject to only 7.5% withholding tax, provided the beneficiary is resident in a country with which Australia has an exchange of information treaty. Of Australia's key Asian trading partners, Australia has treaties with China, India and Japan, but not Korea.

The current Managed Investment Trust withholding rate is substantially lower than Australian withholding rates on other types of distributions to foreign residents such as dividends (generally 30%) and interest (generally 10%).

A surprising and unfavourable decision was announced in the budget to increase the Managed Investment Trust withholding rate to 15%, with no apparent grandfathering of long term deals already entered into in reliance on the 7.5% rate.

Company loss carry back

Australian companies can currently carry forward tax losses to offset assessable income in later years.

The Australian government announced in the budget that Australian companies will now be entitled to carry back a tax loss to a prior year and potentially generate a refund of tax paid.

However, this measure is primarily targeted at small and medium sized businesses so the amount of loss that can be carried back will be capped to $1 million (potentially generating a $300,000 tax refund at most).

The technical details around this proposal are yet to be released and, as is often the case, such details may be key to determining the usefulness (or otherwise) of this measure.

29% corporate tax rate cancelled/deferred

As a trade-off for the introduction of the mining tax (discussed below), the Australian government had originally proposed to reduce Australia's corporate tax rate from 30% to 29%. However this proposal faced significant resistance in the Australian parliament.

The government announced in the budget that the proposed reduction will not proceed, with the 'savings' now being used to fund the company loss carry back (discussed above).

However, in its national economic forum held on 13 June 2012, just one month after its budget announcement, the government has again made a cut to the Australian company tax rate a key priority. We will keep readers posted if and when these announcements are acted upon.

Investment Manager Regime

With the goal of increasing Australia's attractiveness as a regional financial services centre, the Australian government is proposing to implement an Investment Manager Regime to ensure that foreign resident investors using Australian fund managers would not face tax in Australia on income from investments that would otherwise be exempt from Australian tax.

The final elements of the Investment Manager Regime, reaffirmed in the budget, will have effect retrospectively from 1 July 2011 once implemented.

Personal tax for foreign resident individuals

The government has moved to increase tax on Australian income and gains made by foreign residents through two measures:

  1. where foreign resident individuals and trusts are subject to Australian capital gains tax on gains in respect of 'taxable Australian property', they will no longer be entitled the 50% discount previously available where the asset was held for more than 12 months; and
  2. the marginal tax rates applicable to Australian sourced income of foreign resident individuals will be increased somewhat.

New Australian taxes to commence on 1 July 2012

With the impending commencement of the Australian mining tax and carbon tax on 1 July 2012, we briefly outline the key elements of the new taxes below.

Mining tax

The mining tax will only apply to iron ore and coal projects in Australia.

An effective tax rate of 22.5% will apply to mining profits from those projects.

The tax is confined to net profits on upstream mining operations and does not seek to tax the value added in downstream activities.

A liability to pay mining tax will generally arise for projects in the production stage. Exploration expenditure can potentially be recognised to offset revenue once production commences.

The mining tax applies to resources which are commonly subject to State and Territory royalties so the tax provides a credit for royalties paid.

If mining tax losses and royalty credits cannot be used in a year, they can be carried forward to later years and uplifted at the long term bond rate plus 7%.

The value of a miner's existing projects at 1 May 2010 (before the announcement of the mining tax) is recognised in the form of an allowance for the decline in value of the assets over specified periods.

For more detailed analysis of the mining tax, please refer to our Tax Briefs in both English and Chinese.

Carbon tax

Only certain Australian industries will be subject to the carbon tax:
  • stationary energy (eg power stations);
  • transport;
  • industrial processing and manufacturing;
  • waste; and
  • fugitive emissions (eg from coal mines).

Entities with operational control of facilities in those industries that produce at least 25,000 tonnes of carbon emissions per year will be required to purchase and surrender carbon permits to offset their emissions.For the first 3 years commencing on 1 July 2012 and ending on 30 June 2015:

  • the price of carbon permits will be fixed by the government, starting at $23 per tonne and increasing by 2.5% per annum; and
  • there will not be a limit on the number of carbon permits issued.

From 1 July 2015, the carbon tax will change to a 'cap and trade' regime:

  • the number of carbon permits will be capped by the government; and
  • the market will determine the price of carbon permits by way of auction and secondary markets.

In order to protect certain Australian emission intensive and trade exposed industries, operators in those industries can potentially be entitled to concessions to reduce the immediate impact of the carbon tax on their cost structures.

For more detailed analysis of the carbon tax, please refer to our Tax Briefs in both English and Chinese.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Greenwoods & Freehills are the winners of the 2011 BRW Client Choice Awards.

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