Tonight's Budget is very much an election year budget. With an $18 billion deficit to deal with, the Treasurer cited massive falls in projected tax revenue as the cause, including a fall in revenue from the mining tax that was originally expected to raise $13 billion over the first four years, while the revised estimate is now $3.3 billion over the same period. Corporate Australia and non-resident investors are the focus of many of the significant tax changes proposed in this Budget and, if the proposals are ultimately passed into law, are likely to have a significant impact on investment.
The big question will be which of the Budget announcements the Government will be able to legislate before the Federal election in September. There are only 19 sitting days of Parliament before the election and the Government has more than 100 proposed tax changes that are not yet legislated. Some of these include announcements in last year's Federal Budget, including measures allowing companies to get a refund for tax losses (unlikely to see the light of day as this was estimated to cost $700 million over four years) and to remove the 50% capital gains tax (CGT) discount for non-residents
The major revenue measures announced in the Budget include:
- a significant package of measures targeting multinational profit shifting structures, including reducing thin capitalisation ratios, controlled foreign company (CFC) changes, foreign exempt income and non-portfolio dividends
- changes to Australia's foreign resident CGT regime
- measures to prevent "dividend washing" and doubling up of franking credits
- closing consolidation loopholes
- a restriction on immediate deduction for mining rights and information
- changes to the offshore banking units (OBU) regime from 1 July 2013
- tightening of the R&D incentive
- compliance improvements through third party reporting and data matching
- increasing the Medicare levy to 2%
- capping self-education expenses at $2,000, and
- phasing-out the medical expense tax offset.
In last year's Budget the Government introduced a "tax reform roadmap", which has been updated in this Budget. Foreshadowed tax changes proposed to be introduced include:
- extending the loss carry back from 2013-14, enabling companies to carry back up to $1 million of losses against tax paid up to two years earlier
- introducing an uplift allowance for designated infrastructure projects from 2012-13. The incentive will preserve the real value of tax losses over time. Eligible losses will also be exempted from the continuity of ownership test and the same business test
- the progressive increase in the super guarantee rate
- reducing interest withholding tax paid by financial institutions on offshore borrowing
- introducing non-resident CGT withholding tax
- gradually increasing the Age Pension qualifying age to 67 by 2023, and
- in 2015, applying normal Age Pension deeming arrangements to new superannuation account-based income streams.
Set out below is an overview of the main measures for businesses and certain other measures of note.
International tax measures
The Government announced that it would address profit shifting by multinationals through the disproportionate allocation of debt to Australia by tightening and improving the integrity of several aspects of Australia's international tax arrangements. In particular, the Government is proposing to:
- tighten and improve the effectiveness of the thin capitalisation rules by amending the safe harbour limits and extending a worldwide gearing test to inbound investors. It is proposed that the safe harbour limits be amended as follows:
- general entities - the limit be reduced from 3:1 to 1.5:1 on a debt to equity basis (or 75% to 60% on a debt to total asset basis)
- non-bank financial entities - the limit be reduced from 20:1 to 15:1 on a debt to equity basis (or 95.24% to 93.75% on a debt to total asset basis)
- banks - the capital limit be increased from 4% to 6% of their risk weighted assets of the Australian operations
- outbound investors - the worldwide gearing ratio be reduced from 120% to 100% (with an equivalent change to the worldwide capital ratio for banks), and
- on a positive note, it is proposed that the de minimis threshold will be increased from $250,000 to $2 million of debt deductions, which will reduce compliance costs for small business.
Non-portfolio dividends and interest deductions
Government is proposing to:
- better target the exemption for foreign non portfolio dividends received by Australian companies, and
- remove the provision in the tax legislation that allows a tax deduction for interest expenses incurred in deriving certain exempt foreign income. The Assistant Treasurer said "it is now clear that this concession is being abused".
Controlled foreign company measures
The Government announced that the remaining reforms to the CFC rules and foreign source income attribution rules announced in the 2009-10 Budget would "be reconsidered after the OECD's analysis is completed". The Assistant Treasurer said the Organisation for Economic Co-operation and Development recognised CFC rules as a key "pressure area" in its work on base erosion and profit shifting, and that the CFC rules reduce the incentive for businesses to adopt aggressive restructuring arrangements to shift profits.
The above measures are proposed to take effect for income years commencing on or after 1 July 2014. Corporate Australia has been waiting for some years for the range of proposals made over the last four years to be implemented in some form or other. The continual uncertainty of these reforms is a matter of concern for the business community, which has had to operate offshore operations without any clear guidance as to the legislative regime applying.
Capital gains tax - Foreign residents
The Government will make a number of amendments to Australia's CGT regime and its application to non-residents. Amendments will be made to the principal asset test to ensure that indirect Australian real property interests are taxable if disposed of by a foreign resident. The amendments will:
- remove the ability to use transactions between members of the same consolidated group to create and duplicate assets, and
- value mining, quarrying or prospecting information and goodwill together with the mining rights to which they relate.
These amendments will apply to CGT events with effect from 14 May 2013.
The Government is also proposing to introduce a 10% non final withholding tax that will apply to the disposal by foreign residents of certain taxable Australian property from 1 July 2016. This measure will only apply to residential property transactions over $2.5 million. This is designed to assist revenue collection from transactions by non-residents without a connection to Australia.
Preventing "dividend washing"
The Government will close a loophole that enables sophisticated investors to engage in "dividend washing". Currently, sophisticated investors can engage in dividend washing to, in effect, trade franking credits. This can result in some shareholders receiving two sets of franking credits for the same parcel of shares, which is outside the intent of the dividend imputation system.
This measure will ensure that when an investor engages in dividend washing by selling shares with a dividend and then immediately buying equivalent shares that still carry a right to a dividend, they will only be entitled to use one set of franking credits. The changes will be targeted to the two day period after a share goes ex dividend.
It is proposed that this measure will apply from 1 July 2013.
Accessing international tax info: Australia to sign revised DTA with Switzerland
Although not a Budget announcement, the Government has also announced that it intends to sign a revised tax treaty with Switzerland. The Assistant Treasurer said a revised treaty would strengthen administrative assistance between Australian and Swiss revenue authorities, including overcoming long-standing bank secrecy provisions. He said that signing an updated treaty would boost investment and fill a crucial gap in Australia's ability to access international tax information.
The Treasurer said that, until now, "we have hit a roadblock investigating people who are suspected to be hiding their money in Swiss bank accounts to avoid paying their fair share of tax. This [revised] treaty means we'll be able to share information with the Swiss authorities so we can track down those who are hiding money overseas".
Offshore banking units
The Government will amend the OBU regime to better target genuine mobile financial sector activities and address integrity issues with the current regime. These measures will:
- treat dealings with related parties, including the transfer of transactions between an OBU and a related domestic bank, as ineligible for OBU treatment
- treat transactions between OBUs, including between unrelated OBUs, as ineligible for OBU treatment
- ensure that other provisions of the income tax law interact appropriately with the OBU provisions, and
- tighten the current list of eligible OBU activity.
These changes will apply to income years commencing on or after 1 July 2013.
Research and Development Tax Incentive
The Government will limit access to the R&D tax incentive to companies with annual aggregate Australian turnover of less than $20 billion. The incentive will provide:
- a 45% refundable tax offset to eligible companies with annual aggregate turnover of less than $20 million, and
- a 40% non-refundable tax offset to all other eligible companies.
This measure provides more focus on the SME market in the area of R&D and moves away from the very large corporates. This measure will apply to income years starting on or after 1 July 2013.
In response to recommendations made by the Board of Taxation, the Government is making a number of changes to the taxation consolidation regime that will apply to transactions occurring after 14 May 2013. The changes are aimed at
- preventing non-residents buying and selling assets between consolidated groups in order to achieve double deductions for the ultimate owner
- preventing the double counting of certain deductible liabilities and
- preventing consolidated groups shifting the values of assets between entities in order to achieve double deductions.
Further, where a member exits a consolidated group, taxpayers will only be able to recognise net gains and losses for certain intra-group assets and liabilities subject to the Taxation of financial arrangements (TOFA) regime. This will only apply to amended assessments lodged from the date of announcement.
The Government also plans to legislate to so that multiple entry consolidated (MEC) groups used by multinationals are no longer able to access tax benefits not available to domestic consolidated groups. Treasury, the ATO and the private sector will conduct a review on how best to implement this.
These measures will apply from 1 July 2014.
Extension of Monthly PAYG Instalments
The Government is proposing to extend the shift to monthly PAYG instalments to all "large" entities in the PAYG instalment system, including trusts, superannuation funds, sole traders and large investors. An entity qualifies as "large" if it meets certain turnover thresholds. The revised schedule is as follows:
- corporate tax entities with turnover of more than $1 billion will still move to monthly PAYG instalments from 1 January 2014
- corporate tax entities with turnover of $100 million or more will still move to monthly PAYG instalments from 1 January 2015
- corporate tax entities with turnover of $20 million or more, and all other entities in the PAYG instalment system with turnover of $1 billion or more, will move to monthly PAYG instalments from 1 January 2016, and
- all other entities in the PAYG instalment system with turnover of $20 million or more will move to monthly PAYG instalments from 1 January 2017.
However, entities (other than head companies or provisional head
companies) that have a turnover of less than $100 million and
report GST on a quarterly or annual basis will not be required to
shift to monthly PAYG instalments.
Further, entities in the TOFA regime will assess their entry to monthly instalments using a modified turnover test, based on their gross TOFA income rather than their net TOFA income.
These measures will apply from 1 January 2016.
Deduction for genuine exploration activities
The Government will target the immediate deduction for the cost of assets first used for exploration by excluding mining rights and information. Under this measure, mining rights and information first used for exploration will be depreciated over 15 years or their effective lives, whichever is shorter. The effective life of a mining right and associated exploration information will be the life of the mine that it leads to. If the exploration is unsuccessful, the remaining amount will be written off when this is established.
The following will continue to be immediately deductible (that is, the measure will not apply to):
- the costs of mining rights from a relevant government issuing authority
- the costs of mining information from a relevant government authority
- the costs incurred by a taxpayer itself in generating new information or improving existing information, and
- the mining rights acquired by a farmee under a recognised "farm in, farm out" arrangement—which are often used by small explorers and do not represent a base erosion concern.
The measure applies to taxpayers who start to hold the mining right or information after 7.30 pm on 14 May 2013 unless:
- the taxpayer has committed to the acquisition of the right or information (either directly or through the acquisition of an entity holding the asset) before that time, or
- they are taken by tax law to already hold the right or information before that time. Any commitment will need to be objectively verifiable.
Petroleum resource rent tax—addressing issues arising from litigation
The Government will amend the Petroleum Resource Rent Tax Act 1987 to provide industry with certainty regarding the scope to deduct legitimate expenditure following the decision in Esso Australia Resources Pty Ltd v Commissioner of Taxation. This measure will have effect from the commencement date of petroleum projects subject to the petroleum resource rent tax (PRRT).
The Government will amend the PRRT law to:
- restore the capacity for taxpayers to apportion expenditure across a number of projects, and
- allow taxpayers to claim a deduction for services purchased from third parties (while preserving the requirement to break down the cost of services where the contractor is a related party).
CGT—native title benefits
Uncertainty regarding the CGT treatment of native title rights will be removed. This measure supplements the Mid-Year Economic and Fiscal Outlook 2012-13 measure, which confirmed that income tax is not payable on certain native title benefits. This measure will clarify that there are no CGT implications resulting from the transfer of native title rights (or the right to a native title benefit) to an Indigenous holding entity or Indigenous person, or from the creation of a trust that is an Indigenous holding entity over such rights. This measure also makes it clear that capital gains or losses made from surrendering or cancelling such rights are disregarded.
This measure will apply to CGT events happening on or after 1 July 2008.
Charities and not-for-profits
Not for profit reforms—later start date
The Government has announced a later start date for the 2011 12 Budget measure Not for profit sector reforms—better targeting of not for profit tax concessions. In the case of unrelated commercial activities that commenced after 7.30 pm (AEST) on 10 May 2011, the measure will apply to activities undertaken from 1 July 2014 onwards. The later start date will enable further consultation and engagement with the not for profit sector on this measure and ensure there is an opportunity for detailed stakeholder input to be provided.
In the case of unrelated commercial activities that commenced before 7.30 pm on 10 May 2011, transitional arrangements for these activities will no longer apply from 1 July 2015 and the measure will apply to activities undertaken from 1 July 2015 onwards.
Statutory definition of "charity"—later start date
The Government has announced a later start date for the 2011 12 Budget measure Not for profit sector reforms—introducing a statutory definition of "charity". This measure will take effect from 1 January 2014, rather than 1 July 2013 as was previously announced.
The new start date will provide time for the Australian Charities and Not for profits Commission to develop guidance for charities regarding the definition.
Extending deductible gift recipient status to organisations that provide ethics classes in government schools
The Government will allow public funds that are established and maintained solely for the purpose of providing ethics classes in government schools in Australia to be endorsed as deductible gift recipients, as a new general category. This expansion is for organisations that are authorised under state or territory legislation and approved by those governments to conduct ethics classes in government schools as an alternative to special religious education classes.
The Government did not announce any new major superannuation measures in the Budget and the Budget contains further details on the package of super reforms that was announced on 5 April 2013, which included:
- tax-free pension earnings capped at $100,000 - the tax exemption for earnings on superannuation fund assets supporting income streams will be capped at $100,000 pa per person from 1 July 2014
- higher concessional contributions cap - of $35,000 for people aged 60 or over from 1 July 2013 (or 1 July 2014 for people aged 50-59) instead of the general concessional cap of $25,000, and
- excess concessional contributions - allow all individuals to withdraw any excess concessional contributions made from 1 July 2013 from their superannuation fund.
Medicare levy increase to 2%
The Medicare levy will be increased from 1.5% to 2% to fund the proposed National Disability Insurance Scheme, now renamed DisabilityCare Australia Fund with effect from 1 July 2014.
Self-education expenses to be capped
A $2,000 cap will be introduced for tax deduction claims for work-related self-education expenses per person from 1 July 2014. Deductible education expenses are costs incurred in undertaking a course of study or other education activity, such as conferences and workshops, and include tuition fees, registration fees, student amenity fees, textbooks, professional and trade journals, travel and accommodation expenses, computer expenses and stationery, where these expenses are incurred in the production of the taxpayer's current assessable income, and
Phase-out of medical expense tax offset
The net medical expenses tax offset will be phased out, with transitional arrangements for those currently claiming the offset. However, the offset will continue to be available for taxpayers for out-of-pocket medical expenses relating to disability aids, attendant care or aged care until 1 July 2019.
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