In accordance with the Government's election policy, the major changes to business taxation are the repeal of the Carbon Tax and Minerals Resource and Rent Tax (MRRT). To fund the removal of these taxes, a number of other tax related savings have also been made.
We have also provided below some detail regarding some of the other tax changes that will be made. These are:
- Capital Gains Tax (CGT) treatment of earn out arrangements
- Goods and Services Tax (GST) reverse charge mechanism for sales of going concern and farm land
- GST and cross-border transactions
- Loss recoupment rules where you have multiple classes of shareholders.
The Government has kept to its election commitment to repeal the carbon tax and associated measures. The removal of the carbon tax is intended to reduce cost pressure on households and businesses, which is consistent with the Government's plan for a stronger economy based on lower taxes and less regulation. The abolished carbon tax will be effective from 1 July 2014. This includes:
- Abolishing the carbon pricing mechanism, with liable entities no longer required to compensate for every tonne of greenhouse gas they emit, at a cost of 12.5 billion over the forward estimates period
- Removing the equivalent carbon tax applied to aviation fuels, at a cost of $350 million over the forward estimates period
- Removing the equivalent carbon tax on the importation and production of synthetic greenhouse gases, at a cost of $200 million over the forward estimates period
- Abolishing the equivalent carbon tax applied to liquid and gaseous fuels through reductions in entitlements to fuel tax credits, at a cost of $700 million over the forward estimates period.
Repeal of the carbon tax is at a cost to the Budget of $13.7 billion over the forward estimates period.
From the removal of the carbon tax, the Government expects to achieve savings of:
- $5.3 billion over the next three years from removing business compensation measures
- $474.7 million over next four years by abolishing the energy market compensation measures
- $152 million over four years by abolishing land initiatives and unnecessary government bodies associated with the carbon tax
- $1.3 billion over the next four years by abolishing a range of other measures linked with the carbon tax.
Overall the total impact of the abolition of the carbon tax and associated measures is a net deficit in the budget of $7.4 billion over the forward estimates period.
Minerals Resource Rent Tax ("MRRT")
The Government will repeal tax measures associated with the MRRT. The measures, over the forward estimates period (the 2013-2017 financial years), include:
- Instant asset write-off - The increase in the small business instant asset write-off threshold from $1,000 to $5,000 previously announced in the 2010-11 Budget will be reversed, effective from 1 January 2014. The measure is expected to provide a gain to revenue of $2.3 billion over the forward estimates period.
- Company loss carry-back -The company loss carry-back intended to provide tax relief for companies by allowing them to carry-back tax losses to receive a refund against previously paid tax has been discontinued. The removal of the loss carry-back will be effective from the start of the 2013-14 income years and is expected to provide a revenue gain of $950 million over the forward estimates period.
- Accelerated depreciation – The $5,000 accelerated depreciation for small business motor vehicle purchases will be discontinued from 1 January 2014. The expectation is a revenue gain of $450 million over the forward estimates period.
- Definition of exploration – The inclusion of geothermal exploration under the term "exploration" will be removed as of 1 July 2014. The refined definition will provide a revenue gain of $10 million over the forward estimates period.
- MRRT – The MRRT which was introduced on 1 July 2012 and applied at an effective rate of 22.5% to mining profits from Australian iron ore and coal operations has been repealed, with effect from 1 July 2014. Mining companies will no longer accrue any MRRT liabilities from this date. The repeal will have a cost to the Budget of $3.3 billion over the forward estimates period.
Below is a summary of the key measures that are proceeding:
Capital Gains Tax (CGT) treatment of earn-out arrangements
Under this measure:
- additional payments made under a 'standard' earn-out arrangement will be treated as relating to the original asset for the seller and will be added to the cost base for the buyer
- payments made under a 'reverse' earn-out arrangement will be treated effectively as a repayment of part of the capital proceeds.
Effectively, the measure treats earn out payments as part of the value of the business asset for CGT purposes. This measure will apply to earn-out arrangements any taxpayer enters into on or after Royal Assent of the amending legislation.
Reverse charge GST mechanism for the sale as a going concern or of farm land
Under the current exemptions, the sale of a going concern or farmland can be treated as GST Free as long as certain criteria are satisfied. Under the proposed measure, a reverse charge mechanism is to be introduced where the purchaser is registered for GST, the supply will be a GST taxable supply to the purchaser and the purchaser will be entitled to claim a GST refund at the same time (on the same BAS). This will take effect from the date of Royal Assent.
Income tax treatment of instalment warrants
The measure treats the beneficiary of an instalment warrant trust as the taxpayer for income tax purposes in relation to the underlying asset in the trust.
In the 2011-12 Federal Budget, the Government further announced it will extend the look-through treatment beyond single exchange traded securities to include instalment warrants and receipts over:
- direct and indirect interests in listed securities
- unlisted securities in widely held entities
- bundles of these assets.
The changes confirm the treatment of an instalment warrant or instalment receipt over specified assets as the owner of the security for income tax purposes. As a result, there will be no CGT applicable at the time the last instalment is paid for instalment warrants over these types of assets. The date of effect will be when the measure receives Royal Assent.
GST and cross-border transactions – "connected with Australia" rules
These amendments are expected to be positive for businesses by reducing the numbers of non-residents in the GST system and limiting the circumstances where Australian suppliers need to charge GST to non-residents.
The 'connected with Australia' rules will be amended to limit the circumstances, where supplies of goods, services and intangibles by non-residents to registered Australian businesses, are connected with Australia (and hence subject to GST). It is proposed that:
- the supply of goods between non-residents that are leased to an Australian business will not be connected with Australia and hence not subject to GST; and
- the exemption to the GST free export rules( which allows supplies to non-residents provided to an entity in Australia are taxable) be limited, so that supplies made to a non-resident, but provided to a registered business in Australia or employee or office holder, will be GST-free.
The proposed rules may create new areas of uncertainty, such as the obligation to determine whether customers and non-residents are carrying on a business. As such, it will be imperative for both Australian and non-resident businesses to review their cross border arrangements. The date of effect for the GST rules will be when the measure receives Royal Assent.
Loss recoupment rules – multiple classes of shares
The proposed changes to the loss recoupment rules for companies include:
- ensuring that companies do not fail the continuity of ownership test (COT) because they have multiple classes of shares on issue or because they have special arrangements in place to make distributions of dividends and capital returns with effect from 1 July 2002;
- clarifying the meaning of 'voting power' in the context of the COT with effect from 1 July 2007; and
- ensuring that the entry history rule in the consolidation regime is to be disregarded in applying the same business test (SBT) with effect from 1 July 2002.
The measure is expected to improve the operation of the tax loss rules in a limited range of circumstances (i.e. where a company has non-standard classes of shares or when it joins a consolidated group).
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