The 2015-2016 Federal Budget has, as expected, introduced a number of interesting developments to Australia’s tax landscape. Relevantly, the Budget has introduced revised anti-avoidance measures targeting the diversion of profits from Australia by large multinational corporations. The Budget has also introduced a number of business incentives, including the promised 1.5% tax cut for small businesses and accelerated depreciation to encourage employment growth.
Overall, there have not been substantial changes to large business taxation. The focus of the Budget has been incentives to small business. The Budget is relatively conservative in nature, with modest spending cuts. As expected, the Government is leaving the more structural tax reform to the consultative process arising out of the Tax Discussion Paper released on 30 March 2015 and the forthcoming Green Paper expected later this year.
Among the more significant reforms outlined in the Budget, the Government will:
- amend the existing anti-avoidance measures in Part IVA of the Income Tax Assessment Act 1936(Cth) to include:
- new integrity measures targeting international “contrived arrangements” undertaken by companies with over AUD$1 billion in revenues which seek to impose corporate tax plus 100% penalties on Australian sourced profits by multinational corporations (for both existing and new schemes); and
- new documentation standards, including a country by country report and files covering the global revenue of the relevant corporate group;
- impose GST on supplies of digital products and services in Australia;
- provide a small business tax cut of 1.5% (companies down to 28.5%) and 5% (unincorporated businesses) from 1 July 2015;
- provide small business incentives including accelerated depreciation and capital gains tax (CGT) rollover changes;
- introduce transitional rules for Managed Investment Trusts with the new regime starting on 1 July 2016 (with an opt in from 1 July 2015).
The following table summarises the key measures announced. For further information about a particular budgetary measure, please select a measure below or continue scrolling.
- Small Business
- Tax Compliance
- Personal Tax
- Goods and Services Tax (GST)
- Other measures
Click here to view the table
Research and Development tax incentive — introducing a $100 million expenditure cap
The Government has introduced a cap of $100 million on the amount of eligible research and development (R&D) expenditure for which companies can claim a tax offset at a concessional rate under the R&D tax incentive. Expenditure beyond the $100 million cap will receive a lower offset at the company tax rate.
These changes apply in relation to assessments for income years commencing on or after 1 July 2014. This measure also includes provisions for the changes to be reviewed five years following Royal Assent and to sunset ten years following the start date of 1 July 2014.
Under the R&D tax incentive, companies can claim a refundable tax offset of 43.5% if their turnover is less than $20 million or a non-refundable tax offset of 38.5%.
The Government has announced two significant tax cuts to allow small businesses to improve their cash flows, encourage growth and competition, and allow for the hiring of additional employees.
The first is to reduce the company tax rate to 28.5% for companies with aggregated annual turnover of less than $2 million. The current maximum franking credit rate for a distribution will remain at 30% for all companies, maintaining the existing arrangements for investors, including self-funded retirees.
The second is to introduce a small business tax discount for individual taxpayers with business income from an unincorporated business that has an aggregated annual turnover of less than $2 million. The discount will be 5% of the income tax payable on the business income received from an unincorporated small business entity. The discount will be capped at $1,000 per individual for each income year, and delivered as a tax offset.
The Government has announced amendments to capital gains tax (CGT) roll-over provisions for small business, to recognise that the initial legal structure chosen by new small businesses may not be suitable when the business subsequently becomes more established.
The Government will allow small businesses with an aggregated annual turnover of less than $2 million to change legal structure without attracting a CGT liability. This measure will be available for businesses that change entity type from the 2016-17 income year.
Fringe Benefits Tax
The Government has announced an expansion of the current fringe benefits tax (FBT) exemption for electronic devices, recognising the growing reliance of employees upon multiple electronic devices in a small business environment.
The Government will allow a FBT exemption from 1 April 2016 for small businesses with an aggregated annual turnover of less than $2 million that provide employees with more than one qualifying work-related portable electronic device, even where the items have substantially similar functions – such as a tablet and a laptop.
This change will expand the current exemption, where an FBT exemption can apply to more than one portable electronic device used primarily for work purposes, but only where the devices perform substantially different functions.
The Government will significantly expand accelerated depreciation for small businesses by allowing small businesses with aggregate annual turnover of less than $2 million to immediately deduct assets they start to use or install ready for use, provided the asset costs less than $20,000.
This measure will apply to assets acquired and installed ready for use between 7.30pm (AEST) 12 May 2015 and 30 June 2017. Assets valued at over $20,000 remain eligible to be placed in the small business simplified depreciation pool and depreciated at 15% in the first income year and 30% each income year thereafter. The pool can also be immediately deducted if the balance is less than $20,000 over this period (including existing pools).
The Government will also suspend the current ‘lock out’ laws for the simplified depreciation rules until 30 June 2017. These laws prevent small businesses from re-entering the simplified depreciation regime for five years if they opt out.
From 1 July 2017, the thresholds for the immediate depreciation of assets and the value of the pool will revert back to existing arrangements.
Northern Australia Infrastructure Facility
The Government will provide a $5 billion concessional loan facility to promote private sector participation in major infrastructure to develop the north of Australia.
This initiative reflects a broader shift in focus by the Government towards the Northern Territory, brought about as a result of the economy transitioning away from resources-led growth.
The government envisions the funds will be spent on major infrastructure projects including ports, railways, pipelines and electricity generation.
Digital transformation agenda
The Government will invest $255 million in digital infrastructure to transform the way public services are designed and delivered, making them simpler and easier to use.
Notably, a new online business account will be created to facilitate business transactions with the government, and the myGov platform will be expanded to host additional online services for individuals.
Continuing Focus on Infrastructure Spending
Major projects that were announced in previous years continue. 19 new projects were commenced in 2014, with 55 to start construction in 2015. Notable projects include the NBN, Asset Recycling Initiative, NorthConnex, WestConnex, and North-South Road Corridor.
The Government has also reaffirmed its commitment of $3 billion to the controversial East West Link in Melbourne, and suggested that should the Victorian Government refuse to go ahead with the project, the Commonwealth will demand the return of $1.5 billion already allocated to the project.
Accelerated depreciation for primary producers
From 1 July 2016, the Government will allow agricultural businesses full and instant deductions for capital expenditure on fencing and water facilities (such as dams, tanks, bores, irrigation channels, pumps, water towers and windmills). In addition, investment in silos and tanks used to store grain and other animal feed may be depreciated over 3 years.
These measures offer significant reductions to the current “effective life” of relevant depreciable assets used in agricultural businesses. Currently, fences are depreciated over 30 years, water facilities up to 3 years and storage assets can be depreciated over 50 years.
The measure is aimed at encouraging drought preparedness for primary producers, assisting with cash flow and reducing the administrative burden of tracking expenditure over time.
The Government has indicated that this measure will form part of its White Paper on Agricultural Competitiveness.
In addition to the accelerated depreciation for primary producers, the Government will provide $250 million over the 2015-16 year to extend the concessional loan schemes provided under the Drought Concessional Loan Scheme and the Drought Recovery Concessional Loan Scheme. The Government has announced that whilst both concessional loan schemes will retain the same key features and loan settings, they will now be available in all Australian jurisdictions on an “as required” basis.
The Government will also provide $25.8 million over four years (commencing 1 July 2015) to assist farm businesses to manage the impacts of pest animals in drought-affected areas.
Multinational Anti-Avoidance Law
The Government proposes to amend the existing anti-avoidance measures in Part IVA of the Income Tax Assessment 1936 (Cth) to target the activities of multinational companies who are diverting profits earned in Australia towards no or low tax jurisdictions. These measures are intended to deal with the activities of 30 identified multinational companies that the ATO has recently been reviewing.
In conjunction with the Budget, the Government has released Exposure Draft legislation to amend the current anti-avoidance regime. The new measures seek to impose income tax on profits and withholding tax on royalties and interest on certain foreign resident multinational corporations with a global revenue of over $1 billion.
King & Wood Mallesons has released a separate alert on the Exposure Draft legislation, which is available here.
Offshore Banking Units
The Government will proceed with reforms to modernise the Offshore Banking Unit (OBU) regime and targeted integrity measures. This will apply to income years commencing on or after 1 July 2015.
The law will be amended to modernise the OBU tax concession by:
- updating the list of eligible activities to better target genuine mobile financial sector activities by including, for example, leasing arrangements; and
- updating the method of allocating certain expenses between the operations of a taxpayer’s domestic banking unit and the OBU to ensure expenses and revenue are properly matched.
On 30 January 2014, the Government announced that it would delay the start date of the former Government’s measure to better target and address integrity issues associated with the OBU regime. This delay was to allow for the targeted integrity rules to be fully considered and implemented in one complete package with other OBU reforms that were recommended by the Johnson Report, including the recommendation to review the list of activities eligible for the OBU tax concession.
Strengthening Australia’s foreign investment framework
The Government will strengthen Australia’s foreign investment framework through improved compliance and enforcement, stricter penalties, the introduction of application fees, and more scrutiny and greater transparency for agricultural investment.
The introduction of application fees on all real estate, business and agricultural foreign investment proposals from 1 December 2015 is estimated to raise $735 million in revenue.
Under the new arrangements, increased criminal penalties and a new civil pecuniary penalties regime will be introduced for breaches of the Foreign Acquisitions and Takeovers Act 1975. A reduced penalty period for foreign investors that have previously breached the foreign investment rules in relation to residential real estate has been provided until 30 November 2015. These investors may avoid prosecution, but will be required to divest the property.
Increased scrutiny and transparency around the levels of foreign investment in agriculture will be achieved by lowering screening thresholds and introducing a foreign ownership register.
Managed Investment Trusts – transitional period to apply to recently released rules
Following the release of A New Tax System for Managed Investment Trusts draft legislation in April 2015, the Government has now announced a twelve month transitional period in relation to the rules.
The proposed rules will now apply from 1 July 2016. Managed Investment Trusts (MITs) can however choose to apply the rules from the earlier start date of 1 July 2015.
The provision of a transitional period responds to stakeholder feedback that many MITs require additional time beyond 1 July 2015 to make amendments to their trust deeds and IT systems. It was of particular importance given the regime under the current proposed drafting is not elective.
MITs and other trusts treated as MITs will continue to be allowed to disregard the trust streaming provisions for the 2015-16 income year. This will ensure that the interim arrangements for MITs continue to apply until the commencement of the new rules.
Despite fears of significant superannuation changes in the Budget, the Budget generally maintains the status quo on superannuation arrangements.
Relevantly, however, the Government will introduce measures which provide that a larger proportion of a superannuant’s actual defined benefit income is taken into account when applying relevant social security income test. This is intended to achieve equity in payments and savings of $465.5 million over five years. Under this measure, the proportion of income that can be excluded from any income test (being the deductible amount) will be capped at 10% from 1 January 2016.
The Government has also identified that it will reduce red tape for superannuation funds and individuals by introducing measures to remove redundant reporting obligations, and to streamline lost and unclaimed superannuation administrative arrangements.
Additionally, the Government will increase the supervisory levies paid by financial institutions. This will be undertaken in order to recover the cost of superannuation activities undertaken by the ATO and the Department of Human Services.
A range of other measures are detailed in the Budget in relation to superannuation, such as early release of superannuation funds in certain circumstances.
Serious Financial Crime taskforce
The Government will provide $127.6 million over four years to establish a cross-agency Serious Financial Crime taskforce for investigations and prosecutions that will address superannuation and investment fraud, identity crime and tax evasion.
The aim of the taskforce is to maintain integrity and community confidence in Australian financial markets and regulatory systems. This follows on from, and expands the scope of, the successes of the Project Wickenby investigations, which end in 2015.
The taskforce agencies include the Australian Taxation Office, Australian Crime Commission, Australian Federal Police, Attorney-General’s Department, Australian Transaction Reports and Analysis Centre, Australian Securities and Investments Commission, Commonwealth Director of Public Prosecutions and Australian Customs and Border Protection Services.
The measure is estimated to increase revenue by $419.7 million and expenses by $130.8 million with a net improvement to the Budget of $288.9 million in fiscal terms over the forward estimates period. The revenue includes an additional GST component of $3.2 million, which will be paid to the States and Territories.
Statutory remedial power for the Commissioner of Taxation
The Government will provide the Commissioner of Taxation with a power to make a legislative instrument to modify the operation of the tax law to ensure that the law’s purpose or object is achieved. The measure will have effect from the date of Royal Assent of the enabling legislation.
The nature and volume of tax law and its evolution has sometimes produced unforeseen or unintended outcomes when applied to the specific factual situations of individual taxpayers. The statutory remedial power will allow the Commissioner to administer the law consistently with its purpose or object, where it has no more than a negligible budget impact and provided it has a beneficial outcome for affected taxpayers. The power was discussed by a working group established by the Treasury and the ATO with the private sector in 2014.
APRA and the ASIC already have similar powers. The approach of the Commissioner to this power will be very important to monitor.
Reforms to the Australian Taxation Office
The Government will provide $130.9 million over four years to improve the experience of taxpayers in their dealings with the ATO.
Red tape will be reduced through investment in three key initiatives: a “digital by default” service for the provision of information and the making of payments, improvements to data and analytics infrastructure, and enhancing streamlined income tax returns through the myTax system for taxpayers with more complex tax affairs.
The costs of this measure will be met from within the existing resourcing of the ATO, and will have no net impact on total ATO resourcing.
Tax Residency for Temporary Workers
The Government will change the tax residency rules from 1 July 2016 to treat most temporary workers on working holiday visas in Australia as non-residents for tax purposes, regardless of how long they work in Australia. This means they will be taxed at 32.5 per cent from their first dollar of income.
Currently, a working holiday maker can be treated as a resident for tax purposes if they satisfy the tax residency rules, typically that they are in Australia for more than six months. This means they are able to access resident tax treatment, including the tax-free threshold of $18,200, the low income tax offset and the lower tax rate of 19 per cent for income above the tax free threshold up to $37,000.
Modernising the methods used for calculating work-related car expense deductions
The Government will remove the ‘12 per cent of original value’ and the ‘one-third of actual expenses’ methods of calculating work-related car expense deductions from the 2015-16 income year onwards.
The ‘cents per kilometre’ method will be modernised by replacing the three current rates based on engine size with one rate set at 66 cents per kilometre applicable to all motor vehicles. The ‘logbook method’ of calculating expenses will be retained.
These changes will not affect leasing and salary sacrifice arrangements.
Family Package – Childcare subsidy
As foreshadowed by the Government prior to the Budget, the Budget introduces a simplified Child Care Subsidy (CCS) from 1 July 2017. A subsidy of 85 per cent of child care costs will be available to families with an annual income up to $60,000, tapering to 50 per cent for families with incomes over $165,000.
The subsidy will be uncapped for incomes below $180,000 and otherwise capped at $10,000 per child per year. Hourly fee caps will also apply.
A new activity test is proposed to align the subsidy with hours of work or study. A similar pilot program of subsidised home based care (nannies) will be extended to families who have difficulty accessing flexible child care.
These measures will replace the existing Child Care Benefit, Child Care Rebate and the Jobs, Education and Training Child Care Fee assistance payments.
Age Pension asset free threshold
The Budget proposes three key measures designed to improve the integrity of the Age Pension and reduce expenditure. These are:
- an increase to the asset free threshold;
- an increase to the taper rate from $1.50 to $3 for every $1,000 of assets that exceed the assets free threshold; and
- a cap to the amount of defined benefits income (for superannuants receiving a defined benefits income stream) that can be excluded from the income test at 10%
The Government does not intend to proceed with plans to index the Age Pension by CPI.
Zone Tax Offset will not apply to FIFO workers
The Zone Tax Offset, which provides a tax concession to workers in remote locations, will no longer apply to fly-in fly-out, or drive-in drive-out, workers who do not take up “genuine residence” within a zone. This is so even if a relevant worker work for more than 183 days per year in the zone.
Higher Education Loan Program (HELP) – recovery of repayments from overseas debtors
The Government will extend the HELP repayment framework to debtors residing overseas. From 2016-17, HELP debtors residing overseas for six months or more will be required to make repayments of their HELP debt at the same repayment rates as debtors in Australia if their worldwide income exceeds the minimum repayment threshold.
Goods and Services Tax (GST)
GST to be imposed on digital products and services
The Government proposes to expand the scope of GST so that it applies to cross border supplies of digital products and services (such as streaming or downloading of movies, music and apps, as well as the provision of consultancy and professional services) imported by Australian consumers from 1 July 2017.
Under current law, Australian suppliers of digital products to Australian customers have to charge GST while offshore suppliers do not.
Although rules exist to impose GST on certain services and other intangibles acquired by Australian businesses from overseas suppliers, these rules do not apply to Australian consumers who are not registered or required to be registered for GST. Consequently, such services and other intangibles acquired by Australian consumers from foreign suppliers are currently not subject to GST.
By applying GST to these items, the Government is seeking align the GST treatment of intangible supplies made by offshore suppliers and those made by suppliers who operate in Australia.
Draft GST legislation to enact the proposed changes has been released for review. The Government has said that the changes will require unanimous agreement of the states and territories.
The revenue from this initiative is expected to be $350 million over the next four years.
Three-year extension to GST compliance programme
The Government will provide $265.5 million in funding to the ATO over three years from 2016-17 to continue a range of activities to promote GST compliance. The measure is estimated to derive a net improvement to the Budget of $445 million.
Reverse charge for supplies of going concerns and farmland not to proceed
The Government will not proceed with the previously announced measure to replace the current GST-free treatment for supplies of going concerns and farmland with a reverse charge mechanism. The Government had previously announced that it would proceed with the measure in December 2013.
Scientific Research Infrastructure Funding Cut
Despite previous announcements, the Budget does not contain any measures cutting the funding of the National Collaborative Research and Infrastructure Strategy (NCRIS).
The Government had indicated that it would cease funding the NCRIS if the Senate failed to pass legislation to deregulate the university sector. Draft legislation was introduced into the Senate last year, but that legislation was not approved.
While the NCRIS will continue to be funded, the Government has only committed support for a further 12 months. Funding for scientific research infrastructure is however no longer tied to the passage of the Government’s higher education reforms.
ASIC Competition for Market Services
$12.7 million will be provided over 4 years to ASIC to maintain the Changes to Market Structure and Competition for Market Services policy and market integrity rules.
The market integrity rules were released by ASIC in 2011 (ASIC Market Integrity Rules (Competition in Exchange Markets) 2011). They apply to markets trading in equity market products admitted to quotation on ASX and deal with issues relating to the introduction of competition between exchange markets.
The rules aim to mitigate issues that result because of multiple exchange markets and crossing systems. The funding will help protect retail investors by ensuring the integrity of the financial markets. The funding will be offset by fees levied by ASIC.
Commercialisation of ASIC Registry function
The Budget includes funding of $12.6 million for a competitive tender process to seek offers from the private sector to take over and improve the ASIC Registry and to develop value added products.
The tender process is part of the Government’s push to reduce the size and complexity of government by eliminating duplication and waste, streamlining services and reducing the cost of government administration.
The ASIC Registry manages files on every registered company, providing information on business names, histories and financial records for roughly 2 million Australian businesses.
From 2015-16, a total of $7.8 million over four years will also be allocated to ASIC to implement and monitor a regulatory framework to facilitate the use of crowd-source equity funding. The framework will include simplified reporting and disclosure requirements. $2.6 million in funding has been allocated to the 2015-16 financial year