Significant changes have been made by the Government to Australia’s corporate tax landscape. The key changes include the aspirational goal of reducing the corporate tax rate to 25% over the next 10 years, refinements to the Taxation of Financial Arrangements (TOFA) regime and integrity measures with respect to the tax consolidation regime.

Reduction of the Corporate Tax Rate

The Government will reduce the company tax rate to 25 per cent over 10 years. This is a significant change for corporate taxpayers, as the reduction in the corporate tax rate will apply (eventually) to all companies and not just small companies (as was the case with the reduction in the corporate tax rate to 28.5% in the 2015/16 Federal Budget).

The reduction in the corporate tax rate will be staggered over the next 10 years as follows:

  • For those companies with an annual aggregated turnover of less than $10.0 million, the corporate tax rate will be reduced to 27.5% for the income year commencing 1 July 2016. For those companies that exceed this threshold, they will continue to be subject to the current rate of 30% for the income year commencing 1 July 2016.
  • The turnover threshold for corporate taxpayers who are able to access the 27.5% rate will then be progressively increased for each subsequent income year to ultimately have all companies at 27.5% for the year commencing 1 July 2023. The increases in the threshold will be as follows:

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  • In the income year commencing 1 July 2024 the corporate tax rate will be reduced to 27% for all corporate taxpayers and then be reduced progressively by 1 percentage point per year until it reaches 25% for the year commencing 1 July 2026.

Franking credits will be able to be distributed in line with the rate of tax paid by the company making the distribution.

This move is expected to be welcomed by corporate Australia, as the current 30% rate in Australia is the seventh highest corporate tax rate out of the 34 OECD countries and significantly higher than our Asian neighbouring countries.

TOFA

The taxation of financial arrangements (TOFA) has been an area of great complexity for taxpayers and although originally intended to predominantly apply to larger taxpayers, in practice it has had broader application. The Government will reform the TOFA regime to address these issues. The new simplified rules will apply to income years on or after 1 January 2018.

The redesign will include:

  • A ‘closer link to accounting’ in order to strengthen and simplify the link between tax and accounting in the TOFA rules.
  • Simplified accruals and realisation rules, with the aim of reducing the number of taxpayers subject to the TOFA rules, reducing the arrangements where spreading of gains and losses is required under TOFA and simplify the required calculations.
  • A new tax hedging regime which more accessible, accommodates a wider range of risk management arrangements and removes the direct link to financial accounting.
  • Simplified rules for the taxation of gains and losses on foreign currency to preserve the current tax outcomes but streamline the legislation.

The Government will also take this opportunity to legislate a number of previously announced policy measures. These include

  • amendments to tax hedging rules - to provide greater certainty and transparency with regards to application of these rules;
  • extending the range of entities that can use a functional currency – this will allow certain trusts and partnership entities which report in a foreign currency to calculate net income in the foreign currency; and
  • amendments to foreign currency regulations – to achieve technical and compliance cost savings.

Asset Backed Financing

In the 2014-15 Budget, the Government announced that in certain situations where a subsidiary joined or left a consolidated group, accounting liabilities relating to securitised assets would be disregarded. This amendment sought to target distortions in the consolidation tax cost setting rules. The distortion occurred where an asset was not recognised for tax consolidation purposes, but a related accounting liability was (or vice versa).

This amendment has now been extended to non-financial institutions (recognising that the distortions extended beyond financial institutions) and should ensure a consistent treatment applies to liabilities both within financial and non-financial institutions. The liabilities will be disregarded if the relevant securitised asset is not recognised for tax purposes. This should correct the mismatch that may otherwise arise as part of determining the tax consolidation tax cost setting rules. An example of where a securitised asset may not be recognised for tax purposes where the asset does not have an economic value in the hands of the joining entity as a result of being equitably assigned to the special purpose vehicle. The change is expected to occur by virtue of the entry and exit tax cost setting rules being modified (consistent with the amendments made as part of the 2014-15 Budget measures).

The Government believes that by extending these arrangements to non-financial institutions, the integrity of the consolidation regime will be strengthened.

The proposed amendments are to apply from those arrangements which commence on or after the budget was released (7:30pm, 3 May 2016). Transitional rules will apply to those arrangements which commenced before this time.

Consolidation – Deferred Tax Liabilities

The Government will amend the tax consolidation regime with respect to the treatment of deferred tax liabilities by removing adjustments relating to deferred tax liabilities from the consolidation entry and exit tax cost-setting rules. This change was initially put forth in the Board of Taxation paper of April 2013 on the post implementation review of the tax consolidation regime. As noted in the Board of Taxation paper, the current regime provides for a commercial/tax mismatch under the consolidation entry and exit tax cost-setting processes for deferred tax liabilities which gives rise to integrity risks and uncertainty.

The proposed changes will apply to joining and leaving events involving tax consolidated groups for transactions that commence after the date amending legislation is introduced in Parliament. As with a number of other proposed changes to the consolidation regime which came out of the Board of Taxation paper (see Consolidation – Deductible Liabilities below), it is unclear when the legislation implementing these changes will be introduced into Parliament.

Consolidation – Deductible Liabilities

Corporate Australia will be pleased to learn that the Government has finally addressed the changes to the tax consolidation regime with respect to the double counting of deductible liabilities. This issue was addressed in the Board of Taxation paper of April 2013 on the consolidation regime (see above) and the Government first announced legislative changes on this matter in the 2013/14 Federal Budget. The 2013/14 changes would have required the head company of a tax consolidated group, which acquired an entity with a deductible liability, to include the liability in the ACA calculation and to also include an amount in its assessable income following the joining time. This measure was designed to ensure that there was no duplication of the loss in respect of the same liability.

The 2013/14 changes were never implemented and to date the Government has been unclear on whether the changes would apply from:

  • the date of announcement (i.e. the date of the 2013/14 Federal Budget);
  • the date enacting legislation was introduced into Parliament; or
  • another time in the future.

This has led to confusion, particularly in the context of the acquisition of companies with deductible liabilities by consolidated groups, as the vendor and purchaser took different views as to who should bear the risk of the originally proposed amendment.

The Government has announced that from 1 July 2016, the measure announced in the 2013/14 Federal Budget will be introduced, subject to some modifications. Broadly, the measure will be modified such that:

  • a consolidated group that acquires a subsidiary with deductible liabilities will no longer include those liabilities in the consolidation entry tax cost setting process; and
  • the head company will not be required to bring an amount to account as assessable income as would have been required under the previously announced measure.

This should remove the double benefit associated with deductible liabilities.

Consolidation – Securitised Asset Measure

In the 2014/15 Federal Budget, Government announced that in certain situations where a subsidiary joined or left a consolidated group, accounting liabilities relating to securitised assets would be disregarded. This amendment sought to target distortions in the consolidation tax cost setting rules.

This amendment has now been extended to non-financial institutions (recognising that the distortions extended beyond financial institutions) and should ensure a consistent treatment applies to liabilities both within financial and non-financial institutions. In order for the liability to be disregarded, the relevant securitised asset must not be recognised for tax purposes.

The Government believes that by extending these arrangements to non-financial institutions, the integrity of the consolidation regime will be strengthened.

The proposed amendments are to apply from those arrangements which commence on or after the budget was released (7:30pm, 3 May 2016). Transitional rules will apply to those arrangements which commenced before this time.