This special edition of Acumen discusses the key taxation reforms for business announced on the evening of May 3rd by Treasurer Scott Morrison in the 2016 Australian Federal Budget, highlights of which are:

  • on the positive side, a “10 year enterprise tax plan” involving reductions to the corporate tax rate and some limited additional support for start-up businesses and innovation; and
  • on the negative side, further measures targeting multinational companies, including the introduction of a diverted profits tax, and substantial changes to limit access to superannuation tax concessions.

Just another Budget…

At a headline level, the 2016 Federal Budget forecasts a Budget deficit of A$39.9 billion, with further deficits to follow over the forward estimates.

While the “enterprise tax plan” is positive, there is only an immediate corporate tax cut from 28.5% to 27.5% for small and medium businesses with turnover below A$10 million from 1 July 2016, with the reduction in the corporate tax rate for large taxpayers from 30% to 25% not being implemented until the 2026-27 financial year.

In an election year, serious tax reform - such as addressing Australia’s over-reliance on direct taxes, issues around negative gearing and fundamental reform of the superannuation system - was ruled out early in the process. Instead, the Government has again gone for “soft targets” in terms of voting impact, namely multinational taxpayers and high income earners saving for their retirement.

Little was announced that seems geared to kick-start the economy in what the Treasurer admitted are “extraordinary times”, with the recent 0.2% fall in the consumer price index and a further drop in interest rates announced by the Reserve Bank earlier in the day.

Multinational taxation – the attack continues

Following on from recent legislative changes to tighten Australia’s thin capitalisation rules, introduce new transfer pricing measures aligned with the OECD’s transfer pricing guidelines and enact the multinational anti-avoidance rule, tonight’s Budget includes a number of additional measures directed at addressing perceived multinational tax avoidance which are outlined below.

New diverted profits tax

The diverted profits tax measure will apply from income years starting on or after 1 July 2017 to companies with global revenue of A$1 billion or more. Broadly, the diverted profits tax will apply to related party arrangements:

  • that result in overseas tax paid on the profits diverted of less than 80% of the tax that would have been paid in Australia;
  • where it is reasonable to conclude that the arrangement was designed to secure the tax advantage; and
  • where the arrangement does not have sufficient economic substance.

Where the measure applies, a 40% tax will be imposed on the diverted profits.

“Whistleblower” protection measures

The Government announced that under (unspecified) new arrangements, individuals, including employees, former employees and advisers, disclosing information will be better protected under the law.

Tax avoidance taskforce

The Government intends spending $678.9 million over the next four years on a taskforce, to be led by the Australian Commissioner of Taxation, and charged with improving tax compliance in high tax risk sectors. This expenditure includes:

  • a 55% increase in funding for compliance programs targeting, amongst others, multinationals; and
  • a 43% increase in resources devoted to tackling multinationals (including, on average, an additional 390 staff per year),

to result in better targeted tax audits and higher tax collections. External experts will be appointed to support the taskforce including a panel of eminent former Judges to review any proposed settlement arrangement to ensure that they are fair and appropriate.  The Government has also committed to enhancing the information sharing between the Australian Taxation Office (ATO) and the Australian Securities and Investments Commission.

New hybrid mismatch rules

This measure will implement the OECD’s rules on eliminating hybrid mismatches and take into account the Board of Taxation’s recommendations in its report “Australian implementation of the OECD hybrid mismatch rules” and further work that the Board of Taxation has been tasked to do on how best to eliminate hybrid mismatch arrangements that arise in relation to regulatory capital in the financial sector. Broadly, the measure is aimed at multinational corporations entering into structured arrangements that exploit differences in the tax treatment of an entity or instrument under the laws of two or more jurisdictions resulting in tax being deferred or not paid at all.  These rules will commence from the later of 1 January 2018 or 6 months after Royal Assent of enabling legislation.

Increased penalties for failure to satisfy tax disclosure obligations

This measure is again directed at companies with global revenue of A$1 billion or more. The measure applies from 1 July 2017 and involves substantial increases in the administrative penalties contained in the Taxation Administration Act 1953 (Cth) relating to failure to adhere to tax disclosure obligations as follows:

  1. Penalties relating to failure to lodge tax documents with the ATO will be increased by a factor of 100 with the maximum penalty increasing from A$4,500 to A$450,000; and
  2. Penalties relating to taxpayers making false or misleading statements to the ATO will be doubled.

Changes to transfer pricing rules

This measure will update Australia’s transfer pricing rules with effect from 1 July 2016 to reflect the 2015 updates to the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. These updates focused on intellectual property and hard-to-value-intangibles and on ensuring that transfer pricing analysis reflects the economic substance of the transaction. The changes are designed to keep Australia’s transfer pricing rules in line with international best practice and so that profits said to be made in Australia are taxed here.

Voluntary Tax Transparency Code

The Government announced that it is committed to encouraging greater tax transparency within the corporate sector.  To that end, it encourages all companies to adopt, from the 2016 financial year onwards, the Tax Transparency Code that was the subject of the Board of Taxation discussion paper in December 2015.  

Superannuation – a new “objective” and significant tightening

One of the key focuses in the Budget is on superannuation, which will have a significant impact on senior executives and (indirectly) their employers.

Interestingly, the Government intends to enshrine in legislation that the objective of superannuation is to “provide income in retirement to substitute or supplement the Age Pension”. However, it is not clear how this is intended to apply. For instance, once a person has sufficient assets in a superannuation fund to substitute the Age Pension, will any further accumulations be viewed as being made for some other purpose and without relevant tax concessions? At the very least, this is a signal that concessional superannuation is intended to be limited in its objective to provide an income stream equivalent to the Age Pension.

The Government has tightened contribution rules, with the current concessional caps of A$30,000 and A$35,000 (depending on age) to be reduced to A$25,000 for all individuals up to age 75 (and regardless of employment circumstances) from 1 July 2017. However, these measures will not apply to certain prescribed funds such as Commonwealth defined benefit schemes.

More positively, from 1 July 2017, individuals with a superannuation balance of less than A$500,000 may make additional concessional contributions to the extent that they had not fully utilised their concessional caps in prior years. However, this only applies to unused cap amounts accrued after 1 July 2017 (which may be carried forward for up to 5 years).

Less positively, from 1 July 2017, the threshold income for the 30% tax on concessional contributions will be reduced from A$300,000 to A$250,000 and the existing annual non-concessional contributions caps will be replaced by a A$500,000 life-time non-concessional contributions cap which is available up to the age of 74. Equivalent measures are proposed for non-concessional contributions to defined benefit schemes which may require members who have exceeded their lifetime cap to remove excess contributions and proxy earnings on those contributions. This measure will be subject to ongoing consultation.

In terms of transition to retirement, the tax exemption on assets supporting Transition To Retirement Income Streams will be removed from 1 July 2017, as will the rule that allows individuals to treat certain superannuation streams as lump sums.

Limited support for innovation

Despite the Government talking up the need for innovation and an “ideas boom” in Australia, it has only announced 2 relevant proposals in the Budget, namely expanding tax incentives for early-stage investors and the new arrangements for venture capital limited partnerships (VCLPs).

On the former, the Government will amend the tax incentives for angel investors announced in the Mid-Year Economic and Fiscal Outlook 2015-16 (MYEFO) to:

  • reduce the holding period from 3 years to 12 months for investors to access the 10 year capital gains tax exemption;
  • include in the definition of eligible startups, a time limit on incorporation and criteria for determining if the startup is an innovation company;
  • require that the investor and innovation company be non-affiliates; and
  • limit the investment amount for non-sophisticated investors to A$50,000 or less per income year in order to receive a tax offset.

Similarly, the Government will amend the new arrangement for venture capital investment included in the MYEFO to:

  • add a transitional arrangement that allows conditionally registered funds that become unconditionally registered after 7 December 2015 to access the tax offset if the criteria are met;
  • relax the requirement for very small entities to provide an auditors’ statement of assets;
  • extend the increase in fund size from A$100 million to A$200 million for new early-stage venture capital limited partnerships (ESVCLPs) to also apply to existing ESVCLPs; and
  • ensure that the venture capital tax concessions are available for FinTech, banking and insurance related activities.

Introduction of two new collective investment vehicles (CIVs)

To augment the international competitiveness of the Australian managed funds industry, the Government will introduce a new tax and regulatory framework for two new types of CIVs that are commonly used abroad.

The first form of CIV will be a corporate CIV, which will be introduced for income years starting on or after 1 July 2017. The second form of CIV will be in the legal form of a limited partnership. This form of CIV will be introduced for income years starting on or after 1 July 2018.

The new CIVs will be required to meet similar eligibility criteria as managed investment trusts, such as being widely held and engaging in primarily passive investment. Under the proposal, investors in the CIVs will generally be taxed as if they had invested directly.

Some light for small and medium businesses

In terms of the “enterprise tax plan”, the Government will reduce the company tax rate to 25% over the next 10 years. For small and medium businesses with turnover of up to A$10 million, the corporate tax rate will be reduced to 27.5% from 1 July 2016.

Then, over the next 6 financial years from 1 July 2017 to 30 June 2023, the turnover threshold will gradually increase from A$10 million to A$1 billion, and finally apply to all companies from the 2023-2024 financial year.

Lastly, from the 2024-2025 financial year, the company tax rate will gradually reduce from 27.5% to 25% by the 2026-2027 financial year.

Similarly, the tax discount for unincorporated small businesses will be increased over 10 years from 5% to 16%. This discount applies to the income tax payable on the business income received from an unincorporated small business entity. The discount will be extended to individual taxpayers with business income from an unincorporated business with an aggregated annual turnover of less than A$5 million. However, the existing cap of A$1,000 per individual for each income year will be retained.

Separately, the Government has announced that it will increase the small business entity turnover threshold from A$2 million to A$10 million from 1 July 2016. This means that these entities will be able to access other small business income tax concessions such as simplified depreciation and trading stock rules and the like. However, the increased threshold will not apply to small business capital gains tax concessions, which remain available for businesses with a turnover of less than A$2 million or who satisfy the maximum net asset value test.

Also, from 1 July 2017, the Government will simplify GST reporting so that small businesses will be able to easily classify transactions and prepare and lodge Business Activity Statements. A trial of the simplified arrangements will commence on 1 July 2016.

Is there anything else on the horizon?

Last year, we noted that the 2015 Budget did not address the structural challenges for the Australian tax system in the current economic environment, as that was to be addressed as part of the taxation white paper (Re:think). When that process was abandoned earlier this year, the Prime Minister indicated that the Budget would set out the Government’s tax reform agenda. Apart from the long term reduction of the corporate tax rate, some modest measures aimed at start-up enterprises and some tinkering with things like the tax consolidation and taxation of financial arrangement regimes, there is scant evidence of that agenda in tonight’s Budget. Similarly, the idea of reforming Federal-State fiscal relations which briefly resurfaced before the last Council of Australian Governments (COAG) meeting is nowhere to be seen.

And, if the Government is re-elected, it is not clear that they will have any mandate to tackle these issues.