MAY 2015 AUSTRALIAN TAX UPDATE AUSTRALIAN BUDGET 2015 - 2016 INTRODUCTION The Australian Government has released a measured but significant 2015-2016 Federal Budget. The three main tax changes include a focus on multinational tax avoidance by introducing new targeted non-resident anti-avoidance measures and penalties, changing the Goods and Services Tax (GST) to apply to intangible supplies made by non-residents (including digital content) and tax concessions for small businesses. These changes are very much in line with expectations, however, a number of issues were not touched, including Australia's superannuation regime, the negative gearing rules and Australia's dividend imputation system. These areas were previously earmarked for possible reform but have been left alone in the Budget announcement. The Budget continues the Australian Government's focus on certain foreign based Multinationals, after the Australian Senate's inquiry focussed on the Australian tax positions of Google, Apple and Microsoft. The Government released exposure draft legislation, at the same time as the Budget, which adds a new section 177DA to Australia's general anti-avoidance provisions. The focus of these provisions is on circumstances where income is derived by nonresidents from goods and services provided to Australian customers, and is not taxed via an Australian permanent establishment or branch, but is largely attributable to activities in Australia. These rules also require it to be reasonable to assume that the structure used is designed to avoid a permanent establishment being created in Australia. Other measures to tighten the rules for Multinationals include adopting stronger penalties for groups that enter into tax avoidance measures related to profit shifting, and applying new transfer pricing documentation standards from 1 January 2016. The Budget confirms the GST rules are to be extended to apply to the importations of digital products and services. This so called "Netflix" tax is designed to ensure that non-resident suppliers of such content pay GST, thereby levelling the playing field for Australian suppliers already subject to GST. This measure is consistent with the OECD's guidelines on this subject, but under Australia's laws will require the approval of all States and Territories to be enacted. Finally, a number of changes designed to assist small businesses were also introduced, including in relation to expenses to set up new businesses, restructuring relief and accelerated depreciation. We provide a detailed outline of these, and the other key tax measures, below. 1. Multinational Tax Avoidance Expanded General Anti- Avoidance Rule (Part IVA) (GAAR): Multinational Tax Avoidance As a significant integrity measure to protect Australia's revenue base, draft legislation has been released outlining anti-avoidance rules combatting multinational tax avoidance. Under the proposed section 177DA of Part IVA of the Income Tax Assessment Act 1936, tax benefits will be cancelled in respect of schemes that satisfy all of the following requirements: Under, or in connection with, the scheme goods or services are provided by a non-resident to an Australian resident who is not an associate of the non-resident; income derived by the non-resident from the supply is not attributable to an Australian permanent establishment (PE); activities are undertaken in Australia by an Australian resident, or through an Australian PE of an associate of the non-resident or who is commercially dependent on the non-resident, in connection with the supply; Scheme designed to avoid PE income it would be reasonable to conclude that the scheme is designed to avoid the non-resident deriving income attributable to an Australian PE; Double principal purpose test a person or persons who entered into or carried out the scheme did so for a principal (as opposed to sole or dominant) purpose of enabling a taxpayer to obtain an Australian tax benefit (i.e. an Australian income tax saving) and to reduce foreign taxes or secure a saving from other Australian taxes (for example, Goods and Services Tax); Global revenue threshold annual global revenue of the non-resident in the relevant income year exceeds $1 billion; and No or low corporate tax jurisdiction the non-resident is connected with a no or low corporate tax jurisdiction. Rationale for amendments to GAAR The application of Australia's GAAR is not constrained or overridden by Australia's Double Tax Treaties and thus these proposed amendments to Part IVA provide a very powerful armoury for the ATO in combatting international profit shifting. Further, when these proposed amendments are combined with the new (2013) transfer pricing provisions, Division 815 of the 1997 Act - including particularly its reconstruction powers - the ATO has both a diverse and powerful armoury to pursue perceived erosion of our income tax base. Finally, Australia continues to strongly support the OECD led Base Erosion Profit Shifting (BEPS) action planning. Undefined terms Certain terms under the proposed legislative changes are not defined in the draft legislation which causes uncertainty on application of the new multinational anti-avoidance laws. In particular, 'low corporate tax jurisdiction', 'principal purpose' and 'commercially dependent'. Principal purpose test While the 'principal purpose' test is a lower threshold to the 'sole or dominant purpose' test, the proposed 'principal purpose' test includes an additional purpose of obtaining an Australian tax benefit and a saving on another Australian tax or foreign tax. Substantial economic activity Although there is an exclusion where the foreign entity undertakes substantial economic activity in a no or low corporate tax jurisdiction, there is no definition or detailed guidance on what constitutes a substantial economic activity. The new multinational anti-avoidance law will apply to tax benefits obtained from 1 January 2016. New transfer pricing documentation standards and penalties The Government will from 1 January 2016 implement the OECD's new transfer pricing documentation standards for companies with global revenue of $1 billion or greater. The measures intend to significantly extend information disclosure to the ATO in order to identify multinational tax avoidance. While the Government has not yet released a draft exposure bill outlining the operative clauses that will drive the new documentation standards, the Budget has indicated that large companies operating in Australia will be required to provide the ATO with the following information: a Country-by-Country global activates report that will include the location of income and taxes paid by the multinational; a 'master file' describing the multinational's organisational structure and transfer pricing policies; and a 'local file' detailing the local taxpayer's intercompany transactions. It is anticipated that future reporting and disclosure requirements for multinational corporations will require details on their effective transfer rates, after excluding payments (e.g. royalties, service fees) to related offshore parties. Penalties will be doubled for a broad range of tax avoidance and profit shifting schemes. 2. GST GST extended to intangible supplies to consumers Prior to the release of the Budget, the Treasurer announced the GST would be extended to intangible supplies made by non-resident suppliers. This has been widely cited in media reports as the "Netflix Tax", in reference to the fact that Netflix does not currently pay GST on its streaming media services supplied to Australian customers. The Treasurer tabled exposure draft legislation and explanatory material as a part of the Budget release. The key highlights have been summarised below. The proposed reforms are stated to be an "integrity measure" which is aimed at levelling the playing field between Australian and non-resident suppliers, so that both are liable for GST on taxable supplies of intangibles made to Australian consumers. Broadening the GST net Generally speaking, GST only currently applies to supplies that are "connected with Australia". If enacted, the amending legislation will extend the "connected with Australia" test to include supplies made to a recipient who is an "Australian consumer". For these purposes, an "Australian consumer" will be an entity that is a resident of Australia (excluding external territories) and which is either: (a) not GST registered, or required to be GST registered; or (b) a registered entity which does not acquire the intangible supply wholly or partly for carrying on the entity's enterprise. The intention is to broaden the GST net to capture inbound intangible supplies made to individuals and small businesses which are not GST registered. What are intangible supplies? The proposed amendments will apply to supplies of "anything other than goods or real property", which captures all manner of intangible supplies. It is likely that the amendments will apply to: (a) digital content (including games, software, ebooks, music, etc.); (b) services that are performed remotely from outside of Australia (such as advertising or other services); and (c) contractual rights supplied from outside of Australia. This may capture both intellectual property rights and also rights to access software platforms as part of "software as a service" arrangements. Who is liable to pay the tax? GST is generally payable by the entity that makes a taxable supply. However, the proposed amendments instead provide that where an "inbound intangible consumer supply" is made through a "electronic distribution service", the GST is payable by the operator of the electronic distribution service (and not the supplier). For these purposes, an "electronic distribution service" may potentially include a website, internet portal, gateway, store or marketplace through which supplies are made to Australian consumers via means of electronic communication. For example, this may apply to software applications that are sold by nonresident suppliers to Australian consumers through an online app store. The proposed amendments do provide for some circumstances in which the supplier, rather than the operator of the electronic distribution service, will continue to be liable for the GST. This will principally occur where the identity of the supplier is clear from an invoice that has been issued and the operator has minimal involvement (i.e. the operator is not involved in charging, authorising delivery or setting terms and conditions for the supply). Will the reforms apply to intangible supplies made to GST registered businesses? The proposed reforms will not apply to supplies made to GST registered businesses. This reflects that most GST registered businesses will be entitled to full input tax credits for their acquisitions, negating any revenue impact. Businesses which are not entitled to full input tax credits are generally required to account for GST on inbound intangible supplies under existing special rules (the "reverse charge" rules in Division 84 of the GST Act). Will non-resident suppliers / operators caught by the proposed rules need to register for GST purposes? Non-resident suppliers which make supplies that are connected with Australia and which have a value in excess of the GST registration turnover threshold (currently AUD $75,000 in a 12 month period) will be required to register for GST purposes. Importantly, the GST registration threshold provisions will be amended so that supplies which are connected with Australia under the proposed amendments, but which are also GST-free, do not count towards the AUD $75,000 threshold. It should be noted that where the operator of an electronic distribution service is treated as having made an "inbound intangible consumer supply", the value of that supply will count towards the operator's GST registration turnover threshold. As a practical matter, where a supplier makes inbound intangible consumer supplies through a GST registered operator of an electronic distribution service, GST will apply to all such supplies even if the value of the supplier's own supplies which are connected with Australia does not exceed AUD $75,000. This means all inbound intangible consumer supplies made by micro businesses through large GST registered operators of electronic distribution services will be subject to GST (unless a GST-free exemption applies). New regulations will be introduced which may provide more flexible and / or concessional GST registration and reporting requirements for non-resident suppliers and operators that have limited involvement with Australia. What happens if a supplier / operator cannot determine whether a consumer is an "Australian consumer"? As a safe harbour, suppliers and operators will not be liable for GST under the proposed rules if they have taken "all reasonable steps" to obtain information on whether a consumer is an "Australian consumer" and, after doing so, reasonably believes the consumer is not an "Australian consumer". It is not presently clear what will be regarded as "all reasonable steps". However, it is expected that this will become clearer following ATO consultation. This safe harbour may be relevant where a supplier or operator cannot readily determine whether a consumer is an Australian resident. Will Australian consumers avoid this additional GST cost by denying their residency status? The explanatory materials note that Australian consumers who engage in conduct of making false representations about their Australian residency status to defeat the proposed amendments may commit an offence under section 8U of the Taxation Administration Act. It is also stated that consideration is being given to whether the administrative penalties for giving a false or misleading statement may apply as alternative to this offence. When do the proposed amendments commence? If enacted, the proposed amendments will apply to supplies made on or after 1 July 2017. 3. Reverse charge amendments will not proceed In late 2013, the Government announced that it would be amending the GST provisions relating to GST-free supplies of going concerns and farm land to introduce a voluntary reverse charge. During consultations it became clear that the proposed amendments would have adverse implications. The Government announced in the Budget that it will not be proceeding with that previously announced measure. 4. Small Business Concessions As outlined below, the Government has held true to its declaration that this year's budget would be "focused on in particular helping small business to get ahead", announcing a wide variety of concessions to those businesses with an aggregated annual turnover of less than $2 million, in an attempt to assist the sector and help grow jobs. Small business tax cuts The tax rate for businesses with an aggregated annual turnover of less than $2 million ("small business") will be reduced to 28.5%, after a 1.5% cut from the usual 30% corporate tax rate. Whilst this has been well publicised, the budget confirms the amount of the rate cut and its scope. Those companies that have an aggregated turnover of more than $2 million and, therefore, do not fall under the definition of "small business" will continue to be assessed at the ordinary corporate rate of 30%, creating a two-tiered corporate tax system in Australia effective from 1 July 2015. Further, taxpayers who conduct unincorporated small businesses, will be eligible for a small business tax discount of 5%. The discount will be capped at $1,000 per individual taxpayer. CGT Roll-over relief for changes to entity structure From the 2016-17 income year, small businesses will be able to change their legal structure without attracting CGT liability when they do. This is an expansion on the already existing relief given to individuals who incorporate, but will now apply to other legal structures such as partnerships. Small business asset accelerated depreciation write-off up to $20,000 per year One of the main changes for small businesses is allowing a write off for assets which cost up to $20,000. As a result, the vast majority of capital assets, installed and ready for use after 7:30pm 12 May 2015 and before 30 June 2017 will be able to be written off immediately by small businesses, provided they are purchased for less than $20,000. This is a significant increase on the current threshold of $1,000. The small business accelerated depreciation rules for assets over $20,000 are unchanged. The Government has also allowed small businesses who have previously opted out of the simplified depreciation rules to re-enter the regime until 30 June 2017. Immediate deductibility for start-ups of professional expenses From 1 July 2015, start-ups will be allowed to deduct a range of professional expenses associated with beginning a new business, including professional, legal and accounting advice. This expands on the current regime that allows a new business to deduct these expenses over a five year period. Expansion of FBT exemption for work-related electronic devices Beginning 1 April 2016, small businesses will be able to take advantage of an FBT exemption allowing them to provide employees with more than one qualifying work-related portable electronic device, even where those devices have primarily the same function. Previously small businesses were only able to utilise this exemption if the devices had different functions. 5. Managed Investment Trusts The Government has announced a deferred start date for the changes to the attribution managed investment trust (AMIT) regime to 1 July 2016. Taxpayers will have the option to elect to apply the rules from 1 July 2015. The AMIT rules allow eligible managed investment trusts to allocate taxable income to members based upon attribution rather than the current present entitlement system. The rules also incorporate an unders/overs mechanism which largely reflects current industry practice. An AMIT will be deemed to be a fixed trust which removes uncertainty surrounding the availability of tax losses and franking credits for members. Members' CGT cost base will be increased where the attribution of income exceeds the amount they actually receive. 6. Previously announced measures The budget included a number of measures that have been previously announced by the Government which are at various stages of implementation. Employee share plan changes As set out in our previous article (link https://www.dlapiper.com/en/australia/insights/publica tions/2015/03/tax-and-superannuation-lawsamendment-bill-2015), the tax rules for employee share schemes will be amended to improve the tax outcomes for employees, in particular those of eligible start-up companies. The budget confirms the changes made to the legislation through the consultation process and is consistent with the bill introduced in March 2015. Offshore banking units Amendments designed to modernise the offshore banking units regime and insert targeted integrity measures will commence on 1 July 2015. Exposure draft legislation was released in March and the measures will commence from 1 July 2015. Research and Development tax incentive The amendments to the Research and Development tax incentive have been passed by parliament and apply to income years commencing on or after 1 July 2014. The changes limit the increased rate offset to the first $100m of eligible R&D expenditure, after which the offset is reduced such that the expenditure has the same effect as a normal tax deduction. Statutory remedial power The Commissioner of Taxation will be given a statutory remedial power to remedy unforeseen or unintended outcomes. The power will only be able to be used to benefit taxpayers and will require the Commissioner to consult publicly prior to any exercise of the power. Exposure draft legislation is yet to be released. Conclusion We trust you have found this Tax Update of assistance. If you have any queries about the above topics, please do not hesitate to contact any member of our Tax team. 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