Introduction

Despite being less than 12 months from the next federal election, and the federal budget typically providing a platform to set out economic leadership on key tax issues, this year’s federal budget is surprisingly sporadic with a wide range of small measures generating additional revenue with no overriding theme.

Predictably, there are the headline grabbing proposals reducing personal income tax rates. However, this is a marginal fix. Corporate tax rates will be reduced if the Government is able to secure the necessary political support, but these reductions were announced some time ago. The opportunity to go further and create an internationally competitive corporate tax regime has again been missed. A variety of previously announced reforms have been repackaged, but beyond the technically focused changes, the closure of a variety of real or perceived gaps and increased funding for administration and collection of tax, it is necessary to look beyond our existing tax framework to new areas of reform on the horizon.

Peering into election year, there are some hints of what is to come. The Treasurer’s announced upcoming discussion paper to explore options for taxing digital businesses in Australia provides an avenue to (again) tax foreign multinationals – but has this been done too much already? The details of the discussion paper have not been released, but based on what we have seen overseas, it may include an interim digital services tax or turnover tax, which would mark a fundamental shift to the way the digital economy is taxed. In addition, the Budget proposes GST on the sale of hotel accommodation by offshore sellers – yet another measure targeting offshore sellers and building on recent reforms where GST has been imposed on cross border digital supplies and low value goods.

Set out below is a snap shot of what came out tonight, and what may be relevant to you.

More multinational groups to be subject to anti-avoidance measures and CbC reporting

The existing definition of a Significant Global Entity (SGE) will be extended to include multinational groups which are headed by trusts, partnerships and a wider range of private companies.

The SGE definition determines which multinational entities are subject to Australia's unilateral anti-avoidance measures (the Multinational Anti-Avoidance Law and the Diverted Profits Tax). SGEs are also subject to Country-by-Country (CbC) reporting in Australia.

Currently, the SGE definition only applies to an entity which is a member of a group of entities that are consolidated for accounting purposes, and which have global consolidated revenues of greater than AUD 1 billion (USD 750m). The measure proposes to ensure that entities belonging to groups headed by trusts, partnerships or investment entities which may not be required to consolidate for accounting purposes, can still be considered as SGEs.

The proposed measure will also ensure that the Commissioner of Taxation has the power to determine that an entity is an SGE, notwithstanding that the strict statutory definition of an SGE is not met.

The expanded definition of SGE will apply to income years commencing on or after 1 July 2018.

The Federal Government will reform the R&D tax incentive in response to the 2016 review of the R&D tax incentive program. This follows on the heels of several other changes to the program in the past 3 years, including the introduction of the AUD 100 million R&D expenditure cap in 2015 and a 1.5% cut in R&D tax offset rates in 2016. There are three key elements to the changes, which apply for income years starting on or after 1 July 2018.

The offset rate tied to R&D intensity

As expected, the existing tax offset flat rate of 38.5% will be replaced with staggered rates for companies with aggregated annual turnover of AUD 20 million or more. The rates will increase as R&D expenditure as a proportion of the company’s total annual expenditure increases (referred to as R&D intensity) as follows:

Amount of R&D expenditure falling within an R&D intensity range: Is eligible for a non-refundable tax offset of the company’s tax rate, plus:
Between 0% and 2% 4%
Above 2% to 5% 6.5%
Above 5% to 10% 9%
Above 10% 12.5%

This is intended to reward more intensive additional R&D investment, but will increase uncertainty as the offset available will only be able to be accurately determined retrospectively. The R&D expenditure cap will also be increased to AUD 150 million.

Cap on cash refunds

For companies with aggregated turnover of less than AUD 20 million, cash refunds from the refundable tax offset will be capped at AUD 4 million annually. While higher than the AUD 2 million cap recommended by the 2016 review, it is likely to significantly affect start-ups which rely on this to fund the development phase. R&D tax offsets for clinical trials will be excluded from the AUD 4 million cap. The refundable tax offset rate has also been amended so that it is equal to the company’s tax rate plus 13.5%.

Increased transparency and enforcement

The ATO will publish the names of companies claiming the R&D tax incentive and the amounts of R&D expenditure claimed. The general anti-avoidance rules will be amended to ensure tax schemes involving the R&D tax incentive are captured, as well as technical provisions relating to feedstock and clawback rules. Increased funding will also be provided for enforcement activity and to enable Innovation and Science Australia to provide more effective and binding guidance.

Managed investment trusts

The Federal Government confirmed that it will be proceeding with all elements of the stapled structures integrity package that was announced in March, including the measures increasing the tax on Managed Investment Trust (MIT) distributions derived from trading income that has been converted to passive income, but did not provide any further clarification of how the integrity measures will apply. Our previous legal alert summarising these measures can be found here.

However, there are two new changes for MITs. The first is about the way the 50% capital gains tax discount applies through MITs. Instead of allowing the MIT to apply the discount in calculating its net income (leaving the investor to apply a gross-up mechanism), the MIT will distribute the full gain leaving the investor to apply the 50% discount if they qualify. This is intended to address a perceived leakage from investors not grossing up gains received through trusts and will apply from 1 July 2019.

The second is a long awaited update to the list of information exchange countries whose residents are eligible to access the lower 15% MIT withholding tax rate, adding 56 jurisdictions that have entered into information sharing agreements since the list was last updated in 2012, effective from 1 January 2019.

Denial of deductions for vacant land expenses

The Federal Government has announced it will deny deductions for expenses associated with the holding of certain vacant land from 1 July 2019. This measure seeks to reduce the tax incentive for land banking and, more broadly, prevent deductions from being claimed in circumstances where vacant land is not held for the purpose of producing assessable income.

This measure will not apply to expenses incurred in relation to the holding of land after,

  • a property has been constructed on the land, it has received approval to be occupied and is available for rent; or
  • the land is being used by the owner to carry on a business, including a business of primary production.

Although the measure technically applies to both residential and commercial land, the Federal Government has indicated that the "carrying on a business test" will usually prevent the denial of deductions for expenses relating to commercial development.

Deductions which are denied may still be included in the cost base of a CGT asset where it is appropriate to do so but cannot be carried forward and applied in future income years.

Asset valuations for thin capitalisation purposes

The thin capitalisation rules will be tightened by requiring entities to align the value of their assets for the purpose of applying the thin capitalisation rules with the value included in their financial statements. This measure means that entities operating in Australia cannot reduce their tax liabilities by claiming tax deductions for debt financing based on asset values which are higher than the values in their audited financial statements or revaluing assets for thin capitalisation purposes in order to get around the reduced safe harbour thresholds.

In addition, foreign controlled Australian consolidated entities and multiple entry consolidated groups that control a foreign entity are treated as both outward and inward investment vehicles for thin capitalisation purposes. This will ensure that inbound investors cannot access tests that were only intended for outward investors.

These measures will apply to income years on or after 1 July 2019.

Further extending the AUD 20,000 instant asset write-off threshold for small businesses

Currently, small businesses with an aggregated annual turnover of less than AUD 10 million can claim an immediate deduction for depreciating assets valued less than AUD 20,000 in the income year the asset was first used or installed ready for use. Assets valued at more than AUD 20,000 can be placed into a small business pool, depreciated at accelerated rates, and immediately written off if the balance of the pool is less than AUD 20,000 at the end of the income year.

The AUD 20,000 threshold amount was due to revert to the significantly lower amount of AUD 1,000 on 1 July 2018. However, the Federal Government will keep the higher threshold until 30 June 2019, after announcing a similar extension in last year’s Budget. These measures have been extended for another year to improve cash flow for small businesses, and further increase small business activity and investment.

The "lock out" rules, which prevent businesses that have opted out of the simplified depreciation regime from re-entering the regime for five years, have been deferred from 30 June 2018 to 30 June 2019. This should be welcomed by small businesses, as they can continue to take advantage of the higher AUD 20,000 threshold amounts.

It is expected that the AUD 20,000 threshold will be reduced to AUD 1,000 from 1 July 2019 onwards, unless the measures are extended once again in next year’s Budget.

Goods and Services Tax (GST)

Hotel Accommodation

The Federal Government has announced that they intend to extend GST to offshore sellers of hotel accommodation in Australia.

Currently, some offshore sellers of Australian hotel accommodation do not have to include these supplies of Australian hotel accommodation in their GST turnover. From 1 July 2019, the Federal Government proposes to change the way GST turnover is calculated by removing this exemption, thus requiring offshore sellers of hotel accommodation to register and account for GST on their supplies.

Sales that occur before 1 July 2019 will not be subject to the proposed measure even if the stay at the hotel occurs after this date.

Director Penalty Regime (Phoenixing Activity)

In a measure telegraphed before the formal release of the budget, the Federal Government proposes to extend the director penalty regime to GST, luxury car tax, and wine equalisation tax.

The director penalty regime makes directors of entities liable for tax debts accrued in the entity's name. At present, the regime covers Pay-As-You-Go withholding tax. The extension of the regime to GST and other taxes will impose a significantly higher burden on directors, particularly those that may act as non-resident directors of Australian subsidiaries of multinational groups.

Diplomatic and consular concessions

The Federal Government has granted or extended access to refunds of indirect tax under the Indirect Tax Concession Scheme (ITCS) for 4 countries: Cote d'Ivoire, Guatemala, Costa Rica, and Kazakhstan.

The ITCS is a scheme that allows the ATO to refund taxes on goods and services purchased in Australia by diplomatic missions, consular posts, overseas missions, and their staff.

Customs Duty & Excise

Tobacco

The Federal Government proposes that from 1 July 2019, importers of tobacco products will be required to pay all duty and tax liabilities when the tobacco products enter Australia, rather than when they leave a licenced warehouse and enter the local market. Existing weekly settlement arrangements where excise is paid on a rolling weekly basis will no longer apply to imported tobacco.

Tobacco products that are held in licensed warehouses at the commencement of the measure on 1 July 2019 will be subject to transitional arrangements allowing eligible affected entities to pay the liability on the warehoused stock within 12 months.

Further, from 1 July 2019, the Federal Government will introduce an import control regime for tobacco, requiring licences for all tobacco imports (except for tobacco imported by travellers within duty-free limits). In parallel, the Federal Government plans to establish a new illicit tobacco taskforce, to be led by Australian Border Force (ABF) targeted at dismantling illicit tobacco supply chains.

These measures are intended to make it easier for the ABF to take enforcement action and seize tobacco where no duty has been paid and combat illicit tobacco smuggling. It is estimated that at least 864 tonnes of illicit tobacco escapes excise duty each year.

It is anticipated that these measures will result in increased tobacco excise revenue of AUD 3.6 billion over four years.

These changes will have a significant impact on the supply chains of importers of tobacco products, including:

  • to importer cash-flow, as importers will be required to fund excise duty payments upfront at importation of tobacco products, rather than once they are released from a licenced warehouse; and
  • more rigorous assessment and review of tobacco warehousing arrangements by ABF to ensure sufficient supply chain security.

This significant change in tobacco product supply chain policy presents a good opportunity for importers to re-evaluate their supply chains and tax management processes.

Alcohol

The Federal Government has announced that the concessional draught beer excise rate for kegs larger than 48 litres will be extended to smaller kegs, typically used by craft brewers.

Currently, full-strength beer in a keg smaller than 48 litres is subject to an excise rate approximately 40% higher than that enjoyed by the same beer in a larger keg (typically 50 litre kegs are used by large manufacturers).

The Federal Government proposes to change the size at which the concessional rate kicks-in down to 8 litres. This will equalise the excise rate paid by craft and smaller brewers compared with large domestic and international "macro" brewers, who typically ship in larger keg sizes.

The Federal Government also proposes to increase the excise refund scheme for alcohol manufacturers. At the moment, an alcohol manufacturer (not including wine-makers who have access to the Wine Equalisation Tax (WET) refund scheme) is entitled to a refund of 60% of excise duty paid up to a maximum of AUD 30,000 per financial year. The proposed changes will increase this cap to AUD 100,000 from 1 July 2019 for all brewers and distillers.

Medical Goods

The Federal Government will remove customs tariffs from placebos and clinical trial kits that are imported into Australia from 1 July 2018.

This measure is expected to simplify, somewhat, the import process for clinical trial kits and placebos. There will be no more need to differentiate between medicines and placebos as both will now be subject to a free rate of duty.

This lower costs to medical businesses will be welcome.

Biosecurity imports levy

The Federal Government will introduce a new levy on sea imports, imposed on port operators from 1 July 2019.

This measure will apply a AUD 10.02 levy per twenty foot container (or equivalent) and non-containerised cargo will incur a levy of AUD 1 per tonne. The levy will be payable on a quarterly basis.

Trade 

On 8 March 2018, the Australian Federal Government along with the governments of Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam signed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (TPP-11). The TPP-11 is expected to deliver major new opportunities for Australian exporters, investors and companies engaged in international business.

This measure contributes to the Federal Government’s agenda for delivering more opportunities for Australian businesses globally, as outlined in the Federal Government 2017 Foreign Policy White Paper.

The black economy package

The Federal Government has announced a number of measures in response to the Black Economy Taskforce Final Report. These include the denial of deductions for employee and contractor payments (e.g. wages) where Pay-As-You-Go withholding requirements have not been complied with, expanding the taxable payments reporting system to include payments made to contractors in certain industries, requirements for ATO issued tax compliance statements to tender for certain Federal Government contracts and monetary caps on certain cash transactions. Businesses will need to ensure their systems are updated to ensure compliance with these measures.

Taxation of fame or image

From 1 July 2019, high profile individuals (such as sportspeople and actors) will no longer be able to take advantage of lower tax rates by licensing their fame or image to another entity. Currently, high profile individuals can license their fame or image to another entity, such as a related company or trust, and any income derived from the licence is attributed to that entity (as opposed to the high profile individual). The changes will mean that all remuneration (including payments and non-cash benefits) derived from the commercial exploitation of a person’s fame or image will be included in the assessable income of that individual.

Superannuation

The Federal Government will:

  • update the "notice of intent" (NOI) processes for claiming personal superannuation contribution tax deductions so that income tax returns will now alert individuals of the NOI requirements and the ATO may deny deductions to individuals who do not comply. This is intended to address the issue of taxpayers claiming deductions for their contribution without submitting a NOI, with the result that the superannuation fund does not apply the appropriate 15% tax to their contribution.
  • allow eligible individuals with an income exceeding AUD 263,157 who have multiple employers (e.g. company directors who hold multiple board positions) to nominate that their wages from certain employers are not subject to the superannuation guarantee (SG) concessional contributions, which should avoid unintentional breaches of the AUD 25,000 annual concessional contributions cap.
  • From 1 July 2019, change the annual audit requirement to a three-yearly requirement for self-managed superfunds (SMSFs) with a history of good record-keeping (e.g. clear audit reports) and compliance (although this measure is subject to consultation).
  • From 1 July 2019, increase the maximum number of allowable members in new SMSFs and small APRA funds from four to six, providing greater flexibility for larger families and joint management of retirement savings, or additional complexity in the management of the fund.

Private wealth management anti-avoidance rules

Certain structures which are currently being utilised in the private wealth management landscape will now be affected by new amendments in relation to Division 7A, testamentary trusts and certain arrangements involving family trusts.

Division 7A Amendments

Where a related private company is entitled to a share of trust income (as a corporate beneficiary), but the trust has not paid that amount, an unpaid present entitlement (UPE) will arise under Division 7A. New measures will be introduced to ensure that the UPE will have be repaid to the private company over time as a complying loan. Failure to do so will result in the UPE being taxed as an unfranked dividend under Division 7A.

The Federal Government has also announced that the start date of other Division 7A amendments that were announced in the 2016-17 Budget will be deferred from 1 July 2018 to 1 July 2019.

Concessional tax rates limits- minors and testamentary trusts

Under the current rules, it is possible for minors to be taxed on income from testamentary trusts at ordinary adult tax rates, rather than the higher tax rates that generally apply to minors. These concessional rates will now be limited to income derived from assets that are transferred from deceased estates or the proceeds of the disposal/investment of those assets.

This measure applies from 1 July 2019, and is meant to prevent the abuse of the concessional tax rates by injecting assets unrelated to the deceased estate into testamentary trusts.

Anti avoidance rules- circular distributions to family trusts

There are certain structures in the market involving round robin arrangements where family trusts are beneficiaries of each other, and a distribution may ultimately returned to the original trustee without being taxed. The Federal Government has announced anti-avoidance measures that will allow the ATO to target family trusts which are active in these arrangements, and the distributions will effectively be taxed at the top individual marginal tax rate plus the Medicare levy.

These measures will apply from 1 July 2019.

Concessional loans between tax exempt entities

Tax exempt entities, such as Government exempt entities and charities which cease to be exempt, either by legislation or by sale to private interests, may now be denied tax deductions relating to the repayment of a concessional loan.

Broadly, tax exempt entities which become taxable after 8 May 2018 will now be denied tax deductions which arise on the repayment of the principal of a concessional loan. Under this measure, concessional loans that are entered into by tax exempt entities that become taxable will be required to be valued as if they were originally entered into on commercial terms.

No update on corporate tax cuts - Company tax update

In the 2016-17 Federal Budget the Federal Government announced a staged reduction in the corporate tax rate from the current 30% (28.5% for small businesses) to 25% for all companies over 10 years.

Current reduction

The Treasury Laws Amendment (Enterprise Tax Plan) Act 2017 (Cth) was enacted with the effect that, from the 2017-18 income year, a lower corporate tax rate applies to a corporate tax entity that is a "base rate entity", being an entity that carries on a business and:

  • for the 2017-18 income year – has an aggregated turnover of less than AUD 25 million; and
  • for the 2018-19 income year – has an aggregated turnover of less than AUD 50 million.

The corporate tax rate applying to base rate entities will be progressively lowered until it reaches 25%.

Bill to widen the net

The Treasury Laws Amendment (Enterprise Tax Plan No. 2) Bill 2017 (Cth), introduced and read for the first time in the House of Representatives on 11 May 2017, is currently before the Senate (debate on the Bill has been postponed until 10 May 2018). If passed, the aggregated turnover that applies for a corporate tax entity to qualify for the lower corporate tax rate will be increased annually until it reaches AUD 1 billion in the 2022-23 income year.

In the 2023-24 income year, the corporate tax rate will be 27.5% for all corporate tax entities.

The corporate tax rate will then be progressively lowered in stages until it reaches 25% for the 2026-27 income year and for subsequent income years.

Limited to certain base rate entities

The Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017 (Cth) has also been proposed. If passed, this Bill will ensure that a corporate tax entity will only qualify as a base rate entity (and therefore qualify for the lower corporate tax rate for an income year) if:

  • no more than 80% of the corporate tax entity’s assessable income for that income year is "base rate entity passive income"; and
  • its aggregated turnover for the year of income, worked out at the end of the year, is less than AUD 25 million (this figure will increase to AUD 50 million in the 2018-19 income year).

Current status of the corporate tax rates

There are no further updates to the corporate tax rate changes in this budget.

Opposition to corporate tax cuts

These Bills have been heavily debated in the House of Representatives and are currently before the Senate. The Federal Government has postponed debate on extending the reduction in corporate tax rates to entities with an aggregated turnover of AUD 50 million or more. Accordingly, Treasury Laws Amendment (Enterprise Tax Plan No. 2) Bill 2017 (Cth) has been withdrawn from the Senate's Order of Business. Debate on the Bill is scheduled to resume on 10 May 2018. However, passage of the Bills may be obstructed if the Federal Government is unable to secure the support of cross-benchers.

Opposition leader, Bill Shorten, has also commented that, if elected, Labor would review the corporate tax rate reforms introduced by the Turnbull Government.