2014-2015 Australian Federal Budget - Government takes its first steps of tax reform in preparation for a broader comprehensive review of the Australian taxation system.
The Australian Coalition Government has presented the 2014-2015 Federal Budget, which includes changes to personal tax rates, the fuel excise rules and various other taxation rules.
From a business taxation perspective, the tax reforms announced in the Budget have been relatively minor, with broader comprehensive taxation reform to be addressed in the Government's proposed White Paper. As an initial step in this process, the Government has indicated that a discussion paper is due to be released later this year outlining options for tax reform in Australia.
As expected, the Budget maintains the Government's position on previously announced (but not yet enacted) tax reforms, such as a cut in the company tax rate for small businesses and repeal of the mineral resources rent tax. Other reforms, such as the tax treatment of employee share schemes for "start-up" companies and the GST, are slated for release in the Government's White Paper.
We would expect most of these measures to progress into law in the coming year, noting that changes earmarked in the 2013-14 Budget were hampered by an upcoming election.
The announcements in the Budget continue the Government's strong focus on sponsoring infrastructure investment through, for example, the infrastructure growth package and the establishment of the medical research future fund. These initiatives follow closely upon the recently announced incentives for asset recycling for States and Territories.
We provide a more detailed analysis of the principal tax related measures below.
- R&D tax incentive reduction
In connection with the Government's commitment to cut the company tax rate by 1.5% to 28.5% from 1 July 2015, the rates of the Research and Development Tax Incentive benefits (R&D Tax Offsets) have been reduced. Both the refundable and non-refundable offset rates have been reduced by 1.5%, effective from 1 July 2014 (one year earlier than the company tax cut is proposed to take effect).
We note that the Government has previously announced that the proposed company tax cut will not be available to all companies, in particular, large companies. Thus, large companies that are currently eligible to claim the R&D Tax Offset but are not eligible for the company tax cut will incur a net tax cost from these changes.
- Temporary Budget Repair Levy
The Government will introduce a Temporary Budget Repair Levy which will apply to individuals with taxable income in excess of $180,000. The levy will apply at a rate of 2% for the next three years, starting on 1 July 2014.
The top rate of tax currently payable by individuals with taxable income above $180,000 is 45%. From 1 July 2014, this increases to 47% when combined with the 2% Medicare Levy. Thus, the additional 2% Budget Repair Levy will effectively take the top marginal tax rate to 49% for the next three years, until 30 June 2017.
A number of other tax rates, including trust tax rates, which are calculated by reference to the top personal tax rate will also temporarily increase from 1 July 2014 to 30 June 2017, while the budget repair levy is in place. The fringe benefits tax (FBT) rate will also be increased by 2% for the relevant FBT years.
Opposition parties, including both Labor and the Greens, have already foreshadowed that they will oppose the levy in the Senate. This is notwithstanding the levy will only apply to high income earners.
- Previously announced measures deferred or no longer proceeding
In December last year, the Government released a Press Release that identified a number of previously announced but unenacted taxation measures that would be proceeding. However, in the Budget a number of these measures have now been deferred or are no longer proceeding, including:
- The introduction of a new taxation regime for managed investment trusts has been deferred from 1 July 2014 to 1 July 2015 with updated exposure draft legislation expected to be released within the week;
- The reform of the Offshore Banking Unit taxation regime has also been deferred to 1 July 2015;
- The proposed changes to the taxation of multiple entry consolidated (MEC) groups will no longer be proceeding; and Third party reporting and data matching programs to improve tax compliance will be deferred to 1 July 2016.
- Fuel Excise
For most fuels, including unleaded petrol, the excise rate has been frozen at approximately 38.1 cents per litre since 2001.
The Government has announced that it will reintroduce indexation of fuel excise. This will occur twice per year, starting on 1 August 2014. It is anticipated that this change will raise the excise rate by approximately 1 cent per year.
Despite pressure from the Greens, the Government has not reduced the Fuel Tax Credit (formerly known as the diesel fuel rebate). It is anticipated that the Fuel Tax Credit rate will increase in line with any changes to relevant fuel excise rates.
- MRRT Repeal and Changes to Super Rate Schedule
As previously announced, the Coalition will be proceeding with the repeal of the Minerals Resource Rent Tax. This will be funded by deferring any increases in the super guarantee rate from 9.5% until 30 June 2018. The rate will then increase by 0.5% each year until it reaches 12% on 1 July 2022.
Prior to the last Federal election in September 2013, the Coalition (which was then in opposition) stated that there would be no changes to either the GST rate or GST base during the first term of a Coalition Government. However, the Coalition did state that GST reform would be considered as a part of a Tax White Paper which would be produced during the new Government's first term (see comments on the Tax White Paper further below).
The Budget does not contain any GST reforms.
TAX WHITE PAPER
During the 2013 election campaign, the Coalition announced that, if elected, it would produce a White Paper within three years regarding options for "lower, simpler, fairer taxes for higher economic growth, and better and more sustained services".
Some of the issues to be considered in the White Paper potentially include revising State taxes (in consultation with the States), changes to the GST rate and / or base, restructuring the ATO, reducing the corporate tax rate and increasing tax incentives for start-ups and innovation.
Treasury is expected to deliver a discussion paper canvassing options for tax reform before the end of 2014, which will allow for public discussion on those options. This discussion paper will then form the basis for the White Paper.
If the Government adopts any recommendations from the White Paper, it is envisaged that those policies will be taken to the next Federal election in 2016. This would arguably provide the Government with an electoral mandate to introduce the reforms during the Government’s second term.
2013 BUDGET MEASURES UPDATE
On 8 May 2014, the Australian Government released Exposure Draft legislation (Tax and Superannuation Laws Amendment (2014 Measures No 3) Bill 2014) in respect of the changes to the thin capitalisation rules and the section 23AJ exemption for foreign non- portfolio dividends which were previously announced in last year's Australian Federal Budget.
The Exposure Draft introduces the following key changes to the thin capitalisation rules:
- Reducing all safe harbour ratios and the worldwide gearing amount;
- Introducing a worldwide gearing amount test for inbound investors; and
- Increasing the de minimis threshold from $250,000 to $2 million of debt deductions.
At this time, no changes have been proposed to the arm's length debt amount test.
The start date for these changes is 1 July 2014 and a brief summary of the key changes are below.
Safe harbour debt amount and worldwide gearing amount
Under the proposed changes, the safe harbour ratios will be reduced as follows:
- For general entities, the limit will be reduced from 75% to 60% of assets. This halves the effective debt to equity ratio to 1.5:1;
- For non-bank financial entities, the limit will be reduced from 20:1 to 15:1 on a debt to equity basis; and
- For banks, the capital limit will be increased from 4 per cent to 6 per cent of their risk weighted assets of the Australian operations.
For outbound investors, the worldwide gearing ratio will be reduced from 120% to 100% of the gearing of their worldwide investments. However, this worldwide gearing amount test will now also be available for inbound investors.
Clearly, these reductions will further limit the amount of debt that multinational enterprises can use to fund their Australian operations and the associated interest deductions they can claim in Australia. Thus, going forward, taxpayers will need to take into account the reductions when financing their operations in Australia and preparing any financial modelling of Australian investments.
De minimis test
Currently, the thin capitalisation rules do not apply in an income year where debt deductions (e.g. interest expenses) of the taxpayer do not exceed the de minimis threshold of $250,000. This de minimis threshold will be increased to $2 million. Based on a 5% interest rate, the thin capitalisation rules would not apply until borrowings exceed $40m. This measure is aimed at reducing compliance costs for smaller businesses and will result in many smaller business operations no longer being subject to the thin capitulation rules in Australia.
NON-PORTFOLIO DIVIDENDS - SECTION 23AJ
Currently, non-portfolio dividends (dividends on a voting interest of at least 10% in a foreign company) are not taxable under section 23AJ of the Income Tax Assessment Act 1936 (ITAA36). The Exposure Draft introduces a re-write of section 23AJ into new Subdivision 768-A of the Income Tax Assessment Act 1997 (ITAA97) with the following key changes:
- The exemption is based on the debt/equity classification rules in Division 974 of the ITAA97 such that returns on debt interests will not be treated as dividends under this section.
- The exemption will also apply to distributions of a non-share dividend.
- The exemption will be extended to apply to non- portfolio dividends received via interposed trusts or partnerships.
- Section 404 of the ITAA36 will be deleted to prevent the pooling of portfolio dividends in an offshore entity to obtain non-portfolio dividend taxation treatment.