Last night, the Federal Treasurer, Scott Morrison MP, released the 2016-7 Federal Budget. With an announcement regarding an election expected to be imminent, the Government has released a conservative budget that doesn’t tackle structural tax reform and might be viewed as more of a policy roadmap.
The budget deficit is projected to be approximately $37.1 billion in 2016-17 (2.2% of GDP). Many of the announced measures had been the subject of pre-budget speculation whilst other changes that had been expected were missing.
Below are some of the more significant measures in this year’s Budget that will impact business.
Diverted profits tax
The trend of targeting multinationals continues with the Government announcing a diverted profits tax (or “Google tax” as it has become widely known) for income years commencing on or after 1 July 2017 which will buttress the Multinational Anti-avoidance Law that has been effective since 1 January 2016.
The targets of these measures are large entities that have global revenue of $1 billion or more and who have a presence in Australia (with exceptions for entities with Australian revenue of less than $25 million) that seek to transfer profits offshore by way of related party transactions. The tax will apply to arrangements with insufficient economic substance but which reduce the tax paid on the diverted profits such that it is less than 80% of the amount of tax that would otherwise have been paid in Australia. However, before the ATO can raise an assessment for the diverted profits tax, it must still be reasonable to conclude that the arrangements were entered into to generate a reduced rate of tax.
If applicable, the tax rate will be 40% (as compared with the current company tax rate of 30% - refer below). Significantly, no reduction will be made to any assessment for tax paid in a foreign jurisdiction on the diverted profit.
Preventing exploitation of cross-country tax differences
The Government will close loopholes that exploit differences between the tax treatment of payments in respect of debt and equity. Such loopholes can arise where, say, Australian law treats a share in a company as debt and the law of another country treats the same share as equity. A payment on the share from Australia to the other country may generate a deduction in Australia, but the payment may not be subject to tax in the country of receipt.
The measures will reflect Action 2 of the OECD’s Action Plan on Base Erosion and Profit Shifting. For example, it is expected that the measures will ensure that payments will only be deductible if the payee is liable to tax on the payment. This measure will apply from the later of 1 January 2018 or 6 months following the date of Royal Assent of the enabling legislation.
An example of a measure expected but not announced concerns the thin capitalisation rules. The pre-budget speculation included an expectation that the Australian thin capitalisation limits that operate to deny interest deductions available to thinly capitalised groups would be tightened further. The safe harbour threshold is currently a debt to equity ratio of 1.5:1. However, the Government has maintained the status quo for now.
A range of administrative measures were also announced in respect of multinational tax avoidance, including:
The ATO will receive a significant funding injection ($679 million over four years) to establish the Tax Avoidance Taskforce which will be charged with undertaking enhanced compliance activities targeting multinationals as well as other large public and private groups and high wealth individuals.
Better protection for whistleblowers who disclose information to the ATO on tax avoidance behaviour and other tax issues.
Significantly increased administrative penalties for global entities with turnover in excess of $1 billion from 1 July 2017, including an increase of maximum penalties for failing to lodge tax documents with the ATO from $4,500 to $450,000 and a doubling of the penalties in relation to statements made to the ATO.
COMPANY TAX RATE
After last year backing away from a general cut to the company tax rate, the Government has announced that it will extend the cuts to the company tax rate for small business (currently those with a turnover of $2 million are subject to a 28.5% company tax rate). From the 2016-17 year, companies with a turnover of up to $10 million will have their company tax rate cut to 27.5%. The turnover threshold will be progressively increased so that all companies have a 27.5% tax rate from the 2023-24 year. With further progressive reductions in the tax rate from the 2025-26 year, the end game is to see all companies with a tax rate of 25% from the 2026-27 year (yes – 10 years from now). The Government considers that the reduction in the company tax rate will make Australia more internationally competitive in attracting investment.
The GST exemption for low value imports (with a value of less than $1,000) by consumers will be removed from 1 July 2017. This measure is in addition to those announced last year imposing GST on digital products and services imported by Australian consumers from 1 July 2017. Overseas suppliers that have an Australian turnover of $75,000 or more will be required to register for, collect and remit GST for low value goods supplied to consumers in Australia, even if the overseas suppliers have no presence in Australia.
COLLECTIVE INVESTMENT REGIME
The Government has announced the introduction of two new investment vehicles – a corporate CIV and a limited partnership CIV. These vehicles will allow investors to pool funds to be managed by a fund manager. Both will be “flow-through” vehicles for income tax purposes such that the profits will be taxed in the hands of investors. These entities will be required to meet similar eligibility criteria as managed investment trusts (ie. widely held and engaging primarily in passive investments). Facilitating investment in this way is likely to be more attractive to foreign investors that are often unfamiliar with trust structures. The corporate CIVs will commence from 1 July 2017 and the limited partnership CIVs will commence from 1 July 2018.
SMALL BUSINESS MEASURES
Consistent with the Government’s focus on small business, the Budget includes a number of measures to encourage small business growth. These include increasing the small business turnover threshold from $2 million to $10 million, thereby allowing access to the small business tax rate of 28.5% (to be further reduced to 27.5% as noted above), simplified depreciation and trading stock rules, ability to account for GST on a cash basis and simplified PAYG reporting and payment. The higher threshold of $10 million does not apply to capital gains tax concessions.
NON-BUSINESS RELATED MEASURES
We anticipate that much of the commentary regarding the budget is likely to focus on the non-business related measures that were announced last night such as changes to superannuation (eg. reducing the income threshold at which superannuation contributions attract an additional 15% tax rate from $300,000 to $250,000) and personal income tax rates (ie. increasing the threshold for the second marginal tax bracket from $80,001 to $87,001 and the commitment to remove the Temporary Budget Repair Levy).