The Australian Treasurer, the Hon Josh Frydenberg, delivered the 2020/21 Federal Budget on 6 October, 2020 and as widely anticipated, the key focuses were on firstly, bringing forward to 1 July, 2020 the effective date of previously legislated personal income tax cuts and secondly, expanding significant economic stimulus initiatives.
However, several important business tax and related measures were also announced, including:
- Enabling businesses, with aggregated annual turnover of less than AUD5 billion, to immediately deduct the full cost of certain capital assets (with restrictions), provided these assets are first used or installed by 30 June, 2022;
- Introducing limited loss carry-back rules for companies with aggregated annual turnover of less than AUD5 billion;
- Clarifying the “corporate residency” test for non-Australian incorporated companies, and in effect requiring a “significant economic connection” to Australia, as well as Australian central management and control, in order to be regarded as Australian resident;
- Expanding the list of Exchange of Information countries for concessional (15%) Managed Investment Trust (MIT) withholding tax purposes;
- Reversing various integrity measures and limitations to the Research and Development (R&D) tax offset;
- Introducing an Fringe Benefits Tax (FBT) exemption for employer provided retraining and reskilling benefits for redundant or soon to be redundant employees; and
- Providing additional funding to the ATO to target serious and organised crime for a further two years to 30 June, 2023.
The Federal Budget also contains important non-tax (i.e. stimulus) measures, intended to support businesses and growth in specific sectors throughout Australia. It is expected that businesses in the following sectors would benefit from these funding measures – medical, telecommunications, technology (including fintech and blockchain), energy, infrastructure and manufacturing sectors.
Further details on each of these measures are provided below.
Instant asset write-off
The Government has increased the instant asset write off to allow businesses with aggregated annual turnover of less than AUD5 billion with eligible capital assets acquired from 7.30pm AEDT on 6 October 2020 and first used or installed by 30 June 2022, to claim an immediate tax deduction for its full cost.
This is a substantial increase to this measure which was already expanded from an instant asset write off threshold from AUD30,000 to AUD150,000 on 24 March 2020 by the Government as a stimulus and tax-relief measure in response to COVID-19. The 2021 Budget now removes any write-off thresholds and allows for the full expensing in the first year of use to new depreciable assets and cost of improvements to existing eligible assets.
The Government has also provided businesses with an extra 6 months, to 30 June 2021, to first use or install assets costing less than AUD150,000. For small to medium business with aggregated annual turnover between AUD50 million and AUD500 million, those businesses can obtain an instant asset write-off deduction for the full cost of eligible second-hand assets costing less than AUD150,000 purchased by 31 December 2020 and installed by 30 June 2021.
For small business with aggregated turnover of less than AUD10 million, in addition to the above measures, these can deduct in full the balance of their simplified depreciation pool at the end of this income year.
Based on existing rules, there are a small number of excluded assets to the instant asset write off measures that include assets that are leased out for more than 50% of the time on a depreciating asset lease, low-value assets, horticultural plants, software allocated to a software development pool and capital works deductions.
These measures encourage spending for businesses, by providing immediate tax-relief. Coupled with the tax loss carry-back rules (discussed below) these measures will reduce the amount of tax a business will pay freeing much need cashflow and are expected to unlock essential investment.
Temporary loss carry-back measures
This year’s Budget reintroduces temporary loss carry-back measures, aimed at helping businesses to claim back some of the tax paid pre-COVID to offset losses sustained during the pandemic-induced economic crisis. Loss carry-back measures were previously introduced in 2012 by the Gillard government, but were scrapped just one year later in 2013.
Broadly, under this initiative, eligible companies will be allowed to carry back tax losses from the 2019-20, 2020-21, or 2021-22 income years to offset previously taxed profits in the 2018-19 or later income years.
These measures are targeted at corporate tax entities with an aggregated turnover of less than AUD5 billion. These entities can apply tax losses from the relevant income years against taxed profits in a previous year, generating a refundable tax offset in the year in which the loss is made. Importantly, there is a limit to the tax refund available under this initiative, by the imposition of a requirement that the amount carried back is not more than the earlier taxed profits and that the carry back does not generate a franking account deficit.
Eligible companies will be able to access the tax refunds on election when they lodge their 2020-21 and 2021-22 corporate tax returns. Companies that do not elect to carry back losses under this measure can still carry losses forward as normal.
Changes to corporate residency test
The Bywater case, handed down by the High Court in 2016, and the ATO’s response to it, have created significant uncertainty in the international market as to whether a foreign-incorporated company with some Australian presence will be a resident of Australia for income tax purposes. Broadly, before Bywater and ATO’s interpretation, to be an Australian tax resident (and thus taxed in Australia on worldwide income), such company needed to have central management and control in Australia and carry on a business here in Australia.
Under the ATO’s formal and informal interpretation of Bywater, to be an Australian tax resident, where such a company has its central management and control in Australia, this also should mean that it is treated as carrying on business in Australia and can be an Australian tax resident (and thus taxed in Australia on worldwide income). ATO’s interpretation meant in principle that, in certain circumstances, the second limb (carrying on business) was no longer separately relevant to being treated as an Australian tax resident.
As a result, it meant that companies that were previously sitting outside the Australian tax net, could be drawn into the net. Where a company is a resident for tax purposes, broadly, it pays Australian tax on its worldwide income and has significant compliance obligations. As a result of the above change in interpretation of the definition of resident, company groups were subjected to different tax outcomes such as:
- Foreign-incorporated companies now needing to determine under double tax treaties where the treaty applies tax to them;
- Distributions from foreign-incorporated companies deemed to be resident, to Australian parent companies, not being exempt under the participation exemption in subdivision 768-G of the ITAA97;
- A sale of shares in the foreign-incorporated company by an Australian parent company not being exempt under 768-G of the ITAA97;
- The disposal of an asset (which is not taxable Australian property) would not be exempt under Division 855 of the ITAA97, no longer being so;
- The application of the ‘significant global entity’ rules to the company, which could trigger increased and very significant penalties if ATO returns and other forms have never been filed; and
- Complications under the new Multilateral Instrument which could require administrative approval by a tax authority to determine residency (which could take time).
In addition, as a result of the above changes, Board composition and behaviour needed to pivot to ensure Australian tax residency was not triggered. This included:
- Australian Directors of overseas companies travelling overseas to attend board meetings (when they could attend via video-link technology);
- Australian Directors not attending Board meetings of overseas companies if they cannot attend in person (but could attend via video link);
- Foreign Directors of overseas companies not attending Board meetings via video link, if they were in Australia at the time of the meeting; and
- The number of Australian Directors on Boards being restricted, or prohibited.
The above interpretation therefore caused significant inefficiencies and possible restrictions on or prohibitions for Australian based Directors. It also caused inefficiencies in relation to, for example, travel purely for the purpose of ensuring that the Australian tax residency test was not triggered. As a result, the Government asked the Board of Tax to review the situation, and this review was released in December 2019.
As announced tonight, the Government will legislate a change in line with the Board of Taxation review, to ensure that a company will only trigger the residency test where it has a ‘significant economic connection’ to Australia. This will only occur where a company has central management and control here, as well as it having its ‘core commercial activities’ being undertaken in Australia (basically, going back to the 2 limb test as it applied before the Bywater case and the ATO’s above interpretation, but replacing the “carrying on business test” with a new ‘core commercial activities’ test). Another point the Board of Tax review made was that the definition of “central management and control” as distinct from “carrying on a business” needed to be clarified, so hopefully this is undertaken as part of the legislative process.
Importantly, taxpayers will have the option of applying these rules from 15 March 2017 (the date that the ATO withdrew its previous ruling on corporate residency).
On one hand, the above changes by the Government to clarify and simplify these rules are welcome news for global corporate groups and their Directors.
On the other hand, the Government did not quantify the impact of this measure on tax revenue receipts.
It remains to be seen as whether (and, if so, how) ‘core commercial activities’ would be defined as part of the new legislated measure, and how it would be interpreted and applied in practice, having regard to both traditional business corporate governance models and modern and digitalised corporate governance procedures (which have been accelerated by the COVID-19 pandemic).
There is also uncertainty whether the announced amendments will extend to the residency rules for limited partnerships, which are generally deemed to companies for Australian income tax purposes.
Updating the list of Exchange of Information jurisdictions
Managed Investment Trusts (MITs) are a very common Australian vehicle used by foreign investors to invest in, principally, passive assets such as Australian commercial real estate.
One key feature of such investment structures is that distributions made by the Australian MIT to investors can be subject to a reduced rate of withholding tax of 15% (down from 30% or 45%) when the investor is a resident in a jurisdiction which is listed as having an “effective” information sharing agreement with Australia.
The list of eligible jurisdictions is to be expanded (from 122) to add the Dominican Republic, Ecuador, El Salvador, Hong Kong, Jamaica, Kuwait, Morocco, North Macedonia and Serbia. Kenya will be removed from the list.
These changes will be effective from 1 July 2021 and will further expand the scope of countries and foreign jurisdictions that can benefit from the lower withholding tax for investments held in Australian MITs.
Tax treaty network to be modernised
The Government has also announced that it will work on “modernising and expanding our tax treaty network to eliminate double taxation, settle taxing rights between Australian and other countries and attract foreign investment and skilled workers.” It says it will prioritise refurbishing treaties with “key strategic partners”.
No further details have been given to date.
R&D tax incentive reforms
The Federal Government has announced further amendments to its reforms to the Research and Development Tax Incentive (R&D Incentive) that were first announced in the 2018-2019 Federal Budget. Importantly, a number of the proposed integrity measures and limitations on the R&D Incentive will be relaxed, to support R&D investment in Australia in light of COVID-19.
These changes will take effect from 1 July 2021 (being a further 24 month deferral of the application of the reforms to the R&D Incentive).
Currently, there are two core components of the R&D Incentive in Australia:
- a refundable tax offset equal to 43.5% of eligible R&D expenditure, for eligible entities whose aggregated turnover is less than AUD20m; and
- a non-refundable tax offset equal to 38.5% of eligible R&D expenditure for all other eligible entities (which can be used to reduce tax payable in current or future income years).
The key amendments to the R&D Incentive will be as follows:
- For small companies (aggregated annual turnover of under AUD20m), the refundable R&D tax offset will now be equal to 18.5 percentage points above the claimant’s company tax rate, rather than only 13.5 percentage points as announced in the 2018-2019 Federal Budget. Thus, for eligible small entities that are subject to the 25% corporate tax rate from 1 July 2021 onwards, the refundable tax offset rate should remain at 43.5%.
- The proposed AUD4m limit on annual cash refunds for small companies will not proceed.
- For larger companies, the rates of the non-refundable R&D Incentive will remain linked to its "R&D intensity” (being its R&D expenditure as a proportion of its total annual expenditure), as announced in the 2018-2019 Federal Budget. However, the number of tiers will be reduced from three to two and the maximum tax offset rate will be available at a much lower R&D intensity level, as follows:
- Tax offset rate equal to 8.5 percentage points above the claimant’s company tax rate (i.e. up to 38.5%)for R&D expenditure between 0% and 2% R&D intensity; and
- Tax offset rate equal to 16.5 percentage points above the claimant’s company tax rate (i.e. up to 46.5%) for R&D expenditure above 2% R&D intensity.
The Government will also proceed with the increase in the cap on eligible R&D expenditure from AUD$100 million to AUD$150 million per annum, further increasing the potential value of the tax offsets available for eligible entities under the R&D Incentive.
These changes reflect the importance of having R&D activities conducted in Australia, in light of the impact of COVID-19 on employment and the overall economy in Australia.
Personal income tax
The Government announced that it will provide additional support to Australian taxpayers by bringing forward tax cuts in the second stage of the Personal Income Tax Plan from 1 July 2022 to 1 July 2020 (backdated). Additionally, the Government will retain the Low and Middle Income Tax Offset for the 2020-21 income year.
By bringing forward the second stage of the Personal Income Tax Plan to 1 July 2020 (backdated), the changes would be as follows:
- The low income tax offset will increase from AUD445 to AUD700;
- The top threshold of the 19 per cent personal income tax bracket will increase from AUD37,000 to AUD45,000; and
- The top threshold of the 32.5 per cent personal income tax bracket will increase from AUD90,000 to AUD120,000.
Additionally, by retaining the Low and Middle Income Tax Offset for the 2020-21 income year, a reduction in tax of up to AUD1,080 would be available as follows:
- For taxable incomes of AUD37,000 or less, taxpayers are provided a reduction in tax of up to AUD255;
- For taxable incomes between AUD37,000 and AUD48,000, the value of the offset increases at a rate of 7.5 cents per dollar to the maximum offset of AUD1,080;
- For taxable incomes between AUD48,000 and AUD90,000, taxpayers are eligible for the maximum offset of AUD1,080; and
- For taxable incomes between AUD90,000 to AUD126,000, the offset phases out at a rate of 3 cents per dollar.
The above measures are intended to provide immediate tax relief to individuals and support the economic recovery and jobs by boosting consumption.
Sector-specific, non-tax measures
The Federal Budget also contains important non-tax (i.e. funding) measures, intended to support businesses and growth in specific sectors. These significant measures and their expected sector-specific impacts include: