Federal Budget 2016-17
5 May 2016
Key tax announcements for business
On 3 May 2016, the Treasurer Scott Morrison delivered the 2016/17 Federal Budget. This is the Treasurer's first Budget. It is also a pre-election Budget, with a double dissolution Federal election expected to be called on 2 July 2016.
The tax announcements in the Budget reflect a continuation of the major themes on taxation from the 2015/16 Budget:
The Federal Government continues to focus on small business as a way to grow the economy, and has proposed a number of additional measures including a cut in the tax rate for small business to 27.5%, and a change to what is considered a "small business" when accessing certain small business tax concessions.
The Federal Government also continues to focus on multinationals, with additional integrity measures announced, funding for a new ATO Tax Avoidance Taskforce, and consultation on the adoption of other measures proposed by the OECD as part of its Base Erosion and Profit Shifting (BEPS) Project (for further detail about the BEPS Project see Tracking the changes to Base Erosion and Profit Shifting).
Other announcements continue the Government's recent theme on encouraging innovative business, and there are proposals about future work to simplify particular complex areas of tax law, such as the taxation of financial arrangements (TOFA) regime.
There are also an array of changes to the treatment of superannuation. While the change in threshold for the 30% tax on concessional contributions from $300,000 to $250,000 was widely discussed prior to the Budget, perhaps the most significant change is the $1.6 million cap on the total amount of superannuation that can be transferred into 'retirement phase' accounts. For those with very large super balances, this effectively changes the tax rate on the excess over $1.6 million from nil to 15%. Underlying the changes, which are detailed below, the Government will legislate that the purpose of superannuation is to 'provide income in retirement to substitute or supplement the Age Pension'. It can be seen that these measures are guided by that purpose encouraging contributions to superannuation at the lower end, while limiting the concessions for those with very large balances.
The table below sets out a summary of the key tax announcements in the Budget which affect business. The major announcement of a new Diverted Profits Tax is also elaborated on in our commentary below.
Page 1
Proposal
Who is affected
Multinationals
Applicable for income years after 1 July 2017. A 40% Diverted Profits Tax is proposed to apply to profits which arise where there is an effective tax mismatch and a new insufficient economic substance test is met.
An effective tax mismatch arises where:
there is a transaction between an Australian taxpayer and a related party cross-border; and
the transaction reduces the Australian taxpayer's Australian tax; and the transaction increases the related party's tax, but by less than 80%
of the corresponding reduction in the Australian taxpayer's Australian tax liability. The example used is if there is a $100 reduction in the Australian taxpayer's Australian tax liability, but the related party only pays $60 of tax, there is an effective tax mismatch.
Entities with:
global income or consolidated income of $1b or more; and
Australian turnover of $25m or more unless the Australian turnover is less than $25m because income is artificially booked offshore rather than in Australia.
The insufficient economic substance test is met where it can be reasonably concluded based on the information available to the ATO that the transaction at issue was designed to secure a tax reduction.
It is also notable that the Budget provides the ATO with additional funding to establish a new Tax Avoidance Taskforce (to have more than 1000 staff). This is stated (amongst other matters) to be to provide the ATO with greater resources to target compliance activities on multinationals.
From 1 July 2016, it is proposed that amended transfer pricing guidance issued by the OECD in 2015 as part of the BEPS Project will be adopted. This amended guidance relates to intellectual property and intangibles in particular, and also places increased focus on economic substance (including for instance when non-recognition or recharacterisation of transactions is appropriate).
Australian taxpayers with cross border arrangements with associated parties.
What should you do?
Multinationals with cross border intra-group arrangements will need to consider those arrangements, whether restructuring should occur, and their tax governance processes. The following should be documented and considered: whether a reduction in tax arises in Australia from the
cross-border arrangement; if a reduction in tax arises in Australia, a comparison
between the tax outcomes in Australia and in the foreign jurisdiction to determine whether overall there is a tax mismatch; what the commercial benefits of the arrangement are and what the monetary value of those commercial benefits are as compared to the overall tax reduction.
Tax governance processes will need to be considered to ensure that transfer pricing documentation meets the new OECD guidance.
Federal Budget 2016/17 | Minter Ellison | Commercial-in-Confidence
Page 2
Proposal
Who is affected
What should you do?
From the later of 1 January 2018 or 6 months after the relevant law is enacted, anti-hybrid rules or hybrid mismatch rules are proposed to be implemented. The rules are intended to be prospective. There is no specific detail in the Budget as to the nature of the rules, although the Budget suggests that the Board of Taxation's recommendations are likely to be adopted.
The Board of Taxation suggests that these rules are intended to apply to cross border transactions:
between related persons or between persons within the same control group (there are a range of
tests proposed for this, including if one company holds 25% of another, or a third party holds 25% of both, and if there is "effective control") and that are structured transactions which involve a hybrid instrument or hybrid entity.
Multinational groups with financing arrangements involving hybrid instruments, or with hybrid entities in their group.
At this stage, any potential hybrid transactions should be identified as part of effective risk governance. When the detail of the rules is announced, the impact of those rules will need to be considered.
A 'hybrid' is treated for tax purposes differently between Australia and the other jurisdiction and might as a consequence give rise to a tax benefit such as a double deduction in both jurisdictions.
In those circumstances, Australia will (in relation to a hybrid instrument) deny a deduction where a double deduction arises, or include an amount as income (where the income would otherwise be non-assessable, and it is deductible in the other jurisdiction).
There are also rules relating to dual resident entities, and a proposed wide-ranging and complex "imported mismatch rule" which seems (broadly) an anti-avoidance rule designed to prevent taxpayers from seeking to avoid the impact of Australia's anti-hybrid rules by way of transactions through a chain of offshore entities. The imported tax mismatch rule requires (amongst other matters) a tracing through of corporate groups, and an understanding of foreign tax treatment for transactions which may have no relationship to Australia. The detail of such complex rules will be critical.
Federal Budget 2016/17 | Minter Ellison | Commercial-in-Confidence
Page 3
Proposal
Who is affected
What should you do?
The adoption of a mandatory reporting regime in Australia is subject to consultation, and a Consultation Paper has been issued by Treasury. Such a regime is a reporting regime, and would require taxpayers to report "aggressive" transactions which fall within certain criteria or hallmarks set by the ATO.
This regime follows work from the OECD as part of the BEPS project, which recommended the adoption of a similar regime as that adopted in the UK known as the Disclosure of tax Avoidance Schemes (DOTAS) regime. For more detail see Mandatory Disclosure Rules - OECD releases final paper on BEPS 12.
At this stage consultation only if a regime is adopted it is likely it would require disclosures to be made to the ATO in defined circumstances, with harsh penalties if disclosure is not made.
At this stage keep aware of and engage in the consultation process.
From 1 July 2017, new increased penalties of up to $450,000 are proposed to be applicable for failing to meet disclosure obligations to the ATO. A doubling of the penalties for making false or misleading statements to the ATO is also proposed.
Entities with global income or consolidated Given the potential level of penalties, risk governance
income of $1b or more.
procedures should be reviewed.
Small business
Effective 1 July 2016, the small business turnover threshold will be increased from $2m to $10m.
The threshold is to be increased further incrementally to $1 billion by 2022-23.
Companies who now qualify as 'small businesses' under the expanded definition.
Businesses with an aggregate annual turnover of less than $10m will have access to a number of additional tax concessions from 1 July 2016 (but note: not the small business CGT concessions).
Business should consider their aggregate annual turnover.
If aggregate annual turnover is less than $10m tax advice should be sought about tax concessions that are newly available.
Reduced company tax rates are proposed for small businesses:
Short term--the company tax rate for small business entities is proposed to reduce from 28.5% to 27.5% (effective from the 2016-17 income year).
Long term--The rate are proposed to reduce to 27% for all companies in 2024-25, 26% in 2025-26 and 25% in 2026-27.
There are also associated amendments proposed to unincorporated small businesses, increasing the unincorporated small business tax discount incrementally over time to 16%, but from 1 July 2016 to 8%.
Concurrent with the increased threshold to $10m to be a small business, these changes decrease the tax burden on small businesses.
Federal Budget 2016/17 | Minter Ellison | Commercial-in-Confidence
Page 4
Proposal
Who is affected
Small business GST simplification.
From 1 July 2016, small business will have the option to account for GST on a cash basis and pay GST instalments as calculated by the ATO.
Small businesses.
What should you do?
Advice should be sought as to whether this method of accounting for GST would be more effective for the business.
From 1 July 2018, compliance with Division 7A of the Income Tax Assessment Act 1936 (Cth) (which applies to provide for deemed dividends to arise in certain circumstances) is to be simplified. This is much needed. The proposals are:
A self-correction mechanism will provide taxpayers whose arrangements have inadvertently triggered Division 7A with the opportunity to voluntarily correct their arrangements without penalty.
Safe harbour rules will simplify compliance for taxpayers.
Private company shareholders with existing Division 7A loans, or who are seeking to access capital tied up in their businesses.
Affected businesses and shareholders should take the opportunity to consider existing loan arrangements and Division 7A risk, and ensure that future arrangements are fully compliant.
Other business tax measures
Removal of $1000 threshold for GST on imported goods - previously announced in August 2015.
Overseas suppliers of goods to Australian consumers, subject to meeting the $75,000 turnover threshold.
Overseas suppliers will need to determine whether as a result of supplying goods to customers in Australia they will: be required to register for GST; be required to remit, GST upon sale; or be required to remit GST upon importation.
It is proposed that a vendor registration and payment model will be applied, subject to a registration turnover threshold.
It is unclear whether all goods, or only those with a value less than $1,000 will count towards the registration turnover threshold.
It is also unclear whether this vendor payment model will only apply to goods with a value under $1,000 (with those over $1,000 dealt with by Customs at the border as is currently the case), or to all goods regardless of value.
Federal Budget 2016/17 | Minter Ellison | Commercial-in-Confidence
Page 5
Proposal
New measures are proposed to clarify particular provisions of the consolidation regime. These: provide for the extension of the tax consolidation regime such that
it applies to liabilities arising from securitisation arrangements within both financial and non-financial institutions, with effect for arrangements that commence on or after 7:30 pm (AEST) on 3 May 2016; provide for the removal of adjustments relating to deferred tax liabilities from the consolidation entry and exit tax cost-setting rules, with effect from the date that the legislation is introduced into Parliament; and prevent a consolidated group from obtaining a double tax benefit when an entity joins the group, with effect from 1 July 2016.
In relation to GST and digital currency a Consultation Document has been issued which considers whether digital currency should be treated as "money" and not subject to GST, as opposed to the current GST treatment.
New protections for whistleblowers who provide information to the ATO about tax misconduct.
On 3 May 2016, the Government released the Board of Taxation's final report on voluntary corporate tax transparency code.
Who is affected
What should you do?
Parties who are subject to, or provide securitisation arrangements such as banks and financiers.
Corporate groups who have formed or will form consolidated tax groups.
Consider whether these changes will impact on your business.
Digital currency providers or brokers, and digital businesses which if a change occurs may be able to accept digital currency from customers without greater cost.
Get engaged in the Consultation process.
These protections appear to apply to disclosures in relation to all types of tax misconduct, including, but not limited to, large businesses.
There is no substantive detail as yet, it will be important to ensure that HR procedures are considered when these rules are announced.
Large businesses including, but not limited to, large multinationals.
Risk governance should be considered, and consideration should be given as to whether the voluntary tax transparency code (if similar measures have not already been adopted) could mitigate reputation risk or tax risk.
Federal Budget 2016/17 | Minter Ellison | Commercial-in-Confidence
Page 6
Proposal
Who is affected
What should you do?
Banks, financial services, investors
Introduction of new vehicles for collective investment, being: Corporate Collective Investment Vehicles; and Limited Partnership Collective Investment Vehicles.
The Corporate CIV will allow Australian funds managers to offer investments through a company structure, taking effect from 1 July 2017. The Government considers that this vehicle will be well suited for offering retail investment products.
A limited partnership CIV will be introduced for income years starting on or after 1 July 2018.
Australian funds managers, and potential investors in Australian assets.
These regulatory frameworks are intended to increase access to overseas markets. Specific mention was made of the Asia Region Funds Passport.
Be prepared to engage with Government in relation to development of the details of the new regime.
From 1 July 2018, the Government proposes to apply the same tax treatment to asset backed financing as is presently applied to interest bearing loans and investments.
Businesses currently using, or who would benefit from, asset backed financing arrangements. Suppliers of asset backed financing.
There is not a lot of information as to the detail of this measure. Be prepared to engage in consultation with the Government as legislation to support this measure is developed.
The Budget announces that the TOFA regime will be reviewed with simplification in mind. In particular, the review is designed to link TOFA to accounting more closely, to simplify the rules around recognising gains and losses on foreign currency, to provide simplified accruals and realisation rules, and to provide for the adoption of a new tax hedging regime. Measures that have previously been announced but not enacted relating to hedging and functional currency will form part of this announcement..
Banks, financial institutions, companies/businesses subject to TOFA.
Be prepared to engage in consultation with the Government as legislation to support this measure is developed.
Superannuation funds
Superannuation pension phase and transfer balance cap for retirement Individuals with high value superannuation
accounts.
portfolios.
Effective 1 July 2017, a transfer balance cap of $1.6million will be introduced on the total amount of accumulated superannuation an individual can transfer into a tax-free 'retirement account.'
Superannuation funds.
Amounts in excess of $1.6m will be maintained in an 'accumulation phase' account, and will be taxed at 15%.
Individuals
Consider the impact on retirement phase assets, and be prepared to comply with requirements to transfer excess balances into accumulation phase.
Funds
Be prepared to engage with Government on development of the regulation necessary to give effect to this proposal.
Federal Budget 2016/17 | Minter Ellison | Commercial-in-Confidence
Page 7
Proposal
Who is affected
What should you do?
Effective immediately, a lifetime non-concessional contributions cap of $500,000 is introduced.
The $500,000 lifetime cap takes into account all non-concessional contributions made on or after 1 July 2007.
Non-concessional contributions include contributions which are not included in the assessable income of the receiving superannuation fund, eg non-deductible personal contributions made from the member's after-tax income.
Individuals who have made nonconcessional contributions to their superannuation of more than $500,000 since 1 July 2007.
If, prior to the commencement of the provision, an individual has exceeded their cap they will not be required to take the excess out of the superannuation system.
Ensure that future non-concessional contributions do not exceed the new cap. This may require adjustments to salary sacrifice arrangements presently in place.
Concessional contributions cap cut to $25,000.
Effective 1 July 2017, the annual concessional contributions cap will be reduced to $25,000 for all individuals regardless of age from 1 July 2017.
The concessional cap is currently set at: $30,000 for those aged under 49 on 30 June for the previous
income year; or $35,000 for those aged 49 or over on 30 June for the previous
income year,
for the 2015-16 and 2016-17 income years.
Persons making concessional contributions in excess of $25,000 per year.
Ensure that future concessional contributions do not exceed the new cap. This may require adjustments to salary sacrifice arrangements presently in place.
Concessional contributions cap averaging
Superannuation contributors will be able to 'catch-up' concessional contributions if their contributions over the previous five years have been less than the cap, provided the account balance is less than five years.
This measure will apply to unused amounts accrued from 1 July 2017.
Persons with variable or lumpy income streams, particularly persons returning to the workforce (such as from maternity or paternity leave), who wish to 'catch up' on prior year contributions.
Consider whether these changes may be of benefit to you.
Federal Budget 2016/17 | Minter Ellison | Commercial-in-Confidence
Page 8
Proposal
Superannuation contributions tax--Application of extra 15% tax for incomes of $250,001 and over.
Effective 1 July 2017, the relevant threshold is reduced from $300,000 to $250,000. Individuals with incomes above $250,000 who make superannuation concessional contributions are subject to an additional 15% contributions tax.
Who is affected
Persons with incomes (including concessional contributions) between $250,000 and $300,000.
What should you do?
From 1 July 2017, all Australians under 75 years of age will be able to make deductible contributions to super up to the concessional cap.
Persons who are currently prevented from making deductible superannuation contributions, including individuals aged 65 to 74 who must currently meet a work test.
Consider whether these changes may be of benefit to you.
Federal Budget 2016/17 | Minter Ellison | Commercial-in-Confidence
Page 9
Multinationals Diverted Profits Tax
On 11 May 2015, in a Press Release entitled Strengthening our Taxation System Joe Hockey, then Federal Treasurer, said that it was clear that Australia did not need to replicate the UK's Diverted Profits Tax. Mr Hockey said that amendments to the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 (Cth) and the adoption of a Multinational Anti-Avoidance Rule (MAAL) went further than the UK had in any event. For further detail on the MAAL which was enacted in 2015 see Multinational Anti-avoidance law and Country-by-Country reporting introduced.
Now a year later, with a new Prime Minister and new Federal Treasurer, the 2016/17 Budget suggests that the MAAL was intended to be phase 1 of an introduction of the UK's Diverted Profits Tax, and that a Diverted Profits Tax is needed as the MAAL is difficult to enforce if a taxpayer does not co-operate with the ATO during an audit.
A Treasury Consultation Paper on the Diverted Profits Tax has been issued following the Budget announcement with submissions due by 17 June 2016. The Diverted Profits Tax is intended to be effective for income years following 1 July 2017, but will apply from that date to transactions whenever they were entered into.
The proposed Diverted Profits Tax is intended to apply to entities with: global income or consolidated income of $1b or more; and Australian turnover of $25m or more unless the Australian turnover is less than $25m because
income is artificially booked offshore rather than in Australia. There is no detail on when it can be concluded that the income has been artificially booked offshore.
The Diverted Profits Tax is proposed to apply where there is an effective tax mismatch and the insufficient economic substance test is met.
An effective tax mismatch arises where: there is a transaction between an Australian taxpayer and a related party cross-border; and
the transaction reduces the Australian taxpayer's Australian tax; and
the transaction increases the related party's tax, but by less than 80% of the corresponding reduction in the Australian taxpayer's Australian tax liability. The example used is if there is a $100 reduction in the Australian taxpayer's Australian tax liability, but the related party only pays $60 of tax, there is an effective tax mismatch.
The insufficient economic substance test is met where it can be reasonably concluded based on the information available to the ATO that the transaction at issue was designed to secure a tax reduction.
The guidance provided in the Consultation Paper is that where the non-tax financial benefits of the arrangement exceed the financial benefit of the tax reduction, the arrangement will have economic substance, will not meet the insufficient economic substance test, and the Diverted Profits Tax will not therefore be applicable. This test is not expressed as a purpose type of test, and this is not worded like an avoidance provision. It is a 'design' test, and is satisfied if there is a conclusion from the ATO as to that 'design'.
When considering the proposed Diverted Profits Tax, some high level features when comparing it to the UK equivalent should be noted: The proposed Diverted Profits Tax is deliberately designed to provide a wide discretion to the ATO as
to whether to impose it or not, including, for example, whether to determine a transaction is 'low risk' and not apply the tax. This discretion is beyond the ATO's existing powers which could apply to transactions in the Diverted Profits Tax's ambit (such as reconstruction powers in Part IVA and in the transfer pricing provisions, and to seek and compel access to information). It is notable that the examples in the Consultation Paper seem to all be able to be attacked by the ATO using existing powers such as the transfer pricing rules, and Part IVA.
Federal Budget 2016/17 | Minter Ellison | Commercial-in-Confidence
Page 10
The UK Diverted Profits Tax specifically excludes loans, and specifically excludes certain entities from its ambit (eg some widely held funds, and pension funds). The Consultation Paper suggests that it will be at the ATO's discretion whether to apply the Diverted Profits Tax or not, and this may suggest that specific exclusions similar to those in the UK might not be enacted, and ATO administrative guidance would need to be relied upon.
The Diverted Profits Tax will be imposed at the rate of 40% by the ATO. This is similar to the UK, in that the 40% rate is a step up from the corporate tax rate, and the tax is intended to be penal in nature. This also reflects that, to some extent, the Diverted Profits Tax is aimed at encouraging taxpayers to agree to or make voluntary transfer pricing or other adjustments to avoid the penal rate of the Diverted Profits Tax.
It is notable that the Diverted Profits Tax is not a self-assessment regime like the UK equivalent, and instead there is an new assessment process proposed. The new assessment process involves:
- a 'provisional' Diverted Profits Tax assessment from the ATO no later than 7 years' following the lodgement of the taxpayer return for the relevant year;
- 60 days provided for taxpayer response and further information to be provided (and presumably objection). The taxpayer can for instance propose a transfer pricing adjustment instead, and any such adjustment would be imposed at 30% not the 40% penal rate;
- a final Diverted Profits Tax assessment 30 days following the taxpayer's 60 day response period; - a further 12 months is then provided for the ATO to review the assessment; - the ATO can issue a supplementary Diverted Profits Tax assessment up to 30 days after the end
of the 12 month period; - the taxpayer can then lodge an appeal through the Court process. Withholding taxes and CFC tax paid will be credited against the Diverted Profits Tax. If the Diverted Profits Tax arises it will not be creditable against income tax (similar to the UK model), and while a franking credit will be generated, that credit will be limited to the company tax rate, not the 40% Diverted Profits Tax rate.
The proposed Diverted Profits Tax is light on the detail of:
where it will fit in the scheme of the income tax legislation;
how it will work with Australia's double tax treaty obligations (from which only Part IVA is excluded as a general rule). There is a suggestion that foreign tax paid by the related party will not be creditable, and double tax seems to potentially arise as a result. Consistency with Australia's Double Tax Treaty obligations is critical to Australia's international standing. The Budget response seems to be that the Diverted Profits Tax is a 'penalty' which seems an incomplete answer to this important issue; and
what transactions will be exempt from the Diverted Profits Tax. As is suggested above, it may be that the ATO will simply be provided a broad discretion whether to apply the Diverted Profits Tax and administrative guidance will be issued instead.
What should multinationals do?
Multinationals with cross border intra-group arrangements will need to consider those arrangements and their tax governance processes.
The following should be documented and considered:
whether a reduction in tax arises in Australia from the particular arrangement;
if a reduction in tax arises in Australia, a comparison between the tax outcomes in Australia and the foreign jurisdiction should be made to determine whether (overall) there is a tax mismatch meeting the test outlined above;
the commercial benefits of the arrangement pricing those commercial benefits as compared to the tax saving will be needed to substantiate a position that the Diverted Profits Tax is not applicable.
If you need further information about any of the key issues we have identified or to assist you to assess risk for your business, please do not hesitate to contact our team noted below.
Federal Budget 2016/17 | Minter Ellison | Commercial-in-Confidence
Page 11
Contact us
Joanne Dunne Partner
T +61 3 8608 2944
Adrian Varrasso Partner
T +61 3 8608 2483
Alan Kenworthy Partner
T +61 3 8608 2390
Mark Green Partner
T +61 3 8608 2380
William Thompson Partner
T +61 7 3119 6221
Paul Ingram Partner
T +61 8 8233 5601
Carmen McElwain Partner
T +61 3 8608 2355
Bastian Gasser Partner
T +61 3 8608 2476
Hamish Wallace Partner
T +61 2 9921 4596
Peter Poulos Partner
T +61 2 9921 4244
David Pratley Partner
T +61 2 9921 4606
Chris Douglas Partner
T +61 7 3119 6227
Craig Bowie Special Counsel
T +61 7 3119 6424
Peter Capodistrias Partner T +61 3 8608 2563
Rhys Guild Partner T +61 2 9921 4782
Chris Kinsella Partner T +61 2 9921 8614
Christian Pellone Partner T +852 2841 6882
Federal Budget 2016/17 | Minter Ellison | Commercial-in-Confidence
Page 12
