Budget 2017-18.pdf (267 kb)
The last month has seen a steady stream of major policy announcements combined with hints about the contents of the Budget – a ‘housing affordability package,’ changes to University student fees and the recovery of HELP debts, more money and a new model for infrastructure, changes to school funding, amendments to media ownership laws, more money for national security, and so on. Tax was largely missing in action, except for clear statements about what was not going to change – negative gearing and reducing the CGT discount.
As it turns out, the lack of any detailed forewarning about the tax measures in the Budget was probably because the tax changes are few, and many of them are not especially welcome. Our Tax Brief outlines the main elements of the tax components of this year’s Budget.
Banking industry measures
Under the rubric of ‘Building an Accountable and Competitive Banking System,’ the Government has responded to the prevailing political mood by applying the proverbial ‘big stick’ to the largest banks.
As well as the tax-related measures, there is a raft of other bank-related announcements, including:
- introducing a new ‘Banking Executive Accountability Regime’ which will provide APRA with far greater powers to monitor and regulate the activities of senior executives within banks (including in relation to banks’ remuneration policies for senior executives);
- establishing a new dispute resolution framework with the newly created Australian Financial Complaints Authority empowered to deal with all financial disputes; and
- undertaking an independent review to recommend the best approach to implement an open banking regime in Australia.
Big 5 bank levy
Notwithstanding the above measures, the most significant change is unquestionably the introduction of a ‘major bank levy.’ It is the second largest revenue measure in the Budget, estimated to raise at least $1.6bn per year. The significance of the introduction of the bank levy was evidenced by the reaction of the markets earlier today when over $14bn was wiped off the value of the major banks.
So, why now? As we all know, the UK (and several other countries) have introduced bank levies over the last decade. The UK’s bank levy was introduced in 2011 against the backdrop of the Global Financial Crisis (‘GFC’) and the UK government bailing out the banking sector. The Australian bank levy seems to have been driven by other factors. Throughout the GFC and beyond, the Australian banks have remained some of the strongest banks in the world. Indeed, during the last few years as the housing market has continued to grow, the Australian banks have continued to deliver record profits. The Government has decided that enough is enough and that the banks should make a ‘fair additional contribution’ to Government revenue – the ‘fair additional contribution’ taking the form of a bank levy which is estimated to raise $6.2bn over the next four years.
At this stage, we have been provided with little detail in relation to the precise scope of the levy – the details that we have received include:
- it will apply to the big 5 Australian banks (ie, banks with ‘licensed entity liabilities’ of $100bn or more – hence, it being a ‘major’ bank levy);
- the levy will be payable quarterly at 0.015 % of an ADI’s licensed entity liabilities (ie, 6bp per annum);
- liabilities that will be counted will include normal debt, including bonds and commercial paper, as well as Tier 2 capital debt. Whether other types of liabilities will be caught is not clear; and
- liabilities that will be excluded will include Additional Tier 1 (‘AT1’) capital and deposits of individuals, businesses and other entities protected by the Financial Claims Scheme.
There will surely be a huge amount of detail to follow. For example, previous levies (such as the financial institutions duty and bank accounts debits tax) were deductible for income tax purposes so this levy will presumably be deductible as well. If that turns out to be the case, it presumably will not generate franking credits for the bank when paid. The jurisdictional aspects of the levy have not been spelt out – how will the liabilities of the local branches and subsidiaries of foreign banks be assessed; what impact will the liabilities of offshore branches and subsidiaries of local banks have on the calculation of the levy?
There is a striking resemblance between the basic features of the UK levy and the proposed Australian levy. It is hoped that some of the problems that have been encountered with the UK regime are not replicated here – for example, one criticism of the UK regime is that it included liabilities reflected in the bank’s global accounts rather than just liabilities relating to the UK business. It is unclear at this stage precisely which entities’ liabilities will be included – the announcement simply refers to ‘licensed entity liabilities.’
As well as setting out the basic parameters of the levy, the Government has also included a fairly clear message (or perhaps, threat) to the major banks about passing this cost on to their customers. In this regard, the Government has stated that the Australian Competition and Consumer Commission will undertake a residential mortgage enquiry which will ask banks to explain any changes or proposed changes to the pricing of their mortgages. Furthermore, in his speech, the Treasurer stated that, ‘unlike the previous bank deposit tax, this is specifically not a levy on pensioners’ and others’ ordinary deposit accounts, nor on home loans.’ As such, the message is clear – if rates or fees increase then the bank should be prepared to justify those increases.
Banks and the markets will unquestionably be trying to quantify the potential effects of the levy in the next few days. The levy is clearly a strategic hit aimed at the big 5 banks. It would be interesting to know whether smaller (eg, regional) banks will regard the levy as providing them with a competitive advantage or a barrier to growth or an impost that in the not-too-distant future will be extended to them as well.
The end of ‘deductible/frankable’ hybrids
The Budget has announced the end of so-called ‘deductible/frankable’ hybrid mismatch arrangements that can arise from the issue of AT1 regulatory capital by banks and other financial institutions through overseas branches.
The two new measures will:
- prevent returns on AT1 capital from carrying franking credits where such returns are tax deductible in a foreign country; and
- where the AT1 capital is not wholly used in the offshore operations of the issuer, require the franking account of the issuer to be debited as if the returns were to be franked.
The first measure is straight-forward and not entirely unexpected. The rationale and precise scope of the second measure is unclear and hopefully will be clarified by the Government or Treasury at an early date.
The new measures are to apply to returns on AT1 instruments paid from the later of 1 January 2018 or six months after Royal Assent, subject to transitional arrangements. Where AT1 instruments have been issued before the Budget, the new measures will not apply to returns paid before the instrument’s next ‘call date’ (broadly, being a date before scheduled maturity on which the issuer can redeem or otherwise wind-up the instrument) occurring after that time.
The Budget announcement follows on the Treasurer’s request to the Board of Taxation in April 2016 to, ‘examine how best to implement the OECD Hybrid Mismatch recommendations to eliminate deductible/frankable hybrid mismatch arrangements that arise in relation to regulatory capital.’ In doing so, the Treasurer asked the Board to report on an ‘implementation strategy’ that was to address specific terms of reference. The Board indicated in November last year that ‘various options [were] under consideration’ and that it hoped to finalise its report to Government before the end of 2016. Unfortunately, the Budget and related papers contain no mention of this report. As a consequence, the Budget is silent on submissions that were made to the Board, particularly on international competitiveness and other grounds, that returns paid on AT1 instruments should be deductible in Australia, where the funds are used to produce assessable income.
The announcement in this Budget should not be confused with the broader review of the taxation of hybrid mismatches generally (ie, not just bank regulatory capital) that was flagged in last year’s Budget as a result of the Board’s review of the OECD Hybrid Mismatch recommendations. In that Budget, the Government released the Board’s report and announced that it will implement the OECD’s anti-hybrid principles, taking into account the recommendations of the Board. Draft legislation in this regard has yet to see the light of day.
Housing affordability and the property industry
Affordable housing MITs
The Government will introduce legislation to enable managed investment trusts (‘MITs’) to invest in affordable housing. The impetus for this measure can be seen in the fact sheet accompanying the announcement, ‘under the current law, the ATO has generally taken the view that investment in residential property is active, with a primary purpose of delivering capital gains from increased property values, and therefore taxed on income at a 30% rate as it is not eligible for the MIT tax concessions which apply to passive investments only.’ With the current focus of some REITs in the ‘build to rent’ market, this comment will need to be monitored very carefully.
Apparently, the Government has acquiesced in the ATO’s view that residential rent can be active income and so the affordable housing MIT has been developed as the solution. Whether there is actually a technical problem is highly debatable as it must depend on facts and circumstances. But there seems little doubt that the affordable housing MIT will not be sufficiently attractive to local and foreign investors to make these vehicles a major force in the market (and we may be left with just the dampening effect on the future prospects for the residential property sector of the ATO’s position). There is perhaps tacit acknowledgement of this in the Budget papers which say the revenue impact of this proposal is ‘unquantifiable’ implying that any revenue loss will likely be modest.
A property will qualify as ‘affordable housing’ if the rent is set below market rates and the property is rented to tenants on low-to-moderate incomes. The Government will consult further in relation to this policy including the precise definition of relevant terms.
The MIT must hold affordable housing ‘available for rent for at least 10 years.’ It must also derive at least 80% of its assessable income from affordable housing. The fact sheet suggests that all other income of the MIT must still be income from eligible investment activities.
The tax treatment given to investors in an affordable housing MIT is complicated and differs between resident and non-resident investors.
The impact of the rules on a resident unitholder in the MIT will be as follows:
- taxable income (including capital gains) of the MIT will continue to be taxed in the hands of the unitholder at their marginal rates, with capital gains remaining eligible for the capital gains tax (‘CGT’) discount;
- unitholders that are individuals will be eligible for an additional 10% discount on capital gains realised by the MIT (ie, a total CGT discount of 60% for individuals). This is only available, however, if the property is managed through a registered community housing provider (‘RCHP’) and held as affordable housing by the MIT for at least three years; and
- the sale of units in the MIT by a resident investor does not seem to be affected by the rules.
The impact of the rules on a non-resident unitholder in the MIT will be as follows:
- taxable income (including capital gains) of the MIT will be subject to a final withholding tax rate of 30% unless it is attributable to a unitholder that is resident in a designated exchange of information (‘EOI’) country in which case the withholding tax rate will be 15%;
- this is, however, subject to two qualifications: where the MIT does not derive at least 80% of its income from affordable housing in an income year, the investment income of the MIT in that year will be subject to a final withholding tax rate of 30% (even if the unitholder is resident in an EOI country). Secondly, where the MIT does not hold the property for affordable housing for at least 10 years, the capital gain on disposal of that property will be subject to a final withholding tax rate of 30% (even if the unitholder is resident in an EOI country). Rental returns will not however be impacted;
- capital gains realised by the MIT will continue not to be eligible for the CGT discount; and
- the sale of units in the MIT by a non-resident investor will not be affected by the rules.
Consistent with the above, from 1 January 2018 the Government will also introduce legislation that will provide Australian resident individuals with an additional 10% discount on capital gains realised on the sale of qualifying affordable housing managed through a RCHP that they held directly for a period of at least three years.
The affordable housing MIT rule will apply to income years starting on or after 1 July 2017 and introduces yet another type of MIT into the tax law. The model adopted is similar to that used for a Clean Building MIT in that it includes various restrictions and consequently will be more difficult to administer than a withholding MIT. It will also be interesting to see whether the rules are effective in promoting investment into affordable housing. It seems that the Government believes that the concessional MIT withholding tax rate for non-resident investors and the higher CGT discount for resident individual investors is attractive enough to compensate for the lower return which investing in affordable housing necessarily implies. It appears that the discount is only available for the sale of affordable housing held by the MIT and not in relation to units in that MIT so one obvious limitation is that unitholders must hold their units for as long as the property is held in order to benefit from the CGT concessions available under the rules.
There is much about the announcement that is unclear, confusing or odd. It is puzzling why the required holding period for resident investors seems to be shorter than that required for non-resident investors. It is not clear why the extra CGT discount is not extended to superannuation funds who are likely to be exactly the kind of patient investors being sought. And it is not clear just what consequences are meant to follow from failure to meet a condition in any year – is Div 6C triggered for the MIT, is all (or just some) of its income more highly taxed, are there different consequences for capital gains, do these consequence follow for all (or just some) of the investors? There is clearly much work to be done turning the confusing announcement into a coherent and workable proposal. Turning it into an attractive proposal would require a more ambitious vision.
Non-resident investors in real estate
There are a number of changes aimed at increasing supply and restricting foreign ownership of residential property, including:
- imposing an annual charge on foreign owners of underutilised residential property. Foreign owners of residential property will be required to pay a charge where the property is not occupied or genuinely available on the rental market for at least six months per year. The charge will be levied annually and will be equivalent to the relevant foreign investment application fee imposed on the property at the time it was acquired by the foreign investor. The measure will apply to foreign persons who make a foreign investment application for residential property from 7:30PM (AEST) on 9 May 2017;
- extending Australia’s foreign resident CGT regime by denying foreign and temporary tax residents access to the CGT main residence exemption from 7:30PM (AEST) on 9 May 2017, however existing properties held prior to this date will be grandfathered until 30 June 2019;
- increasing the CGT withholding rate for foreign tax residents from 10% to 12.5%, from 1 July 2017;
- reducing the CGT withholding threshold for foreign tax residents from $2 million to $750,000, from 1 July 2017; and
- restricting foreign ownership in new developments to no more than 50%. A 50% cap on foreign ownership in new developments will be applied through a condition on New Dwelling Exemption Certificates. The cap will be included as a condition on New Dwelling Exemption Certificates where the application was made from 7:30PM (AEST) on 9 May 2017. New Dwelling Exemption Certificates are granted to property developers and act as a pre-approval allowing the sale of new dwellings in a specified development to foreign persons without each foreign purchaser seeking their own foreign investment approval. The current certificates do not limit the amount of sales that may be made to foreign purchasers.
CGT and income tax for non-residents on sale of shares and units in land rich entities
In addition to the changes just discussed (which are squarely aimed at residential property held by non-residents), there are 2 measures which will affect sales of shares and units in Australian land rich entities held by non-residents.
- from 1 July 2017, the withholding rate for foreign tax residents will increase from 10% to 12.5%; and
- the Government will amend the principal asset test of the CGT regime for foreign tax residents with indirect interests in Australian real property. This measure is designed to prevent foreign residents from avoiding a CGT liability by disaggregating indirect interests in Australian real property below 10%. As presently drafted, if the non-resident holds a direct interest in an Australian land rich entity of less than 10%, that interest would not be subject to Australian CGT, even if the non-resident on an associate inclusive basis held a greater than 10% interest in the entity. This measure is stated to be applied from 9 May 2017, so presumably applies to existing structures where the sale contract is entered into after tonight.
Although not tax related, there have been a number of changes to the application process and reducing fees, which generally look positive. These measures, which take effect from 1 July 2017, will reduce the requirement for investors to seek multiple approvals for similar low-risk transactions, amend the commercial fee framework to improve transparency and consistency and improve the treatment of low-risk commercial transactions.
Key changes include:
- streamlining and simplifying fees into a three-tier fee structure;
- introducing a new business exemption certificate for foreign investors in securities allowing pre-approval for multiple investments in the one application rather than having to apply separately for each investment. This will be particularly useful for venture capital and private equity funds undertaking follow-on investments or bolt-on acquisitions;
- amending the treatment of residential land used for commercial purposes. Currently, the statutory definition of commercial residential premises excludes some property that for the purposes of the foreign investment framework are considered commercial in nature, for example, student accommodation and aged care facilities. This will be addressed by bringing these types of residential dwellings that are used for a commercial purpose within the meaning of commercial residential premises;
- narrowing the scope of the ‘low threshold’ non-vacant commercial land definition. Non-vacant commercial land treated as sensitive and subject to the lower $55 million screening threshold is currently too broad and captures developed commercial land that is not sensitive in practice. For example, most CBDs are sensitive investments as they come within ‘prescribed airspace;’
- clarifying the treatment of developed solar and wind farms as commercial non-vacant land rather than vacant land and agricultural land; and
- restoring the previous arrangement whereby companies with significant foreign custodian holdings (ie, legal rather than equitable interest holders) are not subject to notification requirements.
Tax administration measures
Toughening the MAAL. The multinational anti-avoidance law (‘MAAL’) was introduced from 1 January 2016. It was designed to counter schemes where a ‘foreign entity’ avoided Australian income tax, by supplying goods or services to Australian customers, in a manner that did not involve the ‘foreign entity’ making the supplies through a permanent establishment in Australia.
The measure was a textbook example of the unexpected problems that can be caused by oddly defined terms. ‘Foreign entity’ was defined as anything that was not an ‘Australian entity’ but the definition of ‘Australian entity’ was borrowed, perhaps strangely, from the CFC rules. In those rules, the term includes foreign partnerships that have a single Australian partner and foreign trusts whose trustees include a single Australian trustee or have in the past 12 months had central management and control in Australia.
On 15 September 2016 the ATO issued Taxpayer Alert TA 2016/11 warning that it had become aware of arrangements to have goods and services supplied to Australian customers by foreign partnerships with minority Australian partners that were claimed to circumvent the MAAL, because the supplier partnership was not a foreign entity, but rather an Australian entity, as defined. The ATO strongly asserted such arrangements were ineffective. The MAAL will, however, be amended, retrospective to 1 January 2016, to ensure it cannot be circumvented by such arrangements.
Chasing the underground economy. The Budget contains a number of announcements (labelled the Tax Integrity Package) which are directed at administration and compliance.
Some of the measures result from the Interim Report of the Black Economy Taskforce which was released along with the Budget papers:
- from 1 July 2018, courier and cleaning businesses will be brought into the taxable payments reporting system (‘TPRS’). The TPRS is a transparency measure that requires businesses to report to the ATO all payments they make to certain contractors; and
- the Government is providing the ATO with $32m for an additional year of funding for its ongoing audit and compliance programs targeting the black economy. These programs are targeted towards businesses which have an annual turnover under $15 million and have ‘disengaged from the tax system.’
The Government will make decisions about the future of these programs after the Black Economy Taskforce’s final report which will be delivered in October 2017.
The Government also announced that it will provide an additional $28.2 million to the ATO to target serious and organised crime in the tax system. The additional funding extends existing funding for a further four years. The Government claims that this funding will deliver almost $380m in additional revenue over the next 4 years.
Drafting resources. Shortly after its election in 2013, the incoming Coalition government withdrew many ALP announcements which had not yet been enacted. It seems the Government has recognised that the problem of announced but unenacted measures is beginning again.
Tonight’s Budget starts a process to reduce the growing backlog of announced but unenacted measures with the announcement of additional resources for the Office of Parliamentary Counsel ‘to progress … taxation reform legislation.’ The Appendix to this Tax Brief shows some of the measures for which we are still waiting on legislation. Of course, this measure can only solve the challenge of insufficient drafting resources; it cannot solve other possible causes of inaction such as unacceptable revenue cost or Government indecision.
Personal tax and small business measures
Medicare and personal tax changes. The Budget contains 3 modest tweaks to the Medicare and personal income tax rates:
- the Medicare levy will increase from 2% to 2.5% of taxable income from 1 July 2019. This turns out to be the single largest revenue item in the Budget expected to raise over $3.5 - $4bn per year once it starts;
- there will be consequential changes to other rates which are aligned with the top personal rate and levy (such as FBT, the tax on income to which no beneficiary is presently entitled, no ABN withholding and no TFN withholding); and
- the various low-income thresholds for the Medicare levy will be increased for the 2016-17 year.
In addition, the Government has said it will now earmark all revenue from the Medicare levy to fund Medicare and the NDIS. This is an interesting move as earmarking is generally frowned upon in public finance circles. But given that the annual cost of the Medicare system and the Pharmaceutical Benefits Scheme far exceeds the revenue from the Medicare levy, earmarking may be of little practical consequence.
The Budget Repair Levy introduced by the Abbott government for 3 years from 1 July 2014 is being allowed to expire on 30 June 2017; there will be a 2 year hiatus before the 0.5% increase to the Medicare levy takes effect.
Small business measures. The Budget contains two measures directed at small businesses:
- CGT concessions. From 1 July 2017, the government will amend the small business CGT concessions to ensure that the concessions can only be accessed in relation to assets used in a small business or ownership interests in a small business. The government says that in the past these concessions have been inappropriately accessed by taxpayers for assets which are unrelated to their small business. The small business CGT concessions will continue to be available to small business taxpayers with aggregated turnover of less than $2 million or business assets less than $6 million.
- Depreciation. A measure in the 2015-16 Budget which expanded small businesses depreciation concessions will be extended to 30 June 2018. Small businesses with aggregated annual turnover less than $10m can immediately deduct the cost of assets costing less than $20,000 which are first used or installed ready for use by 30 June 2018. From 1 July 2018, the immediate deductibility threshold will revert to $1,000.Assets costing more than $20,000 can be put into a pool and depreciated at 15% in the year first included and 30% in subsequent years. If the pool balance falls below $20,000 before 30 June 2018, the balance can be immediately deducted. From 1 July 2018, the pool balance threshold will revert to $1,000.The rules which prevent small businesses from re-entering the simplified depreciation regime for five years if they opt out will continue to be suspended until 30 June 2018.
Superannuation and housing
The Budget announces two new superannuation measures which are being introduced to help make housing more affordable – one on the demand side and one on the supply side.
Demand side – first home super saver. From 1 July 2017 first home buyers will be able to salary-sacrifice into superannuation with the ability to withdraw the amount sacrificed for a home purchase, along with deemed earnings at the Bank Bill rate plus 3%, after 12 months. This will be a significant improvement on the First Home Saver Scheme jettisoned by the Abbott Government in 2014. It will provide more benefit, and by using home buyers’ existing superannuation fund account it should also be simpler.
Contributions will be limited to $30,000 in total and $15,000 per year. The existing concessional contribution caps ($25,000 per year) will also continue to apply but in practice are unlikely to impact the target group – it won’t affect anyone earning under $105,000 unless the person is already salary sacrificing.
The measure won’t amount to an unpalatable ‘dip into retirement savings’ because compulsory 9.5% employer SGC contributions will not be affected – employers must continue to make contributions, and superannuation must remain in the superannuation system.
Withdrawals will be taxed but subject to a 30% rebate, so an average wage earner (approximately $80,000) will be taxed at only a 4% rate (including Medicare levy).
Proposed new personal concessional (ie, tax deductible) contributions will also qualify for the measure subject to the same constraints.
Supply side – downsizing. In a major in-road into the new, yet-to-begin, caps on non-concessional contributions, people over 65 years will be able to make non-concessional (after-tax) contributions into superannuation from the proceeds of selling their homes. The measure will start from 1 July 2018.
A single person will be able to contribute up to $300,000 outside the proposed new contribution caps; a couple will be able to contribute $600,000 outside the caps, effectively extending their combined new superannuation balance cap to $3.8 million. A couple selling a home for $1.2 million could, in theory, contribute the whole amount into super by using this new concession in conjunction with the three-year non-concessional contribution cap aggregation rule – ie, $300,000 per person from 1 July 2017.
The work test for those over 65 years will be lifted, and people over 75 years will also be able to contribute. The home must have been owned for at least 10 years.
However, the $1.6 million per person ‘transfer balance cap’ on moving super assets into tax exempt pension phase will not be lifted. So the member can put this money into superannuation but can’t draw an income stream from it if the member is already at his or her transfer balance cap.
Likewise, the Government age pension income and assets tests will not be lifted for this measure. So, again, the member can put this money into super but it could reduce the age pension. The position here is complicated because the age pension assets limit increases for non-home owners, but once a person is near the assets limit the person is likely to be earning (or deemed to be earning) too much income to receive a significant age pension (the pension reduces by 50 cents in the dollar once financial assets reach $271,000), and retirement village entry contributions can also impact age pensions. The complexity itself could dampen the enthusiasm of age pensioners.
All told, homeowners may find this measure encourages them into downsizing, but age pensioners will need to do their sums.
Fund merger relief extended
Superannuation fund merger relief, currently due to expire on 1 July 2017, will be extended to 1 July 2020. The relief allows closing funds a CGT roll-over for asset transfers to a successor fund, and also allows the transfer of tax losses. Pooled superannuation trusts and life companies supporting the closing fund can also access the relief.
The rollover relief promotes industry consolidation and therefore economies of scale and reduced fund administration costs. However, this is the third time the expiry date has been extended and the Government is underwhelmed by the take-up. It has therefore also asked the Productivity Commission to conduct an inquiry into the competitiveness and efficiency of the super industry.
Non-arm’s length income and expenses
Non-arm’s length dealing rules will be extended from 1 July 2018 to uncommercially low expense payments by superannuation funds, typically SMSFs, to related parties. The current rules prevent circumvention of super contribution caps through inflated income from related parties, but don’t deal with the expense side of the equation. The superannuation caps themselves are designed to regulate the amount that can be transferred into the concessionally taxed super environment.
The measure will effectively legislate the approach already taken by the ATO in TD 2016/6 and PCG 2016/5 to limited recourse borrowing arrangements involving uncommercially low interest payments by SMSFs to related parties.
Limited recourse borrowing integrity
The Budget Papers repeat the announcement of 27 April 2017 concerning limited recourse borrowing arrangements (‘LRBA’). Under this measure, the payment of LRBA expenses from accumulation accounts will count against a member’s new transfer balance account when the LRBA supports the member’s retirement pension account. The measure prevents use of LRBAs to circumvent the new $1.6 million limit on the amount a member can transfer into retirement pension accounts.
Australian Financial Complaints Authority
The Government will introduce a framework for the establishment of a new industry-funded Australian Financial Complaints Authority from 1 July 2018. It will act as a single authority for a free binding dispute resolution service for all financial and superannuation disputes by financial services consumers.
The new authority will replace the existing Superannuation Complaints Tribunal, Financial Ombudsman Service, and Credit and Investments Ombudsman. It will be able to deal with higher value disputes than the existing bodies, and will be able to award more appropriate levels of compensation.
Purchasers to remit GST on property transactions
Much to our surprise, the Government has announced that from 1 July 2018, purchasers (rather than the supplier) of ‘newly constructed residential properties or new subdivisions’ will be required to remit GST directly to the ATO. The Budget Papers suggest that purchasers will need to do so as part of settlement (presumably sending one settlement cheque to the ATO for the GST). The measure, labelled as a ‘tax integrity’ measure, is expected to raise $660m more of GST over three years from 1 July 2018 plus bring forward $1bn of collections.
This drastic ‘sledgehammer’ measure has been put in place to crack the walnut of the very few property developers who fail to remit GST on residential property transactions that are subject to GST. Yet it will have a big impact on all developers. Given there was virtually no foreshadowing of this measure prior to budget night, we are still yet to find out how this measure is proposed to be implemented and how it will operate in practice.
A number of key issues will need to be addressed over the next 12 months before the measure takes effect including:
- Will the GST liability actually be transferred to purchasers? Does that reduce stamp duty? Who is liable if the purchaser defaults?
- What exactly are ‘newly constructed residential premises and new subdivisions’ – will they mean ‘new residential premises’ as defined in the GST Act or an extended version of this term? What are ‘new subdivisions’? Does the vendor or purchaser need to determine whether the provisions apply?
- Calculating the GST liability on sales: is the onus still on the vendor to get it right and what if it is incorrectly calculated? How and when will vendors need to notify the purchasers of this GST liability? Does the government appreciate how complicated this can be with the margin scheme, settlement adjustments and differing treatment of deposits and option fees?
- How will adjustment events impact purchasers’ GST liabilities?
- Who will obtain the GST refund if there is a calculation error?
No doubt the next 12 months will be full of consultations and lobbying by industry … and then a rush to change standard and non-standard land contracts.
GST and digital currency
The Budget Papers clarify two aspects of the proposal in the Treasurer’s FinTech statement from March 2016 to remove the potential ‘double GST’ that can arise from treating digital currency (such as bitcoin) as intangible property for GST purposes.
After consultations with industry and key advisers (including this firm), Treasury has decided that digital currency will be treated in the same way as money is treated for GST purposes (ie, as the medium of exchange rather than a separate input taxed supply). The announcement also confirms the treatment will apply from 1 July 2017 which will please industry as it avoids the potential complications of applying the ‘Netflix tax’ to digital currency; the measure to levy GST on supplies of imported services and intangible property (colloquially known as the ‘Netflix tax’) also commences on 1 July 2017.
The list below outlines some of the tax developments announced by the current and former Governments which have been formally adopted, consulted on by industry and the profession with the Board of Taxation and/or Treasury (including the release of Exposure Draft legislation for some measures) but where we are still waiting for legislation to enact the measure.
Reports by the Board of Taxation
- Anti-hybrid rules (2016)
- Debt and equity tax rules (2015)
- The arm’s length debt test in the thin capitalisation regime (2014)
- Aligning the base for calculating required contributions and the superannuation guarantee charge (2014)*
- Tax arrangements applying to permanent establishments (2013)
- Changes to the consolidation regime (2013)
- Taxation treatment of collective investment vehicles (2011)
- Taxation treatment of Islamic financial products (2011, 2016)
- Stapled structures (2017)
- Increasing the transparency of the beneficial ownership of companies (2017)
- Protection for whistle-blowers on tax and corporate matters (2016)
- Adoption of the OECD multilateral instrument (2016)
- Changes to the withholding tax regime for non-resident investors in CIVs (2016)
- Repeal and replacement of s. 974-80 (2016)
- Implementation of BEPS Action 12 on mandatory disclosure of tax positions (2016)
- GST treatment of digital currency (2016, 2017)**
- Changing the composition and governance structures of the boards of superannuation fund trustees (2015)
- Improving the mechanisms (dashboards) for identifying fund holdings and allowing greater member choice (2015)
- Allowing members to choose a superannuation fund different from the one stipulated in an enterprise agreement and reform of the selection of default funds (2015)*
- Changes to the treatment of MEC groups (2014)
And to that list one can add measures which have been announced but where the formal public consultation process has yet to begin:
21. The reform of the TOFA and forex regimes (2016)
* The government introduced a Bill into Parliament to enact this measure but it lapsed when Parliament was prorogued in April 2016 for the July 2016 election. The announcement has not been withdrawn but the measure has not re-appeared in another Bill.
** This measure is repeated in tonight’s Budget.