The 2013-14 Budget has announced significant changes to the Australian taxation system to address revenue shortfalls and seek to fund spending promises. There has been a particular emphasis on international transactions and closing perceived loopholes in the taxation system.

Among the more significant corporate reforms, the Government has:

  • proposed significant changes to Australia’s thin capitalisation regime;
  • made a targeted approach to profit shifting activities;
  • confined exploration expenditure;
  • removed interest deductions for funding non-portfolio investments in foreign subsidiaries; and
  • introduced a new taxing regime for capital gains tax (CGT) on non-resident investors in Australian real property.

The summary table below provides an overview of the key measures announced. For more information about particular budgetary measures, please select a section from the following menu or continue scrolling down.

Summary table

Measures:

Corporate/Infrastructure

Capital Gains Tax ("CGT")

International

Trusts/Venutre Capital Limited Partnerships

Superannuation

Tax Compliance

Personal Tax

Goods and Services Tax ("GST")

Not for Profit

Click here to view table.

Corporate / Infrastructure    [back to top]

Changes to the thin capitalisation rules

The Government proposes to tighten thin capitalisation safe harbours for income years starting on or after 1 July 2014 by:

  • reducing the general thin capitalisation safe harbour from a ratio of 3:1 to a ratio of 1.5:1 (or 75 per cent to 60 per cent on a debt to total asset basis);
  • reducing the debt limit for non-bank financial entities from 20:1 to 15:1 (or 95.24 per cent to 93.75 per cent on a debt to total asset basis);
  • increasing the capital limit for banks from 4 per cent to 6 per cent of the risk weighted assets of their Australian operations;
  • reducing Australian gearing levels to those of the worldwide group (from 120 per cent of global gearing to 100 per cent for outbound investors and with an equivalent change to worldwide capital for banks). The worldwide gearing test will also be extended to inbound investors.

The Board of Taxation will also report on the arm’s length gearing test by December 2014, with a view to clarifying when the test should apply and reducing compliance costs and the administration burden for the ATO.

The de minimis threshold will also be increased from $250,000 to $2 million of debt deductions in order to reduce compliance burdens on small business.

Changes to the consolidation rules

The Government will improve the integrity of the corporate tax system by addressing a number of issues relating to consolidated groups that were identified by the Board of Taxation whose 2012 report was released today. A number of these amendments will apply to transactions that take place from 14 May 2013.

In particular, the law will be amended to ensure that:

  • non-residents are not able to ‘churn’ (that is, buy and sell) assets between consolidated groups to allow the same ultimate owner to claim double deductions;
  • certain deductible liabilities are not taken into account twice; and
  • consolidated groups cannot access double deductions by shifting the value of assets between entities.

In addition, the Government will ensure that only net gains and losses are recognised for tax purposes for certain intra-group liabilities and assets that are subject to the taxation of financial arrangements regime, upon exit of a member from a consolidated group. To preserve how taxpayers have applied the current law, this amendment will apply to all income tax returns and requests for amended assessments lodged from the date of announcement. The Commissioner of Taxation will not have the power to alter the treatment of affected amounts in assessments made before the date of announcement.

The Government will consult on the development of the legislation. The Government will also address concerns raised by the Board of Taxation about inconsistencies in the tax treatment for multiple entry consolidated (MEC) groups used by multinationals and ordinary consolidated groups. The Government will ensure that MEC groups cannot access tax benefits not available to domestic consolidated groups. A tripartite review chaired by the Treasury and involving the Australian Taxation Office and the private sector will consider how best to implement the measure. The amended tax treatment will apply from 1 July 2014 (with the caveat that amendments could take effect from 14 May 2013 if necessary to preserve the integrity of the tax system).

A number of other recommendations were made by the Board of Taxation which the Government has either agreed to, agreed to in principle subject to legislative priorities and fiscal constraints or agreed to consider further!

Infrastructure investment incentives

As previously announced, the Government is to:

  • introduce an uplift allowance for designated infrastructure projects from 2012-13; and
  • allow eligible infrastructure entities to carry forward their tax losses for use in later income years without the need to satisfy the requirements for the use of such losses (such as the majority control tests and same business tests).

The proposed changes will affect entities who undertake large scale infrastructure projects and investors and financiers of such projects.

This initiative builds on the government’s short-term commitment to support private investment in infrastructure projects which is considered to be a national priority. Exposure draft legislation introducing these measures has been released for consultation. You may access our alert on the Exposure Draft legislation titled “Tax loss incentives for designated infrastructure projects – Draft legislation released” dated 3 May 2013 here.

Preventing dividend washing

The Government will close a loophole that enables sophisticated investors to engage in ‘dividend washing’ from 1 July 2013.

Currently, sophisticated investors can engage in ‘dividend washing’ to, in effect, trade franking credits. This can result in some shareholders effectively receiving additional franking credits for the same parcel of shares.

Under the changes - when an investor engages in ‘dividend washing’ by selling shares with a dividend and then immediately buying equivalent shares that still carry a right to a dividend, they will only be entitled to use one set of franking credits. The changes will be targeted to the two-day period after a share goes ex-dividend.

The Government intends to close the “loophole” by making changes to the holding period rules, which generally require stakeholders to hold a share at risk for 45 days in order to gain access to franking credits attached to dividends paid on the share. In particular, the Government will consider modifying the “last-in-first-out” rules to ensure that shares acquired in the above circumstances are treated as one parcel of shares.

The proposed changes will only apply to investors who have franking credit tax offset entitlements in excess of $5,000.

The Government will consult on the development of the legislation.

Restriction on immediate deduction for mining, quarrying or prospecting rights and information

Expenditure on mining, quarrying or prospecting rights and information will no longer qualify for an immediate deduction. In 2001, the current section 40-80 of the 1997 Act was legislated. While it maintained the longstanding immediate deduction for the costs of depreciating assets first used for exploration, it also extended the immediate deduction to mining, quarrying and prospecting rights and information. According to the Government, the extension of the concession in this way opened up opportunities for taxpayers to claim a deduction for a cost relating, in substance, to the cost of gaining access to known resources for subsequent use in development and production. The announced change will address situations where an immediate deduction is being claimed for the costs of acquiring an interest in natural resources that have effectively already been discovered.

Mining, quarrying or petroleum rights and information first used for exploration will be depreciated over 15 years, or their effective lives, whichever is shorter. The effective life of such rights and associated exploration information will be the life of the mine, quarry or petroleum that it leads to. The Government will consult on whether the methodology used to determine the life of a future mine, quarry or petroleum field for the purposes of this measure could be made clearer or simpler.

If the exploration is unsuccessful, any remaining undepreciated value will be immediately deductible.

The following will continue to be immediately deductible:

  • the costs of mining rights acquired directly by a taxpayer from a relevant government issuing authority;
  • the cost of mining rights acquired by a taxpayer as a farmee under a co-exploration (or ‘farm-in, farm-out’) arrangement, to the extent that the cost is the non-cash exploration benefit provided by the farmee to the farmor under such an arrangement.  ‘Farm-in, farm-out’ arrangements are often used by small explorers and are not considered by the Government to represent a base erosion concern.  The Government will consult on codifying ‘farm-in, farm-out’ arrangements, in line with the tax outcomes currently delivered through the ATO’s tax rulings on such arrangements;
  • the costs of mining information acquired by a taxpayer from a relevant government authority; and
  • the costs incurred by a taxpayer itself in generating new information or improving existing information.

The changes will affect taxpayers who start to hold a mining, quarrying or prospecting right or information after 7.30pm (AEST) on 14 May 2013 unless:

  • the taxpayer has committed to the acquisition of the right or information (either directly or through the acquisition of an entity holding the asset) before that time (any commitment will need to be objectively verifiable); or
  • they are taken by tax law to already hold the right or information before that time.

The Government also understands that there is an industry practice to swap exploration or retention lease tenements with other companies to consolidate holdings and facilitate better infrastructure development. The Government will consult further with the industry to identify any circumstances in which an interest acquired through an exchange of mining rights (by way of interest realignments and tenement swaps) should receive concessional tax treatment because the transaction does not give rise to integrity concerns.

Finally, the ATO is currently reconsidering its interpretation of the scope of the definition of exploration used in the tax legislation. While this would mainly affect the petroleum resource rent tax, it could also affect the scope of exploration for income tax purposes. The ATO is consulting on the ruling and plans to progress their rulings on exploration in the second half of 2013.  It remains to be seen whether the ATO will adopt a view that accords more closely with the views of the mining and petroleum industries.

Changes to the Research & Development refundable tax offset

In the research and development space, the Government has proposed to:

  • make the 45% R&D refundable tax offset available quarterly to further improve cash-flow for eligible companies and enable them to claim the value of the offset quarterly rather than annually. The measure will apply for each quarter commencing on or after 1 January 2014; and
  • limit access to the R&D tax incentive so that it only applies to companies with annual aggregate Australian turnover of less than $20 billion from 1 July 2013.

Companies that exceed the threshold will no longer be able to access the R&D tax incentive and will need to claim deductions for the R&D expenditure under general deduction provisions in the tax laws.

Extension of Monthly PAYG instalments to other large entities

The obligation to make monthly Pay As You Go (PAYG) income tax instalments will be extended to all large entities in the PAYG instalment system, including trusts, superannuation funds, sole traders and large investors. This will not include entities (other than head companies or provisional head companies) with a turnover of less than $100 million and report GST on a quarterly or annual basis.

These entities will be progressively brought in in the following manner:

  • 1 January 2014 - corporate tax entities with a turnover of more than $1 billion;
  • 1 January 2015 - corporate tax entities with a turnover of $100 million or more;
  • 1 January 2016 - corporate tax entities with a turnover of $20 million or more, and all other entities in the PAYG instalment system with a turnover of $1 billion or more; and
  • 1 January 2017 - all other entities in the PAYG instalment system with a turnover of $20 million or more.

To ensure the continued equity of the system, a modified turnover test (based on gross TOFA income, rather than net TOFA income) will apply to entities in the taxation of financial arrangements (TOFA) regime.

Phasing down of interest withholding

The Government has confirmed the previously announced phasing down of interest withholding tax payable by financial institutions.

The Government previously announced that interest withholding tax would be phased down where interest is paid by:

  • Australian subsidiaries and branches of foreign financial institutions on borrowings from their overseas parent;
  • Australian-owned financial institutions on borrowings from related parties overseas; and
  • any financial institution borrowing under offshore retail deposits which they on-lend in Australia.

The measures do not extend to offshore borrowings by entities that are not financial institutions. Corporate borrowers would still need to rely on existing interest withholding tax exemptions, such as for publicly offered debt under section 128F of the Income Tax Assessmemnt Act 1936 (Cth).

Amendments to provide certainty for legitimate expenditure deductions relating to petroleum resource rent tax

The Government will amend the Petroleum Resource Rent Tax Act 1987 (Cth) to provide certainty on the scope to deduct legitimate expenditure, which will have effect from the commencement date of petroleum projects subject to the petroleum resource rent tax. The changes are being introduced following the Esso Australia Resources Pty Ltd v Commissioner of Taxation decision (see here).

The Government will amend the law to:

  • restore the capacity for taxpayers to apportion expenditure across a number of projects; and
  • allow taxpayers to claim a deduction for services purchased from third parties (while preserving the requirement to break down the cost of services where the contractor is a related party).

This is a welcome development for taxpayers in the oil and gas industry following Esso’s unsuccessful special leave application to the High Court of Australia in August 2012. In refusing special leave, Gummow J stated that the “terms in which the provisions of the Petroleum Resource Rent Tax Assessment Act 1987 and the relevant service agreement are expressed are so intractable as to deny the apportionment of expenditure for which [the taxpayer] contends.”

The proposed amendment will provide certainty to PRRT taxpayers and avoid the need for those taxpayers to review existing services agreements to address the apportionment issue.

Capital Gains Tax ("CGT") [back to top]

Amendments to “principal asset test” for foreign resident CGT exemption

The Government has announced certain changes to the scope of the foreign resident capital gains tax exemption that is likely to expand the scope of indirect Australian real property interests that foreign residents will be required to pay capital gains tax on.

The announced changes relate to the “principal asset test”. Under the “principal asset test”, foreign residents are only required to pay Australian capital gains tax on disposals of interests in certain entities where, very broadly speaking, it can be established that the value of the taxable Australian real property assets of the entity exceeds the value of the non-taxable Australian real property assets of the entity.

The Government has announced that it will amend the “principal asset test” such that:

This is likely to result in an increase in the value of the taxable Australian real property assets and a decrease in the value of the non-taxable Australian property assets, given that such assets would usually be regarded as non-taxable Australian real property assets; and

  • in determining the value of the taxable Australian real property assets and non-taxable Australian real property assets of an entity, intangible assets that are connected to rights to mine, quarry or prospect for natural resources (such as mining, quarrying or prospecting information, rights to such information and goodwill) will be treated as part of the rights to which they relate.
  • intercompany dealings between entities in the same tax consolidated group will not form part of the principal asset test calculations, to prevent double counting and the effective dilution of the true asset value of the group.

The first of these measures appear to be aimed at increasing the likelihood that interests in Australian mining companies will attract capital gains tax for foreign residents. In particular, it appears to respond to the recent decision of the Federal Court of Australia decision in Resources Capital Fund III LP v Commissioner of Taxation, where the Court ruled that a foreign resident was not liable to capital gains tax on shares in an ASX-listed mining company due to, amongst other things, the value of “mining information” which was regarded as separate from the mining assets to which it related.

The second measure appears to be aimed at the use of intercompany dealings within a tax consolidated group to potentially distort the value of taxable Australian real property assets vis-à-vis non-taxable Australian real property.

These measures will apply to CGT events that occur after the time of the announcement.

Proposed withholding tax regime on purchasers of assets from foreign residents

Controversially, the Government has also announced that it will introduce a non-final withholding tax regime for disposals of taxable Australian assets by foreign residents. This measure appears aimed at ensuring that foreign residents comply with their capital gains tax obligations, and reflects the difficulties associated with collecting tax from foreign resident taxpayers (as illustrated by the ATO’s recent experience with respect to TPG in connection with the Myer IPO).

In summary, the measure will require purchasers of assets from foreign residents to withhold and remit to the ATO 10% of the proceeds from the sale. This will apply not only to capital gains tax disposals, but also disposals that are likely to generate gains on revenue account. However, residential property transactions of less than $2.5 million will be excluded.

In order for this measure to be workable, there are, obviously, a number of important aspects of this measure that will need to be properly considered and defined. This includes, for example, identifying what transactions the withholding obligation will arise in respect of, removing the withholding obligation where no gain will arise and the impact of any intermediaries. This has been identified by the Government which has committed to consulting publicly on the design and implementation of the regime.

This measure will apply from 1 July 2016.

International [back to top] 

Addressing profit Shifting / Repatriation of Dividends

The Government will confine the exemption for foreign non portfolio dividends in s 23AJ by:

  • applying a substance over form debt/equity test, so that returns on legal form equity interests that are in substance debt (for example some redeemable preference shares) will be taxable in Australia; and
  • excluding dividends on in-substance portfolio holdings (less than 10%) from the scope of s 23AJ by repealing s 404 of the Income Tax Assessment Act 1936 (Cth).

The s 23AJ exemption will also be extended to dividends received through investments in a partnership or trust.

The Government will also repeal s 25-90, which currently allows for the deductibility of interest expenses incurred in deriving certain exempt foreign income.

These changes are proposed to have effect for income years starting on or after 1 July 2014.

The Board of Taxation will also be reviewing the tax debt and equity rules in Division 974 of the 1997 Act in order to align Australia’s measures with the corresponding tax debt and equity rules in other jurisdictions. This is to ensure that no tax arbitrage opportunities arise.

Targeting marketing hubs & business restructures

Consistent with the Government’s theme of reviewing profit shifting arrangements, the Government will provide $109.1 million over four years to the Australian Taxation Office to be allocated to increasing compliance activity targeted at restructuring activity and regional marketing hubs that facilitate profit shifting opportunities.

Changes to the Offshore Banking Unit (“OBU”) regime

The Government will amend the existing Offshore Banking Unit (OBU) regime to better target genuine mobile financial sector activities and address integrity issues with the current regime. Under the current regime, certain transactions undertaken by an OBU are taxed at 10% (which is significantly lower than the current corporate tax rate of 30%). These changes will apply to income years commencing on or after 1 July 2013.

The measure will:

  • treat dealings with related parties, including the transfer of transactions between an OBU and a related domestic bank, as ineligible for OBU treatment;
  • treat transactions between OBUs, including between unrelated OBUs, as ineligible for OBU treatment;
  • ensure that other provisions of the income tax law interact appropriately with the OBU provisions; and
  • tighten the current list of eligible OBU activity.

The measures are proposed to reduce profit shifting of banks, that is, to prevent banks from shifting their domestic banking activities and profits into OBUs to access the concessional tax rate. The Assistant Treasurer's Press Release specifically states that these changes are necessary to circumvent the use of complex arrangements to shift ineligible income into the OBU to attract the 10% rate, while at the same time seeking to ensure any losses or deductions remain in the domestic operations to be deducted at the company rate. The measures will seek to continue to allow genuine banking activities.

The Government will consult with industry to develop recommendations to address concerns with the allocation of expenses between OBU and non-OBU activities and on issues raised by the Johnson Report.

Future CFC reform

The Government will tie future CFC changes to the review to be undertaken by the OECD. This will mean a further delay in these rules being settled.

Trusts / Venture Capital Limited Partnerships    [back to top]

Use of trusts by high net wealth individuals

The ATO will be given $67.9M over 4 years to undertake compliance activities of taxpayers suspected to be using tax structures for egregious tax avoidance and evasion.

The ATO will target trust structures which may be concealing income, mischaracterising transactions, artificially reducing trust income amounts and underpaying tax. The ATO will pursue tax scheme designers, promoters, individuals and businesses known to participate in such arrangements.

Enhancing taxation arrangements for venture capital limited partnerships

The Government will make changes to the VCLP and the ESVCLP regimes to better meet the objective of increasing investment in new knowledge-based companies, high-skill jobs and competitive products and services. These changes will have effect from the date of Royal Assent of the enabling legislation.

As recommended by the Board of Taxation, this measure includes changes that will deem any gains or losses made by a VCLP on the disposal of an eligible venture capital investment held for 12 months that flow through to partners to be on capital account for eligible domestic partners.

The Government will also lower the minimum investment capital required for entry into the ESVCLP program from $10 million to $5 million to facilitate increased investment by ‘angel’ investors.

The Government will also phase out the Pooled Development Fund (PDF) program over a number of years in consultation with stakeholders. The PDF program has been closed to new registrants since 2007.

Superannuation [back to top]

No new significant announcements

All of the significant measures in the Budget relating to superannuation have been previously announced.  They include:

  • reducing the tax concession for contributions of very high income earners;
  • narrowing the tax exemption for earnings on superannuation assets supporting retirement income streams;
  • allowing excess contributions to be withdrawn and taxed at an individual’s marginal rate;
  • introducing a higher concessional contributions cap based on an individual’s age; and
  • providing concessional tax treatment for deferred lifetime annuities.

Enhance third party reporting and data matching

The Government will provide $77.8 million over four years to the ATO to expand data matching with third party information by establishing new and strengthening existing reporting systems for taxable government grants and payments, real property and securities transactions, sales through merchant debit and credit services, financial distributions (e.g. dividends and interests) and transactions reported by AUSTRAC. These measures may improve the pre-filling of tax returns and make tax time simpler for taxpayers.

Personal Tax [back to top]

Increase in the Medicare levy

The Government will increase the Medicare levy from 1.5 to 2 per cent from 1 July 2014 to provide funding for DisabilityCare Australia. All revenue raised from this measure will be protected in a dedicated fund, only to be used for expenditure directly related to DisabilityCare.

The current exemptions from the Medicare levy for singles, families, seniors and pensioners through the low income thresholds will be retained.

Medicare levy low-income threshold

From 1 July 2012, the Medicare levy low-income threshold will be increased to $33,693 for families and $20,542 for individuals for the 2012-13 income year. The additional amount of threshold for each dependent child or student will also increase to $3,094.

Net medical expenses tax offset

The net medical expenses tax offset (NMETO) will be phased out, with transitional arrangements applying to those who currently claim the offset. However, for taxpayers with out of pocket medical expenses relating to disability aids, attendant care or aged care expenses, NMETO will continue to be available until 1 July 2019 when DisabilityCare Australia is fully operational and aged care reforms have been in place for several years.

From 1 July 2013 those taxpayers who claimed the NMETO for the 2012-13 income year will continue to be eligible for the NMETO for the 2013-14 income year if they have eligible out of pocket medical expenses above the relevant thresholds.

Reforms to work-related self-education expenses

The Government will introduce an annual $2,000 cap on work-related self-education expense deductions from 1 July 2014. Examples of deductible education expenses that will be affected by this cap include costs incurred in undertaking a course of study or other education activity, such as conferences and workshops, and include tuition fees, registration fees, student amenity fees, textbooks, professional and trade journals, travel and accommodation expenses, computer expenses and stationery, where these expenses are incurred in the production of the taxpayer’s current assessable income.

However, the treatment whereby employers will generally not be liable for fringe benefits tax for education and training they provide or fund for their employees, in order to support employers investing in the skills of their workers will be retained, unless the employee salary sacrifices to obtain these benefits.

Deferral of the 2015-16 tax cuts

Due to revised carbon price projections from 2015-16 income year, the Government will defer the application of the Clean Energy Future personal income tax cuts which were to start on 1 July 2015. However, no changes will be made to the tax cuts which applied from the 2012-13 income year.

Changes to the FTB regime

From 1 January 2014, the value of FTB Part A will be increased by $2,000, to be paid in the year following the birth or adoption of a first child or each child in multiple births, and $1,000 for second or subsequent children. The increase will replace the Baby Bonus. Parents who take up Paid Parental Leave will not be eligible for the increase in FTB Part A.

From 1 January 2014 onwards, children aged 16 years and over will only be entitled to FTB Part A until the end of the calendar year in which they complete school. As a consequence, Youth Allowance is expected to become the primary form of assistance of young people no longer in school.

Goods and Services Tax (“GST”)    [back to top]

Allowing businesses in a net refund position to continue to use the GST instalment system

In 2011-12 Budget measure GST — providing businesses in a net refund position with access to the GST instalment system, the Government announced measures that would have allowed small businesses in a net refund position (i.e. where input tax credits exceed GST liability on sales) to choose to access the GST instalment system (which is currently not available). The Government has announced that the measure will be revised to only allow those businesses already using the GST instalment system to continue to use it if they move into a net refund position (due to a perceived revenue risk). These changes will have effect from the date of Royal Assent of the enabling legislation.

Not-for-profit (“NFP”) sector    [back to top]

Later start date for NFP tax concession reforms and conclusion of transitional arrangements

The Government has announced a later start date (and set the conclusion date for transitional arrangements) relating to the 2011-12 Budget measure Not-for-profit sector reforms — better targeting of not-for-profit tax concessions. The measure is aimed at ensuring concessions are targeted only at activities directly furthering a not-for-profit organisation’s purpose. The extension of the start date will enable further consultation and engagement with the NFP sector.

In particular:

  • the measure will apply to new unrelated commercial activities that commenced after 7.30pm (AEST) on 10 May 2011 from 1 July 2014 onwards; and
  • transitional arrangements for unrelated commercial activities that commenced prior to 7.30pm (AEST) on 10 May 2011 will end on 30 June 2015, and the new measure will apply to activities undertaken from 1 July 2015 onwards.

The new measure will not affect tax concessions that were used for the relevant unrelated commercial activities prior to the applicable start date. The new measure will also incorporate an exemption from income tax for unrelated commercial activities under a small-scale threshold of $250,000 of annual accounting revenue (which has been and will again be subjected to public consultation).

Later start date for introducing a statutory definition of “charity”

The Government will defer the start date for the 2011-12 Budget measure Not-for-profit sector reforms — introducing a statutory definition of ‘charity’ from 1 July 2013 (as originally announced) to 1 January 2014. The measure was introduced to provide greater clarity and certainty in relation to the meaning of “charity” and increase accessibility to the NFP tax concessions.

The proposed statutory definition was intended to codify long-established key common law principles relating to the definition of “charity” as well as incorporating recent court decisions and feedback from the 2011 consultative process. The Government released an exposure draft of the Charities Bill 2013 on 8 April 2013. The delayed start date will allow for public consultation on the exposure draft legislation and allow new national charities regulator, the Australian Charities and Not-for-profits Commission (ACNC), to develop further guidance for charities in relation to the definition.

Click here to view the Budget 2013-14 papers.