Introduction

As expected, the main focus of this year’s Budget is emphasising the expected Budget surplus, cash payments to meet living costs, delivering tax cuts to individuals, and increasing investment in infrastructure.

Nevertheless, there are a few tax proposals which will have important impacts on businesses, subject of course, to the outcome of the election. Our Budget Tax Brief outlines the key elements for Australian businesses.

Key features – at a glance

A projected Budget surplus for 2019-20 of $7.1 bn.

For multinational enterprises the key message is: expect more attention from the ATO. The ATO is being given an additional $1bn and is expected to deliver $4.6bn revenue in return.

Proposed $100bn for new infrastructure projects over the next decade.

Low and middle income individuals receive personal income tax cuts:

  • some cuts start this year
  • significant cuts start from 2022.

Small business instant asset write-off to be expanded.

Reforms to Div 7A deferred.

Expect more ATO enforcement activity

The Budget announces an additional $1bn of funding for the ATO over 4 years to expand the size of the Tax Avoidance Taskforce, extend its life and expand its market coverage.

  • The Taskforce was originally announced in the 2016-17 Budget and was intended to bring greater scrutiny to bear on the tax affairs of multinational enterprises, large corporates and high wealth individuals. The Budget announcement says the scope of the Taskforce’s focus will be expanded to include scrutiny of tax advisors and "intermediaries that promote avoidance schemes".
  • The Taskforce was established with funding of around $200m per year; the additional funding will increase its budget by 50%, bringing the Taskforce’s annual budget to over $300m.
  • When it was formed, the Taskforce was funded until 2019-20. The Budget announcement extends the life of the Taskforce until 2022-23.

Taxpayers already feeling the brunt of ATO review activity should expect no respite. Indeed, the Government is expecting that the Taskforce’s activities will result in additional revenue of $4.6bn over the next 4 years, so large corporates and multinationals need to prepare themselves and their stakeholders for additional ATO scrutiny and (potentially) disputes.

It is far from clear where the additional revenue is expected to be found, given that the most recent estimate of the net large corporate tax gap (for 2015-16, i.e. before the Taskforce was created) was only $1.8bn per year, and the Taskforce already claims to have collected more than $5.6bn in tax liabilities in its first 2 years of operation.

Hybrid instruments and entities

In 2018, Australia introduced provisions to neutralise the consequences of hybrid mismatches. Hybrid mismatches typically occur in relation to cross-border transactions when different countries treat instruments or entities differently. The classic example is an instrument that gives rise to a tax deduction in one jurisdiction (e.g. because it is treated as debt) with the income not being assessable in the other jurisdiction (e.g. because it is treated as equity). The rules generally apply to taxpayers for income years starting after 1 January 2019.

As is the way with all pieces of complex new legislation, we have encountered a number of problems and anomalous results when applying the provisions. There is little doubt we will uncover further problems as we continue to test the rules against real life fact patterns.

When new legislation like this is introduced, the Government will typically conduct a review of the provisions after 12 months (at least) with a view to then fixing any problems. Somewhat surprisingly, the Government has announced that it will make a number of immediate “minor” amendments to the provisions to “clarify” their operation. Scant detail is provided in relation to the changes other than to note that the clarification will be made in relation to how the rules apply to “MEC groups and trusts, limiting the meaning of foreign tax, and specifying that the integrity rule can apply where other provisions have applied”. The proposed change to the integrity rule in particular appears to be more than a mere “clarification”, but a fundamental change to when that rule can apply.

Despite this, the amendments are stated to have a negligible revenue impact, again implying that the changes are simply to clarify the rules. Only time will tell whether taxpayers will share this view.

Managed investment trust withholding tax

Under the Managed Investment Trust (MIT) withholding regime, a fund payment made to a recipient with an address or place of payment in an Exchange of Information (EoI) country is subject to withholding tax of 15%, instead of 30%. The list of EoI countries for the purposes of the MIT withholding regime will be updated to include Curacao, Lebanon, Nauru, Pakistan, Panama, Peru, Qatar and the United Arab Emirates (UAE).

The updated list will be effective from 1 January 2020. A fund payment made on or after that date to a recipient with an address or place of payment in one of the new 8 countries will be subject to MIT withholding tax of 15%.

Div 7A deemed dividends

The Government has announced that it will defer the start date of the reforms to Div 7A, announced in the 2018-19 Budget, from 1 July 2019 to 1 July 2020.

A considerable amount of feedback was provided to Treasury on the Consultation Paper released in October 2018 containing the proposed amendments to Division 7A. It appears that the feedback received is being considered, including the proposed transitional measures, which were of concern to many taxpayers.

Small business measures

The immediate deduction for the cost of depreciating assets used by small business entities will be expanded by:

  • increasing the cost threshold to $30,000; and
  • allowing access to this concession to taxpayers with an aggregated turnover of up to $50m.

The expanded measure applies to assets first used or installed ready before use from the time of the Budget to 30 June 2020.

The announcement suggests that the relevant turnover test will be the test in Division 328. This is a complex test that requires consideration of both current year and prior years’ turnovers. There is no exclusion in this test for entities deriving predominantly passive income (as there is for the small business income tax rates concession), merely that the entity is carrying on a business. However, the exclusion in Division 328 for assets that are leased to other parties (other than short term hires) will apply.

Other measures

  • Personal income tax cuts will be delivered in the current year and beyond by adjusting the Low and Middle Income Tax Offset created in last year’s Budget, and increasing the low income threshold for the Medicare Levy.
  • More significant personal income tax cuts are scheduled to start from 1 July 2022 (which could be two elections away) and even more cuts from 1 July 2024.
  • Several changes will be made to superannuation, the most significant being permitting more people to make concessional and non-concessional contributions. The ATO will also be given additional resources to audit compliance with tax and superannuation liabilities. The government has said it will make permanent the tax concessions to encourage small superannuation funds to merge (which were announced in 2008 and have proved somewhat unattractive to date).