A Federal Budget targeted towards individual taxpayers has some notable tax changes for business, with the big-ticket item being changes to the research and development (R&D) tax incentive.

In essence, most of the corporate tax changes were tinkering rather than any largescale corporate tax reform. However, the Federal Government did foreshadow the release of a discussion paper in the next few weeks that will explore options for taxing digital business in Australia.

Significant changes to the R&D tax incentive

The Government has announced a number of changes to the R&D tax incentive broadly in line with the recommendations of the Ferris, Finkel and Fraser Review of the R&D Tax Incentive handed down in 2016, and further addressed in the Australia 2030: prosperity through innovation report.

While there are significant changes, including new caps and varying rates for R&D expenditure intensity, the Budget also indicates that the Government intends to take greater action to address growing concerns around the integrity of claims made under the program. These include:

  • increased resources for the ATO and AusIndustry to undertake more enforcement activity;
  • increased resources for the ATO and AusIndustry to provide improved guidance to claimants;
  • allowing the ATO to publicly disclose claimants of the R&D tax incentive, and the amount of R&D expenditure they each claim (and it is to be hoped that these measures will be appropriately limited to ensure no loss of commercial advantage or confidentiality); and
  • legislative changes to time extensions and certain technical provisions.

Accordingly, with compliance reviews of R&D tax incentive registrations on the increase in recent years, claimants of the R&D tax incentive should expect greater audit scrutiny from both the ATO and AusIndustry. It has never been more critical for claimants to ensure that they contemporaneously collate and maintain evidence to support their claim.

In order to improve the focus of the program on "additionality" effects of the R&D tax incentive and reduce the overall cost of the program, the Government has announced significant changes to come into effect from 1 July 2018, including:

  • an increase of the R&D expenditure cap from the existing $100 million cap to $150 million;
  • for companies with aggregated turnover above $20 million, the rate of R&D benefit will change from the existing fixed rate of 8.5% (based on the current standard 30% company tax rate) to a marginal rate between 4% and 12.5%, depending on the incremental "R&D intensity"; and
  • for companies with aggregated turnover below $20 million, while the rate of R&D benefit will generally be unchanged, the refundable amount of the tax offset will be capped at $4 million, with any excess tax offsets able to be carried forward. In what would seem a welcome boost to the pharmaceutical and related industries, expenditure on "clinical trials" will be exempt from this $4 million cap.

A surprising omission from the budget is the collaboration premium, which was intended to incentivise collaboration between research organisations and the private sector – despite the Treasurer alluding to it at the AFR Banking and Wealth Summit last month, and consistent recommendation in the recent Australia 2030: prosperity through innovation report and Ferris Finkel and Fraser Review.

As the R&D tax incentive is administered on an income year basis, claimants of the R&D tax incentive should carefully consider the commercial impact of these changes for the coming income year, rather than in relation to the commencement and intended concluding dates of their R&D projects. Claimants should also expect greater scrutiny through increased review and enforcement activity by the ATO and AusIndustry, and ensure that they collate and maintain adequate evidence to support claims.

Multinationals

Thin capitalisation

For income years commencing on or after 1 July 2019, the thin capitalisation rules will be tightened by:

  • requiring all relevant entities to rely on the asset values contained in the financial statements when valuing assets for thin capitalisation purposes. Valuations that were made prior to 7:30pm on 8 May 2018 may be relied on until the beginning of an entity's first income year commencing on or after 1 July 2019; and
  • foreign controlled Australian consolidated entities and multiple entity consolidated groups that control a foreign entity being treated as both "outward" and "inward" investment vehicles for thin capitalisation purposes (ie. restricting access by "inbound" investors to certain provisions that were only intended for "outward" investors)

"Significant Global Entities"

From 1 July 2018, the definition of "Significant Global Entity" will be broadened from the current definition of an entity which is a member of a group headed by a public company or a private company required to provide consolidated financial statements to include members of large multinational groups headed by trusts, companies and partnerships. It will also include members of groups headed by investment entities. The definition is relevant, for example, in determining the entities which may be subject to Australia's multinational tax integrity rules, such as the Multinational Anti Avoidance Law and the Diverted Profits Tax.

Multinational digital and technology companies

The Federal Government foreshadowed that it will release a discussion paper in the next few weeks that will explore options for taxing digital business in Australia, as part of broader G20 efforts to bring the digital economy into the global tax net. While details are currently scarce, the measures are expected to target multinational digital and technology companies who provide services to Australian customers.

Trusts

Information Exchange Countries

From 1 July 2018, the list of countries whose residents will be able to access the reduced withholding rate of 15% instead of the default 30% from Managed Investment Trusts has been expanded. This will add the 56 jurisdictions that have entered into information sharing agreements since 2012.

Division 7A

From 1 July 2019, the law will be amended to ensure that where a related private company is made entitled to a share of trust income as a beneficiary but has not been paid that amount (i.e. unpaid present entitlement), the unpaid present entitlement will be either required under Division 7A to be repaid over time as a complying loan or subject to tax as a dividend.

The Federal Government will defer the start date of the "Ten Year Enterprise Tax Plan — targeted amendments to Division 7A" measure that was announced in the 2016-17 Budget from 1 July 2018 to 1 July 2019.

Circular distributions: family trusts

The Government has proposed the introduction of a tax integrity measure targeting circular distributions ("round robin" arrangements) involving family trusts, effective 1 July 2019. As the law currently stands, it is possible for distributions to be returned to the original trustee in such a way that avoids tax in circumstances where family trusts act as beneficiaries of each other. These measures mirror those introduced in respect of other closely held trust arrangements (such as those that were aimed at avoiding the imposition of the trustee-beneficiary non-disclosure tax).

Testamentary trusts: New measures will limit the concessional tax rates available to minors to income derived from the transferred assets or the proceeds of sale. This is intended to address the situation where distributions to minors from testamentary trusts are taxed at a concessional rate as a result of moving assets into a testamentary trust that is unrelated to the deceased estate to take advantage of the concessional rate of tax on the proceeds those assets generate.

No CGT discount for MITs and AMITs

Managed Investment Trusts (MITs) and Attribution MITs (AMITs) will be prevented from applying the 50% capital gains discount at the trust level from 1 July 2019. Instead, income will be taxed in the hands of the beneficiaries, ensuring that only those beneficiaries who would otherwise be entitled to the 50% capital gains discount had they invested in the asset directly will enjoy that benefit.

This measure is squarely aimed at foreign resident beneficiaries of MITs and AMITs, and will directly affect the amount of MIT withholding tax on fund payments which include capital gains from "taxable Australian real property" (TARP) assets. Currently, MIT withholding tax on fund payments is calculated after applying the 50% discount to capital gains income on TARP assets (capital gains income on non-TARP assets is already excluded from the meaning of a fund payment). As MIT withholding is a final tax, by disallowing the discount for MITs and AMITs, the amount of tax withheld in respect of TARP capital gains will in effect double.

Small business

Partnership concession

From 7:30pm on 8 May 2018, partners that alienate their income by creating, assigning, or otherwise dealing in rights to the future income of a partnership (ie. such as via an 'Everett assignment') will no longer be able to access small business CGT concessions.

Small business investment

Small businesses will be able to claim an immediate tax deduction for eligible assets that cost less than $20,000 and are installed and ready for use by 30 June 2019 (extending the existing concession by a further 12 months). Assets that cost $20,000 or more can be added to the small business simplified depreciation pool and depreciated at 15% in the first income year and then 30% for each subsequent income year. The balance of the pool can be immediately deducted if it is less than $20,000 before 30 June 2019.

The immediate deduction will now end on 30 June 2019 and will apply to businesses that have an aggregated annual turnover of less than $10 million.

Other income tax changes

Removing tax deductibility of non-compliance

From 1 July 2019 businesses will no longer be able to claim deductions for payments:

  • to employees such as wages, where they have not withheld any amount of PAYG; and
  • made by businesses to contractors where the contractors have not provided an ABN and the business does not withhold any amount of PAYG,

despite PAYG withholding requirements applying.

It will be interesting to see if the final legislation permits a reinstatement of the tax deduction in circumstances where the failure to withhold results from an oversight or error and the taxpayer makes a voluntary disclosure, pursuant to which the Commissioner agrees to remit PAYG withholding penalties

Vacant land

From 1 July 2019, deductions will be denied for expenses, such as interest costs, associated with holding vacant land, where the land is not genuinely held for the purpose of earning assessable income. Denied deductions will not be able to be carried forward in future income years, however they can still go towards the cost base of a CGT asset where appropriate, such as borrowing expenses and council rates. The measure will not apply to expenses associated with holding land that are incurred after a property has been constructed on the land, it has received approval to be occupied and is available for rent, or the land is being used by the owner to carry on a business, including the business of primary production, but will exclude land held for commercial development.

Black economy

The ATO will receive more funding to enhance enforcement against the black economy. These measures include an increased audit presence, educational activities, improved government data analytics and information sharing between enforcement agencies.

Stapled structures

Confirmation of previously announced measures to address risks associated with stapled structures and similar arrangements – learn more here.

Further extending the offshore reach of Australian GST

The Australian GST continues to draw more non-residents into its net. From 1 July 2017 supplies of digital products to Australian consumers became subject to GST, requiring offshore suppliers of digital products to become registered for GST purposes even though those suppliers have no business presence in Australia. From 1 July 2018, similar rules will extend to offshore suppliers making supplies of goods of less than AU$1,000 to Australian consumers.

The Budget measures continue this theme and seek to ensure that non-residents supplying the right to hotel accommodation in Australia will be drawn into the Australian GST net.

The GST turnover rules determine when an entity must register for GST purposes in Australia and, as a consequence, remit GST on the supplies that they make.

Currently, a supply is excluded from the GST turnover of an entity where it is:

  • not made in Australia;
  • made through an enterprise a that the supplier does not carry on in Australia; and
  • a supply of a right or option to use "commercial accommodation" in Australia.

The Budget proposes to remove this exclusion from 1 July 2019 as part of a stated intention to remove an anomaly favouring offshore suppliers.

ABN reform

Part of the package of measures to tackle the black economy is a review of the Australian Business Number system. The Australian Business Number (ABN) was introduced as part of the "A New Tax System" measures in 2000. However, recent press reports of widespread misquoting of ABNs have exposed flaws in this system, frustrating the ATO's efforts in ensuring the integrity of the GST's "tax and credit" system.

Existing reforms to enhance collection of GST in relation to real property transactions will come into operation from 1 July this year, requiring purchasers to pay GST directly to the ATO.

However, the Government has announced a new round of consultations in an attempt to restore confidence in the ABN system. Details are limited at this stage but this will be an important consultation to ensure that the system can be enhanced without adding to the burden of business – particularly small business.