As part of the Budget measures, the Gillard Government has announced it will limit concessions for Offshore Banking Units (OBUs), with effect from 1 July 2013.

Contrary to recommendations of the Johnson Report commissioned by the Rudd Government, the proposed measures will tighten the current list of eligible OBU activity and remove any ‘choice’ as to which OBU-eligible activities must be treated as OBU transactions.

There is concern within the Government that some OBU licensees are shifting OBU-eligible income into their OBUs to attract the concessional 10% rate while retaining tax deductions within their domestic operations.  This policy change may make Australia’s OBU regime less competitive.

Background

The OBU regime was introduced to exempt OBUs from interest withholding tax (IWT) on eligible borrowings.  OBUs are subject to an effective income tax rate of 10% for eligible offshore activities.  These tax concessions were seen to be necessary to enable the Australian OBU regime to compete with low taxed jurisdictions, such as Singapore.

  1. Deposits: A non-resident deposits money with the OBU and receives interest.  The OBU is not required to withhold IWT.  As IWT is typically passed on to the customer, the depositor may expect a better return than if the money was deposited in Australia with a non-OBU institution.
  2. Loans: A registered OBU borrows funds offshore and on-lends those funds to a non-resident.  Assessable income derived by the OBU will be subject to an effective income tax rate of 10% rather than the general corporate tax rate of 30%.

A view emerged some time ago that Taxation Determination TD 93/135 allows OBU licensees to choose which OBU-eligible activities they book on domestic or offshore (OBU) accounts.  However, in December 2007, the ATO threatened to withdraw TD 93/135 and sought industry reactions.

The Rudd Government subsequently commissioned an investigation of the OBU regime by the Australian Financial Centre Forum.  The Forum delivered its report (Johnson Report), which was released in January 2010.  The Johnson Report recommends that:

  • The Government express its support for the OBU regime and ensure the ongoing competiveness of OBUs.
  • The Government resolve uncertainty among OBU licensees as to whether all OBU-eligible activities must be treated as OBU transactions or whether OBU licensees have a ‘choice’ as to whether to book offshore transactions. 
  • The list of eligible OBU activities should be clarified and brought up to date.  The Forum was concerned that the OBU regime was failing to keep up with continued product innovation.  It was the strong view of the Forum that changes should encourage a range of financial transactions to take place through Australia that are currently being transacted offshore.
  • The Government introduce a new streamlined process for vetting OBU applications.

These changes, according to the Johnson Report, would have the potential to generate additional taxable income, jobs and benefits to domestic consumers from greater economies of scale and lower fees.

Proposed measures

The Gillard Government has announced it will amend the OBU regime to ‘better target genuine mobile financial sector activities and address integrity issues with the current regime’ (Budget 2013/14).  

The Budget papers explain that the proposed 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.

A media release by the Hon David Bradbury MP on 14 May 2013 explains that integrity rules are needed to prevent banks from shifting their domestic banking activities and profits into OBUs, rather than attracting new mobile activity.

These changes will commence on 1 July 2013.

What next?

An implementation discussion paper will be released in June 2013.