Federal Treasurer Scott Morrison’s third budget, released 8th May, should be reviewed in the context of an anticipated federal election in the next twelve months, accompanied by a more buoyant economy and an uptick in company tax collections. This helps explain the focus on the commitments made to personal income tax cuts and increased spending on infrastructure (including what is billed as a 10-year $75 billion national infrastructure plan), healthcare and aged care. It may also explain why there doesn’t seem to be any current appetite for structural tax reform. However, the budget does include a number of specific taxation measures intended to protect its revenue base.
Here are some of the more significant measures that will impact on business and investment:
1) Company tax rate
The Budget commits (again) to a progressive reduction in company tax cuts in Australia from 30% to 25% for all companies, even though it has been unable to pass these proposed measures in full through the Senate. The business community has lobbied long and hard for this measure but it seems that there is more work to do in the current political environment.
2) Changes to thin capitalisation
For income years starting on or after 1 July 2019, asset valuations for thin capitalisation purposes must align to asset valuations in the entity’s financial statements. At present, there is no specific requirement for asset valuations to align. The Australian Taxation Office has been reviewing valuation issues in this regard for prior income years (as indicated before the Senate committee on corporate tax avoidance).
The thin capitalisation rules will also be amended to treat consolidated tax groups and multiple entry consolidated groups that control a foreign entity as both an inward and outward investor, which will result in the same tax treatment as for standalone entities.
The budget also included the previously announced measure to lower the associate entity threshold under the thin capitalisation rules from 50 per cent to 10 per cent in relation to stapled structures.
3) Significant global entity definition
The definition of a “significant global entity” will be broadened to include members of corporate groups that are headed by private companies, trusts and partnerships, and to include investment entities that are not required to prepare consolidated financial statements. This broadens the number and types of entities to which Australia’s diverted profits tax and multinational anti-avoidance law apply, as well as increasing the scope of entity to which country-by-country reporting and increased administrative penalties apply.
1) Managed investment trusts and stapled structures
From 1 January 2019, the list of countries whose residents are eligible for a reduced final withholding tax rate of 15% under the managed investment trust (MIT) regime will be expanded to include countries with whom Australia has information sharing agreements for tax purposes. The list of countries is yet to be announced.
While the expansion of the number of countries eligible for the reduced rate is good news for foreign investors, the potential benefits for such investors has been tempered by the previously announced changes in respect of stapled structures that include a trust eligible for MIT regime taxation. Please refer to our recent article on this very subject.
In addition, new rules will be introduced from 1 July 2019 to prevent MITs and attribution MITs (AMITs) from applying a discount capital gain when calculating taxable income at the trust level. While intended to ensure that corporate beneficiaries do not receive the benefit of discounted capital gains – corporate taxpayers are not eligible for such discounts – the proposed change may adversely impact other types of beneficiary.
2) Integrity measures for private trusts
The budget announced integrity measures to prevent:
- any reduction in tax payable that results from circular trust distributions; and
- misuse of testamentary trusts to obtain lower rates of tax for minor beneficiaries.
In addition, Division 7A of the Income Tax Assessment Act 1936 will apply to unpaid present entitlements of a related private company, ensuring that the unpaid present entitlement is taxed as a dividend in the absence of a complying payment arrangement over time.
From 1 July 2019, deductions will be denied for expenses relating to holding vacant land where the land is not genuinely held for income earning activity (ie such as carrying on a business). Some expenses may be included in the cost base of the relevant land for CGT purposes. The stated intention is reduce the commercial incentive for land banking.
Research and development incentives
Despite the Government’s innovation agenda, the government will amend the research and development tax incentive. Noting the Government’s previous concerns about misuse of the existing rules, the redesigned package involves:
- for companies with annual aggregated turnover of $20 million or more, a R&D premium that increases as the proportion of R&D expenditure as a proportion of total expenditure increases, and an increase in the R&D expenditure threshold from $100 million to $150 million;
- for companies with annual aggregated turnover of less than $20 million, a R&D premium of 13.5 percentage points above the company’s tax rate and a $4 million cap on refundable offsets (excluding clinical trials); and
- stronger compliance and administrative arrangements to improve integrity.
Small business with annual aggregated turnover of less than $10 million will be eligible for an immediate deduction for assets costing less than $20,000. This extends the existing measure for a further twelve month period to 30 June 2019.
Small business CGT concessions will no longer be available for assignment of rights to future income (Everett assignments) from 8 May 2018.
The widest-reaching proposal in relation to GST, is to include GST in the director penalty regime. The director penalty regime can make a director of a company personally liable for unpaid GST liabilities of a company in certain circumstances. Previously, the regime extended to PAYG and superannuation guarantee charge obligations of a company only. This measure is proposed as part of the broader proposals in relation to the ‘black economy’ and phoenixing activity (noted below).
In a much narrower context, the budget also includes measures to level the playing field for online accommodation service providers that operate outside Australia by imposing GST on the net margin they earn on booking arrangements.
‘Black economy’ and phoenix activity
The focus on tax recovery as a means of increasing Government revenue has sharpened with a range of new measures and new funding proposed to ensure taxpayers report their income correctly and pay tax on that income. These measures include:
- A $300 million budget to undertake enforcement activity;
- Extending the taxable payment reporting scheme to further industries, being security, road freight, and computing system design;
- A limit on business-to-business cash payments of $10,000;
- Denying deductions for payments to employees or contractors where a person failed to withhold where required under the PAYG rules;
- New powers for the ATO to withhold tax refunds due to a taxpayer where the taxpayer has outstanding lodgements;
- New rules relating to the appointment of external administrators and resignation of directors; and
- New rules and enforcement measures to ensure tobacco duties and taxes are paid.
The above measures are designed to raise significant revenue and the success of those measures will be imperative to support the spending initiatives announced in the Budget.
Much attention has focussed upon the Government’s commitment to spending, particularly on infrastructure, health and aged care. The focus on increasing revenue is clearly upon a continued path of increased enforcement activity and additional integrity measures, rather than any structural reform that may otherwise increase the tax base. For a number of businesses, implementation of the proposed corporate tax cuts is likely to remain the key measure that they would like to see adopted. However, it appears unlikely that progress will be made on that front in the current political environment.
The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.