The 2016-17 Australian Federal Budget confirms that the Australian Taxation Office (ATO) will continue to be heavily focused on the tax affairs of private groups and high net worth individuals (HNWIs) (and their tax advisors). However, there will be some welcome relief on Division 7A and a lower company tax rate (eventually).

The 2016-17 Australian Federal Budget confirms that the ATO will continue to be heavily focused on the tax affairs of private groups. With tax enforcement being a dominate theme, the new Tax Avoidance Taskforce (Taskforce) will explicitly target HNWIs. Private groups and HNWIs will need to grapple with a new (voluntary) Tax Transparency Code and tax advisers will now be required to make early disclosures to the ATO of "aggressive" tax arrangements entered into by their clients. Often these disclosures will have to be made before income tax returns are lodged. Notwithstanding these “tough new laws”, the budget does offer some relief with improvements on the operation and administration of Division 7A, which governs the tax treatment of the movement of profits between private companies and their shareholders, as well as a gradual decline in the corporate tax rate.

Tax Avoidance Taskforce

In line with the Budget’s focus on tax avoidance, the Government has announced the establishment of the new Taskforce within the ATO. With “more power and more resources for [the] tax ‘cop on the beat’”, the Taskforce will undertake enhanced compliance activities which will target, amongst others, large private groups and HNWIs.

The establishment of the Taskforce is intended to increase Australia’s capacity to identify tax avoidance and to work with other countries to combat tax evasion and tax avoidance, whilst raising more than $3.7 billion in revenue over the next four years. This is one of the most significant revenue raising measures announced in the Budget; it can be expected that the Taskforce will be under considerable pressure to raise the forecasted revenue.

It is also interesting to note that whilst the ATO currently separates its compliance activities targeted at large private groups and HNWIs from those targeted at large public groups and multinationals, no such separation has been suggested for the Taskforce. This could be taken as a signal that the ATO is now going to apply a uniform approach when it comes to compliance activities targeted at perceived tax avoidance.

Tax transparency

The Budget also included the Board of Taxation’s final report on the introduction of ‘A Tax Transparency Code’. This report recommends that all businesses with annual Australian turnover of over $100m should disclose (at a minimum):

  • A reconciliation of accounting profit to income tax expense, and from income tax expense to income tax paid or income tax payable;
  • an Australian accounting effective tax rate (ETR) calculated as company income tax expense divided by accounting profit; and
  • a global ETR (if applicable) calculated for the worldwide accounting consolidated group of which the Australian operations form a part.

In addition to the above, the Board recommends that ‘large businesses’ (i.e. with annual Australian turnover over $500m) disclose information on tax policy and strategy, total Australian tax contribution and international related dealings.

Importantly, while the new code may well be aimed at ‘multinationals’, the Board considers the code should apply to both Australian-headquartered (including privately owned groups), and foreign-owned companies.

The code is not yet mandatory and it is not clear whether it will become mandatory. However the Government encourages all affected taxpayers to adopt the code from the 2016 financial year onwards.

Mandatory disclosure by tax advisers

The Government has also announced that it intends to start a consultation process on new rules requiring tax and financial advisors to mandatorily report potentially aggressive tax planning schemes (often before income tax returns are lodged). These proposed new rules are said by the Government to enhance the information available to the ATO to crack down on tax avoidance.

Division 7A

Private groups will obtain some relief under proposed amendments which aim to improve the operation and administration of Division 7A (which deals with private company dividends).

The changes will provide greater clarity on the scope and operation of Division 7A, with the following changes proposed:

  • a self-correction mechanism to correct any arrangements which ‘inadvertently’ trigger the application of Division 7A without attracting a penalty;
  • the introduction of new safe harbour rules aimed at preventing the application of Division 7A in certain circumstances where an asset is provided for use by a company to a shareholder or associate;
  • amendments to the documentation requirements for compliant Division 7A loans; and
  • technical amendments to improve the overall operation of Division 7A. The detail and extent of these technical amendments is yet to be provided.

The Government will consult on the amendments and any changes are expected to apply from 1 July 2018.

Reduction in the corporate tax rate

On another positive note, the Government has announced a plan to reduce the corporate tax rate progressively. For private groups with an aggregated Australian annual turnover below $10 million, the company tax rate will be reduced from 28.5% to 27.5% from 1 July 2016. This 27.5% tax rate will then be gradually made available to more companies over the next seven years, and the rate will decline thereafter until it reaches 25% in the 2026–27 income year.