Below, we bring you the key taxation reforms announced by Treasurer, the Hon. Josh Frydenberg in the 2019/20 Australian Federal Budget. Unsurprisingly, with the next Federal election due sometime in May, the main beneficiaries of this year’s budget are low to middle income earners and small to medium businesses, with the government announcing:
- an immediate increase in the non-refundable low and middle income tax offset for individuals, followed by a further increase in the low income tax offset from 1 July 2022;
- structural changes to combat bracket creep, with an increase in the top threshold (from A$41,000 to A$45,000) for the lowest personal income tax bracket from 1 July 2022, and a reduction in the 32.5% tax bracket (currently applicable to taxable income between A$37,001 and A$90,000) to 30% from 1 July 2024; and
- an increase and expansion of the instant asset write-off which will now run until 30 June 2020 and be available to businesses with aggregated annual turnover of less than A$50 million for assets costing less than A$30,000 (up from A$25,000).
Despite the Treasurer once again commenting on multinational enterprises (MNEs) needing to pay their “fair share” of tax in his speech, surprisingly this year’s budget contained no substantive measures targeted at MNEs.
Back in the black, and back on track
Last year, the then Treasurer announced the budget was projected to return to surplus, in 2019/20. The government is now forecasting a modest, but better than expected, budget surplus of A$7.1 billion for 2019/20, the first surplus in 12 years.
The Treasurer positioned the budget to deliver “a stronger and more competitive economy” by restoring the nation’s finances, creating jobs through investments in skills and infrastructure, and guaranteeing essential services while tackling the cost of living, “all without increasing taxes”.
However, with measures such as the one off energy payment of up to A$125 for pensioners, in addition to the immediate and future tax cuts for individuals and small business, there can be no doubt that this is a budget which has been set with the hopes of securing the future of the Coalition government at the next election which may now only be 6 weeks away.
Multinational taxation reforms and anti-avoidance measures
The expression “no news is good news” has been attributed to King James I of England, who, in 1616, allegedly said “No news is better than evil news”.
In terms of tonight’s budget, the expression rings true for MNEs carrying on business in Australia who, over the life of this government, have been the subject of a number of anti-avoidance measures (including the multinational anti-avoidance law and the diverted profits tax), said to be necessary to ensure that these MNEs pay their “fair share” of tax. It would come as a relief then for MNEs that tonight’s budget did not contain any additional announcements of new taxing provisions designed specifically at extracting further taxation revenue from MNEs.
That said, the government did announce that it will provide A$1 billion additional funding over four years from 2019/20 to the Australian Taxation Office (ATO) to extend the operation of the ATO’s Tax Avoidance Taskforce, its programs and its market coverage. The Tax Avoidance Taskforce undertakes compliance activities targeting multinationals, large public and private groups, trusts and high wealth individuals. According to the Treasurer, the expanded activities of the Tax Avoidance Taskforce will include increased scrutiny of specialist tax advisors and intermediaries that promote tax avoidance schemes and strategies. The government estimates that the additional funding for the Taskforce will result in a fiscal gain of A$3.6 billion to the budget over the forward estimates period.
The Treasurer also announced minor amendments to Australia’s new hybrid mismatch rules to clarify their operation. Broadly, the hybrid mismatch rules prevent MNEs from exploiting differences in the tax treatment of an entity or instrument under the laws of two or more tax jurisdictions. The minor amendments will provide greater certainty to taxpayers in terms of complying with the rules by stipulating how the rules apply to multiple entry consolidated (MEC) groups and trusts, limiting the meaning of foreign tax and specifying that the integrity rule can apply where other provisions have applied. The measure applies to income years commencing on or after 1 January 2019, with the exception of the amendments to the integrity rule which apply to income years commencing on or after 2 April 2019. The government considers that the amendments will have a negligible revenue impact over the forward estimates period.
Of course, the lack of new taxation reforms and anti-avoidance measures in the budget will be of cold comfort to MNEs if the government is not returned in the upcoming election. More to the point, with a new government, MNEs may face new headwinds. In “What’s on the horizon” at the conclusion of this budget brief, we speculate upon some possible new measures potentially impacting MNEs, which may be introduced by a Labor government.
International taxation measures
Updated list of information exchange countries
The government will update the list of countries which have entered into information sharing agreements with Australia to include 8 new jurisdictions, from Curaçao to the United Arab Emirates. This will enable residents of those countries to access the reduced withholding tax rate of 15% on certain distributions from Australian Managed Investment Trusts from 1 January 2020.
The government has announced that it will be amending the International Tax Agreements Act 1953 to provide that certain income covered by a tax treaty will be deemed to have an Australian source. Whilst no further detail is provided on what income will be covered by this amendment, surprisingly it is forecast to result in an unquantifiable reduction in revenue over the forward estimates period.
The International Tax Agreements Act 1953 will also be amended to incorporate into the law the new Australia-Israel double tax agreement which was recently signed on 28 March 2019. The new Australia-Israel treaty is the first treaty entered into by Australia since it signed up to the OECD’s multilateral instrument, and like the treaty signed with Germany in 2015, incorporates the OECD measures aimed at addressing base erosion and profit shifting.
Instant asset write-off
The government has announced that it will once again extend the operation of the instant asset write-off for small business (which was first introduced in the 2015 budget) for another year (until 30 June 2020). The scope of the concession has also been increased to cover assets costing less than A$30,000 (up from A$25,000) and expanded to include medium-sized businesses with an aggregated turnover up to A$50 million (up from A$10 million) for assets acquired after budget night.
This announcement follows the government’s move earlier this year to extend and increase the instant asset write-off to assets costing less than A$25,000 (up from A$20,000) which saw the introduction of the Treasury Laws Amendment (Increasing the Instant Asset Write-Off for Small Business Entities) Bill 2019. As this Bill is still before the House of Representatives, the A$25,000 threshold will, if and when enacted, apply to assets first used or installed between 29 January 2019 and 2 April 2019.
Division 7A consultation
After releasing a consultation paper in October 2018, the government has decided to delay the start date of this budget measure until 1 July 2020, in order to provide additional time for stakeholder consultation and the development of transitional arrangements.
Australian Business Number System
As a measure to disrupt the so-called “black economy”, Australian Business Number (ABN) holders who wish to retain their ABN will be required to lodge their income tax returns (from 1 July 2021) and to confirm the accuracy of their details on the Australian Business Register annually (from 1 July 2022).
Support with tax disputes
The government will provide significant funding to the Department of Jobs and Small Business, the Administrative Appeals Tribunal (AAT) and the ATO to provide a fast, low cost and independent review mechanism for small businesses involved in disputes with the ATO. The AAT has recently issued a Guide and Practice Direction for its new Small Business Taxation Division.
With the rise of the "gig economy", the government has announced that it will establish a dedicated "sham contracting unit" within the Fair Work Ombudsman to address "sham contracting". The unit will be targeted at employers that knowingly or recklessly characterise emplyees as indepedent contractors to avoid their statutory obligations, such as emplyees entitlements and superannuation.
As part of last year’s budget, the government announced a seven-year personal income tax plan to lower taxes for individuals. This year, the government has announced it will build on the plan, to “support consumption growth and ease cost of living pressures”, by:
- increasing the non-refundable low and middle income tax offset from a maximum of A$530 to up to A$1,080 per annum, which individuals can claim in returns lodged from 1 July 2019;
- increasing the top threshold of the 19% tax bracket from A$41,000 to A$45,000 from 1 July 2022;
- increasing the low income tax offset from A$645 to A$700 from 1 July 2022; and
- reducing the 32.5% marginal tax rate (currently for taxable income between A$37,001 and A$90,000) to 30% from 1 July 2024.
The Medicare levy low-income thresholds have increased slightly for singles, families and seniors and pensioners from the 2018/19 income year to account for recent movements in the CPI.
What’s on the horizon?
Adapting Benjamin Franklin’s famous aphorism, “in this world nothing can be said to be certain, except death and tax … and elections”.
The Morrison government’s budget is an election budget, with accelerated and improved tax cuts for individuals and further tax relief for small and medium enterprises through extension of the instant asset write-off, but no new tax reform initiatives. It is likely that, in his budget reply, Shadow Treasurer Chris Bowen will seek to match (if not exceed) the government’s largesse, while also confirming measures to remove refundable franking credits for individuals (other than pensioners), restrict negative gearing and halve the capital gains tax discount for assets held by individuals and trusts for more than 12 months.
What is less certain is the tax position for inbound and outbound multinationals. It seems likely that the changes to the thin capitalisation regime, announced by the Coalition government in last year’s budget, will not be passed before the election. The Opposition (Labor Party) has announced that it will, if elected, adopt more restrictive constraints on debt funding, including a single cap equal to a multinational group’s worldwide gearing.
Another area of uncertainty is the reform of digital taxation, with the government recently deciding to await OECD developments before confirming what approach to take in Australia. It appears that, while the Opposition supports taxing the digital economy, it also favours an international approach to the issue.
Lastly, if elected, the Opposition’s tax policy also includes proposals:
- to amend the tax consolidation regime to eliminate perceived advantages enjoyed by MEC groups when compared to Australian based tax consolidated groups. The Labor Party proposes to implement changes which were identified following a Treasury review undertaken in 2014; and
- to improve the level of “tax transparency”, including introducing public disclosure of country by country reporting, a publicly accessible register of the beneficial ownership of Australian listed companies and trusts, and requiring mandatory reporting of tax havens as “material tax risks” in company accounts.
With the Federal election likely to be held in mid-May, Australian voters will get to decide on which vision they prefer to take the country forward.