This special edition of Acumen discusses the key taxation reforms for business announced on the evening of 9 May 2017 by Treasurer Scott Morrison in the 2017 Australian Federal Budget. Highlights from the tax announcements in the Budget are:
- on the positive side, various tax concessions to address housing affordability (but at the same time the retention of negative gearing) and some fairly modest tax breaks for small business; and
- on the negative side, additional focus on multinational entities (MNEs) not paying their “fair share” of tax in Australia, a new 0.06% levy on the five big banks’ liabilities from 1 July 2017 and a 0.5% increase in the Medicare Levy from 1 July 2019.
Fairness, opportunity and security …
The Treasurer positioned tonight’s Budget as one “based on the principles of fairness, security and opportunity”, one that is “about making the right choices to secure the better days ahead”.
Despite announcing the reversal of savings from the 2014/15 and 2015/16 Budgets at a cost of $13 billion, the Treasurer announced that the Budget is projected to return to balance in 2020/21 and remain in surplus over the medium term.
From the Government’s perspective, the Budget:
- achieves “fairness”, through measures that include: levies on foreign work visas to fund a new Commonwealth – State Skilling Australians Fund; a $10 billion re-investment in Australia’s health care system and legislation to guarantee Medicare and the Pharmaceutical Benefits Scheme; a schools funding package; measures designed to make the banking system fairer and big banks more accountable; and various measures to address housing affordability. The latter measures include a raft of capital gains tax (CGT) and superannuation concessions for first home buyers, investors in affordable housing and those aged 65 or over who are downsizing, and tougher CGT and other rules for foreign investment in residential property;
- creates “opportunity”, through measures that include: major investments in road, rail and airport infrastructure; unlocking the States’ equity in Snowy Hydro to be reinvested in priority infrastructure projects; and major investment in regional areas including funding for a Melbourne to Brisbane Inland Rail project; and
- bolsters “security”, through measures that include: increasing defence spending to 2% of GDP; investing over $300 million in the Australian Federal Police fight against terrorism and other crimes; and continuing to fund Operation Sovereign Borders.
The Government’s crackdown on MNEs not paying their “fair share” of tax continues although, in this regard, the Treasurer’s speech was longer on rhetoric than on additional substantive measures.
The Treasurer announced that the Australian Taxation Office (ATO) has raised $2.9 billion in tax liabilities from seven large MNEs in the current financial year and anticipates raising more than $4 billion in total this financial year from large public companies and MNEs. Interestingly, the Government will provide $8.1 million over the next two years to communicate its key tax integrity measures to the Australian business community and the general public. Apparently this is designed to demonstrate Australia’s international leadership in addressing multinational tax avoidance.
The Treasurer announced that the Multinational Anti-Avoidance Law will be strengthened to deal with structures involving foreign partnerships and trusts.
In addition, the Government will introduce measures to prevent banks and financial institutions taking advantage of hybrid mismatches that occur in cross-border transactions relating to regulatory capital referred to as Additional Tier 1 Capital:
- by preventing returns on Additional Tier 1 Capital from carrying franking credits where such returns are tax deductible in a foreign jurisdiction; and
- where the Additional Tier 1 Capital is not wholly used in the offshore operations of the issuer, requiring the franking account of the issuer to be debited as if the returns were franked.
It should be noted that rules are currently being developed for Action Item 2 of the OECD Base Erosion and Profit Shifting Action Plan, which recommends neutralising the effects of hybrid mismatch arrangements that occur due to the different treatment of an entity or instrument, under the laws of two or more tax jurisdictions. These measures were announced in last year’s Budget and are expected to apply to payments made on or after the later of 1 January 2018 or six months following the date of Royal Assent for the legislation introducing these anti-hybrid measures.
The Government has announced that, from 1 July 2019, the Medicare levy will be increased from 2.0% to 2.5% of taxable income. This increase will not only impact personal income tax, but also other tax rates which are tied to the top marginal rate, such as the fringe benefits tax rate.
The revenue raised from this measure will be used to fund the National Disability Insurance Scheme and the Medicare Guarantee Fund which was also announced in the Budget.
Reducing pressure on housing affordability
The changes in the Budget to reduce pressure on housing affordability focussed on foreign property investors are:
- Following Victoria’s lead, the Commonwealth Government will introduce a new annual charge on foreign owners of residential property where the property is not occupied or genuinely available on the rental market for at least six months per year. The charge will be equivalent to the relevant foreign investment application fee at the time the property was acquired, which in turn is related to the value of the property (1% for properties valued at $1 million or more).
- Foreign and temporary residents will not be able to access the main residence exemption for CGT purposes (subject to transitional measures for existing properties) and the foreign resident CGT withholding rate will increase from 10% to 12.5%, with a reduced threshold for its application to direct property investments of $750,000 (down from $2 million). Connected with this, the principal asset test for foreign tax residents (which determines if CGT applies to dealings in non-portfolio indirect interests in Australian real property) will now be applied on an associate inclusive basis.
- There will be a 50% cap on foreign ownership in new developments, enforced by imposing conditions on new dwelling exemption certificates (from foreign investment approval) granted to property developers.
For Australian resident property investors, the measures are less severe as follows:
- Travel expenses related to inspecting, maintaining or collecting rent for a residential rental property will be disallowed from 1 July 2017, presumably to address concerns around deductions being claimed for private interstate travel to inspect holiday rental properties.
- There will be restrictions imposed on depreciation deductions for furniture, fixtures and fittings in residential real estate, effectively to limit such claims to outlays actually incurred by investors. This will generally apply from 1 July 2017.
Lastly, there are a number of housing affordability measures, as follows:
- The managed investment trust (MIT) concessions (e.g. the 15% withholding tax rate on distributions to foreign residents) are being extended to investments in affordable housing, provided that the affordable housing is available for rent for at least 10 years and 80% of the MIT’s income is from affordable housing in each income year.
- For Australian tax resident individuals who invest in qualifying affordable housing, the discount on any capital gains will increase from 50% to 60%, provided that the property is held for at least 3 years, managed through a registered community housing provider and leased by low to moderate income tenants who are charged rent at a discount to market rentals.
- Millennials currently shut out of the housing market will welcome the ability, albeit limited, to contribute, from 1 July 2017, to superannuation and to withdraw, from 1 July 2018, the contributions and deemed earnings (net of tax) to fund a first home deposit.
- Persons aged 65 or over should also welcome the ability to use up to $300,000 (and perhaps $600,000 per couple) of the proceeds of selling their principal residence held for 10 years or more to make non-concessional contributions to superannuation (outside the $1.6 million balance test) from 1 July 2018 onwards.
Major bank levy (MBL)
The Government will introduce a MBL for Authorised Deposit-taking Institutions (ADIs) with licensed entity liabilities of at least $100 billion from 1 July 2017. The $100 billion threshold will be indexed to grow in line with nominal GDP.
The MBL will be calculated quarterly as 0.015% of an ADI’s licensed entity liabilities at each Australian Prudential Regulatory Authority mandated quarterly reporting date (i.e. an annual rate of 0.06%). The liabilities that are subject to the MBL will include items such as corporate bonds, commercial paper, certificates of deposit and Tier 2 capital instruments. The MBL will not apply to Additional Tier 1 capital and deposits of individuals and businesses and other entities protected by the Financial Claims Schemes.
The Australian Consumer and Competition Commission (ACCC) will undertake a residential mortgage pricing inquiry until 30 June 2018 to facilitate the introduction of the MBL. As part of the inquiry, the ACCC will require ADIs to explain changes or proposed changes to residential mortgage pricing, including changes to fees, charges and interest rates.
Small business taxation measures announced in the Budget include:
- extension of the $20,000 immediate deductibility threshold for small businesses with an annual turnover of less than $10 million to 30 June 2018. The deduction applies to eligible assets (which exclude horticultural plants and in-house software);
- continued suspension until 30 June 2018 of lock out laws which prevent small businesses from re-entering the simplified depreciation regime for five years if they opt out; and
- amendment from 1 July 2017 of small business CGT concessions, which apply to small business taxpayers with aggregated turnover of less than $2 million or business assets of less than $6 million, such that the concessions can only be accessed in relation to assets used in a small business or as part of an ownership interest in a small business.
GST integrity measures
On the GST front, the Government announced the following integrity measures:
- From 1 July 2018, purchasers of newly constructed residential property or subdivisions will be responsible for remitting the GST payable on the sale directly to the ATO as part of the settlement process. Currently, developers have the obligation to remit to the ATO the GST payable on the sale of newly constructed residential property or subdivisions. However, the Government has expressed concerns that some developers are failing to remit this GST despite having claimed input tax credits on their construction costs.
- Changes will be made to the GST law intended to combat fraud in the precious metals industry. Under the changes, buyers of precious metals (gold, silver and platinum) will be responsible for reporting and paying the GST payable on the supply of those metals to the ATO instead of the seller (i.e. a reverse charge). Changes are also being made to clarify that gold, silver and platinum are not second hand goods for GST purposes.
- The GST treatment of digital currencies (such as Bitcoin) will be aligned with ordinary money from 1 July 2017. This measure is intended to prevent the double taxation of consumers using digital currency. As digital currencies are not currently considered money for GST purposes, consumers can effectively be required to pay the GST twice - once for the purchase of the digital currency and again when used in exchange for goods and services.
Additional cost on business
Whilst not a taxation measure, from March 2018, businesses that employ foreign workers on temporary skill shortage visas (TSSV) or support workers for a permanent employer nomination scheme or regional sponsored migration scheme visa (Permanent Visa) will be required to pay a Skilling Australians Fund Levy, which will be used to support the training and development of Australian workers. Businesses with an annual turnover of less than $10 million per year will be required to make an upfront payment of $1,200 per year ($1,800 per year for businesses with a turnover of more than $10 million) for each employee on a TSSV and a one off payment of $3,000 ($5,000 for businesses with a turnover of more than $10 million) for each employee sponsored for a Permanent Visa.
What is on the horizon?
In the corporate tax space, there are a number of measures under active consultation that have not found their way into this year’s budget, including:
- changes to the petroleum resources rent tax following the recent review by Michael Callaghan;
- a proposed mandatory disclosure regime for tax advisors; and
- mooted reform of the tax regime for stapled trusts in the property and infrastructure sectors.
It can be expected that there will be further announcements in relation to these matters over the course of the next financial year. Despite some speculation, there were no measures to change the thin capitalisation regime in this Budget.
On housing affordability, the Government has shied away from the more controversial measures that have been floated by various commentators, such as abolishing negative gearing or reducing or eliminating the CGT discount. It remains to be seen whether the announced measures will have any appreciable effect on housing affordability. If not, then the calls for more drastic action may need to be addressed.