The Treasurer, the Hon Wayne Swan MP, has this evening delivered the 2013-14 Federal Budget. It forecasts a $19.4 billion deficit for 2012-13 and budgets on further deficits of $18 billion in 2013-14 and $10.9 billion in 2014-15 before a return to surpluses of $800 million in 2015-16 and $6.6 billion in 2016-17.

The Budget also points out that expected tax receipts have been written down by $170 billion over the five years since 2008-09 when the GFC started to bite. Moreover, they have been written down $17 billion since the 2012-13 Budget including $12.3 billion just since the Mid-Year Economic and Fiscal Outlook in October 2012.

Against this backdrop, it comes as no surprise that the 2013-14 Budget is a tough one for business. For multinational business, it is especially tough. The front page of today's edition of the Australian Financial Review declared, "Labor, business at war." That may be going too far but it certainly gets the point across.

So what are the most significant tax measures that will impact the business bottom line?

Thin capitalisation

The changes to the thin capitalisation rules for the deductibility of interest were well telegraphed. But, perhaps surprisingly, they will only apply to income years commencing on or after 1 July 2014. This is to provide time for taxpayers to rearrange their financing arrangements.

The changes are:

  • for general entities, the safe harbour limit will be reduced from 3:1 to 1.5:1 on a debt to equity basis (or from 75% to 60% on a debt to total assets basis);
  • for outbound investors, the worldwide gearing ratio will be reduced from 120% to 100%; and
  • the de minimus deductions threshold will be increased from $250,000 to $2 million.

Other changes apply to banks and non-bank financial entities. The Board of Taxation will also consider ways to improve the operation of the arm's length debt test.

The halving of the safe harbour limit is a big change and business has some justification for being opposed to it. It and the other changes were first proposed by the Business Tax Working Group as a way to fund a cut to the company tax rate in a revenue neutral way. Now business gets the changes without the cut. Originally forecast to raise just $300 million, it's now thought the changes will bring in $2 billion.

There will be consultation on the implementation of these changes. A proposal paper is already available on the Treasury website.

Capital gains tax

Until tonight, a foreign resident was only liable to Australian CGT on the disposal of certain direct or indirect interests in Australian real property and mining, quarrying or prospecting rights. Now, an indirect interest in an intangible asset connected to mining, quarrying or prospecting rights (eg mining information) is in the frame.

Changes will also be made to the principal assets test in relation to intercompany dealings.

In a significant move, a 10% non-final withholding tax will also apply where a foreign resident makes a capital gain on the disposal of certain taxable Australian property after 1 July 2016.

Other international tax measures

Other international tax measures include:

  • the removal of the concession that allows a deduction for interest incurred in deriving certain foreign exempt income;
  • a tightening of the exemption available to Australian companies for their non-portfolio dividend income;
  • a reconsideration of Australia's controlled foreign company rules; and
  • more funding for the Australian Taxation Office to investigate restructuring activity that facilitates profit shifting.

Exploration expenditure

The other significant development, relevant to both Australian and multinational businesses in the energy and resources sector, is changes to the immediate deduction for exploration expenditure.

Until tonight, an immediate deduction was available for the cost of depreciating assets first used in exploration. This included the cost of acquiring mining rights and information. Sometimes the price paid (and deducted) reflected the value of resources already discovered. This has caused Treasury and the ATO concern.

Now, the immediate deduction will be limited to:

  • co-exploration (or "farm-in, farm-out") arrangements, often used by small explorers;
  • the costs of acquiring a mining right from the relevant government issuing authority;
  • the costs of acquiring mining information from the relevant government issuing authority; and
  • the costs incurred by a taxpayer in generating new information or improving existing information.

Otherwise, the cost of acquiring mining rights and information will be depreciable over the effective life, or 15 years if this is shorter.

Again, there will be consultation on the implementation of this change and a proposal paper is already available on the Treasury website.

The energy and resources sector is already seeing investment drop off and finance more difficult to secure. This measure may further accelerate this trend.

The Budget contains many more tax measures that will have an impact on business but these are the headline measures.

Australia is a net importer of capital. The economy depends on it. Despite this, the Government must consider multinational business to be an easy fiscal target in what are clearly difficult and uncertain economic times. But multinationals can choose where to invest. The Government is gambling the Budget won't turn them off investing in Australia. Only time will tell.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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