In an effort to protect and increase tax revenues, the
Government has relied on Treasury and the ATO to target a series of
reforms at perceived loopholes that are supposedly being exploited
by multinational and other large corporations. In our view, it is
not all bad news for businesses. The Government has proposed a
number of amendments that will result in
compliance savings for business taxpayers.
Thin capitalisation
The Government proposes to tighten the safe harbour limits available under the thin capitalisation rules. Under the proposed new rules, the maximum permissible debt to total assets ratio of general entities will be reduced from 75% to 60%. Further, the Board of Taxation will be engaged to conduct a review of the thin capitalisation arm's length test.
However, the thin capitalisation limits will be eased in other areas. The de minimis threshold will increase from $250,000 to $2 million of debt deductions. Further, inbound investors will be granted access to the worldwide gearing test, which is normally only available to outbound investors.
The proposed amendments are scheduled to apply from 1 July 2014.
Foreign non-portfolio dividends
The Government will amend the exemption available for foreign non-portfolio dividends to ensure that the exemption is not available for returns on debt interests or interests that the Government considers to be, in substance, portfolio in nature.
However, taxpayers will benefit from an expansion in the scope of the exemption that will allow it to apply where an Australian company receives foreign non-portfolio dividends from a foreign trust or foreign partnership.
The proposed amendments are scheduled to apply from 1 July 2014.
Denial of deductions for interest incurred in deriving certain exempt income.
The concession that allows a tax deduction for interest incurred in deriving certain foreign exempt income (such as foreign non-portfolio dividends) will be removed due to perceived abuses, effective from 1 July 2014.
Consolidation regime
The Government has responded to the Board of Taxation's post-implementation review of the consolidation regime by committing to a number of amendments to the tax cost setting rules to improve the integrity of the consolidation regime. In particular:
- non-residents will no longer be permitted to transfer assets between consolidated groups to allow the same ultimate owner to claim double deductions;
- certain deductible liabilities will no longer be allowed to be taken into account twice; and
- consolidated groups will not be able to access double deductions by shifting the value of assets between entities.
The Government will also address concerns raised by the Board of Taxation about inconsistencies in the tax treatment for multiple entry consolidated (MEC) groups used by multinationals and ordinary consolidated groups. The Government will ensure that MEC groups cannot access tax benefits not available to domestic consolidated groups.
The amended tax treatment will apply from 1 July 2014.
Non-residents and capital gains tax
Effective from 7.30pm (AEST) 14 May 2013 amendments will be made to the principal asset test to ensure that indirect Australian real property interests are taxable if disposed of by a foreign resident. In particular, the amendments will:
- remove the ability to use transactions between members of the same consolidated group to create and duplicate assets; and
- value mining, quarrying or prospecting information and goodwill together with the mining rights to which they relate.
Also, from 1 July 2016, a 10% non-final withholding tax will apply to the disposal by foreign residents of certain taxable Australian property. This measure will not apply to residential property transactions under $2.5 million or to disposals by Australian residents.
ATO compliance checks on offshore marketing hubs and business restructures
The Government will provide $109.1 million over four years to the Australian Taxation Office to increase monitoring of restructuring activity that facilitates profit shifting opportunities.
ATO trusts taskforce
The Government will provide $67.9 million over four years to the ATO to heighten compliance activity in relation to taxpayers who have been involved in tax avoidance and evasion using trusts. The ATO will be required to target the exploitation of trusts to conceal income, mischaracterise transactions, artificially reduce trust income amounts and underpay tax. This activity is expected to target known tax scheme designers, promoters, individuals and businesses who participate in such arrangements.
Restriction on immediate deduction for mining rights and information
Effective from 7.30pm (AEST) 14 May 2013, expenditure on acquiring mining rights and information will no longer qualify for an immediate deduction in situations where an interest in natural resources has effectively already been discovered.
The mining rights and information will be depreciated over 15 years, or their effective lives, whichever is shorter.
The effective life of a mining right and associated exploration information will be the life of the mine that it leads to. If the exploration is unsuccessful, any remaining undepreciated value will be immediately deductible.
Preventing duplication of franking credits
From 1 July 2013, any investor that sells shares with a dividend and then immediately buys equivalent shares that still carry a right to a dividend will only be entitled to use one set of franking credits. The changes will be targeted at the two-day period after a share goes exdividend.
Research & development tax incentive
From 1 July 2013, the Government will better target support for research and development (R&D) by limiting access to the R&D tax incentive so that it only applies to companies with an annual aggregate Australian turnover of less than $20 billion.
Further, from 1 January 2014, the Government will allow eligible entities (i.e. entities with an aggregated annual turnover of less than $20 million) to claim the R&D refundable tax offset on a quarterly basis.
Monthly PAYG instalments — extension to other large entities
The Government will extend the requirement to make monthly Pay As You Go (PAYG) income tax instalments to include all large entities in the PAYG instalment system, including trusts, superannuation funds, sole traders and large investors.
The changes follow the already announced move to monthly PAYG instalments for corporate entities. Specifically:
- Non-corporate entities in the PAYG instalment system with turnover of $1 billion or more, will move to monthly PAYG instalments from 1 January 2016; and
- Non-corporate entities in the PAYG instalment system with turnover of $20 million or more will move to monthly PAYG instalments from 1 January 2017.
However, non-corporate entities that have a turnover of less than $100 million and report GST on a quarterly or annual basis will not be required to pay PAYG instalments monthly.
In addition, to ensure the continued equity of the system, entities in the taxation of financial arrangements (TOFA) regime will assess their entry to monthly instalments using a modified turnover test, based on their gross TOFA income, rather than their net TOFA income.
Carbon Tax
From July 2015 Australia will move to a floating carbon price linked to international prices. This will be a welcome reduction in the tax burden on those employers that are impacted.
GST
The Government has not bowed to pressure from retailers. They have not imposed GST onimport transactions under $1,000.
Attachments
Business Tax - Moore Stephens Federal Budget 2013 Insights
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