Swan Unveils Australian Tax System Overhaul
16 May 2013
Posted by: Author: Mary Swire
Source: Mary Swire (Tax-News.com, Hong Kong)
Australia is facing its second largest revenue write-down since the Great Depression, Treasurer Wayne Swan has said, announcing a raft of new tax measures in his latest Budget.
Speaking before parliament, Swan warned that "challenging global conditions and the high Australian dollar have put huge pressure on the Budget." This has resulted in "a significant reduction in expected tax receipts totalling over AUD60bn (USD59.6bn) over the four years to 2015-16." Revenues for the 2012-13 financial year have also been written down since last year's Budget, to the tune of AUD17bn. Australia has now "seen almost AUD170bn wiped off" its tax receipts since the global financial crisis. This year's tax-to-gross domestic product (GDP) ratio is projected at 22.2 percent, 1.8 percent lower than the average seen in the five years prior to the recession.
Hitting out at previous governments, Swan claimed that were he to have continued with his predecessors' tax policies, the Treasury would benefit from an additional AUD24bn in taxes in 2013-14, and "be comfortably in surplus every year of the forwards." Instead, his proposals set "a sensible pathway to surplus, while making room for the big investments in our nation's future." The Government intends to return to balanced books in 2015-16, and expects to be in surplus by 2016-17. AUD43bn will be made in savings over the forward estimates to reach these targets.
In addition, the Government will intensify its tax compliance program, by closing loopholes and protecting the corporate tax base. A separate press release, issued by Swan in conjunction with his Assistant Treasurer David Bradbury, states that the Government is to accept a number of Treasury recommendations on maintaining fairness in the corporate tax regime. The planned changes will save more than AUD4bn over the forward estimates period.
As part of the reform package, the thin capitalization rules will be amended to tighten the safe harbor limits. For general entities, the limit will be reduced from 3:1 to 1.5:1 on a debt-to-equity basis, or 75 percent to 60 percent on a debt-to-total-asset basis. For banks, the capital limit will rise from 4 percent to 6 percent of their weighted assets of the Australian operations, while non-bank financial entities will see their limit fall from 20:1 to 15:1 on a debt-to-equity basis, or 95.24 percent to 93.75 percent on a debt-to-total-asset basis. Finally, for outbound investors, the worldwide gearing ratio will drop from 120 percent to 100 percent. A worldwide gearing test will be extended to inbound investors, and the de minimis threshold will rise from AUD250,000 to AUD2m of debt reductions. The Board of Taxation has been asked to consider ways to improve the operation of the arm's length test, and to make it easier to comply with and administer.
The reforms to the exemption available to Australian companies for their foreign non-portfolio dividend income, first announced in the 2009-10 Budget, will now be implemented. The aim is to ensure that the exemption operates as intended, but it will also be expanded to apply in cases where an Australian company receives foreign non-portfolio dividend income through an investment in a trust or partnership. The Government will however remove the concession that allows a tax deduction for interest expenses incurred in deriving certain foreign exempt income, on the grounds that it is being abused as part of profit shifting structures.
The foreign resident capital gains tax (CGT) regime will be altered, to improve its integrity and make sure that gains on Australian real property are appropriately taxed. The "principal asset test," used to determine if an interest is an indirect Australian real property interest will be amended. Intercompany dealings between entities in the same tax consolidated group will not form part of the principal asset test calculations. This will mean that assets cannot in effect be counted multiple times in order to dilute a group's true asset value. Assets of the entity in which the interest is held and intangible assets connected to the rights to mine, quarry or prospect for natural resources, will be treated as part of the rights to which they relate in determining the value of the Taxable Australian Real Property assets in which the entity is held. These changes will apply to CGT events occurring after the Budget announcements.
A non-final withholding regime will be introduced from July 1, 2016, to support the operation of the foreign resident CGT regime. When certain taxable Australian property is disposed of by a foreign resident, the purchaser will need to withhold and remit to the Australian Taxation Office (ATO) 10 percent of the proceeds from the sale. It will equally apply where the disposal of such assets is likely to generate gains on revenue account. It will not apply in relation to property transactions valued under AUD2.5m. Bradbury says that there have been a number of cases relating to the mining sector where a foreign investor has disposed of an interest in a mining operation, without being subject to CGT. The Government will consult on the design and implementation of the regime, with the aim of minimizing compliance costs.
The Offshore Banking Unit (OBU) regime will be altered, to address integrity issues and better target the concession to "genuinely mobile banking businesses." Banking activity in an OBU is taxed at 10 percent, rather than the headline 30 percent corporate tax rate. Under the changes, dealings with related parties, including the transfer of transactions between the OBU and a domestic bank, will be ineligible for OBU treatment, as will transactions between OBUs. The current list of eligible OBU activities will also be refined. The measures will enter into force from income years commencing on or after July 1, 2013.
Loopholes in the consolidation regime will be closed, in response to a Board of Taxation review. Consolidated groups will no longer be able to access double deductions by shifting the value of assets between entities, and non-residents will not be able to "churn" assets between consolidated groups. The treatment of certain deductible liabilities will be altered, so that they are not taken into account twice. Tax advantages for multiple-entry consolidated groups will be removed, while only net gains and losses will be recognised for tax purposes in the case of intra-group liabilities and assets. A tripartite review of multiple-entry consolidated groups will be conducted by the Treasury, ATO and Government, and the Government will take retroactive legislative action if it becomes aware of any aggressive tax minimization practices.
A loophole that allows some investors to engage in so-called "dividend washing" will also be closed. "Dividend washing" enables shareholders to claim two sets of franking credits, on what the Government says is effectively the same parcel of shares. From July 1, 2013, when an investor sells shares ex-dividend and then immediately buys equivalent shares which still carry the right to a dividend, they will only be entitled to claim one set of franking credits. The holding period rules will be reformed, and the Government will consider modifying the "last-in, first-out" rules, to ensure that shares brought in in such circumstances are treated as one parcel of shares.
Issues with resource sector concessions for depreciating assets will be dealt with. Mining rights and information that would currently benefit from an immediate deduction will instead be depreciated over 15 years, or their effective life, whichever is shorter. The Government will consult on options for identifying the life of a future mine. Where exploration is unsuccessful, any remaining undepreciated value will be immediately deductible. The non-cash costs of a mining right will continue to be immediately deductible, if the right is acquired under an eligible "farm-in, farm-out" arrangement. These measures will apply to mining rights or information a taxpayer starts to hold after Budget day, unless the acquisition had been committed to prior to the announcement, or the taxpayer is deemed to already hold the right or information.
Finally, the ATO will be provided with an additional AUD109.1m in funding over the next four years, to be spent on resources for compliance activity focussed on business restructuring practices.
According to Swan and Bradbury, these changes are "consistent with the OECD's approach in its work on base erosion and profit shifting, and the Australian Government's leading role in the G20's multilateral action to address base erosion and profit shifting to ensure international tax standards keep pace with the changing nature of global commerce."
Moving away from compliance work, Swan announced in his speech that the Pay As You Go (PAYG) monthly instalment option will now be extended to all large entities (not just corporates). This will be phased in over four years, and will provide total savings of AUD1.4bn. The tobacco excise and excise equivalent customs duty will be indexed to average weekly ordinary time earnings (AWOTE) instead of the consumer price index (CPI).
The Budget also provides for the introduction of a series of pre-announced initiatives. The Medicare levy will rise by 0.5 percent to 2 percent, to pay for the introduction of the new DisabilityCare Australia insurance scheme. In line with this, the current net medical expenses tax offset (NMETO) will be phased out as DisabilityCare Australia is implemented, providing savings of over AUD963m. The low-income threshold for families paying the Medicare levy will be lifted in line with the CPI, with effect from July 1, 2012, and at a cost of AUD38m.
Due to lowered projections for the carbon price in 2015-16, the Government, in line with a statement made by the Climate Change Minister last week, will defer the 2015-16 tax cuts. These will be on hold until the carbon price is above AUD25.40, currently estimated at 2018-19. The Research and Development refundable tax offset will now be "better targeted" to companies with an annual aggregate Australian turnover of less than AUD20bn, and will be made available in quarterly installments from January 1, 2014.
Closing his speech, Swan said that the Government had made a "clear choice" to keep the economy strong and invest in Australia's future.