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Australia: Recent Tax Changes

Friday, 11 July 2014   (0 Comments)
Posted by: Author: Marcus Leonard
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Author: Marcus Leonard and Lance Cunningham(BDO)

Australia has recently had a change of Federal Government, with the new Government introducing various tax changes. In addition, the previous Federal Government had announced 96 tax amendments that remained un-enacted. The new Government has reviewed all of these announced changes and has confirmed that 34 of them will proceed and the remainder will not proceed. The recent and proposed tax law changes that are of international interest are detailed below:

Tax Rate Changes

–- Company tax rate decrease for small to medium companies

From 1 July 2015, the company tax rate is to be reduced by 1.5% from 30% to 28.5% for all companies. However, large companies (taxable income over AUD 5 million) will incur an additional levy of 1.5% to assist in funding the Government’s proposed paid parental leave scheme. This levy means that the effective rate of tax for large companies remains the same at 30%. However, as the 1.5% parental leave levy will not give rise tofranking credits under the Australian dividend imputation provisions, it will lead to an overall increase in tax payable by the resident shareholders of these large companies when
profits are distributed to them as dividends.

–- Income tax rate increase for higher income earners

A temporary 2% ‘deficit reduction levy’ is to be introduced for individuals earning above AUD 180,000 per year. This levy will apply for the 2015, 2016 and 2017 income tax years. Combined with the 0.5% rise in Medicare levy for resident individuals, from 1 July 2014 the effective top marginal tax rate for resident individuals will rise from 46.5% to 49% and for non-resident individuals the top marginal rate will rise from 45% to 47%.

The Government announced that this 2% levy is designed to assist the Government in reducing the size of its budget deficit over the next 3 years.

–- Fringe benefits tax rate increase

In line with the increase in the highest marginal income tax rate, the fringe benefits tax rate will increase from 47% to 49% from 1 April 2015. Fringe benefits tax is a tax payable by employers on the value of non-salary and wage benefits that are provided to their employees in respect of their employment.

Mining and Natural Resources

–- Minerals resource rent tax to be repealed

The Minerals Resource Rent Tax (MRRT) is a profit-based tax on the ex-mine gate value of iron ore, coal and other coal derived resources extracted within the Australian territory. One of the election promises for the new Government was to repeal this tax, as it said it was an impediment to further exploitation of Australia’s mineral wealth. The repeal of the MRRT is proposed to apply from 1 July 2014, but it has not yet passed through the Australian Parliament and is not expected to do so until after 1 July 2014, when there will be a change in the composition of the Senate.

Australia also has a Petroleum Resource Rent Tax (PRRT), which is similar to the MRRT, but is imposed on the extraction of petroleum based resources within the Australian territory (both offshore and land based). The PRRT will not be repealed and will continue to operate as before the change of Government.

–- Minerals exploration development incentive

The new Government will provide an AUD 100 million fund to be used over three years for the introduction of an Exploration Development Incentive (EDI). The EDI will allow investors in early stage mineral exploration entities to receive a credit for expenditure incurred by the exploration entity, and apply this directly against their personal taxable income.

Eligible entities that are in a tax loss position will generate credits through exploration expenditure, which can then be distributed to shareholders for application against their assessable income. The company cannot then offset this expenditure against its future income. The distribution of credits to shareholders will be optional, with explorers able to otherwise carry forward losses. The policy intent of the EDI is to encourage investment in small exploration companies.

Repeal of The Carbon Pricing Scheme

The previous Federal Government introduced a "Carbon Pricing Scheme” (also known as ‘carbon tax’) that aimed to put a price on the emission of carbon dioxide and other greenhouse gases in an effort to reduce Australia’s impact on global climate change. The repeal of this Carbon Pricing Scheme was another election promise of the new Government, as it said Australia should be waiting until there was a widely accepted international carbon pricing scheme.

The repeal of the Carbon Pricing Scheme is also to apply from 1 July 2014, but enactment of this change is also waiting for the change in the composition of the Senate on 1 July 2014.

Without the Carbon Pricing Scheme the Government intends to meet Australia’s Kyoto carbon emission reduction targets with the introduction of the "Direct Action  Plan”. The Direct Action Plan represents a complete reversal from the existing Carbon Pricing Scheme. Under the Carbon Pricing Scheme, large emitters make payments to the Government to cover their carbon emission liabilities, whereas under the Direct Action Plan the Government will pay organisations for reducing their carbon emissions.

Thin Capitalisation Amendments

The Government has confirmed proposed changes to the Thin Capitalisation measures as announced by the previous Federal Government. The proposed changes include the following:

  • The de minimis threshold will be increased from AUD 250,000 to AUD 2 million of debt deductions (interest)
  • The safe harbour debt limit for general entities which are not authorised deposit taking institutions (non-ADI) is to be reduced from 3:1 to 1.5:1 on a debt-to-equity basis
  • The safe harbour debt limit for financial entities (non-ADI) is to be reduced from 20:1 to 15:1 on a debt to equity basis
  • The safe harbour capital limit for an ADI is to be increased from 4% to 6% of its risk weighted Australian assets
  • The worldwide debt limit for outward investing entities (non-ADI) that can be allowed for Australian operations in certain circumstances is to be reduced from 120% to 100% of the gearing of the entity’s worldwide group
  • The worldwide debt limit method will be extended to inward investing entities (currently only available for outward investing entities), with a debt limit of 100% of worldwide gearing.

Transfer Pricing Re-Write and Amendments 

Australia’s transfer pricing rules have recently been rewritten with some important conceptual changes. The provisions apply to entities which engage in cross border transactions, without any de-minimis thresholds.

The new provisions are self-executing, as opposed to the old provisions which required a determination from the Tax Commissioner. The amendments require the taxpayer to self assess whether they obtained a transfer pricing benefit, which is defined as having lower taxable income, a higher tax loss, or a greater tax offset than would have resulted if the entity had been dealing at arms length in the relevant transactions. In these circumstances, there is a seven year amendment period for tax assessments. This contrasts with the unlimited amendment period which existed under the old

In identifying the result expected under an arms length transaction, the legislation requires consideration of the method(s) which are the most reliable and appropriate given:

  • The strengths and weaknesses of all methods in the circumstances
  • The circumstances of the transactions
  • The information available
  • The circumstances of the entities involved, including the functions, assets and risks of the
    entities, any contracts between the entities, and the business strategies of the entities.

Any assessment of the relevant ‘arm’s length conditions must also consider how to achieve  consistency with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax

Where a taxpayer does not contemporaneously maintain documentation supporting its transfer pricing position, it will be deemed not to have a ‘reasonably arguable position’ for penalty purposes. This means that where a taxpayer’s assessment of income tax is increased to reflect a transfer pricing
adjustment, the base rate of penalties will automatically be at least 25% where such documentation is not maintained.

Fatca - Australia Signs Agreement with the United States of America

The Australian Government has recently signed an intergovernmental agreement with the United States of America (US) under the US Foreign Account Tax Compliance Act (FATCA). The objective of FATCA is to cause the reporting of foreign financial accounts held by US taxpayers in order to detect ‘US taxpayers’ who are concealing income from the US Internal Revenue Service (IRS). It is important
to note that the US taxes its citizens on world wide income whether they are resident in the US or not. Therefore US citizens who are residents of Australia may be ‘US taxpayers’ and therefore could be subject to these new reporting requirements.

From 1 July 2014, affected Australian financial institutions and certain other organisations that provide accounts will be required to obtain certain information about their account holders that are ‘US taxpayers’ and report it to the Australian Tax Office (ATO), which will then automatically report the information to the IRS. Those financial institutions that do not comply with FATCA will be subject to a 30% withholding tax on their US sourced income, in addition to Australian penalties for noncompliance
with the applicable Australian laws.

The reporting requirements apply to a broad range of Australian financial institutions, including banks, some building societies and credit unions, specified life insurance companies, private equity funds, managed funds, exchange traded funds and some brokers.

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