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May 11, 2018 Australia issues 2018-19 Federal Budget Executive summary On 8 May 2018, Australia's Federal Treasurer, Scott Morrison, delivered the Australian Federal Budget, Federal Budget 2018 – punting on growth. Accelerating growth has seen tax revenues above forecasts while spending has maintained a steady path. Cautious growth forecasts underpin future reform plans and the path to surplus. This Tax Alert focuses on the key tax measures announced and foreshadowed. Key business tax measures announced include:
Numerous integrity measures to be introduced will impact businesses and forward planning for financing and tax compliance purposes. These include:
Indirect tax and customs duty measures saw changes also. This Tax Alert outlines the key proposed tax measures, categorized into changes affecting:
Detailed discussion Business tax measures R&D offset significant changes The Government's response to the 2016 Review of the R&D Tax Incentive proposes significant changes to the R&D offsets (incentives). The changes will apply for income years starting on or after 1 July 2018. For companies with over AU$20m1 aggregated annual turnover (eligible for non-refundable offsets):
Many large global and domestic based companies will now only receive 4% support for every $1 of R&D expenditure. Only 18 months ago this same level of R&D expenditure by these companies received 10% support. This is not competitive with other local foreign jurisdictions to encourage R&D investment in Australia. For companies with under $20m aggregated annual turnover (eligible for refundable offsets):
During the consultation process, impacted businesses can provide feedback directly to the Government. Alternatively, in this regard, EY will make a submission to the Government and we would welcome input from impacted businesses. Significant global entity companies The definition of significant global entities (SGEs) is to be broadened for income years commencing on or after 1 July 2018. Broadly, an SGE is currently defined as either a "global parent entity" with annual global income of $1b or more or, an entity that is a member of a group of entities containing a global parent entity and the annual global income of the group is $1b or more. The SGE definitions are proposed to include (in addition to the current groups headed by a company required to provide consolidated financial statements) members of large groups headed by private companies, trusts, partnerships and also by investment entities (e.g., private equity funds). This broader range of companies will be subject to SGE higher tax penalties, obligations for general purpose financial statements and Country-by-Country reporting, and will need to adjust compliance and reporting processes. Transparency, black economy and ATO Big Data The full Government response to the Black Economy Taskforce Report is expected to bring in $5.3 billion over the next four years. From broadly 1 July 2019, key measures include: Business deductions
Transparency measures
Illegal phoenixing
Taxable payments reporting
Other
The ATO receives significant funding under the black economy, R&D, superannuation and other initiatives, including $318.5 million over the next four years for new ATO mobile strike teams, increased audit presence, black economy hotline, improved data analytics and educational activities. Businesses can expect significantly increased ATO activities including data analytics and systems reviews, and should prepare for efficient response management. Small business instant asset write-off for assets under $20,000 extended The instant asset write-off for assets under $20,000 for small businesses with aggregated annual turnover of less than $10m will be extended yet again, for assets first used or installed ready for use by 30 June 2019. The write off was due to expire 30 June 2018. Eligible entities will welcome the further time to access this concession. Retailers and suppliers of assets to small businesses will also benefit. Private group integrity measures Tax integrity announcements aimed at private groups include:
International tax Thin capitalization rules integrity changes Valuation of assets – to align the value of assets for thin capitalization purposes with the value included in their financial statements. The Government will tighten Australia's thin capitalization rules by requiring entities to align the value of their assets for thin capitalization purposes with the value included in their financial statements.
These measures may adversely impact entities that hold assets which have an accounting value that is significantly less than market value, and also where there is reluctance to revalue assets on its accounting balance sheet. Asset valuations for thin capitalization purposes have recently been contentious, with several ATO Tax Alerts and a number of significant ATO audit processes and disputes. The acceptance of valuations before the Budget will be a positive development in management of outstanding matters. This change will impact many sectors including not only services groups but also infrastructure and resources. Mining and exploration companies will need to consider the impact of the above in conjunction with soon to be released ATO guidance on the classification of "mining, quarrying and prospecting right" assets. The thin capitalization arm's-length debt test remains available and may be a potential option for some. Inbound investors – closing access to thin capitalization tests intended only for outbound investors Foreign controlled Australian consolidated entities and multiple entry consolidated groups that control a foreign entity will be treated as both outward and inward investment vehicles. This measure will ensure that inbound investors cannot access tests (such the worldwide gearing test for outward investors) that were only intended for outward investors. This change is applicable for income years commencing on or after 1 July 2019. Income tax base for international digital companies The Treasurer stated in the Budget speech that the "next big challenge is to ensure big multinational digital and tech companies pay their fair share of tax" and he has been working with the G20 to bring the digital economy into the global tax net. In a few weeks he will release a discussion paper that will explore options for taxing digital business in Australia. EY supports the issue of a paper to inform and engage the community that:
Digital economy companies need to prepare for consultation. Businesses with a digital presence in Australia need to assess the potential future implications of a broader digital transactions tax. Financial services and real estate Removing the CGT discount for MITS and AMITs Managed Investment Trusts (MITs) and Attribution MITs (AMITs) will no longer be eligible to apply the 50% CGT discount at the trust level from 1 July 2019. MITs and AMITs will still be able to distribute a capital gain that can be discounted in the hands of the beneficiary, when entitled. Given this measure will only apply to MITs and AMITs it is likely to create significant complexity and system development costs for custodians and administrators to comply with CGT rules as they apply to various types of investment entities. Further in relation to beneficiaries that have investments in non-MIT trusts, MITs and AMITs, this will increase the complexity of their tax affairs. The proposed changes align to the treatment of capital gains in the proposed Corporate Collective Investment Vehicle rules and for Listed Investment Companies. These further proposals, impacting the funds and asset management industry, will warrant careful review and involvement in consultation as they develop, given the significant complexity and systems issues for participants. Updated list of Information Exchange Countries Effective from 1 January 2019, the Exchange of Information (EOI) countries will be expanded. Fifty-six countries to be added include Austria, Lichtenstein, Luxembourg, the Philippines and Switzerland but not Hong Kong. The updated list in the regulations will allow investors to benefit from lower MIT withholdings. Deductions denied for vacant land Deductions for expenses associated with holding vacant land will be denied to address concerns they are being improperly claimed for expenses, such as interest costs, where the land is not genuinely held for the purpose of earning assessable income. We understand that this measure, applicable from 1 July 2019, is not intended to apply to landholders who carry on a business of property development. Thus it may have limited application. Indirect tax, customs and trade-related measures GST – online hotel bookings Following the extension of the GST to digital products and other services provided by offshore suppliers from 1 July 2017 and to low value imported goods from 1 July 2018, the GST will be extended to offshore sellers of hotel accommodations in Australia from 1 July 2019. The impact of the measure will be that offshore sellers of Australian hotel accommodations will pay GST on the mark-up over the wholesale price of the respective accommodation. It will ensure the same tax treatment of Australian hotel accommodations, whether booked through an offshore company or an Australian company. Alcohol excise refund scheme and concessional excise changes to benefit craft brewers and distillers As previously announced, the alcohol excise refund scheme cap will increase from $30,000 a year to $100,000, for all brewers and distillers, and the concessional draught beer excise rate will be extended to smaller kegs typically used by craft brewers and distillers. This applies from 1 July 2019. Illicit tobacco taskforce and tobacco duty measures As previously announced, the Government will further crackdown on the illicit tobacco trade with a new Illicit Tobacco Taskforce, new framework to protect tobacco duty, and further resources to combat illegal domestic production. Importers must have permits and pay all duty and tax liabilities when tobacco enters the country, rather than when it leaves a licensed warehouse and enters the domestic market, from 1 July 2019. New levy on sea cargo A new levy is to be imposed on port operators from 1 July 2019 in relation to sea cargo. The levy will be payable on a quarterly basis calculated at $10.02 per twenty foot container (or equivalent) and $1 per ton for non-containerized cargo. Relevant costs can be expected to be passed on to importers and should be taken into account in pricing and budgeting decisions. Removal of custom duty related to clinical trials From 1 July 2018 customs duty will no longer be payable on placebos and clinical trial kits imported into Australia simplifying the import process associated with conducting clinical trials in Australia. Extension of benefits for trusted traders Importers accredited under the Australian Trusted Trader Program are set to benefit from the removal of the requirement to produce country of origin documentation under certain free trade agreements. It is unclear when this benefit will commence and which free trade agreements it will impact. Accreditation under the Australian Trusted Trader Program is becoming increasingly attractive for importers and exporters. Parties involved in international trade should assess the potential benefits of pursuing accreditation. ——————————————— 1 Currency references in this Alert are to AU$. ——————————————— For additional information with respect to this Alert, please contact the following: Ernst & Young (Australia), Sydney
Ernst & Young (Australia), Melbourne
Ernst & Young (Australia), Perth
Ernst & Young (Australia), Canberra
Ernst & Young (Australia), Brisbane
Ernst & Young (Australia), Auckland
Ernst & Young LLP, Australian Tax Desk, New York
——————————————— PDF version of this Tax Alert
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