For those anxiously watching the Federal Budget 2019 for significant tax change for corporate Australia and multinationals, Tuesday night would have been a disappointment, with its focus on individual taxpayers and major spending announcements in the lead-up to the Federal Election. Nonetheless, there were announcements of changes which may provide more certainty, or prompt some review and rethink for business, their tax managers and their advisers: clarification of the hybrid mismatch rules, deferral of Division 7A reforms, and support for small business in the form of additional instant asset write-offs. In addition, the ATO will receive more funding – in the order of $1 billion – for enforcement and detection. Small business will get some relief in the form of instant asset write-offs, while big business with cross-border financing arrangements will need to consider the impact of impending clarification of the hybrid mismatch rules.
The big headline for the Government was delivering the first budget surplus ($7.1b for 2019-20) in 12 years, with surpluses forecast for 2020-21, 2021-22 and 2022-23 (approximately $45b of surpluses in total).
In our Federal Budget 2019 analysis, we explore some of the more relevant issues for business which were announced for the first time last night.
Clarifying the operation of the hybrid mismatch rules
The purpose of the hybrid mismatch rules is to prevent multinational corporations from exploiting differences in the tax treatment of an entity or a financial instrument under the laws of two or more jurisdictions.
For instance, the hybrid mismatch rules may apply in certain circumstances where a payment is deductible in one jurisdiction and non-assessable in the other jurisdiction, or where the one payment qualifies for a tax deduction in two jurisdictions.
These rules operate to neutralise these kinds of mismatches by cancelling deductions or including amounts in assessable income.
However, due to the breadth of the rules, a number of taxpayers and tax advisers have identified areas where the rules may apply in a potentially harsh manner, notwithstanding the clear absence of any mischief.
The Government has announced that it will make a number of minor amendments to Australia's hybrid mismatch rules to give greater certainty to taxpayers seeking to comply with the rules, by stipulating how the rules apply to multiple entry consolidated (MEC) groups and trusts, limiting the meaning of foreign tax, and specifying that the integrity rule can apply where other provisions have applied.
It is hoped that the proposed amendments will address the concerns that have been raised by taxpayers and tax advisers.
This measure is stated to apply to income years commencing on or after 1 January 2019, with the exception of the amendments to the integrity rule, which apply to income years commencing on or after 2 April 2019.
Div 7A reform deferred (again)
Proposed amendments to the dividend deeming provisions of Division 7A, announced as part of the Government's "Ten Year Enterprise Tax Plan — targeted amendments to Division 7A", have been delayed a further year with the expected start date pushed out to 1 July 2020.
As a specific anti-avoidance measure, Division 7A seeks to prevent private companies from making non-assessable distributions of profits to shareholders (or their associates), whether those distributions take the form of payments, the use of assets, the provision of loans, or the forgiveness of debts. However, for many family groups and their advisers, these provisions have been the source of significant uncertainty and when issues do emerge, their impact often compounds over a number of years, thereby creating very significant exposures.
The delay appears to be a direct result of the feedback Treasury received from stakeholder responses to its Consultation Paper released in October 2018, "Targeted Amendments to Division 7A". The proposed amendments draw on recommendations from the Board of Taxation, and include:
- simplified Division 7A loan rules to make it easier for taxpayers to comply;
- a self-correction mechanism to assist taxpayers to promptly rectify breaches of Division 7A;
- safe harbour rules for the use of assets to provide certainty and simplify compliance for taxpayers;
- technical amendments to improve the integrity and operation of Division 7A while providing increased certainty for taxpayers; and
- clarification that unpaid present entitlements (UPEs) come within the scope of Division 7A.
The Government considers that a delayed implementation date "will allow additional time to further consult with stakeholders on these issues and to refine the Government’s implementation approach, including to ensure appropriate transitional arrangements so taxpayers are not unfairly prejudiced." Given the feedback received highlighted that the proposed amendments to Division 7A touch on complex areas of the tax law, the Government's decision to delay their implementation date would appear to be sensible. In the meantime, it is hoped that in an audit context, the Commissioner uses the discretions he is legally afforded under Division 7A to assist taxpayers that are genuinely trying to do the right thing but are struggling with the uncertainties of the current law.
ATO enforcement gets a boost
Extension and expansion of the ATO Tax Avoidance Taskforce on Large Corporates, Multinationals and High Wealth Individuals
$1 billion in funding will be provided to the ATO over four years from 2019-20 to extend the operations of the ATO Tax Avoidance Taskforce.
The Taskforce was established in 2016 following the 2016-17 Federal Budget for the purpose of undertaking enhanced compliance activities in purported high tax risk sectors, and initially had funding until 2019-20.
This measure provides further funding until 2022-23 to allow the Taskforce to expand its activities including increasing its scrutiny of specialist tax advisers and intermediaries that promote tax avoidance schemes and strategies. The Government predicts this measure will raise approximately $4.6b in additional revenue.
Increasing engagement on tax and superannuation liabilities
$42.1 million will be provided to the ATO to increase activities to recover unpaid tax and superannuation liabilities. The 2019-20 Budget papers indicate that this particular measure will be directed to larger businesses and high wealth individuals (but not small businesses) to ensure on-time payment of their tax and superannuation liabilities.
Instant asset write-off to rise
The Government's Budget contains changes to the instant asset write-off rules which have implications for both small businesses (aggregated annual turnover of less than $10 million) and medium-sized businesses (aggregated annual turnover between $10 and $50 million).
Small businesses
After increasing the instant asset write-off for small businesses to $25,000 in January 2019, the Government has further increased this threshold to $30,000 in its 2019/20 Budget. Small businesses are now able to deduct purchases of eligible assets costing less than $30,000. Small businesses should be aware that this increased threshold applies to eligible assets that are first used, or installed ready for use, from Budget night and before 30 June 2020.
No changes have been made to the small business simplified depreciation pool. Small businesses may continue to place assets which cannot be immediately deducted into the pool, and depreciate those assets at:
- 15% in the first income year; and
- 30% each income year thereafter.
These measures have the potential to spur growth among small businesses which continue to play a vital role in the Australian economy. It will be interesting to see how this policy interacts with the Labor party policy regarding franking and elimination of refundable franking tax offsets for many taxpayers and whether the two policies combined encourage further investment of profits into purchases of new equipment (rather than paying dividends).
Medium-sized businesses
In addition, the instant asset write-off has been extended to medium-sized businesses, allowing them to immediately deduct purchases of eligible assets costing less than $30,000. The scheme operates differently in respect of medium size businesses, as not only must the assets first be used, or installed ready for use, from Budget night to 30 June 2020 to be eligible for the write-off, the asset must also have been acquired after Budget night. Medium-sized businesses should therefore take note that the purchase date of an asset will have an impact on their ability to claim the deduction.
Updating list of information exchange countries from 1 January 2020
The Australian Managed Investment Trust (AMIT) regime provides for a reduced withholding tax rate of 15%, instead of the default rate of 30% on certain distributions from AMITs to residents of countries that enter into effective information exchange agreements with Australia.
The list of information exchange countries will be updated effective from 1 January 2020. The list of information countries will be updated to include Curaçao, Lebanon, Nauru, Pakistan, Panama, Peru, Qatar and the United Arab Emirates, which will join the 114 other jurisdictions already on the list.
Amendments to ABN regime to impose new compliance obligations
Under the current Australian Business Number (ABN) rules, ABN holders are able to retain their ABN regardless of whether they are meeting their income tax return lodgement obligations or their obligation to update their ABN details.
Amendments will be made to the ABN regime to impose new compliance obligations. From 1 July 2021, ABN holders with an income tax return obligation will be required to lodge their income tax return and from 1 July 2022, ABN holders will be required to annually confirm their details on the Australian Business Register.
This measure is related in part to the 2018-19 Budget measure Black Economy Taskforce — consulting on a new regulatory framework for Australian Business Numbers.