Implications of change in Government

Transcription

1 Australia 92 outstanding tax and superannuation measures revisited by new Government Implications of change in Government Since the last update, Australia has had a change of Government. The centre-right Liberal Party/National Party coalition is now in power, having defeated the centre-left Labor Party during the 2013 federal election, which was held on 7 September After taking power, the new Government has sought to reverse some of the tax changes introduced by the former Government. For example, the new Government has introduced legislation to repeal the carbon tax and the mining tax (although both are yet to pass the Senate) will proceed will be significantly amended will not proceed The new Government has also revisited the backlog of 92 announced but unlegislated tax and superannuation measures. It has announced that in respect of the outstanding measures: it will proceed with 34 three will be significantly amended, and it will not proceed with 55. Among others, the Government will (and already has in some instances) proceed with: thin capitalisation amendments announced as part of the Federal Budget to reduce the gearing limit from 75% to 60% of adjusted Australian assets (from 3:1 to 1.5:1 on a debt to equity basis) as discussed in the next section measures to unwind recent changes to the tax consolidation provisions (e.g. in relation to deductions for rights to future income ) announced as part of the Federal Budget the removal of the research and development (R&D) concession for very large businesses with over AUD20 billion in annual aggregate Australian turnover measures improving the integrity of the non-resident capital gains tax regime to explicitly include some intangible assets (e.g. mining information) in the valuation of taxable Australian real property assets targeting the deduction for exploration expenditure to genuine exploration activity

2 managed investment trusts measures and the third tranche of the investment manager regime to reduce compliance costs by introducing a de minimis threshold, the application of an arm s length rule, and the reporting of unders and overs corporate tax rate reduction of 1.5% for some tax payers, and a paid parental leave scheme for new mothers with six months paid leave based on their wage. The amendment to Australia s general anti-avoidance rule and the re-write of the transfer pricing rules which were discussed in the May 2013 issue of have now been enacted and are unaffected by the change in Government Federal Budget: tighter thin capitalisation regime The new Government has decided to proceed with the changes to Australia s thin capitalisation regime which were announced as part of the Federal Budget. In broad terms, the thin capitalisation regime limits deductions available for interest (and other defined debt deductions) for certain inbound and outbound investors. The changes, which will have effect for income years commencing on or after 1 July 2014, include: reduction in the safe harbour debt limit for general entities from 75% to 60% of adjusted Australian assets (from 3:1 to 1.5:1 on a debt to equity basis), which could reduce interest deductions by up to 20% reduction in the safe harbour debt limit for non-bank financial entities from 20:1 to 15:1 on a debt to equity basis increase in the safe harbour minimum capital for banks from 4% to 6% of the risk weighted assets of their Australian operations reduction in the worldwide gearing ratio from 120% to 100% and make it available to inbound investors, and increase in the de minimis threshold from AUD250,000 to AUD2 million of debt deductions per year. Australia s response to base erosion and profit shifting The base erosion and profit shifting (BEPS) debate has been active in Australia over the last year. The former Government had openly commented on the need for stronger rules to combat profit shifting and had endorsed the need for global action. The current Government has reiterated the need for Australia to be an active participant in the global debate through forums such as the Group of 20 (G20) and the Organisation for Economic Cooperation and Development (OECD). Australia s active involvement in the OECD s BEPS project is evident from Australia chairing the G20 in 2014 and the appointment of former Australian Assistant Treasurer, David Bradbury, as the Head of the Tax Policy and Statistics Division of the OECD. We also understand that officials from the Australia Taxation Office (ATO) and Treasury are actively contributing to the OECD working groups on specific BEPS responses. It could be said that the BEPS project commenced in Australia with the release in July 2013 of a scoping paper by the Treasury, entitled Risks to the Sustainability of Australia s Corporate Tax Base Scoping Paper (Scoping Paper). This paper looked at the broader issues surrounding multinational profit shifting and was developed in consultation with experts from the community sector, academics, business and the tax profession on the dedicated taskforce. The Scoping Paper set out the Government s assessment of the risks facing Australia s corporate tax system as a result of BEPS and made recommendations on actions Australia should take to address these risks. The recommendations contained in the Scoping Paper were aligned to the OECD s BEPS Action Plan. However, even before the release of the Scoping Paper, Australia had been active in targeting BEPS through domestic legislation. For example, Australia has recently strengthened its general anti-avoidance rule to address perceived weaknesses. It has also modernised its transfer pricing rules, so that they are more closely aligned with OECD transfer pricing guidance. In addition, Australia has introduced a number of new disclosure and transparency measures, such as the new international dealings schedule which forms an attachment to an annual income tax return for some taxpayers. The schedule represents a significant increase in disclosure requirements in respect of cross border transactions (e.g. volume, nature and type of transactions, transfer pricing method adopted, etc.). In a similar way, some taxpayers are now required to complete a reportable tax position schedule, which requires them to disclose information about their uncertain or contestable tax positions.

3 From a tax administration perspective, the ATO has established a new compliance project team, named as International Structuring and Profit Shifting, to review profit shifting risks. It is understood that the team consists of 30 officers experienced in international tax and will act as an advisory team to field auditors. It is also understood that a significant number of corporate taxpayers have been identified for a risk questionnaire, which could lead to more detailed investigations. The public debate around BEPS is likely to gain further momentum from recently introduced, transparencyfocussed, legislative measures which require the Commissioner of Taxation (Commissioner) to publish, in the public domain, specific tax information of large corporate taxpayers, on a named basis. In broad terms, the measures will apply to taxpayers that have total income equal to or exceeding AUD100 million for an income year, as reported in their annual tax return. The measures are stated to provide more information to inform public debate about tax policy, enable better public disclosure of aggregated tax revenue collected and improve information sharing between Government agencies. They also have the broader objective of discouraging large corporate entities from engaging in aggressive tax avoidance practices which is part of the government s broader BEPS agenda. License fees for use of software taxed as royalties A recent court decision has confirmed that Australian royalty withholding tax may apply to payments to foreign licensors under a software distribution agreement. In Task Technology Pty Limited Commissioner of Taxation [2014] FCA 38, the taxpayer sought declarations from the Federal Court that payments made to a Canadian resident entity pursuant to a software distribution agreement were not royalties under the double tax agreement (DTA) entered into by Australia and Canada (Australia/Canada DTA). If the payments were royalties, the taxpayer (Task Technology) had an obligation to deduct tax from the remittances to the Canadian resident entity (CWI). Briefly, under the distribution agreement (DA), Task Technology was licensed by CWI to market and distribute software developed by CWI, such distribution being pursuant to end user licences. Under the terms of the DA, Task Technology was authorised to make copies of the software for distribution to third parties (end users). As consideration for the benefits under the DA, Task Technology paid annual fees to CWI, with the fees paid including a percentage of the software and template license fees that Task Technology charged the end users. In its submission to the Court, Task Technology argued that the payments were not royalties because they satisfied Article 12(7) of the Australia/ Canada DTA which provided that Article 12 (Royalties) of that DTA did not apply to payments or credits made as consideration for the supply of, or the right to use, source code in a computer programme, provided that the right to use the source code is limited to such use as is necessary to enable effective operation of the programme by the user. In refusing Task Technology s application and finding in favour of the Commissioner, Justice Davies held that Article 12(7) did not apply in this instance, because the nature of the rights that Task Technology acquired under the distribution agreement, in relation to the use of software for which the payments were made, were not limited to such rights as were necessary for the effective operation of the software by Task Technology itself but for the commercial exploitation of that software by Task Technology through the right to copy the CWI software for sale to end users and the right to use the copyright for the purposes of developing its own templates to sell in conjunction with the CWI software.

4 Review of tax and patent box rules The Government is scheduled to undertake a comprehensive review of the tax system this year which will include a review of the R&D tax incentive programme. As part of this, the Government has stated that it will consider the merits of a patent box programme which would provide reduced tax rates on income attributable to the commercialisation of patented intellectual property (IP) developed and/or held in Australia. Patent box rules were recently introduced in the United Kingdom (UK) and have been in place in many other countries in Europe for some time. The UK patent box rules provide a 10% tax rate on revenues from patents (in contrast to the normal corporate tax rate of 26%), encouraging the participating company to retain their IP in the UK rather than migrating the IP to a lower tax jurisdiction. These patent box rules are seen as an effective way of attracting (or retaining) high-value manufacturing jobs. Notably, when the UK introduced its patent box regime in 2013, pharmaceutical company GlaxoSmithKline responded by shifting the development of its IP back to the UK and announced it would build its first manufacturing plant there in 40 years. Corporate tax rate reduction and paid parental leave scheme The Government has proposed a reduction in the corporate tax rate to 28.5% to commence from 1 July This proposal follows from the earlier attempt by the previous Government to reduce the corporate tax rate to 28% which could not proceed on the basis that the Business Tax Working Group s investigation was unable to identify appropriate tax expenditure savings measures. At the same time, the Government has proposed a 1.5% levy on companies earning more than AUD5 million in taxable income to fund a paid parental leave scheme, also to commence from 1 July In effect, the levy will offset the reduction in the corporate income tax rate. In broad terms, the proposed paid parental leave scheme will provide paid leave to women by reference to their salary (up to a cap of AUD75,000) for a period of six months. At the time of writing, there was some uncertainty around the terms of the scheme and whether it will proceed.

5 Stamp duty: recent developments Most Australian states and territories have recently made changes to their legislation to strengthen and expand their landholder duty regimes. Landholder duty operates as a de facto land transfer duty payable in relation to indirect acquisitions in land and land-type assets located in Australia. It recognises that investors are able to obtain an economic interest in land by acquiring interests in entities that hold land, therefore potentially saving on duty that would be otherwise chargeable in relation to direct land acquisitions. The rate of landholder duty is generally around 5.5% based on the market value of the land, fixtures, and in some jurisdictions, the goods of the landholder. The landholder duty regime has a wide ambit, as it looks through holding structures to determine whether there are underlying land interests in Australia. For example, landholder duty may be payable where a transaction occurs in an offshore entity with no direct Australian nexus if there is Australian land (or land type assets) held in the underlying group. Certain states have widened the definition of land in their stamp duty statutes to include items that are fixed to land by a physical connection, regardless of whether such items are fixtures under common law. Concurrently, we have also seen increased revenue authority emphasis on reviewing valuations and increased investigation activity. The increased valuation focus can be observed in recent cases where the courts appear to be taking a broader approach in determining what may form part of, or inform, the value of land. Payroll tax incentive schemes for hiring new employees Both New South Wales (NSW) and Tasmania have recently introduced payroll tax incentive schemes designed to stimulate sustained employment in those states. In NSW, the incentive scheme is referred to as the Jobs Action Plan. The scheme provides payments to employers who employ new employees in NSW on a full-time, part-time or casual basis. Key criteria to be satisfied include an increase in the total full-time equivalent employee head count and that the employee remains employed for 12 and/or 24 months. Amounts payable at the 12 month anniversary are up to AUD3,000 and amounts payable at the 24 month anniversary are up to AUD3,000. This programme is scheduled to be available for new employees hired up to 30 June In Tasmania, the incentive scheme is referred to as the Employment Initiative Scheme. The scheme provides a rebate to employers for new full-time or part-time positions created between 10 December 2012 and 30 June 2014 and maintained until at least 30 June It is also necessary to increase the employer s full-time equivalent employee head count in Tasmania over this period. Employers must lodge a return and pay their payroll tax by the due date to be eligible for the rebate for the same period. Employers can claim for payment of a rebate of payroll tax paid based on the wages paid to employees who were hired during the period of 10 December 2012 and 30 June The rebate will be paid monthly/annually depending on the timing of lodging payroll tax returns.