By Toby Eggleston, Nick Heggart, Ryan Leslie and Graeme Cooper
The first Budget of the new ALP Government contained only one tax surprise for the business community, as well as some additional details on the proposed changes to the thin capitalisation regime and the deductibility of royalties. But it serves as a reminder of the significant upheavals in international tax which are just around the corner.
New business tax measure announced in the Budget
- The tax treatment of off-market share buybacks will be aligned with the treatment of on-market buybacks– that is, no portion of the buyback price will be treated as a franked dividend. The Budget Papers say the measure “will apply from announcement on Budget night” which, hopefully, means buy-backs announced from Budget night rather than buy-backs completed after Budget night. This announcement will effectively end discounted off-market buybacks since it will no longer make economic sense for any shareholders to sell shares into a buyback if the company is offering a discount to market value. This measure will further limit the ability of companies to release franking credits to shareholders.
Refinements of existing measures
- The Budget announces some refinements to the 30% EBITDA thin capitalisation safe harbour test. It is still intended to take effect from 1 July 2023:
- denied deductions will be able to be carried forward for up to 15 years – there is no mention of the need to satisfy ownership or business continuity tests, but this may be a space to watch;
- a worldwide gearing-style test will remain, but will be based on an earnings-based ratio; and
- the arm’s length debt test will be retained but will apply only to debt raised from unrelated third parties – this is a substantial change to the current rules, and was not part of the previous announcement. It will have substantial implications in the infrastructure and real estate sectors, among others.
- There was also some development of the proposed denial of deductions for royalties paid to low tax jurisdictions by Significant Global Entities. In particular, a low tax jurisdiction will be one with:
- a tax rate of less than 15% (aligned with the proposed OECD Pillar 2 minimum tax rate); or
- a patent box regime where the recipient of the royalty does not have sufficient economic substance.
- For more information on these measures, see our Tax Insight and our podcast.
More resources for enforcement
- As mentioned by the Treasurer over the weekend, substantial additional funding is allocated to ATO compliance activity in the personal tax and shadow economy space. So far as MNEs are concerned, the Budget announces an additional $200m per annum increase in funding of the ATO’s Tax Avoidance Taskforce, and a one-year extension of its life to June 2026. The Budget estimates this investment in the Tax Avoidance Taskforce will collect almost $3bn in additional tax revenue over the next 4 years, at a cost of around $1bn.
Withdrawn and deferred measures
The Government has taken the opportunity in the Budget to announce its position on some items on the long list of announced but unenacted measures it inherited from previous governments.
The Government will not proceed with:
- the proposal to allow taxpayers to self-assess the effective lives of intangible depreciating assets;
- the draft legislation amending s. 974-80 of the debt / equity test;
- the proposed rewrite of the TOFA regime;
- measures relating to ‘asset based financing’, which were understood to be directed at Islamic financing and other similar transactions where no ‘interest’ is payable; and
- the introduction of a general limited partnership collective investment vehicle. (This is disappointing news for the private capital market as limited partnerships are the recognised standard vehicle globally for real estate, infrastructure, private equity and venture capital funds. It had also been hoped that this may lead to removing the trading trust restrictions in Division 6C, but that would appear to also be dashed. This announcement will not affect the current treatment of VCLPs or ESVCLPs.)
The Government will proceed with – but defer the start date of – some other measures, including –
- the reporting regime for the sharing economy; the start dates are deferred for one year; and
- the technical changes to TOFA announced in the 2021 Budget will now apply from Royal Assent, instead of 1 July 2022.
The unfinished agenda
Unhappily, the Budget did not shed any light on the Government’s attitude to some other entries on the list. For example, we are still awaiting news of any further developments with respect to:
- the draft legislation to rewrite the residence test for companies;
- the Board of Taxation’s proposal to rewrite the residence test for individuals;
- the Board of Taxation’s proposals to reform CGT rollovers;
- the proposed patent box regime to impose tax at 17% on income from certain medical and biotechnology patents;
- the reform of Division 7A deeming dividends from private companies; or
- the recommendations of the House of Representatives Standing Committee on Tax and Revenue to reform the tax treatment of employee share ownership schemes.