The Treasurer has delivered the 2013-14 Budget. With the Treasurer noting that almost $170 billion has been wiped off tax receipts since the GFC, a series of measures increasing the tax burden of multinationals, foreign investors and the mining industry has been introduced. The key issues are discussed below.
1. Non-resident multinationals targeted
(a) Tightening of thin capitalisation
The thin capitalisation rules, which limit the debt deductions allowed for certain multinational enterprises, will be tightened from 1 July 2014, so that:
This will have a detrimental impact on debt-funded structures of Australian operations that are controlled by foreign residents.
The Board of Taxation has also been asked to consider ways to review the operation of the arm's length debt test, which allows these safe harbour tests to be exceeded in certain circumstances, but details are limited.
It isn't all bad news on thin capitalisation changes. Some concessions are being recommended. In particular, an additional test (the worldwide gearing test) will be extended to inbound investors and the threshold below which the thin capitalisation rules do not apply will be increased from $250,000 to $2 million.
(b) Non-resident's disposal of interests in Australian operations
Tightening of foreign residents CGT exemption
By way of background, non-residents that are not operating through an Australian permanent establishment are only taxed on capital gains from assets that are direct or indirect interests in Australian real property - which includes mining, quarrying and prospecting rights.
An indirect interest in Australian real property is determined by way of the principal asset test. The principal asset test looks at whether the majority of the value of the total assets of an interposed entity in which a non resident holds an interest can be attributed to Australian real property.
This principal asset test will be tightened with effect for CGT events occurring after 14 May 2013.
Australian real property will be expanded to include mining, quarrying and prospecting information, rights to such information and goodwill. This change is a consequence of the fact that foreign investors were able to sell interests in Australian mining, quarrying and prospecting companies without incurring Australian tax where the majority of the value of the company related to the goodwill, information and other non-real property assets. This change is limited to the definition of an indirect property interest. This measure will have a detrimental impact on foreign residents with interests in Australian mining businesses.
The definition of total assets will be reduced to exclude dealings between members of a consolidated group. Under the current law, through the creation of intra-group assets (such as a shareholder loan), an entity that otherwise has the majority of its value attributed to Australian real property on a consolidated basis may in fact not be land rich due to assets created between group members. This change is limited to arrangements between members of a consolidated group and does not apply to arrangements between other types of related entities. This measure will have a detrimental impact on foreign residents with interests in Australian tax consolidated groups with significant intra-group dealings (and, as a consequence, significant non-taxable assets).
This change may bring assets into the CGT net that may have previously been excluded from the scope of the provisions.
A new withholding tax for foreign residents' disposal of non-land assets
In addition, from 1 July 2016, a non-final withholding regime will also be introduced whereby the purchaser will be required to withhold and remit to the Australian Tax Office 10% of the gross proceeds from the sale of certain types of Australian real property.
The 10% withholding will apply whether the transaction is on capital or revenue account, but will not apply to residential property transactions under $2.5 million or to disposals by Australian residents.
The Government will explore options for removing the withholding obligation where it can be shown that no gain will arise.
(c) Removal of advantages of Multiple-Entry Consolidated groups
The Government intends to amend the tax consolidation rules to address a number of issues that were identified by the Board of Taxation. A review is to be undertaken of the MEC regime with the intention of focusing on the integrity of the regime and any tax minimisation practices undertaken by multinationals. The Assistant Treasurer has flagged that any changes enacted as a consequence of this review may apply from today. These amendments are intended to ensure that MEC groups, used by multinationals, cannot access tax benefits that are not available to Australian consolidated groups. Three examples of where the Assistant Treasurer will be focusing his attention are:
2. Australian multinationals also targeted
(a) Limitation of the participation exemption
Currently, the dividend income earned by an Australian corporate from an interest of 10% or more interest in a foreign company is not taxable. The scope of this concession will be limited such that a greater level of true equity ownership is required to qualify for this concession. (It will however be expanded to interests held through an interposed trust).
In addition, under the current law, companies are able to claim a deduction for the cost of funds on money borrowed to undertake such investments. This will be repealed such that the interest cost on such funding is no longer deductible.
If enacted, the measures will mean that the Australian company will no longer be able to claim interest deductions on the basis of deriving exempt dividends, and certain dividends received will no longer be exempt. These measures are intended to target cross-border structures which have the effect of shifting Australian profits offshore. This change in law is relevant to both Australian multinationals and foreign companies with significant assets in Australia.
(b) Tightening offshore banking unit (OBU) regime
The OBU regime, which allows a concessional tax rate of 10% for certain highly mobile financial sector activity, will be tightened, with effect from 1 July 2013, to:
3. Tightening of deductions for the mining industry
Mining rights and information that would currently benefit from an immediate deduction will instead be depreciated over 15 years or the effective life of the mine that they relate to. The change will apply to mining rights and information (including quarrying and prospecting rights and information used in extractive industries) from 14 May 2013 and the Government will consult on options to identify the life of a future mine. Where exploration is unsuccessful, any remaining undepreciated value will be immediately deductible.
As previously announced on 17 February 2013, the R&D concessions will be limited after 1 July 2013 to companies with an annual aggregate Australian turnover of less than $20 billion.