Federal Budget

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3 Table of Contents FEDERAL BUDGET SUMMARY Preface... 1 Challenges identified in the 2015 Intergenerational Report... 1 Some facts about the Australian economy Federal Budget the key information... 5 What we have been told so far... 5 Some leaks and other kite flying... 7 INCOME TAX... 8 Announcements Announcements Federal Budget Jobs for Families childcare package Federal Budget Strengthening Australia s foreign investment framework Federal Budget Increase in supervisory levies Income Concepts Residency Federal Budget Residency changes for temporary working holiday makers (Backpackers) Income Foreign Income Federal Budget Income tax exemption for ADF personnel deployed overseas Federal Budget Removing the tax exemption for government employees Capital Gains Tax Small Business CGT Concessions Federal Budget CGT roll over for small business restructures Deductions Work related Expenses Federal Budget Modernising the calculation of work related car expenses Tax Offsets Personal Tax Offsets May 2015 i

4 Federal Budget Zone Tax Offset unavailable to FIFO and DIDO workers Research and Development Tax Offset Federal Budget R&D tax offset $100 million expenditure cap Individual Taxpayer Issues Medicare Levy Federal Budget Increasing the Medicare levy low income thresholds Student Assistance Federal Budget Higher Education Loan Programme recovery of repayments from overseas debtors Company and Shareholder Issues Employee Share Schemes Federal Budget Further changes to tax treatment of employee share schemes Trust Issues Managed Investment Trusts Federal Budget Transition period for new tax system for managed investments trusts Special Classes of Taxpayers Primary Producers Federal Budget Accelerated depreciation for primary producers. 21 Small Business Entities Federal Budget Expanding accelerated depreciation for small businesses Federal Budget Immediate deduction for professional expenses Federal Budget Tax cuts for small business Exempt Organisations and Funds General Federal Budget Listing of the Global Infrastructure Hub as a tax exempt entity Federal Budget List of DGRs updated International Issues General Federal Budget Global fight against tax evasion Federal Budget Modernising the Offshore Banking Unit regime Transfer Pricing Federal Budget New transfer pricing documentation standards ii 12 May 2015

5 AVOIDANCE AND TAX PLANNING Anti Avoidance General Federal Budget Serious Financial Crime Taskforce established to address financial and tax fraud General Anti avoidance Rule Part IVA Federal Budget Multinational anti avoidance law GOODS AND SERVICES TAX GST Announcements Announcements Federal Budget GST to apply to digital products and services imported by consumers Federal Budget Extension of GST compliance program Federal Budget Reverse charge for going concerns and farmland not proceeding FRINGE BENEFITS TAX FBT Announcements Announcements Federal Budget FBT exemption for electronic devices Fringe Benefits Tax Issues Meal Entertainment Fringe Benefits Federal Budget Cap on salary sacrificed meal entertainment SUPERANNUATION Superannuation Issues Superannuation, Retirement and Termination Payments Federal Budget Relaxing criteria for release of super for terminal medical conditions TAX ADMINISTRATION Administration Issues General Federal Budget Statutory remedial power for the Commissioner of Taxation May 2015 iii

6 Charges, Penalties and Offences Penalties Federal Budget Commonwealth penalty units Federal Budget Double penalties on multinational tax avoidance 43 OTHER FEDERAL TAXES Federal Announcements and Developments Announcements and Developments Federal Budget Exemption from LCT for cars acquired by endorsed public museums and public art galleries iv 12 May 2015

7 Federal Budget summary Preface On 12 May 2015, the Treasurer, Joe Hockey, delivered his second Federal Budget which he recently foreshadowed was to be a budget focused on better control of government spending. 1 He said that it would be responsible, measured and fair. Given that Australia has just started (again) the process of re designing its tax system for the future, a Budget that delivers major structural change would pre empt the design process. The Treasurer identified the challenge for the Budget as too much government spending i.e. the expenditure on welfare, infrastructure and handouts that was locked in by the previous government against receipts that did not materialise under the Mining Tax. 2 Having learned its lesson from the general resistance to last year s Budget repair measures, the Government has said that it will implement the required structural reform of spending progressively rather than immediately and dramatically and therefore the Government will have to accept a slower path of deficit reduction. In the words of the Governor of the Reserve Bank of Australia, Glenn Stevens: On the fiscal front, the government has little choice but to accept the slower path of deficit reduction over the near term. But over the longer term, hard thinking still needs to occur about the persistent gap we are likely to see (under current policy settings) between the government s permanent income via taxes and its permanent spending on the provision of good and services. 3 Challenges identified in the 2015 Intergenerational Report The challenges which the future tax system will have to address and which the Federal Budget must take into account were set out in the 2015 Intergenerational Report which was released on 5 March The Intergenerational Report assesses the long term sustainability of current Government policies. It analyses the key drivers of economic growth population, participation 4 and productivity and what the projected changes in these drivers will mean for our standard of living The Treasurer noted that Australia s social services system accounts for over a third of all government spending and is growing at the rate of over five per cent per year. The Treasurer s speech to the Australia Israel Chamber of Commerce, Crown Towers Melbourne on 22 April Glenn Stevens, Governor of the Reserve Bank of Australia. Address, titled The World Economy and Australia to The American Australian Association luncheon, New York USA on 21 April Participation refers to the proportion of people aged 15 years and over who are actively engaged in the workforce. See: Intergenerational Report 12 May

8 The challenges identified include: an aging population that is living longer: a boy born today will, on average, live to 91 years of age; a girl will live to 93 years of age; currently there are about four people aged between 15 and 64 for every person aged 65 and over; in 2055, it is expected that the number will halve; 6 a declining participation rate: the proportion of Australians working is expected to fall from 64.6 per cent in to 62.4 per cent in ; the female participation rate, although increasing 7, is lower than in some other advanced economies such as Canada and New Zealand; productivity (about working more efficiently or producing more or better goods and services with the same level of resources) has slowed: productivity growth through the 2000s was an average of 1.5 per cent compared to an average of 2.2 per cent during the 1980s and 1990s. Both the Prime Minister, Tony Abbott 8, and the Treasurer, Joe Hockey 9, are on record as stating that there were no plans to increase taxes. Mr Hockey recently stated that the falling taxes as a result of the falling commodity prices and lower than expected wage growth 10 will not be replaced with new taxes. Indeed, the objective of the Tax reform process, which commenced with the release of the Discussion paper titled Re: think on 30 March 2015, is to achieve a better tax system that delivers taxes that are lower, simpler, fairer The Treasurer, Joe Hockey. Tax and our Future, Address to The Tax Institute, National Convention, Gold Coast, 20 March The Intergenerational Report notes on page viii that in there were 7.3 people for every person aged 65 and over. The participation rate for females aged between 15 and 64 is around 66 per cent. It is projected to increase to 70 per cent by It was 46 per cent in Mr Abbott was quoted in the Sydney Morning Herald on 17 April 2015 in the article by Nassim Khadem titled Prime Minister Tony Abbott rules out changes to negative gearing as saying: I would say to the people who are running around looking to increase taxes on people, what we really need to do is to get our spending under control. Australia does not have a problem with taxes being too low; Australia has a problem with spending being too high because of the excesses of the former government. Mr Hockey has often said that no country has ever taxed its way to prosperity see his speech titled Australia s Economic Prosperity delivered on 31 March 2015 to the Institute of Public Affairs, Melbourne and his more recent speech to the Australia Israel Chamber of Commerce, Crown Towers Melbourne on 22 April He also made the same point in his doorstop interview in Melbourne on 22 April Wage growth can lead to an increase in tax collections as a result of the effect of bracket creep which occurs when rises in nominal income from employment and investments push people into higher income tax brackets over time and thereby increasing the personal income tax burden May 2015

9 Some facts about the Australian economy The macro view of the Australian economy is critical to the Government s policy settings for the future. As advisers and business owners, we tend to focus on the micro view and on things which directly affect us. It may nevertheless be useful to our own planning for the future to know some of the facts which the Treasurer has highlighted in recent speeches and interviews in the lead up to his handing down the Federal Budget. Mr Hockey has identified the following facts as potentially providing opportunities for growth: 70 per cent of the Australian economy is services including tourism and education, yet it represents only 17 per cent of our exports 11 ; mining and resources are around 10 per cent of our economy, but represent over 50 per cent of our exports 11 ; financial services represent more than 50 per cent of the value of the ASX ; and the small business sector employs about 4.5 million people and contributes a third of Australia s output per cent of the Federal Government s tax collected is from personal and company taxes: just 12 companies pay one third of all company tax; and just two per cent of taxpayers pay a quarter of all personal income tax. 12 Australia is currently borrowing $100 million each and every day just to pay our day to day bills. 12 The Federal Budget which sought to rein in the projected debt of $667 million inherited from the previous Government 13 met with resistance and some of its measures were amended or delayed by the Senate with a consequential impact on the Budget position. The MYEFO 14 reported that the underlying cash deficit for the income year was expected to be $40.4 billion. Actual figures will be available in September The graphs below, reproduced from the MYEFO, illustrate the impact of the Government pursuing alternative approaches. The following graph depicts the proportion of GDP that would be represented by projected government spending depending on alternative policy scenarios The Treasurer, Joe Hockey. Address to the Australia Israel Chamber of Commerce, Crown Towers, Melbourne, on 22 April The Treasurer, Joe Hockey. Australia s economic prosperity, Address to the Institute of Public Affairs, Melbourne, 31 March Craig Emerson reported in the Financial Review on Tuesday 12 May 2015, that interest payments on public debt will soon exceed $1 billion per month. Page 5 of the MYEFO states that The MYEFO showed that, without action, the budget would not return to surplus for a decade, and debt would reach $667 billion by and still be rising. The 2015 Intergenerational Report states on page 46 that the net debt for the income year is expected to be $245 billion i.e per cent of GDP. 15/content/myefo/download/01_part_1.pdf. The MYEFO is a mid year budget report which provides updated information to allow the assessment of the Government s fiscal performance against its fiscal strategy. Commonwealth of Australia, The 2015 Intergenerational Report, at page May

10 The projected government spending has implications for the level of government debt as follows 16 : 16 Commonwealth of Australia, The 2015 Intergenerational Report, at page May 2015

11 Federal Budget the key information The Government s MYEFO reported a deterioration in the Budget position of $43.7 billion over the forward estimates as a result of the weaker than expected wage growth, lower tax receipts and the costs associated with the Senate s deferral of a number of key measures of the Budget and negotiations concerning others. 17 Estimates Actual Actual Budget Budget Budget Budget Underlying cash position 19 ($48.5b) ($41.1b) ($35.1b) ($25.8b) ($14.4b) ($6.9b) Economic growth 2.5% 2.5% 2.75% 3.25% 3.5% 3.5% Unemployment rate 5.9% 6.25% 6.5% 6.25% 6.0% 5.75% CPI inflation 3.0% 1.75% 2.5% 2.5% 2.5% 2.5% What we have been told so far The Budget will be dull and much less exhilarating than last year s Budget. Cabinet s razor gang should not cut as deeply as they did last year. There would be significant changes in both childcare funding and small business through an expected tax cut. 20 The Government will consider several aspects of the superannuation system as part of the review of the tax system. The Government is also considering improving the way in which the superannuation system transforms savings into retirement income streams. 21 The Financial Services Inquiry (FSI) highlighted the concern among retirees that they would outlive their benefits and therefore they failed to draw down their superannuation balances in retirement. This results in lower living standards and significant transfers to beneficiaries. The Government will review regulatory obstacles to the development of better post retirement products. 22 The Budget would provide assistance to innovative small businesses The MYEFO estimates the costs of Senate delays and negotiations to be $10.6 billion over the forward estimates. The final budget outcome is expected to be released by the end of September Underlying cash position a reduction in the underlying cash balance means that the government must borrow more and as a consequence the interest cost on the higher public debt increases. The Prime Minister, Tony Abbott, reported by Emma Griffiths on 17 March 2015 on the ABC News website at: /abbott says budget will be dull/ Commonwealth of Australia, The 2015 Intergenerational Report, at page xix. Commonwealth of Australia, The 2015 Intergenerational Report, at page 67. The Government has stated that it will respond to the FSI recommendations later in The Treasurer, Joe Hockey. Address to the Australia Israel Chamber of Commerce, Crown Towers, Melbourne on 22 April May

12 Recent announcement On 6 May 2015, the Treasurer, Joe Hockey, in a joint media release with the Minister for Small Business, Bruce Billson, announced that: 1. From July 2016, new start ups will be able to immediately deduct professional costs associated with starting up a business. 2. Business registration will be streamlined with a single online registration site. 3. Small business owners will be able to change the legal structure of the business without incurring a CGT liability. 4. The obstacles to crowd sourced equity funding will be removed. 5. The Government will investigate whether some of the regulatory requirements for companies can be removed or relaxed. Last year s Budget measure to constrain increases in the pension to the CPI is off the table. Instead, the Government proposes to 24 : reverse the reduction in taper rates 25 which was introduced by the Howard Government in 2007 the current taper rate of $1.50 for every $1,000 in assets above the minimum threshold for a full pension will be increased; the asset free area i.e. the value of assets that a pensioner can have in addition to their family home and still qualify for the full pension will increase from $202,000 to $250,000 for single home owners and from $286,500 to $375,000 for couple home owners; and reduce the maximum asset threshold for qualifying for a part pension. 26 Negative gearing in connection with real property will not be restricted in the Budget changes, if any, should be considered as part of the White Paper discussion Media Release by the Minister for Social Security, Scott Morrison, on 7 May 2015, titled Fairer access to a more sustainable pension : releases/fairer access to a more sustainablepension Prior to the reduction in the taper rates which was introduced by the Howard Government in 2007, for every $1,000 in assets above the minimum threshold for a full pension, fortnightly payments were reduced by $3. The Howard Government changed this to $1.50 which meant that an extra 110,000 people became entitled to a part pension. Currently, a couple will qualify for a part pension if their assets do not exceed $1.15 million plus the family home. The Treasurer, Joe Hockey. Doorstop interview in Sydney on 23 April May 2015

13 Some leaks and other kite-flying The following measures have been listed as being in the Budget : 1.5 per cent tax cut and $10,000 write off; incentives to encourage older unemployed people to retrain and get another job; no double dipping into government and employer paid parental leave; extending GST to online purchases of low value imports and media downloads 28 ; imposing a bank deposits tax; imposing a cap of $5,000 on meal and entertainment expenses that employees of not forprofit organisations can salary sacrifice 29 ; and expansion of tax avoidance legislation to target 30 multinationals that do not pay tax in Australia The Financial Review which reported this measure on 12 May 2015 under What s in the budget on page 6 also reported on page 4 that the budget will not include extending the GST to goods valued at less than $1,000 that are imported over the internet. Mr Hockey said there was still trouble trying to determine the threshold and the taxing point. This change was recommended by the Productivity Commission inquiry in 2013 which gave the example of Jane (not her real name) who salary sacrificed her $40,000 wedding. 12 May

14 Income Tax Announcements 2015 Announcements Federal Budget - Jobs for Families childcare package The Government confirmed in the Federal Budget that it would make child care simpler, more affordable, accessible and flexible by: abolishing the current Child Care Benefit, Child Care Rebate and Jobs, Education and Training Child Care Fee Assistance programmes; introducing a single means tested Child Care Subsidy (CCS) for families with incomes of: < approximately $60,000 provided with a CCS of 85% per child of the lower of the actual fee or a benchmark price which will taper to 50% per child for family incomes of approximately $165,000 and above; < $180,000 not subject to a cap on the amount of subsidy they receive; $180,000 a cap of $10,000 per child for the total value of subsidies received. As part of the Federal Budget, the Treasurer, Joe Hockey, confirmed that the Government would make child care simpler, more affordable, accessible and flexible though its Jobs for Families child care package, which includes: START DATE 1 July abolition of the current Child Care Benefit, Child Care Rebate and Jobs, Education and Training Child Care Fee Assistance programmes; 2. introduction of a single means tested Child Care Subsidy (CCS) for all families subject to a new activity test for up to 100 hours of subsidised care per child per fortnight paid directly to approved care service providers; (a) (b) (c) for families on incomes of less than approximately $60, the CCS will be 85 per cent per child of the lower of the actual fee or a benchmark price. This will reduce to 50 per cent for family incomes of approximately $165, and above at the time of implementation. for families on incomes under $180, there will no longer be a cap on the amount of subsidy they receive. for families on incomes of $180, and above a cap of $10,000 per child at the time of introduction will be established for the total value of subsidies. 30 The Overview: Families Package on page 6 reports these thresholds as $65,000, $170,000, and $185, May 2015

15 3. hourly benchmark prices at the time of introduction will be: (a) (b) $11.55 for Long Day Care, $10.70 for Family Day Care, (c) $10.10 for Out of School Hours Care; and (d) $7.00 for the In Home Care (Nannies) pilot commencing on 1 January a CCS for up to 24 hours per fortnight will be provided to children from families with incomes of less than approximately $60, per year who do not meet the activity test to ensure continued access to early childhood learning. The Government will also provide targeted support to disadvantaged or vulnerable families to address barriers to accessing child care through the Child Care Safety Net i.e. the Additional Child Care Subsidy (ACCS), a new Inclusion Support Programme (ISP) and the Community Child Care Fund (CCCF). Note This measure was previously announced by the Minister for Social Services on 10 May 2015 in his Media Release titled Job for Families child care package delivers choice for families. Source: Budget Paper No. 2 page Budget Overview Paper titled Families Package Federal Budget - Strengthening Australia s foreign investment framework The Government confirmed in the Federal Budget that it will take action to strengthen the integrity of the foreign investment framework through: improved compliance and enforcement; stricter penalties; the introduction of application fees; and more scrutiny and greater transparency for agricultural investments. As part of the Federal Budget, the Treasurer, Joe Hockey, confirmed that the Government will take action to strengthen the integrity of the foreign investment framework through: START DATE Generally 1 December improved compliance and enforcement: (a) the Government will provide $19.7 million over four years from to Treasury and $47.5 million to the ATO to strengthen enforcement; and (b) all residential real estate functions will be transferred to the ATO which will enforce compliance through sophisticated data matching systems and specialised staff with compliance expertise; 31 The Overview: Families Package on page 7 reports this threshold as $65, May

16 2. stricter penalties increased criminal penalties and a new civil pecuniary penalties regime will be introduced for breaches of the Foreign Acquisitions and Takeovers Act 1975 e.g. the maximum civil penalty imposed on an individual third party that assists a foreign investor to breach the rules will be 250 penalty units or $45, ; 3. the introduction of application fees to be imposed on all real estate, business and agricultural foreign investment proposals; and 4. more scrutiny and greater transparency for agricultural investment by lowering screening thresholds 33 and introducing a foreign ownership register with information provided directly to the ATO. Note This measure was previously announced by the Treasurer on 2 May 2015 in his Media Release titled Government strengthens the foreign investment framework. Source: Budget Paper No. 2 page Federal Budget - Increase in supervisory levies The Government will increase the supervisory levies payable by financial institutions. The Government will raise additional revenue of $46.9 million over four years from by increasing the supervisory levies payable by financial institutions. This will fully recover the cost of superannuation activities undertaken by the ATO and the Department of Human Services. Source: Budget Paper No. 2 page As part of the Federal Budget, it was announced that the value of a penalty unit will increase from $170 to $180 with effect from 31 July A $55 million threshold for investments in agribusiness will be introduced from 1 December May 2015

17 Income Concepts Residency Federal Budget - Residency changes for temporary working holiday makers (Backpackers) The tax residency rules will be changed from 1 July 2016 to treat most temporary working holiday makers in Australia as non residents for tax purposes regardless of how long they are in Australia. This means that they will not be entitled to the tax free threshold and will not benefit from the low income tax offset (LITO). As part of the Federal Budget, the Treasurer, Joe START DATE Hockey, announced that the Government will amend the tax 1 July 2016 law to change the tax residency rules from 1 July 2016 to treat most people who are temporarily in Australia for a working holiday as non residents for tax purposes, regardless of how long they are here. This means that they will not be eligible for the tax free threshold, presently $18,200, and will be taxed at 32.5 per cent from their first dollar of income. Currently, a working holiday maker can be treated as a resident for tax purposes if they satisfy the tax residency rules, typically that they are in Australia for more than six months. This means they are able to access resident tax treatment, including the tax free threshold, the low income tax offset and the lower tax rate of 19 per cent for income above the tax free threshold up to $37,000. The residence status of working holiday makers was recently at issue in three cases before the Tribunal. 34 Source: Budget Paper No. 2 page Koustrup and FCT [2015] AATA 126, Jaczenko and FCT [2015] AATA 125 and Clemens and FCT [2015] AATA May

18 Income Foreign Income Federal Budget - Income tax exemption for ADF personnel deployed overseas Tax relief will be provided to Australian Defence Force personnel deployed on the following operations: Operation AUGURY a full income tax exemption; and Operation HAWICK an overseas forces tax offset. As part of the Federal Budget, the Treasurer, Joe Hockey, announced that tax relief would be provided to Australian Defence Force personnel deployed on the following operations: Operation AUGURY a full income tax exemption; and Operation HAWICK an overseas forces tax offset. Source: Budget Paper No. 2 page Federal Budget - Removing the tax exemption for government employees The Government will remove a tax exemption currently available to government employees deriving foreign income while delivering Official Development Assistance overseas for more than 90 continuous days. As part of the Federal Budget, the Treasurer, Joe START DATE Hockey, announced that, from 1 July 2016, the Government will remove an income tax exemption available to government 1 July 2016 employees who earn foreign income while delivering Official Development Assistance (ODA) overseas for more than 90 continuous days. Important This measure will not affect Australian Defence Force and Australian Federal Police personnel delivering ODA for a charity or a private sector contracting firm. Source: Budget Paper No. 2 page May 2015

19 Capital Gains Tax Small Business CGT Concessions Federal Budget - CGT roll-over for small business restructures Small businesses with an aggregated annual turnover of less than $2 million will be able to change their legal structure without attracting a CGT liability. This measure will assist small businesses to change to a more suitable legal structure as the business becomes more established. As part of the Federal Budget, the Treasurer, START DATE Joe Hockey, announced that small business owners will be able 1 July 2016 to change the legal structure of their business without incurring a liability to CGT. This is expected to provide greater flexibility for growing businesses, as well as reduce risk and complexity. CGT roll over relief will apply if: the business has aggregated turnover of less than $2 million; there is a change of legal structure; and the same owners are maintained. This measure was first announced on 6 May 2015, in a joint media release from the Treasurer and the Minister for Small Business, Bruce Billson, as part of a package of measures supporting start ups and entrepreneurship. Source: Budget Paper No. 2 page 18 Budget 2015: Growing Jobs and Small Business Treasurer s Joint Media Release 6 May May

20 Deductions Work-related Expenses Federal Budget - Modernising the calculation of work-related car expenses The Government will modernise the methods for calculating work related car expense deductions from the income year by: removing the 12 per cent of original value and the one third of actual expenses methods; and replacing the current rates under the cents per kilometre method which are based on engine size with a single rate of 66 per cent per kilometre, irrespective of engine size. The Government will retain the log book method. As part of the Federal Budget, the Treasurer, Joe Hockey, announced that the Government will modernise the methods of calculating work related car expense deductions under Div 28 of the ITAA 1997 from the income year. The 12 per cent of original value and the one third of actual expenses methods will be removed because they are used by less than two per cent of taxpayers who claim work related car expenses. The cents per kilometre method will be modernised by replacing the three rates which are based on engine size with a single rate of 66 per cent per kilometre, irrespective of the engine size. This change is intended to better align deductions with the average costs of operating a motor vehicle. The Commissioner will be responsible for updating the rate in following income years. The log book method of calculating expenses will be retained. The proposed changes may be summarised as follows: START DATE income year Method under Division 28 Current law Proposed new law 12 per cent of original value Available No longer available One third of actual expenses Available No longer available Cents per kilometre Available at one of three rates which are based on engine size Available at single rate of 66 cents per kilometre irrespective of engine size Log book Available Available May 2015

21 Important These measures will not affect leasing and salary sacrifice arrangements. Source: Budget Paper No. 2 page 27 Tax Offsets Personal Tax Offsets Federal Budget - Zone Tax Offset unavailable to FIFO and DIDO workers From 1 July 2015, fly in fly out (FIFO) and drive in drive out (DIDO) workers will be excluded from the Zone Tax Offset (ZTO) if their normal residence is not within a zone. Currently, a worker who resides or works in a remote area for more than 183 days in an income year is eligible for the ZTO. Background START DATE The Zone Tax Offset (ZTO) is a concessional tax offset available 1 July 2015 to individuals in recognition of the isolation, uncongenial climate and high cost of living associated with living in identified remote locations. Eligibility is based on defined geographic zones. Currently, to be eligible for the ZTO, a taxpayer must reside or work in a specified remote area for more than 183 days in an income year. It is estimated that around 20 per cent of all claimants do not actually live full time in the zones. Proposed change As part of the Federal Budget, the Treasurer, Joe Hockey, announced that the Government will exclude fly in fly out (FIFO) and drive in drive out (DIDO) workers from the ZTO where their normal residence is not within a zone. For those FIFO workers whose normal residence is in one zone, but who work in a different zone, they will retain the ZTO entitlement associated with their normal place of residence. Source: Budget Paper No. 2 page May

22 Research and Development Tax Offset Federal Budget - R&D tax offset $100 million expenditure cap The Tax Laws Amendment (Research and Development) Act 2015 amended s of the ITAA 1997 to introduce a cap of $100 million on the amount of eligible research and development (R&D) expenditure for which companies can claim a tax offset at a concessional rate under the R&D tax incentive. Expenditure beyond the $100 million cap will receive a lower offset at the company tax rate. The Act contains a sunset clause which provides that, on 1 July 2024, the $100 million cap will be repealed and the legislation restored to its original state. The Government has introduced a cap of $100 million on the amount of eligible research and development (R&D) expenditure for which companies can claim a tax offset at a concessional rate under the R&D tax incentive. Expenditure beyond the $100 million cap will receive a lower offset at the company tax rate. 35 START DATE 1 July 2014 The amendments were made by the Tax Laws Amendment (Research and Development) Bill 2015 which received Royal Assent on 5 March 2015 as Act No. 13 of The new law amended s of the ITAA 1997 to deny R&D entities with notional R&D deductions exceeding $100 million from accessing the R&D tax offset. R&D entities whose notional deductions exceed the $100 million cap are entitled to a tax offset equal to the sum of: the percentage (referred to in the table in s (1)) of $100 million; and the product of the excess and the corporate tax rate. New s (3) of the ITAA 1997 Schedule 1 of Part 2 to the Act includes provisions for the changes to be reviewed five years following Royal Assent and contains a sunset clause which will, on 1 July 2024, repeal the abovementioned amendments and restore the legislation to its state prior to the amendments. Source: Budget Paper No. 2 page This measure replaces the measure announced by the previous Government in the Federal Budget, A Plan for Australian Jobs Research and Development tax incentive better targeting, and was included as a decision taken but not yet announced in the Mid Year Economic and Fiscal Outlook. This Bill was originally introduced into Parliament on 14 November 2013 as the Tax Laws Amendment (Research and Development) Bill May 2015

23 Individual Taxpayer Issues Medicare Levy Federal Budget - Increasing the Medicare levy low income thresholds The Government will increase the Medicare levy low income threshold from the income year for: singles; families; and single seniors and pensioners. The increase adjusts the thresholds to take into account increases in the CPI. As part of the Federal Budget, the Treasurer, Joe START DATE Hockey, announced that, with effect from the income From the income year year, the Government will increase the Medicare levy low income threshold for singles, families and single seniors and pensioners. The increase adjusts the thresholds to take into account increases in the Consumer Price Index (CPI). The Medicare levy low income thresholds are detailed in the table below. Income year Individuals Families Pensioners below age pension age Senior Australians + amount for each dependent child/student $20,896 $35,261 $33,044 $3, $20,542 $34,367 $32,279 $3, $20,542 $33,693 $32,279 $3, $19,404 $32,743 $30,451 $30,685 $3, $18,839 $31,789 $30,439 $30,685 $2, $18,488 $31,196 $27,697 $29,867 $2, $17,794 $30,025 $25,299 $28,867 $2,757 Source: Budget Paper No. 2 page May

24 Student Assistance Federal Budget - Higher Education Loan Programme - recovery of repayments from overseas debtors Graduates who reside overseas for more than six months will be required to repay their HELP debt as if they resided in Australia. Repayments will not be required unless the graduate s worldwide income exceeds the minimum repayment threshold which currently is $53,000. START DATE Background Income year onwards The Minister for Education and Training, Christopher Pyne, announced in a Media Release on 2 May 2015 that the Government would extend the Higher Education Loan Programme (HELP) repayment framework to debtors residing overseas. The Minister indicated in his media announcement that currently graduates living overseas do not have to lodge an Australian tax return and there is no way to know if they are earning above the threshold that triggers HECS repayments. Under the current system, overseas debtors are able to make voluntary HECS repayments to the ATO but are not under any legal obligation to do so. Proposed change From , HELP debtors residing overseas for six months or more will be required to make repayments of their HELP debt if their worldwide income exceeds the minimum repayment threshold at the same repayment rates as debtors in Australia. This means that all Australian graduates living offshore will be required to start making HECS payments based on their income in the tax year if they earn above the threshold of $AUD 53,000. This will apply where the graduate has moved overseas for more than six months from July Source: Budget Paper No. 2 page 9; and Minister for Education and Training s Media Release 2 May May 2015

25 Company and Shareholder Issues Employee Share Schemes Federal Budget - Further changes to tax treatment of employee share schemes Changes to tax treatment of employee share schemes (ESSs) were announced in the MYEFO. The following further minor technical changes to the legislation will address issues identified in the consultation process: eligible venture capital investments will be excluded from the aggregated turnover test and grouping rules (for the start up concession); the CGT discount will be available to ESS interests that are subject to the start up concession, where options are converted into shares and the resulting shares are sold within 12 months of exercise; and the Commissioner will have a discretion in relation to the minimum three year holding period in circumstances outside the employee s control that make it impossible for them to meet this criterion. In the Mid Year Economic and Fiscal Outlook (MYEFO), the Government announced changes to the taxation of employee share schemes (ESSs). START DATE 1 July 2015 These changes were designed to make ESSs more attractive and accessible for all companies in Australia, and provide additional tax assistance to eligible companies through a start up concession. Note The Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015 was introduced into Parliament on 25 March On 12 May 2015, as part of the Federal Budget, the Treasurer, Joe Hockey, announced that consultations on exposure draft legislation 38 to implement changes to the taxation of ESSs that were announced in the MYEFO identified some minor technical changes that could be made to the legislation Further information can be found in the Media release of 25 March 2015 issued by the Minister for Small Business, Bruce Billson, which is available here: release/ /. Released for comment on 14 January May

26 This measure addresses these issues by: excluding eligible venture capital investments from the aggregated turnover test and grouping rules (for the start up concession); providing the CGT discount to ESS interests that are subject to the start up concession, where options are converted into shares and the resulting shares are sold within 12 months of exercise; and allowing the Commissioner to exercise discretion in relation to the minimum three year holding period where there are circumstances outside the employee s control that make it impossible for them to meet this criterion. A number of other amendments which accompany these changes will be made to the legislation to make employee share schemes more accessible for Australian businesses and their employees. Date of effect These changes will take effect with the remainder of the enabling legislation from 1 July Source: Budget Paper No. 2 page 16 and Overview: Growing Jobs and Small Business pages Trust Issues Managed Investment Trusts Federal Budget - Transition period for new tax system for managed investments trusts A new tax system for certain managed investment trusts (MITs) was proposed to commence from 1 July The modernised tax rules will now apply from 1 July 2016 instead of 1 July 2015, but MITs can choose to apply them from the earlier start date of 1 July START DATE Background 1 July 2016 On 9 April 2015, the Government released for comment draft legislation titled Tax Laws Amendment (New Tax System for Managed Investment Trusts) Bill 2015, and accompanying explanatory material. The draft legislation will implement the recommendations of the Board of Taxation 39 (BoT) and proposes to introduce a new tax system for certain managed investment trusts (MITs). A MIT is a type of collective investment vehicle that is widely held and undertakes primarily passive investment. 39 The Board of Taxation provided its Report on the Review of the Tax Arrangements Applying to Managed Investment Trusts to the Government in August May 2015

27 Announcement As part of the Federal Budget, the Treasurer, Joe Hockey, announced that the Government is proceeding with the implementation of a new tax system for MITs with a 12 month transition period. The modernised tax rules will now apply from 1 July 2016 instead of 1 July 2015, but MITs can choose to apply them from the earlier start date of 1 July Most MITs are expected to apply the new rules from 1 July The provision of a transition period responds to stakeholder feedback that many MITs require additional time to make amendments to their trust deeds and IT systems. Note MITs and other trusts treated as MITs will continue to be allowed to disregard the trust streaming provisions for the income year. This will ensure that these interim arrangements for MITs continue to apply until the commencement of the new rules. Source: Budget Paper No. 2 page 23 Special Classes of Taxpayers Primary Producers Federal Budget - Accelerated depreciation for primary producers For income years commencing on or after 1 July 2016, primary producers will be able to: immediately deduct capital expenditure on: fencing; and water facilities e.g. dams, water tanks, bores, irrigation channels, pumps, water towers and windmills; and depreciate over three years capital expenditure on fodder storage assets e.g. silos and tanks used to store grain and other animal feed. As part of the Federal Budget, the Treasurer, Joe Hockey, announced that from 1 July 2016 primary producers will be able to: START DATE 1 July 2016 immediately deduct capital expenditure on fencing and water facilities such as dams, water tanks, bores, irrigation channels, pumps, water towers and windmills; and depreciate over three years all capital expenditure incurred on fodder storage assets such as silos and tanks used to store grain and other animal feed. 12 May

28 The proposed changes are summarised below: Asset Current effective Life Proposed effective Life Fencing Up to 30 years Immediately deductible Water facilities 3 years Immediately deductible Fodder storage assets Up to 50 years 3 years This measure will form part of the Government s White Paper on Agricultural Competitiveness. Source: Budget Paper No. 2 page 14 Small Business Entities Federal Budget - Expanding accelerated depreciation for small businesses The immediate asset write off threshold which allows small businesses with an aggregated annual turnover of less than $2 million to immediately deduct assets they start to use or have installed ready for use will be increased from $1,000 to $20,000. The immediate asset write off will be available only from 7.30 pm on 12 May 2015 until 30 June Assets that cost $20,000 or more can continue to be placed in the small business simplified depreciation pool. The current rules which lock out or prevent small businesses from re entering the simplified depreciation regime for five years if they choose to exit the regime will be suspended until 30 June As part of the Federal Budget, the Treasurer, Joe Hockey, announced that the Government will significantly expand accelerated depreciation for small businesses with an aggregated annual turnover of less than $2 million to immediately deduct assets which they start to use or have installed ready for use that cost less than $20,000. START DATE Assets acquired and installed ready for use between 7.30 pm on 12 May 2015 and 30 June 2017 The increase in the immediate asset write off threshold from $1,000 to $20,000, which is temporary and will cease on 30 June 2017, will support small businesses to invest into new assets. Assets valued at $20,000 or more (which cannot be immediately deducted) can continue to be placed in the small business simplified depreciation pool (small business pool) and depreciated at 15 per cent in the first income year and 30 per cent each income year thereafter. The small business pool can also be immediately deducted if the balance is less than $20,000 over this period (including existing small business pools) May 2015

29 The Government will also suspend, until 30 June 2017, the current simplified depreciation rules which lock out or prevent small businesses that choose to exit the regime from re entering the simplified depreciation regime for five years. From 1 July 2017, the thresholds for the immediate depreciation of assets and the value of the small business pool will revert to existing arrangements (including the immediate asset write off threshold returning to $1,000). Source: Budget Paper No. 2 page 19 and Overview: Growing Jobs and Small Business page Federal Budget - Immediate deduction for professional expenses From the income year, start up businesses will be entitled to immediately deduct their expenditure on professional expenses associated with establishing a company, trust or partnership. Eligible expenses will include fees for: professional advice; accounting advice; and legal advice As part of the Federal Budget, the Treasurer, Joe START DATE Hockey, announced that a range of professional expenses 1 July 2015 incurred by start up businesses with respect to establishing a company, trust or partnership will be immediately deductible, rather than being treated as blackhole expenditure and deductible over five years. This measure was first announced on 6 May 2015, in a joint Media release by the Treasurer and the Minister for Small Business, Bruce Billson, as part of a package of measures supporting start ups and entrepreneurship. The range of professional expenses for which an immediate deduction will be available includes: professional advice; accounting advice; and legal advice. These expenses will no longer be deductible over five years under section of the ITAA Source: Budget Paper No. 2 page17 Budget 2015: Growing Jobs and Small Business Treasurer s Joint Media Release 6 May May

30 Federal Budget - Tax cuts for small business From the income year, all small businesses will receive a 1.5 percentage point tax cut. The tax rate for companies with an aggregated annual turnover of less than $2 million will be reduced from 30 per cent to 28.5 per cent. Companies with an aggregated annual turnover of $2 million or above will continue to be subject to the current 30 per cent rate. Current maximum franking credit rate for a distribution will remain unchanged at 30 per cent for all companies. Individual taxpayers with business income from an unincorporated business that has an aggregated annual turnover of less than $2 million will be eligible for a small business tax discount, to be delivered as a tax offset and capped at $1,000 per individual for each income year. As part of the Federal Budget, the Treasurer, Joe Hockey, announced that the Government will deliver a tax cut to all small businesses, both incorporated and unincorporated. The tax cuts will be delivered through: a tax cut of 1.5 percentage points for small companies; and START DATE From income year a five per cent tax discount on income tax payable on business income from an unincorporated small business entity. 40 The Government will reduce the company tax rate to 28.5 per cent for companies with an aggregated annual turnover of less than $2 million. Companies with an aggregated annual turnover of $2 million or above will continue to be subject to the current 30 per cent rate on all their taxable income. The current maximum franking credit rate for a distribution will remain unchanged at 30 per cent for all companies, maintaining the existing arrangements for investors, such as self funded retirees. Note Although the company tax rate will reduce to 1.5 per cent for a small company, it will still be able to frank its distributions at 30 per cent, thereby reducing the top up tax payable by shareholders on the cash dividend. However, franking a dividend at 30 per cent rather than 28.5 per cent will mean that the company will use up its credits at a faster rate. Individual taxpayers with business income from an unincorporated business that has an aggregated annual turnover of less than $2 million will be eligible for a small business tax discount. The discount will be five per cent of the income tax payable on the business income received from an unincorporated small business entity. The discount will be capped at $1,000 per individual for each income year, and delivered as a tax offset. 40 A five per cent discount of the tax payable, capped at $1,000, will apply up to a taxable income of $86,629 based on the marginal income tax rates (excluding the Medicare levy) for the income year remaining the same in May 2015

31 The tax cuts from 1 July 2015 are summarised in the table below. Tax cut Aggregated annual turnover less than $2 million Aggregated annual turnover $2 million or above Tax rate Company tax rate reduced from 30 per cent to 28.5 per cent Company tax rate to remain at 30 per cent Maximum franking credit rate 30 per cent 30 per cent Discount on business income received by individual taxpayers from an unincorporated small business entity Eligible for a five per cent discount on the income tax payable on the business income received the discount will be delivered as a tax offset and capped at $1,000 per individual per income year No entitlement to the small business tax discount Example from Overview: Growing Jobs and Small Business Virginia runs an agriculture advisory service in western New South Wales. Virginia s business has annual turnover of $1.3 million and has a taxable income of $200,000. Current law Under the current law, Virginia s business faces a company tax rate of 30 per cent, and her business pays $60,000 income tax. New law Under the new law, Virginia s company tax rate goes down to 28.5 per cent, and her business pays $57,000 income tax. Benefit Virginia s business will be $3,000 better off under the new law. Current law New law Turnover $1,300,000 $1,300,000 Taxable income $200,000 $200,000 Tax paid $60,000 $57,000 Benefit +$3, May

32 Example from Overview: Growing Jobs and Small Business Ashley is a Victorian Angus cattle farmer running her farm as a sole trader. Ashley s cattle farm has an annual turnover of $300,000 and taxable income of $75,000. This is her only income. Current law Under the current law, Ashley pays tax at her marginal tax rates and pays around $16,000 in total. New law Under the new law, Ashley s $16,000 tax bill on her business income is reduced by five per cent, or $800. While there is no change in her tax rate, under the new law, Ashley pays only $15,200 tax. Benefit Ashley is $800 better off than she was before this tax cut. With the five per cent tax discount, Ashley has an extra $800 to spend on her business. Current law New law Turnover $300,000 $300,000 Taxable income $75,000 $75,000 Tax paid $16,000 $15,200 Benefit to Ashley +$800 Source: Budget Paper No. 2 page 19 and Overview: Growing Jobs and Small Business pages 7 9 Exempt Organisations and Funds General Federal Budget - Listing of the Global Infrastructure Hub as a tax exempt entity The Government will ensure that the Global Infrastructure Hub will be specifically listed in Div 50 of the ITAA 1997 (about exempt entities) as an entity that is exempt from income tax. As part of the Federal Budget, the Treasurer, Joe Hockey, announced that the Government will ensure that the Global Infrastructure Hub (the Hub) is exempt from tax by amending Div 50 of the ITAA 1997 (about exempt entities) to specifically list it as an income tax exempt entity. START DATE 24 December May 2015

33 The Hub which will work internationally to improve the quality and quantity of public and private investment in infrastructure was established following a joint statement from the Prime Minister, Tony Abbott, and Mr Hockey at the G20 Leader s Summit in November The mandate for the Hub will cease in The Hub will qualify for tax exempt status for the period from 24 December 2014 to 30 June Source: Budget Paper No. 2 page Federal Budget - List of DGRs updated From 1 January 2015, the following organisations were approved as specifically listed DGRs: International Jewish Relief Limited; and National Apology Foundation. The following DGRs have had their listings extended until 31 December 2017: National Boer War Memorial Association; and Australian Peacekeeping Memorial Project. As part of the Federal Budget, the Treasurer, Joe Hockey, announced that since the announcement of the MYEFO on 15 December 2014 the following organisations have been approved as specifically listed DGRs with effect from 1 January 2015: International Jewish Relief Limited; and National Apology Foundation. The following organisations have had their DGR listings extended until 31 December 2017: National Boer War Memorial Association; and Australian Peacekeeping Memorial Project. Source: Budget Paper No. 2 page May

34 International Issues General Federal Budget - Global fight against tax evasion The Government announced in the Federal Budget that it would commence implementation of four of the key actions that Australia delivered as G20 President to stop multinational tax avoidance relating to: country by country reporting; treaty abuse rules; anti hybrid rules; and harmful tax practices and exchange of rulings. As part of the Federal Budget, the Treasurer, Joe Hockey, announced that the Government would commence implementation of the following four key actions that Australia delivered as the G20 President to stop multinational tax avoidance: 1. implementation of the OECD s country by country reporting to provide tax authorities with a global picture of their operations from 1 January 2016; 2. incorporating into Australia s treaty practice the OECD s recommendations for tackling situations where taxpayers exploit rules in tax treaties to avoid taxation altogether; 3. asking the Board of Taxation to consult on the implementation of the OECD s draft plan to tackle situations where different tax rules in different countries can allow multinationals to claim a tax deduction in one country but not pay tax in the other; 4. exchange of information by the ATO on secret tax deals provided to multinationals by other countries that may contribute to tax avoidance in Australia. Note The Federal Budget also provides an additional $87.6 million to the ATO over the next three years to continue its International Structuring and Profit Shifting programme. Source: Budget Overview Paper titled Fairness in Tax and Benefits May 2015

35 Federal Budget - Modernising the Offshore Banking Unit regime The Government confirmed in the Federal Budget that it will proceed with reforms to modernise the Offshore Banking Unit (OBU) regime and targeted integrity measures. START DATE Background Income years commencing on or after 1 July 2015 Under the OBU regime, certain assessable income earned by an OBU from eligible offshore banking activities is taxed at a concessional rate of 10 per cent, instead of the corporate tax rate of 30 per cent. This is achieved by bringing to account only an eligible fraction of income from OB activities and associated expenses. Expenses of a taxpayer with an OBU must be allocated between the taxpayer s domestic banking unit (DBU) and its OBU. Deductions relating to the DBU are deductible at 30 per cent, whereas deductions relating to an OBU are deductible at 10 per cent. On 12 March 2015, the Government released for consultation exposure draft legislation titled Tax and Superannuation Laws Amendment (2015 Measures No. 2) Bill 2015: Offshore banking units, and accompanying explanatory material, which proposes a number of reforms to modernise the OBU regime contained in Div 9A of Part III of the ITAA Proposed law As part of the Federal Budget, the Treasurer, Joe Hockey, confirmed that the Government will proceed with reforms to modernise the OBU regime and targeted integrity measures. The OBU regime will be amended to: 1. modernise the OBU tax concession by updating: (a) (b) the list of eligible activities to better target genuine mobile financial sector activities e.g. by including leasing arrangements; the method of allocating certain expenses between the operations of a taxpayer s domestic banking unit and the OBU to ensure expenses and revenue are properly matched; 2. improve the integrity of the regime by: (a) (b) (c) limiting the availability of the OBU concession by constraining the ability for the domestic bank to transfer ownership of a foreign subsidiary to the OBU part of the bank; ensuring internal financial dealings e.g. between the OBU part of an Australian bank and the offshore branch of the bank are priced on an arm s length basis; and codifying the choice principle to remove uncertainty i.e. taxpayers can choose to treat a transaction that is an eligible OB activity as if it were ineligible. Source: Budget Paper No. 2 page May

36 Transfer Pricing Federal Budget - New transfer pricing documentation standards From 1 January 2016, the Government will implement the OECD s new transfer pricing documentation standards. The ATO will receive the following information on companies with global revenue of $1 billion or more: a country by country report; a master file; and a local file. As part of the Federal Budget, the Treasurer, Joe Hockey, announced that the Government will implement the OECD s new transfer pricing documentation standards. START DATE 1 January 2016 Note In September 2014, the countries participating in the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project published the report titled Guidance on Transfer Pricing Documentation and Country by Country Reporting which described a three tiered standardised approach to transfer pricing documentation. The following information on large companies i.e. companies with global revenue of $1 billion or more will be received by the ATO under the new documentation standards: 1. a country by country report this will be shared between tax authorities and will show information on the global activities of the multinational, including the location of its income and taxes paid; 2. a master file this will contain an overview of the multinational s global business, its organisational structure and its transfer pricing policies; and 3. a local file this will provide detailed information about the local taxpayer s intercompany transactions. Important To complement the country by country reporting, the Government will also work with businesses to develop a code on the public disclosure of greater tax information by large companies. The Government has asked the Board of Taxation to lead the development of this transparency code. Source: Budget Paper No. 2 page 15;and Budget Overview Paper titled Fairness in Tax and Benefits May 2015

37 Avoidance and Tax Planning Anti-Avoidance General Federal Budget - Serious Financial Crime Taskforce established to address financial and tax fraud The Government will establish a new taskforce for investigations and prosecutions addressing superannuation and investment fraud, identity crime and tax evasion. The taskforce will comprise various government agencies such as the ATO, ASIC and the AFP. As part of the Federal Budget, the Treasurer, Joe Hockey, announced that the Government will establish a new taskforce to be known as the Serious Financial Crime Taskforce for investigations and prosecutions that will address superannuation and investment fraud, identity crime and tax evasion. The aim of the taskforce is to maintain integrity and community confidence in Australian financial markets and regulatory systems. The taskforce, which will build on the work done by Project Wickenby, comprises the ATO, the Australian Crime Commission, the Australian Federal Police, the Attorney Generals Department, the Australian Transaction Reports and Analysis Centre, the Australian Securities and Investments Commission, the Commonwealth Director of Public Prosecutions and the Australian Customs and Border Protection Services. Source: Budget Paper No. 2 page 30; and Treasurer s Media Release of 5 May 2015 titled Serious Financial Crime Taskforce 12 May

38 General Anti-avoidance Rule - Part IVA Federal Budget - Multinational anti-avoidance law A new anti avoidance provision in Part IVA of the ITAA 1936 will be targeted at multinationals that artificially avoid having a taxable presence in Australia. Exposure draft legislation titled Tax Laws Amendment (Tax Integrity Multinational Anti avoidance Law) Bill 2015 which proposes to implement this announcement has been released for comment. The measure will apply to about 30 companies with global revenue of $1 billion or more. From 1 January 2016, the measure will ensure that the profits from economic activities undertaken in Australia are taxed in Australia if the arrangements are entered into for a principal purpose of avoiding tax. Penalties of up to 100 per cent of tax owed will apply to tax avoidance and profit shifting schemes. As part of the Federal Budget, the Treasurer, START DATE Joe Hockey, confirmed that the Government will introduce a 1 January 2016 new targeted anti avoidance provision in Part IVA of the ITAA 1936 aimed at multinationals that artificially avoid having a taxable presence in Australia. On 12 May 2015, the Government released for comment exposure draft legislation titled Tax Laws Amendment (Tax Integrity Multinational Anti avoidance Law) Bill 2015, together with accompanying explanatory material, which proposes to implement this measure. Background On 11 May 2015, the Treasurer, Joe Hockey, announced that draft legislation would be released as part of the Federal Budget to strengthen the anti avoidance laws to ensure that the ATO has the power to collect tax from companies that are diverting profits earned in Australia away from Australia to no tax or low tax jurisdictions. Features of proposed law The new law will apply to companies with global revenue of $1 billion or more and will target approximately 30 companies where: the activities of an Australian company or other entity are integral to an Australian customer s decision to enter into a contract; the contract is formally entered into with a foreign related party to that entity; and the profit from the Australian sale is booked overseas and subject to no tax or low global tax. It is intended that proposed s. 177DA of the ITAA 1936 schemes that limit a taxable presence in Australia will ensure that the profits from Australian sales are taxed in Australia if the arrangements are entered into for a principal purpose of avoiding tax. The new law will apply from 1 January 2016 to tax benefits obtained from new and existing schemes May 2015

39 Application of the Multinational Anti Avoidance law Source: Treasurer s media release titled Strengthening our taxation system dated 11 May May

40 Note Where the law applies, multinationals will be subject to the Government s proposed new double penalty regime for tax avoidance and profit shifting schemes which was also announced in the Federal Budget. This means penalties will be imposed at up to 100 per cent of the tax owed. The Government will also commence consultations with the community on whether further amendments are required to Australian law, consistent with the work being carried out by the G20 and OECD to address other profit shifting strategies. Source: Budget Paper No. 2 pages 14 15; Budget Overview Paper titled Fairness in Tax and Benefits ; Treasurer s media release titled Strengthening our taxation system dated 11 May 2015; and Exposure draft legislation titled Tax Laws Amendment (Tax Integrity Multinational Anti avoidance Law) Bill May 2015

41 Goods and Services Tax GST - Announcements 2015 Announcements Federal Budget - GST to apply to digital products and services imported by consumers Digital products and services imported by consumers are not currently subject to the GST GST will apply from 1 July 2017 to non exempted products and services, including digital supplies purchased from overseas and from Australia. As part of the Federal Budget, the Treasurer, Joe Hockey, announced that the GST will be extended to apply to cross border supplies of digital products and services imported by consumers. START DATE Supplies made on or after 1 July 2017 Current law The growth of e commerce and use of the internet means that Australian consumers can just as easily acquire services from a non resident supplier as from an Australian supplier. Digital products and services imported by consumers are not currently subject to the GST. This results in forgone GST revenue to the States and Territories and places domestic businesses which generally have to charge and remit GST on the digital products and services they provide at a tax disadvantage compared to overseas businesses. The GST was designed to apply to all products and services, except those specifically exempted, for example fresh food, health and education. Proposed change This measure ensures that the GST applies to non exempted products and services, including digital supplies purchased from overseas and from Australia. This measure will result in Australia being an early adopter of guidelines for business to consumer supplies of digital products and services being developed by the OECD as part of the OECD/G20 base erosion and profit shifting project. A number of countries including Japan, Norway, South Africa, South Korea, Switzerland and member countries of the European Union 41 have or will introduce similar rules. 41 The Canadian Government has also announced they would consider introducing similar laws. 12 May

42 Note This change will require the unanimous agreement of the States and Territories prior to the enactment of legislation. Recent Development On 12 May 2015, exposure draft legislation titled Tax Laws Amendment (Tax Integrity: GST and Digital Products) Bill 2015, together with accompanying explanatory material, was released for consultation. Source: Budget Paper No. 2 page 20 and Overview: Fairness in Tax and Benefits page Federal Budget - Extension of GST compliance program The Government will provide $265.5 million to the ATO to promote GST compliance. The Government will provide $265.5 million to the ATO over three years from to continue a range of activities to promote GST compliance. Source: Budget Paper No. 2 page Federal Budget - Reverse charge for going concerns and farmland not proceeding The Government will not proceed with the previously announced but unenacted measure to replace the current GST free treatment for supplies of going concerns and farmland with a reverse charge mechanism. Background On 14 December 2013, the former Assistant Treasurer, Arthur Sinodinos AO, issued a Media release titled Integrity restored to Australia s taxation system outlining the outcome of consultation on the 92 tax and superannuation reforms which the previous Government had announced but not legislated. As part of this announcement, it was stated that the Government would proceed with amendments to implement a GST reverse charge for going concerns May 2015

43 Proposed change As part of the Federal Budget, the Treasurer, Joe Hockey, announced that the Government will not proceed with the previously announced but unenacted measure to replace the current GSTfree treatment for supplies of going concerns and farmland with a reverse charge mechanism. Although the original measure was designed to reduce the compliance burden on taxpayers, during the design of this measure it became apparent that the measure would have resulted in adverse consequences for taxpayers. Source: Budget Paper No. 2 page May

44 Fringe Benefits Tax FBT - Announcements 2015 Announcements Federal Budget - FBT exemption for electronic devices From 1 April 2016, the Government will allow an FBT exemption to small businesses with an aggregated annual turnover of less than $2 million that provide more than one work related portable device to employees. The FBT exemption will be available even if the portable electronic devices perform substantially similar functions. This measure will remove confusion where there is a function overlap between different products such as a laptop and a tablet. Background START DATE Currently, under s. 58 X of the Fringe Benefits Tax Assessment 1 April 2016 Act 1986, the provision of an eligible work related item including a portable electronic device by an employer to an employee is an exempt fringe benefit. This ensures that an exemption from FBT is available for items such as a laptop computer, tablet, mobile phone etc. which are used by employees primarily for work purposes. The current exemption can apply to more than one portable electronic device used primarily for work purposes, but only where the devices perform substantially different functions. Proposed change As part of the Federal Budget, the Treasurer announced that, from 1 April 2016, an exemption from FBT will be available to an employer who provides an employee with multiple portable electronic devices (even if the devices have substantially the same function) provided that: the employer is a small business with an annual aggregated turnover of less than $2 million; and the electronic device is used by the employee primarily for work related purposes To reduce red tape for small businesses and to ensure employees of small businesses can stay connected in the digital economy, the exemption will be expanded to cover multiple portable electronic devices used by an employee for work related purposes from 1 April Source: Budget Paper No. 2 page 18 Budget 2015: Growing Jobs and Small Business May 2015

45 Fringe Benefits Tax Issues Meal Entertainment Fringe Benefits Federal Budget - Cap on salary sacrificed meal entertainment A separate single grossed up cap of $5,000 will be introduced for salary sacrificed meal entertainment and entertainment facility leasing expenses (meal entertainment benefits) for employees. Meal entertainment benefits in excess of $5,000 will be counted in calculating whether the employee exceeds their existing FBT exemption or rebate cap. All meal entertainment benefits will be reportable. The changes will apply from 1 April START DATE Background From 1 April 2016 Currently, for the FBT year ending 31 March 2016, employees of public benevolent institutions and health promotion charities have an FBT exemption cap of $31,177 (the standard is $30,000 but increased for the Temporary Budget Repair Levy) and employees of public and not for profit hospitals and public ambulance services have an FBT exemption cap of $17,667 (the standard is $17,000). In addition to these FBT exemptions, these employees can currently salary sacrifice meal entertainment benefits with no FBT payable by the employer and without it being reported. Employees of rebatable not for profit organisations can also salary sacrifice meal entertainment benefits, but the employers only receive a partial FBT rebate, up to the $31,177 cap. Meal entertainment benefits are used to remunerate many employees who work in: public benevolent institutions, health promotion charities, public and not for profit hospitals, and public ambulance services. Proposed change As part of the Federal Budget, the Treasurer, Joe Hockey, announced that the Government will amend the FBTA Act to introduce a separate single grossed up cap of $5,000 for salary sacrificed meal entertainment and entertainment facility leasing expenses (meal entertainment benefits) for employees. Meal entertainment benefits exceeding the separate grossed up cap of $5,000 will also be counted in calculating whether an employee exceeds their existing FBT exemption or rebate cap. All use of meal entertainment benefits will become reportable. These amendments will apply from the 1 April 2016 for the FBT year ending 31 March Source: Budget Paper No. 2 page May

46 Superannuation Superannuation Issues Superannuation, Retirement and Termination Payments Federal Budget - Relaxing criteria for release of super for terminal medical conditions The Government will allow terminally ill individuals to access their superannuation earlier by increasing the period that must be certified by medical practitioners from one year to two years. Currently, in order to access their superannuation, terminally ill individuals must have two medical practitioners certify that they are likely to die within one year. As part of the Federal Budget, the Treasurer, Joe START DATE Hockey, announced that the Government will extend access to 1 July 2015 superannuation for individuals with a terminal condition. Currently, to access their superannuation, terminally ill individuals must have two medical practitioners (including a specialist) certify that they are likely to die within one year. The Government will increase this period to two years. Source: Budget Paper No. 2 page May 2015

47 Tax Administration Administration Issues General Federal Budget - Statutory remedial power for the Commissioner of Taxation The Government will provide the Commissioner with a statutory remedial power to make a legislative instrument to modify the operation of the tax law. The Commissioner s power will be limited so that it applies only to the extent that: it has a beneficial outcome for taxpayers; and the modification is not inconsistent with the purpose or object of the law and has no more than a negligible revenue impact. The Commissioner s legislative instrument will be subject to consultation and disallowance by Parliament. On 1 May 2015, the Assistant Treasurer, Josh Frydenberg, START DATE issued a Media Release titled Providing more certainty and Royal Assent of enabling legislation better outcomes for taxpayers, stating that the Government will provide the Commissioner with a statutory remedial power to allow for a more timely resolution of certain unforeseen and unintended outcomes in the tax and superannuation law. The power will provide a mechanism to deal with some aspects of complexity in the tax law, and will also provide more certainty and better outcomes for taxpayers. As part of the Federal Budget, the Treasurer, Joe Hockey, announced that the Commissioner will be able to make a legislative instrument to modify the operation of the taxation law to ensure that the law can be administered to achieve its objective. The power will be limited so that it applies only to the extent that: it has a beneficial outcome for taxpayers, and the modification is not inconsistent with the purpose or object of the law and has no more than a negligible revenue impact. A legislative instrument made by the Commissioner will be subject to extensive consultations and disallowance by Parliament. Source: [e.g. Budget Paper No. 2 page 32; Assistant Treasurer s Media Release No May

48 Charges, Penalties and Offences Penalties Federal Budget - Commonwealth penalty units The value of all Commonwealth penalty units will increase from $170 to $180 with effect from 31 July In future, the penalty unit will be indexed based on the CPI. The indexation will occur on 1 July every three years commencing on 1 July The Treasurer announced that the Government will increase the value of all Commonwealth penalty units from $170 to $180, with effect from 31 July The value was last adjusted in December START DATE From 31 July 2015 The Government will also introduce ongoing indexation of penalty units based on the CPI. Indexation will occur on 1 July every three years, with the first indexation occurring on 1 July Penalty units are used to describe the amount payable for fines under Commonwealth laws. Commonwealth penalties are generally expressed in terms of penalty units (rather than specific values) to assist in the consistent adjustment of penalties across the Commonwealth statute book. An example of the effect of the amendment to a common fine The penalty unit will increase from $170 to $180 per unit from 31 July This means that a late lodgment penalty of $850 (i.e. 5 penalty units $170) will rise to $900 (i.e. 5 penalty units $180). Source: Budget Paper No. 2 page May 2015

49 Federal Budget - Double penalties on multinational tax avoidance For income years commencing on or after 1 July 2015, the Government will double the maximum administrative penalties that can be applied by the Commissioner to large companies with global revenue of $1 billion or more that enter into tax avoidance and profit shifting schemes. As part of the Federal Budget, the Treasurer, Joe Hockey, that the maximum administrative penalties that can be applied by the Commissioner under Schedule 1 to the TAA to large companies that enter into tax avoidance and profit shifting schemes will be doubled. START DATE Income years commencing on or after 1 July 2015 Under this proposed measure, tax avoiders will have to pay the primary tax, penalties of up to 100 per cent of the tax owed and interest. Penalties will not change for taxpayers that have a reasonably arguable tax position as defined in s (1) of Schedule 1 to the TAA. The measure will apply to companies with global revenue of $1 billion or more for income years commencing on or after 1 July Note This penalty will apply to multinational entities that artificially avoid having a taxable presence in Australia and to whom the Federal Budget proposed measure dealing with such avoidance will apply from 1 January Source: Budget Paper No. 2 page 16; and Budget Overview Paper titled Fairness in Tax and Benefits 12 May

50 Other Federal Taxes Federal - Announcements and Developments 2015 Announcements and Developments Federal Budget - Exemption from LCT for cars acquired by endorsed public museums and public art galleries The Government will allow public museums and public art galleries that have been endorsed as deductible gift recipients (DGRs) to acquire cars free of luxury car tax (LCT). The exemption will apply only to cars that are acquired for the purpose of public display, consigned to the collection and not used for private purposes. As part of the Federal Budget, the Treasurer, START DATE Joe Hockey, announced that the Government will allow public Royal Assent of enabling legislation museums and public art galleries that have been endorsed by the Commissioner as DGRs to acquire cars free of luxury car tax. The exemption will apply only to cars that are acquired for the purpose of public display, consigned to the collection and not used for private purposes. Source: Budget Paper No. 2 page May 2015

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