BUDGET BRIEFING 2019

Transcription

1 BUDGET BRIEFING 2019 SYDNEY 4 APRIL 2019

2 BUDGET OVERVIEW GRAEME COOPER

3 THE (ELECTION) ELEPHANT IN THE ROOM Budget is (most of) Coalition s election manifesto Decisions taken but not yet announced = $166m over 4 years of which $130m is scheduled to happen in and (Most of) ALP s tax policy is already published ALP to deliver mini-budget by September if elected (Chris Bowen, 31 March 2019) 3

4 GOVERNMENT S KEY TAX MESSAGE The Government is delivering lower taxes by: providing tax relief to hard-working low- and middle-income Australians providing lower taxes to small and medium-sized businesses by increasing the instant asset write-off and expanding access to it alongside the lower tax rates the Government has already legislated; and safeguarding the integrity of the tax system by ensuring everyone, including multinationals and big business, pay their fair share. So Budget story is: lower personal taxes are being for by increased collections from MNEs Increased MNE collections come from 2 sources: higher commodity prices for coal + iron ore increased ATO enforcement activity GREENWOODS.COM.AU 4

5 HOW THAT MESSAGE PLAYS OUT IN THE BUDGET No surplus for , despite substantial revenue growth during May 2018 Budget predicts deficit of $14.5bn; May 2019 Budget predicts smaller deficit of $4.2bn for due to higher-than-assumed commodity prices, in particular for iron ore and metallurgical coal Projected surplus of $7bn for Less revenue collected overall tax receipts have been revised down by $15 billion over the four years to Less tax paid by humans revisions to the outlook for household consumption, dwelling investment and average wages weigh on the forecasts... More tax from (mining) companies more than offset by an increase in company tax collections in and , reflecting the recent observed strength in commodity prices. GREENWOODS.COM.AU 5

6 SHOW ME THE MONEY Revenue impact of tax changes proposed in the Budget over the next 4 years $50m ($819m) $378m $2.2bn ($2.2bn) The only significant revenue figure* in the Budget is the return from ATO Tax Taskforce Total $175m $1.2bn $1.5bn $1.6bn $4.6bn * except for personal income tax cuts which would cost $4.5bn in 2022 GREENWOODS.COM.AU 6

7 WHO IS PAYING THE EXTRA TAX Compared with the MYEFO, company tax receipts are expected to be $1.2 billion higher in , $3.4 billion higher in and $8.0 billion higher over the four years to The large upward revision in reflects expected gains in mining profits flowing into as a result of the delays between when profit is accrued and when company tax is paid. In addition, while commodity prices are assumed to decline over , the continued period of elevated prices relative to the MYEFO further improves mining profits and company tax in that year. The Government s decision to extend and expand the Australian Taxation Office s Tax Avoidance Taskforce will also increase tax receipts, particularly in and GREENWOODS.COM.AU 7

8 COMPARE THAT STORY WITH individuals and other withholding taxation receipts have been revised up by $900 million in , but then revised down by $1.7 billion in and by $13.5 billion over the four years to The downward revisions reflect parameter and other variations, as well as the Government s measure Tax receipts from superannuation funds are expected to grow by 5.1 per cent in but fall by 14.5 per cent in The forecast fall in mainly reflects the impact of recent offmarket share buybacks. GST receipts are expected to be around $1.0 billion lower in , $1.8 billion lower in and $10.3 billion lower over the four years to The downward revisions reflect weaker-than-expected collections, and the downward revisions to forecasts for growth in consumption and dwelling investment GREENWOODS.COM.AU 8

9 HYBRID MISMATCH RULES ANDREW HIRST

10 HYBRID MISMATCH RULES Hybrids cross-border different characterisation of instrument/entities giving rise to a D/NI or DD mismatch Start date 1 January 2019 Australia also implemented a further integrity rule. Purpose of the integrity rule was to: In the MYEFO, the Government announced an extension of the OECD hybrid mismatch rules to introduce a targeted integrity rule to prevent multinational groups from being able to enter into arrangements designed to circumvent the hybrid mismatch rules The targeted integrity rule will prevent the effect of the hybrid mismatch rules to neutralise double non-taxation outcomes from being compromised by multinational groups using interposed conduit type entities that pay effectively no tax to invest into Australia, as an alternative to investing into australia using hybrid instruments or entities. These structures can be used to effectively replicate a deduction/non-inclusion outcome. 10

11 HYBRID MISMATCH RULES Taxpayer experience to date Budget minor amendments to clarify operation in relation to: MEC groups and trusts; limiting the meaning of foreign tax; and specifying that the integrity rule can apply where other provisions have applied Amendments will generally apply from 1 January 2019 Integrity rule amendment will apply from 2 April

12 INTEGRITY RULE Parent Integrity rule Country A (20% tax rate) Country B (5% tax rate) Debt/equity Interest/ dividends No hybrid mismatch Integrity rule potentially applies as (i) payment of interest, (ii) group relationship and (iii) <10% rate (Country B) Australia Finance Co Debt Key test reasonable to conclude that entity/entities had a principal purpose of enabling deduction in Australia and either (i) foreign tax <10% or (ii) payment not subject to foreign tax? Interest Aus Co Integrity rule currently N/A if any of the other hybrid rules apply to it 12

13 INTEGRITY RULE POTENTIAL APPLICATION? Parent Focus Aus Co treated as part of tax group with Parent / Sub in Country B Country B (20% tax rate) Australia Debt Sub Aus Co Interest Hybrid Payer provisions apply No D denied as dual inclusion income Integrity rule previously N/A as hybrid payer mismatch Post Budget? assessable income 13

14 DIVISION 7A UNRESOLVED ISSUES TO BE AWARE OF, INCLUDING FOR LARGE BUSINESSES CAMERON BLACKWOOD

15 DIVISION 7A - RECAP Division 7A is designed to protect the integrity of the progressive tax system by regulating the way shareholders of a private company can access the company s profits through payments, asset use, loans and debt forgiveness If a dividend, top-up tax of $19.50 (total tax paid $47) $72.50 Limit ability to access $72.50 without paying top-up tax Div 7A punitive as deemed dividend generally can t be franked. Results in double taxation Company $27.50 ATO $100 Income GREENWOODS.COM.AU 15

16 DIVISION 7A - PROPOSED REFORMS Timeline Board of Tax Review Budget Amendments to commence from 1 July 2018 Proposals Div 7A proposals: Simplify Div7A loan rates (10 year loan, higher interest rate ) Self correction mechanism (abolish need for ATO discretion) Budget UPE treatment to be clarified, package delayed to 1 July 2019 Treasury Consultation Paper October Budget Further delay to 1 July 2020 Safe-harbour to determine deemed dividend from use of assets Legislative treatment of unpaid present entitlements Technical amendments (FBT/nonresident/interposed entity). GREENWOODS.COM.AU 16

17 DIVISION 7A REMOVAL OF DISTRIBUTABLE SURPLUS Proposal to abolish distributable surplus limitation (limits deemed dividend) yet BoT specifically recommended to retain Left hand vs right hand Potential impacts: LPT Treasury The amendments will remove the concept of distributable surplus. This will ensure the integrity of Division 7A so that dividends can be deemed for the entire value of the benefit that was extracted from the private company. This will also align the treatment of dividends with section 254T of the Corporations Act 2001 (Cth) which allows dividends to be paid out of both profits and capital. ATO The better view appears to be that like the previous section 254T of the Corporations Act, the new section 254T does not authorise any act by a company; the section merely prohibits the payment of dividends in the specified circumstances. In particular, the new section 254T does not 'otherwise authorise by law' a reduction of share capital for the purposes of section 256B and Part 2J.1 of the Corporations Act. It appears that the procedures to approve a share capital reduction in Part 2J.1 of the Corporations Act would also have to be met for a company to pay a dividend not prohibited by section 254T of the Corporations Act that was sourced from share capital. 100% Loan FINCO External loan Shareholders Return of Capital Private Co GREENWOODS.COM.AU 17

18 DISGUISED DIVIDENDS - SECTION 47A 3 Aus shareholder Unlisted Country CFC 1 Applies to: Waiver of debt owed by associated entity to the CFC Non-arm s length loan from CFC to an associated entity Transfer of property from CFC for below market value The intent of section 47A is to prevent the avoidance of the accruals regime (and tax) by the shifting of profits from unlisted countries to Australia or to listed countries as disguised dividends... Differences between s.47a and Div 7A s.47a has less concessions Flagged by Treasury in 2009 that perhaps s.47a can be repealed 2 Unlisted Country CFC 18

19 TAX LANDSCAPE BEYOND THE ELECTION GRAEME COOPER

20 THE (ELECTION) ELEPHANT IN THE ROOM The tax system for 2019 onwards 1.the stuff that will happen whoever wins because it comes from the bureaucrats because it is (largely) common ground 2.the stuff that was never going to happen because it was scheduled to start in 2022 and even 2024!!! 3.the stuff that will happen if the election is won by 20

21 THE INEVITABLE Increased ATO enforcement: the tax increase that doesn t need a tax increase Tax Avoidance Taskforce Enforcement of superannuation obligations Changes to: integrity rule hybrids regime Tax cuts for low income individuals Accelerated depreciation for new equipment GREENWOODS.COM.AU 21

22 THE IMPLAUSIBLE Personal income tax cuts 1 July 2022: increase top of 19% bracket increase LAMITO and reduce withdrawal rate 1 July 2024: reduce 32.5% rate to 30% remove 37% rate Superannuation measures aimed at industry funds GREENWOODS.COM.AU 22

23 THE ELECTION-CONTINGENT ITEMS Seems many have already decided that the Coalition will not win another term companies voting with their franking credits Ministers and MPs voting with their retirements If those guesses are correct, then we will likely see these policies implemented GREENWOODS.COM.AU 23

24 ALP S ANNOUNCED POLICIES INTERNATIONAL TAX Interest deductibility / thin cap: repeal safe harbour and arm s length options in thin capitalisation regime; thin cap limit to be set by worldwide gearing ratio only Transfer pricing ATO will be required to publish high level data extracted from CbC reports increased funding of ATO so it can properly investigate and pursue multinational profit shifting Anti-haven measures require companies to report to shareholders transactions involving havens on ATO black list ; ATO to prescribe activities that have to be reported and level of detail ATO to publish guidelines for responsible investment by super funds require AUSTRAC to publish aggregated data on international funds transfers to overseas destinations tenderers for government contracts >$200,000 have to lodge report showing where they pay their tax 24

25 ALP S ANNOUNCED POLICIES CORPORATE TAX Australian Investment Guarantee immediate deduction for 20% of cost; depreciation calculated in usual way on remaining 80% includes tangible and intangible depreciating assets, but not available for buildings R&D assets passenger motor vehicles starts from 1 July 2020 for all new investments 25

26 CORPORATE TAX (CONT) MEC groups: implement remaining Board of Tax recommendations; currently in the too hard basket Release more information on private companies: require ATO to report tax affairs of private companies with turnover>$100m threshold currently $200m for Aust resident private companies Transparency of corporate ownership: public register of beneficial ownership of companies policy has been under development since 2014; Treasury paper released Feb 2017 ATO integrity: require ATO to disclose high level data about number and value of tax settlements >$50m Board of Taxation: change composition of Board of Taxation to add a business and community perspective 26

27 UNFINISHED LEGISLATIVE AGENDA Two different types of problem Policy announcements: announced but has yet to be embodied in a Bill (or even and ED) around 20 pubic Treasury consultations are still incomplete more exist but not (yet) subject to public consultation Unenacted Bills: assuming Wednesday was last day of this Parliament, around 20 tax and superannuation Bills lapsed on Wed night 27

28 LAPSING LEGISLATION Some of the Coalition s ABUMs January announcement increasing small business asset write-off threshold to $25,000 self-assess effective lives of depreciating intangibles technical MIT and AMIT amendments remove main residence exemption for foreign residents; amend valuation rules for determining TARP; additional 10% CGT discount for affordable housing extend coverage of MAAL and DPT to privately-owned SGEs changes to valuation rules for thin cap regime Black Economy measures phoenix offences / directors liability for GST / DINs taxing insurance companies (in light of changes to AASB 17) consolidate registers / registration processes for Commonwealth legislation amend definition of public trading trust multiple superannuation Bills (dating back to 2016 / 2017) 28

29 INCOMPLETE PROJECTS Some of the current incomplete Treasury consultations digital economy sharing economy Div 7A amendments new s and revisions to debt and equity rules corporate CIV regime mandatory disclosure regime (ie, BEPS Action 12) CCIV non-resident withholding taxes transparency of beneficial ownership of companies taxing insurance companies (in light of changes to AASB 17) Black Economy measures (eg, limits on cash payments / ABN renewal / government procurement / extension of RPS) superannuation measures (transfers of inactive accounts / opt-in for insurance coverage / retirement income disclosures) deductions for vacant land circular trust distributions review of ATO collection practices by ASBFEO review of TPB 29

30 AND OTHER IDEAS FLOATING AROUND Proposal to legislate ATO view that 30% MITWT rate applies to MITs with agricultural / residential property Board of Tax project on residence of individuals Board of Tax to review granny flats Board of Tax review of Tax Transparency Code GREENWOODS.COM.AU 30

31 IMPACT OF LABOR S PROPOSED THIN CAPITALISATION CHANGES SUE ANN KHOO

32 ALP TAX POLICY THIN CAPITALISATION CHANGES Interest deductibility / thin capitalisation Repeal safe harbour and arm s length debt test Worldwide gearing ratio only - Deductions based on the debt-to-equity ratio of an entity s entire global operations Unclear how worldwide gearing rules would apply Under current rules, worldwide gearing test depends on classification for thin cap Australian outbound only or both inbound and outbound Australian entity 32

33 ALP TAX POLICY THIN CAPITALISATION CHANGES Example For inward investing vehicle (general), calculation is based on consolidated financial accounts for the global group. Steps (inward investing vehicle general) Step 1: Statement worldwide debt (A) 60 Step 2: Statement worldwide equity (B) 100 Step 3: Divide A by B (C) 0.6 Step 4: C + 1 (D) 1.6 Step 5: Divide C/D (E) Step 6: Multiply E by net Australian assets from safe harbour debt calculation Step 7: Average associate entity excess amount Step 8: Worldwide gearing debt amount Gearing of 37.5% compared to 60% safe harbour 33

34 Q&A

35 SYDNEY ANZ Tower, 161 Castlereagh Street Sydney NSW 2000 T F MELBOURNE 101 Collins Street Melbourne VIC 3000 T F PERTH QV.1 Building, 250 St Georges Terrace Perth WA T F The contents of this publication, current at the date of publication set out in this document, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication Greenwoods & Herbert Smith Freehills Pty Limited ABN Liability limited by a scheme approved under Professional Standards Legislation