Federal Budget 2018 Financial Services A review of the Budget s major business implications May 2018 KPMG.com/au/budget
Contents Introduction... 3 Reasearch and Development... 3 MIT and AMIT changes... 3 Updated list of EOI contries... 3 Thin Capitalisation... 3 Significant global entities... 4 TOFA reform... 4 Contact us... 5.
Introduction There was little budget night excitement for financial services. The Budget contains a number of low key integrity measures while at the same time deferring a number of previously announced measures. Reasearch and Development The Budget contains a number of changes to the R&D Tax Incentive. Large companies with an aggregated turnover above $20 million are in almost all cases adversely impacted. The previous flat 8.5 per cent tax saving on R&D expenditure will be replaced with a progressive scale that increases from 4 to 12.5 per cent of R&D expenditure, based on R&D intensity (being R&D spend divided by total annual expenditure). The R&D expenditure cap will increase from $100 million to $150 million. However, given the R&D rate for most of large companies will halve, their overall R&D benefit will almost certainly fall. There will be greater transparency, with the ATO to publish details of R&D claimants. AusIndustry will issue public rulings and taxpayers rights will be constrained to expedite the completion of enforcement activities. Both the ATO and AusIndustry will have increased resources to tackle overstated expenditure claims and those stretching the boundary of eligible R&D activities. Many financial institutions have experienced the challenge of dealing with narrowing definitions of R&D through progressively restrictive guidance releases. In the absence of a change to the definition of R&D, financial services companies will need to focus on presenting contemporaneous evidence of their technical unknowns in a scientific manner. MIT and AMIT changes While those interested in Attribution Managed Investment Trusts (AMIT) eagerly await release of exposure draft legislation for previously announced changes to the AMIT rules, the Budget contained a further important change to how capital gains flow through Managed Investment Trusts (MITs) and AMITs. From 1 July 2019, MITs and AMITs will no longer apply the capital gains tax discount at the trust level. Instead, other expenses and non-capital losses will be offset against gross rather than discounted capital gains for assets held for more than 12 months. While eligible investors in the MIT (or AMIT) will still be able to discount any gain received, the changes will mean the expenses and losses no longer create a double benefit. This change will align the treatment of MITs and AMITs with that set out in the Corporate Collective Investment Vehicle (CCIV) exposure draft released in December 2017. Updated list of EOI contries The list of Exchange of Information (EOI) countries will be updated to include the 56 jurisdictions with who Australia has entered into EOI agreements since 2012. Certain distributions by MITs and AMITs made to investors in EOI countries are subject to a reduced 15 per cent withholding tax rate. The reduced withholding rate will apply to payments to these additional jurisdictions from 1 January 2019. Thin Capitalisation Two minor but important changes to the thin capitalisation rules are included in the Budget and apply from income years commencing on or after 1 July 2019. The first is to treat consolidated and multiple entry consolidated (MEC) groups that are both foreign controlled and control a foreign entity as both inward and outward investors for thin capitalisation purposes. Currently, the classification rules can operate to allow these groups to access concessions intended only for outward investing entities. The second change is to prevent taxpayers revaluing assets for thin capitalisation purposes only by requiring all entities to use the accounting value of their assets for their thin capitalisation calculations. A number of provisions in the thin capitalisation rules deal with the revaluation of assets. It is not clear whether these changes affect just the ordinary revaluation provisions or extend to the specific rules giving relief in relation to internally generated intangible assets. KPMG 3 2018 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.
A further previously announced measure commencing on 1 July 2018 is the lowering of the associate entity threshold from 50 per cent to 10 percent for thin capitalisation purposes. This has the potential to significantly affect investors and corporates in joint venture arrangements. Significant global entities The definition of significant global entity (SGE) will be broadened to include entities that are members of a group headed by trusts, partnerships and investment entities. Being an SGE brings the Multinational Anti-avoidance Law and the Divert Profits Tax rules into play as well as increased administrative penalties. Although there is no further guidance on the meaning of investment entities, consideration will need to be given to the impact of this change on various off balance sheet and other investment structures. TOFA reform As previously announced in December 2017, the changes to the Taxation of Financial Arrangements (TOFA) rules foreshadowed 2 years ago have been deferred. These simplification changes have been placed on the backburner and will now apply to income years commencing after Royal Assent. In perhaps a measure designed to address the backlog of announced by unenacted measures, an undisclosed amount of funding has been made available to Treasury to engage legal service providers to for Legislative Drafting to progress Treasury portfolio legislation. KPMG 4 2018 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.
Contact us Jenny Clarke +61 2 9335 7213 jeclarke@kpmg.com.au Julian Humphrey +61 2 9335 7682 jrhumphrey@kpmg.com.au John Bardsley +61 2 9335 7161 jbardsley@kpmg.com.au Adam Gibbs +61 2 9335 7310 amgibbs@kpmg.com.au John Salvaris +61 3 9288 5744 jsalvaris@kpmg.com.au Peter Oliver +61 2 9455 9520 peteroliver@kpmg.com.au Geoffrey Yiu +61 3 9288 6262 gyiu@kpmg.com.au Len Nicita +61 2 9335 7888 lennicita@kpmg.com.au Natalie Raju +61 2 9335 7929 nraju1@kpmg.com.au kpmg.com/au/budget KPMG s Tax practice is not licensed to provide financial product advice under the Corporations Act and taxation is only one of the matters that must be considered when making a decision on a financial product. You should consider taking advice from an Australian Financial Services Licence holder before making a decision on a financial product. The information contained in this document is of a general nature and is not intended to address the objectives, financial situation or needs of any particular individual or entity. It is provided for information purposes only and does not constitute, nor should it be regarded in any manner whatsoever, as advice and is not intended to influence a person in making a decision, including, if applicable, in relation to any financial product or an interest in a financial product. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. To the extent permissible by law, KPMG and its associated entities shall not be liable for any errors, omissions, defects or misrepresentations in the information or for any loss or damage suffered by persons who use or rely on such information (including for reasons of negligence, negligent misstatement or otherwise). 2018 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation. May 2016.