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Budget 2014: Protecting the corporate tax base from erosion and loopholes - measures and consultation arrangements
Download PDF PRESS The Hon David Bradbury MP RELEASE Assistant Treasurer Minister Assisting for Deregulation http:/ I assistant. treasurer. gov .au EMBARGO 14May2013 PROTECTING THE CORPORATE TAX BASE FROM EROSION AND LOOPHOLES- MEASURES AND CONSULTATION ARRANGEMENTS Tonight I am announcing the processes that the Government has put in place to consult on measures to protect the corporate tax system from erosion and loopholes. The Gillard Government is implementing these measures to ensure that Australia's corporate tax system remain fair, competitive and sustainable. Tonight, the Deputy Prime Minister and Treasurer and I issued a press release on this package. The changes announced tonight have been made after targeted consultation with business. To ensure that all key stakeholders have an opportunity to contribute to the implementation of these measures, the Government will arrange roundtable consultation meetings. These roundtables will provide an opportunity for business to contribute directly to the effective implementation of the announced changes as well as providing a forum for broader discussion of the sustainability of the corporate tax base and the work of the G20 on base erosion and profit shifting. The details of these roundtables will be announced soon. Treasury will also conduct consultation on details of the changes. Details of each of the measures and information on consultation are set out in the Attachments. In addition, discussion papers have been released tonight to facilitate consultation on the changes to the debt deduction rules and the treatment of assets first used in exploration. A paper outlining the issues to be addressed in the tripartite review into multiple entry consolidated groups has also been released. Further discussion papers will be released in the coming weeks. Media contact Justin Koek 0400 126 939
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ATTACHMENT A
ADDRESSING AGGRESSIVE TAX STRUCTURES THAT SEEK TO SHIFT PROFITS BY ARTIFICIALLY LOADING DEBT IN AUSTRALIA
The Government will protect our corporate tax base by preventing multinational enterprises from shifting profits out of Australia by loading up their Australian operations with debt.
Key features
⢠The thin capitalisation rules will be changed to:
tighten all safe harbour limits, as follows:
for general entities, the limit will be reduced from 3:1 to 1.5:1 on a debt to equity basis (or 7 5 per cent to 60 per cent on a debt to total asset basis)
for non-bank financial entities, the limit will be reduced from 20:1 to 15:1 on a debt to equity basis (or 95.24 per cent to 93.75 per cent on a debt to total asset basis)
for banks, the capital limit will be increased from 4 per cent to 6 per cent of their risk weighted assets of the Australian operations
for outbound investors, the worldwide gearing ratio will be reduced from 120 per cent to 100 per cent (with an equivalent change to the worldwide capital ratio for banks);
extend a worldwide gearing test to inbound investors.
increase the de minimis threshold from $250,000 to $2 million of debt deductions.
⢠In addition, the Government has asked the Board of Taxation to consider ways to improve the operation of the arm's length test and to make it easier to comply with and administer, including in what circumstances the test should be available.
The reforms to the exemption available to Australian companies for their foreign non-portfolio dividend income (that is returns to Australian entities on the equity interests greater than 1 0 per cent that they hold in foreign entities) announced in the 2009-10 Budget will be implemented as part of this package.
The exemption is intended to apply to returns on foreign non-portfolio equity interests. The amendments will ensure that the exemption operates as intended and is not available to returns on debt interests or interests that are truly portfolio in nature.
The exemption will also be expanded so that it applies where an Australian company receives foreign non-portfolio dividend income through an investment in a trust or partnership.
⢠The concession that allows a tax deduction for interest expenses incurred in deriving certain foreign exempt income will be removed. It is now clear that this concession is being abused as part profit shifting structures with no significant change to economic activity in Australia.
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⢠The OECD has recognised controlled foreign company (CFC) rules as a key pressure area in its work on base erosion and profit shifting. The CFC rules reduce the incentive for businesses to adopt aggressive restructuring arrangements to shift profits. Therefore, the remaining reforms to the CFC rules and foreign source income attribution rules announced in the 2009-10 Budget will be reconsidered after the OECD's analysis is completed.
Commencement date
This integrated package of measures will apply to income years commencing on or after 1 July 2014.
Why the change is needed
This integrated package of measures is designed to protect the corporate tax base by preventing multinationals shifting profits out of Australia.
Multinationals that use aggressive tax practices should not be able get a competitive advantage over other businesses that pay their fair share.
When some taxpayers avoid tax by shifting profits out of Australia, they place pressure on other taxpayers who are doing the right thing and paying their fair share of tax.
Consultation
A proposals paper outlining these changes has been released tonight and is available from the Treasury website www.treasury.gov.au.
The A TO will also commence consultation with taxpayers and Industry to progress any necessary guidance material in relation to these changes, including appropriate and practical ways to allocate interest expenses in accordance with the general deduction rules.
Consistent with normal practice, the Government expects that the Board of Taxation will consult extensively as part of its review of the thin capitalisation ann's length test.
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ATTACHMENT B
IMPROVING THE INTEGRITY OF AUSTRALIA'S FOREIGN RESIDENT CAPITAL GAINS TAX (CGT) REGIME
The Government will improve the integrity of Australia's foreign resident capital gains tax (CGT) regime to ensure gains on Australian real property are appropriately taxed.
Key features
1. Clarifying Australia's taxing rights over indirect Australian real property interests
Consistent with international norms, foreign residents are only taxed on gains on real property, including land and mining rights. This can include gains on the disposal of indirect interests in Australian real property, such as units in a property trust or shares in a land-rich company.
Two changes will be made to improve the operation of the 'principal asset test', which is used to determine whether an interest (such as a share) is an indirect Australian real property interest:
⢠In determining the value of the Taxable Australian Real Property (T ARP) assets of the entity in which the interest is held, intangible assets connected to the rights to mine, quarry or prospect for natural resources (notably mining, quarrying or prospecting information, rights to such information and goodwill) will be treated as part of the rights to which they relate.
⢠Intercompany dealings between entities in the same tax consolidated group will not form part of the principal asset test calculations ensuring that assets cannot in effect be counted multiple times thereby diluting the true asset value of the group.
2. Implementing a withholding regime for foreign residents disposing of assets that give rise to an Australian tax liability
The Government will introduce a non-final withholding regime to support the operation of the foreign resident CGT regime from 1 July 2016.
Broadly, where a foreign resident disposes of certain taxable Australian property, the purchaser will be required to withhold and remit to the Australian Taxation Office 1 0 per cent of the proceeds from the sale.
The withholding regime will not apply in relation to residential property transactions valued under $2.5 million, ensuring that the vast majority of house sales will be unaffected by this measure.
Whilst the withholding regime will protect the integrity of the foreign resident CGT regime, it will equally apply where the disposal of the Australian real property asset by a foreign resident is likely to generate gains on revenue account, and therefore be taxable as ordinary income rather than as a capital gain.
The Government will consult publicly on the design and implementation of the regime to minimise compliance costs. This will include exploring options to provide certainty about when obligations arise, pre-payment of tax liabilities by the seller, removing the withholding obligation where it can be shown that no gain will arise and streamlining any payments required including through the use
of intermediaries.
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Commencement date
The changes to the operation of the principal asset test will apply to CGT events occurring after announcement.
The new withholding regime will apply from 1 July 2016.
Why the change is needed
The foreign resident CGT regime introduced in 2006 narrowed the type of assets that are subject to capital gains tax for foreign residents. Amongst other things, the regime focussed Australia's right to tax capital gains on Australian real property assets (including land and mining rights).
In narrowing the scope of the regime, the importance of Australia being able to effectively enforce those taxing rights became paramount.
This measure seeks to address challenges that have emerged in the proper operation of the foreign resident CGT regime.
In the mining sector, there have been a number of recent cases where a foreign investor disposed of an interest in an Australian mining operation without being subject to capital gains tax.
In these cases, it was argued that the majority of the value of the mining operation was attributable to 'mining information' (that is, the knowledge of the minerals in the ground, which is not a TARP asset) as opposed to the right to extract those resources (which is a TARP asset).
This can result in the foreign investor paying no CGT, even on gains that are attributable to the appreciation in value of the mining right.
A similar issue in the operation of the principal asset test arises where a foreign investor disposes of an interest in a consolidated group that has significant interests in Australian real property assets. The foreign resident investor who controls the group can use intercompany dealings between entities in the group (such as loans) to generate non-T ARP assets, diluting the proportionate value of the TARP assets of the group.
Finally, even where a CGT liability clearly arises, there can be difficulties in collecting tax on gains from foreign resident taxpayers who may have little other connection to the Australian tax system and who may be in a position to transfer proceeds offshore prior to compliance action being taken.
A number of countries with similar foreign resident CGT regimes to Australia, such as the US and Canada, have a longstanding withholding mechanism to support the operation of their regimes.
Consultation
A more detailed discussion paper outlining the proposed design of the withholding regime will be released by the end of2013.
Interested stakeholders will be able to provide comments on exposure draft legislation to introduce the amendments to the principal asset test.
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ATTACHMENT C
CLOSING LOOPHOLES IN THE OFFSHORE BANKING UNIT REGIME
The Government will improve the Offshore Banking Unit (OBU) regime to address integrity issues with the current regime and to better target the concession to genuinely mobile banking business.
The policy intent of the OBU regime is to encourage the development of highly mobile financial sector activity in Australia where it would otherwise take place abroad. The concession taxes banking activity in an OBU at a low 10 per cent, rather than the 30 per cent company tax rate.
Key Features
This measure will improve the OBU regime to ensure its integrity and encourage genuinely mobile banking activity to take place in Australia. The measure will:
⢠treat dealings with related parties, including the transfer oftransactions between the OBU and the domestic bank, as ineligible for OBU treatment;
⢠treat transactions between OBUs, including between unrelated OBUs, as ineligible for OBU treatment; and
⢠refine the current list of eligible OBU activity.
The Government will consult with industry to develop recommendations to address concerns with the allocation of expenses between OBU and non-OBU activities and on issues raised by the Johnson report.
Commencement Date
These changes will apply to income years commencing on or after 1 July 2013.
Why the change is needed
It has become apparent that stronger integrity rules are needed to prevent banks from shifting their domestic banking activities and profits into OBUs, rather than attracting new mobile activity.
In the most egregious examples, some banks have used complex arrangements to shift ineligible income into the OBU to attract the concessional 10 per cent tax rate, while at the same time seeking to ensure any losses or deductions remain in the domestic operations to be deducted at the normal 30 per cent company tax rate.
Consultation
A discussion paper will be issued in June 2013.
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ATTACHMENT D
BETTER TARGETING RESOURCE SECTOR CONCESSIONS FOR DEPRECIATING ASSETS TO SUPPORT GENUINE EXPLORATION
The Government will better target the immediate deduction for expenditure on depreciating assets first used for exploration so that it supports genuine exploration activity.
This change will address situations where the immediate deduction is being claimed for the costs of acquiring an interest in natural resources that have effectively already been discovered. This will help ensure the sustainability of this important concession for the resources industry.
The overwhelming majority of exploration expenditure will continue to benefit from an immediate deduction, maintaining support for genuine exploration activity.
Key features
Mining rights and information that would currently benefit from the immediate deduction will instead be depreciated over 15 years or their effective life, whichever is the shorter period. Where the effective life cannot be determined, the rights and information will be depreciated over 15 years.
The effective life of a mining right and mining information will be the life ofthe mine that they lead to. The Government will consult on options to make it easier to identify the life of a future mine.
Where it is established that exploration is unsuccessful, any remaining undepreciated value will be immediately deductible.. The Government will consult on the methodologies that could be available to demonstrate that the effective life of the mining right has come to an end.
The costs of mining rights and information will continue to be immediately deductible under current rules if acquired directly from the Commonwealth, State or Territory Governments.
The non-cash costs of a mining right will continue to be immediately deductible if the right is acquired under an eligible 'farm-in, farm-out' arrangement. The Government will consult on codifying 'farm-in, farm-out' arrangements, in line with the outcomes delivered by the current ATO rulings, with a view to supporting genuine exploration activity.
The Government understands that there is an industry practice to swap exploration or retention lease tenements with other companies to consolidate holdings and facilitate better infrastructure development. The Government will consult further with the industry to identify any circumstances in which an interest acquired through an exchange of mining rights should receive concessional tax
treatment because the transaction does not give rise to integrity concerns.
Mining rights and information include quarrying and prospecting rights and information used in extractive industries.
The measure is expected to be worth around $1.1 billion over the forward estimates.
Commencement
This measure will apply to mining rights or information a taxpayer starts to hold after the time of announcement, unless the taxpayer has committed to the acquisition of the right or information
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(either directly or through the acquisition of an entity holding the asset) before the announcement or unless they are taken by tax law to already hold the right or information before the announcement.
Why change is needed
Some taxpayers are claiming an immediate deduction for mining rights and information purchased at a late stage, after natural resources have effectively been discovered.
If the purchaser then undertakes some limited additional 'confirmatory' activity, they can claim an immediate deduction for the full purchase price. This means that the immediate deduction is effectively claimed for the value of natural resources that have already been discovered.
Consultation
A proposal paper outlining these changes has been released tonight and is available from the Treasury website www.treasury.gov.au.
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ATTACHMENT E
CLOSING LOOPHOLES IN THE CONSOLIDATION REGIME
The Government will close loopholes in and improve the integrity of the Consolidation regime, which is a key feature of the corporate tax system for large and multinational corporate groups.
The changes address issues that were identified by the Board of Taxation in its post-implementation reviews into the consolidation regime, which the Government has released today.
The Government will also address two other issues relating to consolidated groups that were identified in consultations with the Board of Taxation and the Australian Taxation Office.
Key features
Consistent with Board of Taxation recommendations, amendments will be made to ensure that:
⢠consolidated groups will no longer be able to access double deductions by shifting the value of assets between entities (rec. 4.2, June 2012 report);
⢠non-residents will no longer be able to 'churn' assets between consolidated groups to allow the same ultimate owner to claim double deductions (rec. 5.6, June 2012 report); and
the consolidation regime's treatment of certain deductible liabilities will be amended so that they are not taken into account twice (rec. 2.1, April 2013 report).
The Government is today releasing two Board of Taxation Reports into the Consolidation regime. Tonight I have also issued a press release detailing the Government's response to those reports.
In delivering these reports, the Board of Taxation also raised concerns about inconsistencies in the tax treatment for multiple-entry consolidated (MEC) groups and ordinary consolidated groups. In light of this advice, the Government will amend the law to remove tax advantages for MEC groups.
A tripartite review chaired by the Treasury and involving the ATO and private sector experts will advise the Government on the implementation of this measure. More information about the review is available at www.treasury.gov.au.
In addition, the tax treatment of intra-group liabilities and assets between a continuing member of a consolidated group and a departing member of the consolidated group, which become subject to the taxation of financial arrangements (TOF A) regime upon exit, will be amended to ensure that only net gains and losses are recognised for tax purposes.
For example, this will prevent a lender from being assessed on a return of the principal of a loan and prevent a borrower from claiming a deduction for repayment of that principal.
These measures are expected to have a combined gain to revenue of $540 million over the forward estimates period and will also have a significant revenue protection element.
Commencement
The amendments implementing Board of Taxation report recommendations will apply to transactions that take place after announcement.
The amendments to equalise the tax treatment of MEC groups and ordinary consolidated groups will apply from 1 July 2014.
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To protect the integrity of the corporate tax system, the Government reserves the right to take earlier legislative action, including with effect from today, if it becomes aware of any aggressive tax minimisation practices over the course of the tripartite review. The Government will consider any evidence of aggressive tax practices to include, but not be limited to, a significant number of:
foreign-owned ordinary consolidated groups transitioning to MEC group structures;
⢠MEC groups flattening their structures (for example, by incorporating new tier- I companies or by lifting low-level subsidiaries up to the tier-1 level); and
⢠foreign-owned ordinary consolidated groups transferring subsidiaries to MEC groups with the same ultimate owner.
Changes to the interaction of the consolidation regime and the TOF A regime will apply to all income tax returns and requests for amended assessments lodged from the date of announcement. To preserve how taxpayers have complied with the current law, taxpayers will be prevented from changing their previous tax positions to take advantage of the deficiency in the law. This is because the Commissioner will not have the power to alter the treatment of affected amounts in assessments made before the announcement.
Why change is needed
The Government considers that the consolidation regime is generally operating well.
However, the two Board ofTaxation reports identified a number of minor issues that should be addressed to ensure the ongoing integrity of the regime.
Consultation
The Board of Taxation consulted extensively with the business community and tax professionals in its post-implementation reviews.
As part of this consultation, it sought views on the nature and scope of the issues and also sought views on the relative merits of alternative responses.
The Government will consult further on these matters through the release of exposure draft legislation.
In addition, the tripartite working group will consult on implementation options to remove the tax advantages for MEC groups through the release of a discussion paper in July 2013.
Detailed action
To address value shifting between subsidiaries:
⢠the tax cost setting rules will be amended so that an asset that has been created by transferring the value of an existing asset to a subsidiary is given a cost base that reflects the notional cost of creating the asset, rather than the market value of the newly created asset.
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To address asset 'churning':
⢠when membership interests in an entity that are transferred to a consolidated group or a MEC group are not regarded as taxable Australian property under the non-resident CGT rules, the consolidation tax cost setting rules will only apply when:
there has been a change in the underlying majority beneficial ownership of the membership interests in the entity; or
the membership interests in the entity were recently (less than 12 months) acquired by the foreign entity (or group).
To address double recognition of deductible liabilities:
⢠consolidated groups that purchase entities with deductible liabilities will be deemed to have received or paid an amount that equals the value of the joining entity's non-TOF A deductible liabilities that were taken into account for tax cost setting purposes;
⢠the amount increases (to the extent the liability will give rise to a deduction) or decreases (to the extent the liability will give rise to an assessable amount) the purchasing entity's assessable income over 12 months in relation to current liabilities and over 48 months in relation to non-current liabilities.
To make the tax treatment of intra-group assets and liabilities consistent with the economic substance of transactions:
⢠the entity that holds the liability will be deemed to have received, as consideration for assuming that liability, a financial benefit equal to the liability's market value at the leaving time, so that any deduction obtained under the TOFA regime will reflect the entity's economic loss (if any); and
ensure that the entity that holds such an asset takes into account the asset's market value tax cost setting amount in working out the TOF A gain or loss from the asset, so that the entity is assessed on their economic gain (if any).
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ATTACHMENT F
PREVENTING 'DIVIDEND WASHING'
The Government will close a loophole that allows some sophisticated investors to engage in 'dividend washing'.
'Dividend washing' undermines the integrity ofthe company tax imputation system by enabling shareholders to claim two sets of franking credits on what is effectively the same parcel of shares.
Key features
The Government will ensure that when an investor sells shares ex-dividend and then immediately buys equivalent shares which still carry the right to a dividend (known as cum-dividend shares), they will only be entitled to claim one set of franking credits. The changes will be targeted to the special two-day period after a share goes ex-dividend.
The Government proposes to close this loophole by making changes to the holding period rules, which generally require shareholders to hold a share at risk for 45 days in order to gain access to franking credits attached to dividends paid on the share.
In particular the Government will consider modifying the 'last-in first-out' rules, to ensure that shares brought in the above circumstances are treated as one parcel of shares. The amendments will be targeted at the identified abuse.
However, the Government is open to alternative approaches to prevent dividend washing and will consult with business to ensure that the best legislative response is implemented.
These rules will not impact on typical 'mum and dad' investors, as they will only apply to investors that have franking credit tax offset entitlements in excess of $5000.
Commencement
The new measures will apply from 1 July 2013.
Why change is needed
The imputation system contains integrity rules to ensure that franking credits only benefit the true economic owners of shares, and ensure that franking credits are only available to shareholders in proportion to their shareholdings.
Dividend washing violates both these principles by enabling sophisticated shareholders to effectively 'trade' their franking credits, and by enabling some shareholders to receive two sets of franking credits for effectively the same parcel of shares.
⢠Addressing dividend washing will support investment by improving the efficiency and integrity of the tax system. It will also help ensure the long-term sustainability of the taxation system for all Australians.
Consultation
Treasury will release a discussion paper in late May 2013.
