Australia: Federal budget 2015-16: Quick guide – the big business measures

Last night, the Federal Treasurer, Joe Hockey MP, released the 2015-16 Federal Budget. After public self-evaluation of its last budget as over-reaching, the Government has gone back to basics whilst still focussing on repairing the budget deficit in the medium to long term.

The budget deficit is projected to be approximately $35 billion in 2015-16 (2.1% of GDP), reducing to approximately $7 billion by 2018-19 (0.4% of GDP). Many of the measures announced last night had already been telegraphed and so there were few surprises for business.

Below are some of the more significant measures in this year’s Budget that will impact business.

MULTINATIONAL TAX AVOIDANCE

Despite speculation that Australia would implement a UK-style “diverted profits tax” (or “Google tax” as it has become known), the Government has instead proposed to amend the Australian general anti-avoidance rule (Part IVA) so that it would apply to large multinationals (those with annual global income of more than $1 billion – currently estimated to be 30 companies for the purposes of the new rule) that seek to avoid having a taxable presence in Australia.

Unlike the UK position, these measures do not seek to introduce a new tax. It seems the Government, in substance, is looking to re-examine what should constitute a permanent establishment in Australia or at least what profits should be attributable to a permanent establishment, but in form is doing so via the general anti-avoidance rule.

The measures are said to be enlivened if a multinational conducts activities in Australia supporting sales to Australian customers, but the contract with Australian customers is entered into with a related non-resident entity and the profits from Australian sales are recognised in an overseas jurisdiction and are subject to no or low tax.

However, the parties entering into the relevant scheme must still possess a principal purpose of avoiding tax (tested objectively) before the new rules apply to cancel any tax benefit associated with the scheme. This, coupled with the “no or low tax” condition, may end up limiting the number of multinational taxpayers that would be subject to the new rules.

The Treasurer tabled draft legislation to implement the changes (draft Tax Laws Amendment (Tax Integrity Multinational Anti-Avoidance Law) Bill 2015) which would apply to tax benefits obtained from 1 January 2016 (with no grandfathering). Submissions on the proposed amendments may be made until 9 June 2015.

In addition, with effect from income years commencing on or after 1 July 2015, large multinationals will be subject to an increased administrative penalty of 100% of tax avoided under tax avoidance and profit shifting schemes.

BASE EROSION AND PROFIT SHIFTING (BEPS)

The OECD BEPS project has not yet been finalised but the Government has announced that it will start implementing four of the action items from that project.

One of the main changes will be the introduction of the OECD’s “Country-by-Country” reporting which will require multinationals, from 1 January 2016, to provide information regarding their global operations, including the income earned and tax paid in each jurisdiction in which they operate. The budget announcements have clearly flagged that Australia will join the number of nations that are moving ahead with their responses to the BEPs project before it is completed.

These measures will also be coupled with a “Public Tax Transparency Code” under which large corporates will be required to provide more public disclosure of their tax information.

The design of the code will be developed by the Board of Taxation.

GST ON INBOUND DIGITAL SALES

From 1 July 2017, GST will apply to digital products and services imported by Australian consumers. Examples mentioned by the Treasurer are “movie downloads, games and e-books from overseas”. The reform coincides with Netflix’s entry into the Australian market.

The Treasurer tabled draft legislation, the explanatory material to which refers to “streaming or downloading of movies, music, apps, games, e-books as well as other services such as consultancy and professional services receiving similar GST treatment whether they are supplied by a local or foreign supplier”.

The concept in the draft legislation is that the overseas seller will become liable for GST and must register for GST.

In some cases, the “operator” of an electronic distribution service will become liable for the GST instead of the actual seller.

Business-to-business supplies will generally not be captured.

For overseas suppliers, it will be necessary to take reasonable steps to determine whether the recipients of their supplies are Australian residents that are consumers (as opposed to businesses that are registered for GST). Such suppliers will also need to continue to monitor the methodology that is to be adopted regarding the collection of the GST liability on supplies made to Australian resident consumers.

COMPANY TAX RATE

Despite strong support in the recent ” Re:think Tax discussion paper” the Government has now confirmed it will not proceed with the proposal in last year’s budget to implement a general cut to the corporate tax rate.

Instead, with effect from 1 July 2015, the corporate tax rate will be cut from 30% to 28.5% for small business (those with an aggregated turnover of less than $2 million).

For unincorporated small businesses, the individuals associated with those businesses will receive a 5% discount of the income tax payable on business income (capped at $1,000).

EMPLOYEE SHARE SCHEMES

The Government had already introduced legislation to amend the employee share scheme rules (Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015) prior to the budget.

The main changes in that Bill are to reverse amendments made in 2009 and to ensure that employees were taxed on options only once they were exercised (ie. rather than vesting) and to introduce concessions for certain start-up companies.

The budget announcement includes further proposals, including allowing the CGT discount to apply where options that are the subject of the start-up concession are converted into shares and then sold within 12 months of exercise.

The combined package of proposals will be effective from 1 July 2015.

START-UP COSTS

From the 2015-16 income year, professional costs incurred when starting a new business (eg. legal fees, accounting fees etc) will be immediately deductible instead of deductible over 5 years as is currently the case.

STATUTORY REMEDIAL POWER

The Government proposes to provide the Commissioner of Taxation with a statutory remedial power under which a legislative instrument would be made to modify the operation of the tax law to ensure that it achieves its purpose or object where, on the face of it, the law would otherwise result in unintended or unforeseen outcomes.

The power is proposed to only be exercisable where to do so would be favourable to taxpayers. This measure had previously been announced and will no doubt continue to be the subject of much debate. The measure will have effect from the date of Royal Assent of the enabling legislation.

The 2015-16 Budget has been delivered at a time when the Government has put tax reform on the agenda but has not introduced any major structural tax reform. That will presumably be left to the Tax White Paper process that commenced with the recent delivery of the “Re:think Tax discussion paper” and will be completed in time for the next Federal election expected in 2016.