Latest income tax developments – March - May 2023

In this update we look at the key Australian income tax developments impacting business over the past three months.

Federal Budget

The Federal Budget was delivered on 9 May 2023 and contained a number of tax measures that will impact taxpayers, including taxpayers operating in the real estate, mining, general insurance sectors, as well as small businesses. 

The key tax measures in the 2023-2024 Federal Budget are discussed in our previous Bulletin.

Legislative Updates

Treasury Laws Amendment (2023 Measures No. 1) Bill 2023 (Cth)

The Treasury Laws Amendment (2023 Measures No. 1) Bill 2023 (Cth) contains changes which will affect the capacity for listed companies to attach franking credits to dividends paid as part of offmarket share buy-backs, as well as changes to the frankability of certain distributions made as part of selective reductions of capital and certain distributions funded by capital raisings. The Bill is currently at the second reading stage in the Senate.

The Bill implements the Government announcement made in the 2022-23 October Budget that offmarket share buy-backs by listed companies will have the same tax treatment as on-market share buy-backs (as discussed in our previous Bulletin). It also amends the treatment of selective share cancellations to treat them in an equivalent manner.

Specifically, under the new rules:

• No part of an off-market buy-back undertaken by a listed public company, or a selective share cancellation, will be treated as a dividend for tax purposes and, as a consequence, listed companies
  will not be able to provide franking credits to their shareholders as part of these capital management transactions.
• However, a franking debit may arise in the listed public company's franking account. The franking debit will be equal to the debit that would have arisen if the company were not a listed public company and the share buy-back or selective cancellation of shares were a frankable distribution (because the whole or part of the buy-back or cancellation price was not debited to the company's share or non-share capital account), assuming that the relevant part of the distribution were franked at the applicable franking percentage.

The above amendments are proposed to apply to buy-backs and selective share cancellations undertaken by listed public companies that are first announced to the market after 7:30pm in the Australian Capital Territory, on 25 October 2022. 

The Bill also amends the Income Tax Assessment Act 1997 (Cth) to prevent certain distributions funded by capital raisings from being frankable. Concerns with respect to elements of these capital management strategies were first raised by the ATO in Taxpayer Alert 2015/2. The stated objective of this amendment is to ensure that arrangements cannot be put in place to release franking credits that
would otherwise remain unused. This will affect distributions which, broadly, are made by an entity in a manner which is not consistent with an established practice of making distributions of a similar kind on a regular basis, where there has been an issue of equity interests which it is reasonable to conclude had the principal effect and purpose (other than an incidental purpose) of directly or indirectly funding the relevant distribution.

The measures as drafted are broader than the types of arrangements targeted by TA 2015/2. A number of submissions to the Senate Economics Legislation Committee expressed concern at the breadth of the provisions and particular issues have been raised about the consequences for dividend reinvestment plans, as they could be captured by the proposed measures. The Senate Economics Legislation Committee has recommended that the Government consider amendments to the Bill to ensure that it appropriately targets the behaviours identified as problematic and addresses the concerns raised by stakeholders. 

If enacted, these amendments will apply to distributions made on or after 15 September 2022, as confirmed in the 2023-2024 Federal Budget (as discussed in our previous Bulletin).

The Bill also contains a range of other measures, including amendments to implement certain recommendations of the Independent Review of the Tax Practitioners Board (TPB), which was announced in 2019 and completed in November 2020. The amendments include updating and modernising the objects clause of the Tax Agent Services Act 2009 (Cth), creating financial independence for the TPB from the ATO, requiring tax practitioners to not employ or use a disqualified entity without the TPB's approval, converting to an annual registration period and enabling the Minister to supplement the existing Code of Professional Conduct to ensure that certain behaviours and practices by tax practitioners are properly addressed.

Treasury Laws Amendment (Refining and Improving Our Tax System) Bill 2023 (Cth)

The Government has introduced the Treasury Laws Amendment (Refining and Improving Our Tax System) Bill 2023 (Cth) into Parliament. The Bill will give the force of law to the Convention between Australia and Iceland for the elimination of double taxation, as well as the Protocol to the Convention, which were signed together on 12 October 2022.

In addition, the Bill reforms the deductible gift recipient (DGR) register by transferring administration of Environmental Organisation DGRs, Harm Prevention Charity DGRs, Cultural Organisation DGRs, and Overseas Aid DGRs to the Commissioner of Taxation, which administers all other categories of DGR. This measure does not substantially change any obligations on DGRs and prospective DGRs. Essentially, the effect of the amendment is that DGRs and prospective DGRs will only need to engage with the ATO, instead of both the ATO and relevant government department.

The Bill is currently before the Senate.

Exposure Draft: Multinational Tax Integrity – strengthening Australia's interest limitation (thin capitalisation) rules

Treasury has released exposure draft materials regarding proposed changes to the thin capitalisation rules, which will have a significant impact on:

• entities which are currently classified as "general entities" for thin capitalisation purposes; and
• entities which are currently classified as "financial entities" for thin capitalisation purposes, where that classification arises solely due to registration under the Financial Sector (Collection of Data) Act 2001 (Cth).

The implications of the proposed changes are discussed in detail in our previous Bulletin. Impacted taxpayers should as a matter of urgency consider the implications of the measures on their debt  deduction capacity, noting that the measures (once enacted) are intended to apply from 1 July 2023. We expect that legislation for this measure will be introduced into Parliament in June 2023.

Exposure Draft: Multinational Tax Integrity – denying deductions for payments relating to intangible assets connected with low corporate tax jurisdictions

Treasury has released draft legislation which proposes to deny deductions to significant global entities (being certain entities that, along with their relevant economic group, have a global turnover over $1 billion) (SGEs) for payments made to related parties in relation to intangibles held in low or no-tax jurisdictions. This measure was previously announced in the 2022-2023 Federal Budget following Treasury Consultation in September 2022, as discussed in our previous Bulletin.

The measure will deny a deduction in circumstances to the extent that an SGE makes a payment to an associate that is attributable to a right to exploit an intangible asset and, as a result of that arrangement, income from the exploitation of those or related intangible assets is directly or indirectly derived in a low corporate tax jurisdiction by an associate of the SGE. There is no requirement of a tax avoidance purpose, which departs from general anti-avoidance tax laws.

However, there remains considerable uncertainty around the measure, including the breadth of the concept of "intangible asset". In addition, it remains unclear how this rule will interact with the proposed implementation of the OECD two-pillar solution, or with any potential concurrent tax liability on payments under, for example, the CFC regime. Furthermore, and surprisingly, the measure applies even where the payment has been subject to royalty withholding tax in Australia.

The consultation process has now closed. The measure is proposed to apply to income years commencing on or after 1 July 2023. We expect that legislation for this measure will be introduced into Parliament in June 2023.

Exposure Draft: Multinational Tax Transparency

Treasury has released draft legislation to implement a proposed transparency measure which would require certain multinational entities to publicly release certain tax information on a country-by-country (CbC) basis. The draft legislation, if enacted, will give effect to the Government's announcement in the October 2022-23 Budget, as discussed in our previous Bulletin.

The draft legislation imposes reporting obligations on certain multinational entities with an annual global income of at least AUD 1 billion (CbC reporting parent) where an entity within the CBC reporting group is an Australian resident or operates an Australian permanent establishment.

The CbC reporting parent is obliged to publish the names of each entity within the CbC reporting group, a description of the CbC reporting group's approach to tax risk and, with respect to each jurisdiction in which the CbC reporting group operates, details including:

• a description of the group's main business activities and the number of employees;
• revenue from unrelated parties, and revenue from related parties that are not tax residents of the jurisdiction;
• expenses arising from transactions with related parties that are not tax residents of the relevant jurisdiction;
• the book value of tangible and intangible assets at the end of the income year (other than cash and cash equivalents); 
• income tax paid, on a cash basis, as well as income tax accrued for the current year, and the effective tax rate for the jurisdiction; and 
• reasons for any difference between the income tax accrued for the year, and the amount of income tax due if the income tax rate were to be applied to the CbC reporting group's profit or loss before income tax.

The draft legislation and Explanatory Materials make it apparent that the penalty provisions under the Taxation Administration Act 1953 (Cth) will apply for non-compliance with the proposed CbC reporting obligations.

In its current form, the draft legislation is much broader than, and requires additional information beyond, the Global Reporting Initiative's Sustainability Reporting Standards GRI: Tax (2019) (GRI 207).

It also extends public information reporting requirements beyond other global standards on public CbC reporting, such as EU Directive 2021/2101.The consultation process has now closed. The reporting obligation is proposed to commence for eligible entities for income years commencing on or after 1 July 2023. We expect that legislation for this measure will be introduced into Parliament in June 2023.

Exposure Draft: Tax accounting for primary producer registered emissions units

Treasury has released draft legislation which provides concessional tax treatment for certain primary producers that generate revenue from the sale of Australian Carbon Credit Units (ACCUs). This measure was confirmed in the March 2022-23 Budget, and was discussed in our previous Bulletin. 

The draft legislation expands the definition of "assessable primary production income" to include, among other things, amounts received from starting or ceasing to hold a "primary producer registered emissions unit". Only an ACCU which is held by an individual or trust on or after 1 July 2022 will be a "primary producer registered emissions unit" under the draft legislation.

The effect of the measure is that income derived from sales of prescribed ACCUs will now be eligible for concessional tax treatment under the Farm Management Deposit (FMD) scheme and income tax averaging arrangements.

The draft legislation also expands the amounts which can be deducted as "primary production deductions" to include, among other things, amounts in relation to expenditure incurred for starting or ceasing to hold certain ACCUs, and changes the taxing point for ACCUs held by eligible primary producers to the point of sale.

Consultation on this measure has now closed. If enacted, the measure will apply to ACCUs first held on or after 1 July 2022. 

ATO News

ATO settles dispute over Singapore hub

The ATO has released a media statement acknowledging the announcement by Ampol Limited that it has reached a settlement with the ATO for $157 million. The settlement resolves the dispute for past years back to 2014 for $157 million and locks in the tax outcomes of the arrangement to 2033.

The ATO has stated that the settlement covers the transfer pricing outcomes of refined products and crude oil between Ampol Singapore and Ampol Australia, as well as how Australia's controlled foreign company (or CFC) regime will apply to the profits of Ampol Singapore.

The dispute and settlement reflect the recent focus of the Tax Avoidance Taskforce on offshore procurement hubs, typically located in low or no tax jurisdictions. Multinationals which operate offshore hubs of this nature should consider the potential tax implications associated with these arrangements.

Other Cases

Jamsek v ZG Operations Australia Pty Ltd (No 3) [2023] FCAFC 48: Super guarantee employee

In Jamsek v ZG Operations Australia Pty Ltd (No 3) [2023] FCAFC 48, on a remitted appeal from the High Court, the Full Federal Court concluded that two truck divers were not 'employees' for super guarantee purposes under section 12(3) of the Superannuation Guarantee (Administration) Act 1992 (SGA Act). Relevantly, section 12(3) of the SGA Act extends the definition of employee by providing that 'if a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract.'

The taxpayers in this case were two truck drivers who were initially employed by the respondent. In the mid-1980s, the working conditions of the drivers changed as the respondent could no longer sustain employees. Each driver subsequently set up a partnership with their respective wives and entered into a contract with the respondent to purchase trucks and provide delivery services. The partnerships were responsible for the maintenance costs of the trucks and earned income from the delivery services, which was declared as partnership income. In 2017, following the termination of the contracts between the respondent and the partnerships, the drivers commenced proceedings in the Federal Court seeking, amongst other entitlements, payments of superannuation contributions.

The Full Federal Court dismissed the truck drivers' appeal and unanimously affirmed the first instance decision that the drivers were not employees of the respondent company under section 12(3) of the SGA Act.

The Full Court accepted the submissions of the Commissioner that section 12(3) of the SGA Act only has application where the putative employee is an identified natural person who is a party to the contract with the employer in their individual capacity, rather than in any other capacity such as a partner or trustee of a personal service trust. The drivers had executed the relevant contracts with the respondent company in their capacity as partners. As such, they were not parties to the contract in their individual or personal capacity.

Additionally, the Full Court also held that the relevant contracts were not wholly or principally 'for' the labour of the person, as required by section 12(3) of the SGA Act. The key finding in this respect was that the dominant component of the contracts between their partnerships and the respondent company involved the provision of a substantial capital asset, being a functional and properly maintained delivery truck. Although the contracts also included a labour component in respect of the carriage of goods, there was also a provision for other drivers to be engaged to complete the delivery services. As a result, the labour of the drivers could not be said to be the principal or predominant component of the contract.

JMC Pty Ltd v Federal Commissioner of Taxation [2023] FCAFC 76: Super guarantee employee 

The Full Federal Court has upheld an appeal by the taxpayer in JMC Pty Ltd v Federal Commissioner of Taxation [2023] FCAFC 76 by concluding that a lecturer for a higher education provider was not an 'employee' for super guarantee purposes under the SGA Act.

The taxpayer had engaged a qualified sound engineer to provide teaching services to students which comprised the delivery of lectures and marking of exams. The lecturer issued invoices for payment, which included an ABN that he had registered. The taxpayer did not make any superannuation contributions for the lecturer. Subsequently, the ATO issued the taxpayer with superannuation guarantee charge assessments in relation to the lecturer. The ATO was of the opinion that the lecturer was an 'employee' under section 12(1) of the SGA Act in accordance with the ordinary (common law) meaning of the term, or alternatively the extended meaning under section 12(3). 

At first instance, the Federal Court upheld the assessments and concluded that the totality of the rights and obligations under the relevant contract indicated that the lecturer was an employee, and in the alternative, that the lecturer was an employee under section 12(3) of the SGA Act on the basis that the contract under which the lecturer was engaged was wholly or principally for their labour. The Full Federal Court unanimously reversed the decision of the Federal Court.

The fundamental issue for resolution by the Full Court was the correct characterisation of the relationship between the parties in light of their comprehensive written contract. In this respect, a key consideration was the right bestowed upon the lecturer under the contract to subcontract or assign the performance of his teaching services, subject to written consent by the taxpayer. The Court held that the right to subcontract was ultimately inconsistent with an employment relationship. In addition, the lecturer held a relevant degree of freedom in negotiating the lecture timetable as well as in performing the teaching services and was not required to report to a manager nor was subject to performance reviews. When considering these factors in totality, the Full Court concluded that the contract did not provide the sort of controls over how, when or where the lecturer was required to deliver the services such as to amount to indicia that he was an employee rather than an independent contractor.

On the section 12(3) issue, the Court held that the ability to subcontract was inconsistent with the notion that the contract was wholly or principally for labour – the contract was a contract for teaching services, and not wholly or principally for labour.

Watching Brief – Tax Guidance for 2023

Taxpayers should be aware of the following expected tax guidance to be published by the Commissioner this year:

• Royalties and software. The ATO proposes to update its guidance regarding the tax treatment of development and marketing of software, currently contained in TR 93/12 (Income Tax: Computer Software). Expected completion is in mid-2023.
•  Capital allowances – composite items and identifying the depreciating asset for the purpose of working out capital allowances. The ATO proposes to reissue a revised draft ruling which will cover the items currently covered by TR 2017/D1 (published on 18 January 2017). The revised draft ruling will also incorporate changes made to address earlier feedback provided. Expected completion is currently listed as being in May 2023.
• Privatisation and Infrastructure – Australian Federal Tax Framework. The ATO intends to publish guidance setting out the ATO's overall position in relation to a range of infrastructure-related issues. Expected completion is July 2023.
• Hybrid mismatch rules – subject to foreign income tax. The ATO is expected to issue guidance which will address the Commissioner's view on key aspects of the 'subject to foreign income tax' definition in the hybrid mismatch rules, with particular focus on treatment of intra-group payments between members of the same US consolidated group. Expected completion is late 2023.
• Back-to-back CGT rollovers. The ATO is expected to release guidance in late 2023 on the Commissioner's view on the interpretation and application of the 'nothing else' condition (or equivalent conditions) to qualify for various CGT rollovers.