Latest income tax developments May 2022
22 June 2022
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The 2022 Federal Election resulted in a majority for the Australian Labor Party in the House of Representatives, and Labor has formed Government . This post-election special primarily discusses the tax policies proposed in Labor's Economic Plan and Budget Strategy Statement.
We outlined Labor's key tax policies in our April in Australian Tax Bulletin. In this month's Bulletin we consider in more detail how Labor's policies may impact Australian businesses, and some of the key design elements of the policies that remain to be clarified.
Labor intends to repeal the safe harbour debt amount (generally, 60% of gross assets less non-debt liabilities) and implement in its place a limitation on debt deductions where they exceed 30% of earnings before interest, taxes, depreciation and amortisation (30% EBITDA Rule). This is consistent with the OECD's recommended approach for limiting the deductions multinationals can claim on interest payments.
There remain a number of unclear aspects relating to Labor's proposal, including:
With respect to infrastructure projects, the OECD proposed in Action Item 4 a potential exclusion that countries could adopt for certain infrastructure projects where interest was paid to third party lenders, referred to as "public benefit projects". The OECD permitted the exclusion because the nature of such projects and close link to the public sector was considered to reduce the base erosion and profit shifting (BEPS) risk, as well as recognising that these projects are typically highly geared. The proposed criteria developed by the OECD for such projects were as follows:
Alternatively, it may be considered that it is not necessary to introduce such an exclusion, as Labor intends to retain both the alternatives to determine the maximum allowable debt under the thin capitalisation rules, being the arm's length debt amount and worldwide gearing debt amount. Although many infrastructure participants may already be relying on the arm's length debt amount, the proposed 30% EBITDA Rule could result in many more taxpayers relying on the arm's length debt amount. At present, there is a high administrative burden in complying with the relevant documentation requirements to rely on the arm's length debt amount (even where the debt is genuinely third party debt), such that it may be prudent to relax that administrative burden in genuine third party circumstances.
With respect to whether any denial under the 30% rule is permanent or temporary, the OECD indicated that countries may allow for the carrying forward of denied interest deductions. The United Kingdom, which introduced rules consistent with the parameters of Action Item 4, opted to allow excess thin capitalisation capacity to be carried forward for a period of five years, and also to allow denied deductions to be carried forward indefinitely. This may be a reasonable approach in circumstances where there was no exclusion from the 30% rule for assets that were not presently income earning (e.g., as a consequence of being under construction). However, at this stage there is no indication from Labor as to their position in this regard.
The OECD approach also contained an alternative group ratio rule, which was intended to assist sectors where there are high levels of leverage. Broadly, the group ratio rule operates to cap interest deductions at an amount equal to taxable EBITDA multiplied by the ratio of worldwide net interest expense to worldwide EBITDA. This is somewhat similar to the worldwide gearing debt amount, albeit calculated by reference to interest expense. Given the existence of the alternative worldwide gearing debt amount, it would seem unlikely that the group ratio rule would be introduced, although given the different underlying bases of the rule (i.e., one focussed on interest expense compared to EBITDA, the other focussed on assets compared to debt), this remains to be confirmed.
Finally, it is worth noting that the Labor material associated with the proposed 30% EBITDA Rule has a particular focus on related party debt, including references to the base erosion risk associated with creating "artificial debts … within related entities". It is possible that the measure may be focussed on related party debt specifically rather than debt generally.
Labor proposes to limit the ability of large multinationals to deduct royalties where they are paid to related entities in jurisdictions with which Australia has concluded a Double Tax Agreement ("DTA"), where that jurisdiction is considered a tax haven. It is not presently clear which jurisdictions are considered tax havens.
In relation to scope, Labor has provided that:
If a transaction falls within the scope, deductions from for the royalties will be denied unless the taxpayer can demonstrate that the royalty payments are not for the purpose of tax avoidance.
Labor has stated that this proposed measure is "related" to those in the United Kingdom, United States and the Netherlands. The United Kingdom's Anti-Treaty Shopping Rules prevent the exploitation of double taxation agreements where a person makes an IP royalty payment to a connected party, and the payment is made under a double taxation agreement tax avoidance arrangement (DTA tax avoidance arrangement). DTA tax avoidance arrangements are arrangements where the main purpose, or one of the main purposes, of the arrangement is to obtain a tax advantage by virtue of any provisions of a double taxation agreement and obtaining that tax advantage is contrary to the object and purpose of those provisions (Income Tax Act 2007 (UK), s 917A(4)). Therefore, the rules deny treaty benefits that would otherwise be available.
Given that many of Australia's DTAs already contain anti-treaty shopping provisions (including as a result of modifications made by "The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting" or "MLI"), the additional scope of this measure is unclear, although it could catch some DTAs which have not yet been modified by the MLI .
Labor plans on implementing the OECD's Two-Pillar solution. The Secretary-General of the OECD, Mathias Cormann, has announced that the implementation of the Two-Pillar Solution will be pushed back a year so that practical implementation will now happen from 2024 onwards.
At present, no draft legislation exists for this measure, and other than material released by the OECD, there is limited guidance on how it will be introduced in Australia.
When the Federal election was called on 10 April 2022, the Parliament was prorogued and House of Representatives was dissolved from 11 April 2022. As a result, all unpassed Bills before Parliament lapsed, although some of these lapsed Bills may be re-introduced. The table below outlines Labor's position on the key tax Bills that lapsed.
Bill | Labor's Position |
---|---|
Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022 | The Bill proposed the introduction of the Patent Box Regime "to provide concessional tax treatment for ordinary and statutory income derived by a corporate taxpayer from exploiting a medical or biotechnical patent" in respect of income years commencing on or after 1 July 2022. The Bill was read for a second time on 10 February 2022. No amendments were proposed nor was there any debate. Labor has not expressed a view on whether the Bill will be reintroduced. |
Treasury Laws Amendment (2021 Measures No 7) Bill 2021 | This Bill proposed amendments to the Taxation Administration Act 1953 (Cth) to require electronic platform operators to provide transaction information to the ATO. Labor has stated that it supports the amendments. The Bill also proposed amendments to the Fringe Benefits Tax Assessment Act 1986 (Cth), Income Tax Assessment Act 1936 (Cth) (ITAA 1936) and Income Tax Assessment Act 1997 (Cth) (ITAA 1997) to remove the $250 non-deductible threshold for work-related self-education expenses from the 2022-23 income year. Labor has not expressed a view in relation to this proposed amendments. |
Treasury Laws Amendment (Enhancing Tax Integrity and Supporting Business Investment) Bill 2022 | The Bill proposed amendments to the ITAA 1997 to provide the choice to self-assess the effective life of certain intangible assets that start to be held on or after 1 July 2023, rather than using the statutory effective life in working out the decline in value. During debate in the House of Representatives, Labor stated that it would not oppose the measure. Labor also noted the "significant tax benefit" the amendment will bring for entities that are able to take advantage of the self-assessment. However, we note that Labor opposed similar proposed amendments in the Treasury Laws Amendment (2017 Enterprise Incentives No 1) Bill 2017, and, after debate in 2017, the amendments in dispute were removed. The Bill also proposed a reduction of the tax on certain income earned by foreign resident workers participating in the Australian Agriculture Worker Program or the Pacific Australia Labour Mobility scheme. The proposed reduction is from 32.5% to 15%. In relation to the Pacific Australia Labour Mobility Scheme, Labor has stated that it will:
Accordingly, it seems unlikely that this aspect of the Bill would be re-introduced. |
The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying it to specific issues or transactions.
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