Instant asset write off >
From 6 October 2020, the instant asset write-off will be expanded to apply to businesses with aggregated annual turnover of less than $5 billion. It will apply to all new assets that are acquired and used/installed between 7:30PM AEDT on 6 October 2020 and 30 June 2022. The cost of these new assets can be written off in full in the year that the asset is first used or installed ready for use, in a business.
Businesses with aggregated annual turnover of less than $500 million can write off second-hand assets costing less than $150,000 so long as they are purchased by 31 December 2020. Businesses will have a further six months until 30 June 2021 to use or install the asset.
Currently, small businesses are able to claim the entire balance of their small business pool if the balance of the pool is less than $150,000 (for the 2020 year). Under the proposed measures, this threshold will no longer apply, so the entire balance of the small business pool can be claimed. The restriction on a small business re-entering the simplified depreciation regime for five years if they opt-out will continue to not be applied.
Temporary loss carry-back scheme >
The Government has announced temporary ‘loss carry back rules’ for Australian companies. A similar loss carry-back scheme was briefly introduced in 2012-13 under the Gillard government, in response to the global financial crisis, but was scrapped within two years.
The proposed scheme is designed to generate a cash-flow boost to companies by providing a cash refund of tax previous paid in respect of the 2018-19 year of income (or later years) where the company subsequently incurs a tax loss in the 2020, 2021 or 2022 financial years (“FY20-FY22”).
For example, if:
- A company made a taxable profit of $1,000 in 2018-19 and paid tax of $300; and
- That same company made a loss in 2019-20 of $1,200,
then the company could amend its 2018-19 income tax return and ‘carry-back’ its 2019-20 tax loss to reduce the 2018-19 profit from $1,000 to $Nil. This would mean the company would receive a full refund of the $300 of tax previously paid in respect of the 2018-19 tax return. The company would also have $200 of residual tax losses to be carried forward.
The proposed scheme, and the resultant cash-flow boost, compares favourably to the current laws which require tax losses to be carried forward to be offset against profits derived in future years of income.
Key features of the scheme include:
- The scheme is open to all Australian resident companies with an aggregate annual turnover of less than $5billion. It would seem that turnover of Australian and international ‘group companies’ will count towards this threshold, but this will need to be confirmed;
- The scheme is optional – i.e. companies can elect to carry forward FY20-FY22 tax losses under the current rules;
- FY20-22 tax losses can only be carried back to offset profits of the 2018-19 (or later) year of income. Thus, it will not be possible to obtain a refund of tax paid in 2017-18 or earlier years of income;
- Although the scheme commences to apply from the 2019-20 year of income, the first tax refund will only be available when eligible businesses lodge their 2020-21 and 2021-22 income tax return. Thus, for example, a company with a 30 June year end will not be able to claim a tax refund until (at the earliest) July 2021;
- The tax refund will be limited such that the amount of tax losses carried back is not more than previously tax profits; and
- The tax refund will be capped such that the refund does not generate a franking account deficit for the company.
The limitation in relation to the company’s franking account balance was a restrictive requirement for companies seeking to access the 2012-13 version of the scheme. This feature will necessitate a crucial need for planning in terms of the interaction of the loss carry-back scheme and a company’s dividend policy, including any dividend policy to ‘fund’ Division 7A loans.
Further details are required, including the application to companies with non-June year ends, in order to fully assess the efficacy of the scheme.
Corporate Tax Residency >
Since 2017 there has been considerable uncertainty around the tax residency of companies incorporated outside of Australia, but where Australian based directors control the management of the company.
Following the High Court decision in Bywater Investments Ltd v Federal Commissioner of Taxation, the ATO departed from the long-standing two-pronged test. The ATO adopted a view (applicable from 15 March 2017) that if a foreign company’s central management and control (CMC) was exercised in Australia, that foreign company would be deemed to carry on its business in Australia (irrespective of where its actual day-to-day operations were), and would therefore be considered an Australian tax resident. Essentially, the ATO view post the Bywater case equated the requirement of CMC with that of carrying on a business in Australia.
Historically the corporate tax residency test was interpreted as a two-pronged test – carrying on business in Australia, and central management and control in Australia. Both requirements needed to be present before a foreign incorporated company was treated as tax resident in Australia. This meant that where foreign incorporated companies carried on their business activities outside of Australia, they would not be viewed as Australian tax resident, even where CMC was in Australia.
As a result of the ATO’s revised interpretation, foreign incorporated companies, particularly those forming part of Australian out-bound groups, were forced to reconsider their tax residency and take additional (and in most instances, impractical) steps to ensure they remained foreign tax resident.
In August 2019 the Treasurer requested that the Board of Taxation conduct a review of the operation of Australia’s corporate tax residency rules. The Board of Taxation recently finalised its review and submitted its report to the Federal Government for consideration. The final report is yet to be published, however, the overall conclusion was that “…the rules determining the tax residency of a foreign incorporated company are in need of urgent reform”.
In response to the findings of the Board of Taxation, the Federal Government will make technical amendments to clarify the corporate residency test. A company incorporated offshore will be treated as Australian tax resident if it has a ‘significant economic connection to Australia’. This test will be satisfied where both the company’s core commercial activities are undertaken in Australia and its CMC is in Australia. Whilst the enabling legislation is yet to be released, it appears as though the intention is for the two-pronged test to return.
Favourably, while the amendments will only have effect from the first income year after the date of Royal Assent of the enabling legislation, taxpayers will have the option of applying the new law retrospectively from 15 March 2017 (the date the ATO withdrew its ruling dealing with the two-pronged test and replaced it with its post-Bywater interpretation).
FBT exemption for retraining and reskilling >
From 2 October 2020, the Government is providing a broader FBT exemption for expenditure on retraining and reskilling activities. The FBT exemption will apply to expenditure to retrain and reskill employees for redeployment in a different role within the business, or to prepare them for their next career.
The exemption will not extend to retraining expenses incurred under a salary packaging arrangement or training provided through Commonwealth supported places at universities, which already receive a benefit.
FBT record keeping changes >
Employers will be able to use existing corporate records for FBT purposes, rather than have to obtain additional prescribed records such as employee declaration.
Currently, the FBT legislation prescribes the form that certain records must take and forces employers, and in some cases employees, to create additional records in order to comply with FBT obligations.
The measure will allow employers who already maintain adequate alternative records to rely on those existing records, removing the need to complete additional records. This will reduce compliance costs for employers, while maintaining the integrity of the FBT system. The Commissioner of Taxation will be responsible for determining what are adequate alternative records.
The exemption is proposed to apply from 1 April 2021, subject to the timing of royal assent for the enabling legislation.
Managed Investment Trusts >
Generally, the Managed Investment Trust (“MIT”) withholding tax is imposed at a rate of 30% where the taxpayer is not a resident of an information exchange country, or 15% where the taxpayer is a resident of an information exchange country.
Under the MIT withholding tax provisions, foreign residents are liable to income tax on an amount specified as the “fund payment part”. This concept broadly includes the net income of a MIT from Australian sources, excluding dividends, interest, royalties and capital gains or losses from CGT assets that are not taxable Australian Property.
Information exchange countries are those that have an established legal relationship with Australia, which facilitates the sharing of taxpayer information with the aim of safeguarding Australia against offshore tax avoidance.
Under the 2021 Federal Budget measures, the list of information exchange countries eligible for the reduced MIT withholding tax rate will be updated to include the Dominican Republic, Ecuador, El Salvador, Hong Kong, Jamaica, Kuwait, Morocco, North Macedonia and Serbia; with Kenya being removed from the list.
The updated list is proposed to be effective from 1 July 2021.
ATO and AUSTRAC funding >
The Government will provide $104.9 million to the Australian Transaction Reports and Analysis Centre (AUSTRAC) to enable it to combat serious financial crime. The funding will also contribute to the development of a new financial data reporting system to assist industry in meeting its reporting obligations under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006.
An additional $15.1 million will also be provided to the ATO to target serious and organised crime in the tax and superannuation systems.
Commonwealth Business Registry >
The Government will invest an additional $419.9 million to fund the introduction of the Modernising Business Registers (MBR) program, which will transfer over 35 existing business registers (such as the Australian Business Register, and the ACN Register) to a single modernised platform.
The platform is designed to streamline interactions with government by centralising the location of all business registry data, and to make the registers more user-friendly.
The new platform is expected to be operating from 2021.
Director Identification Number >
Directors of companies and other bodies corporate will be required to apply for a permanent, unique director identification number (DIN). Each director will keep this identifier, even if they cease to be a director, and the same identifier will not be re-issued to any other person
The DIN system is aimed at targeting illegal phoenixing activities (which occur when the controllers of a company avoid paying liabilities by shutting down a company and transferring its assets to another company), and provide traceability of a director’s relationships across companies.
The estimated annual cost of phoenixing to the Australian economy is between $2.9 billion and $5.1 billion.
The DIN system is expected to be operating from early 2021.
Insolvency reforms >
The Government will implement insolvency reforms to help small businesses survive the economic impact of the COVID-19 pandemic. These measures will commence on 1 January 2021, subject to the passing of legislation. The package of reforms features three key elements:
- A new formal debt restructuring process for small businesses to provide a faster and less complex mechanism for financially distressed but viable firms to restructure their existing debts, maximising the chance of them surviving and contributing to economic and jobs growth. Under the new process, incorporated businesses with liabilities of less than $1 million will be able to keep trading while they develop a debt restructuring plan, which is ultimately voted on by creditors. About 76 per cent of companies entering into external administration in 2018-19 had less than $1 million in liabilities, about 98 per cent of which have less than 20 full-time employees.
- A new, simplified liquidation pathway for small businesses to allow faster and lower-cost liquidation, increasing returns for creditors and employees. The process would be accessible to incorporated businesses with liabilities of less than $1 million (the same threshold that would apply to the new debt restructuring process). The simplified liquidation process will retain the general framework of the existing liquidation process, with modifications to reduce time and cost. Time and cost savings will be achieved through reduced investigative requirements, requirements to call meetings, and reporting functions.
- Complementary measures to ensure the insolvency sector can respond effectively both in the short and long term to increased demand and to the needs of small business. In this regard, the Government is introducing a number of permanent and temporary measures to expand the availability of insolvency practitioners to deal with the expected increase in the number of businesses seeking to restructure or liquidate.