Monthly PAYG Instalments
The Government will extend the monthly payment cycle for PAYG Instalments (income tax) to include all large entities including trusts, superannuation funds, sole traders and large investors. Currently, the monthly PAYG Instalments arrangement was only to apply to large companies.
Monthly PAYG instalments will be introduced progressively as follows:
- 1 January 2014 for companies with turnover of $1bn or more
- 1 January 2015 for companies with turnover of $100m or more
- 1 January 2016 for companies with turnover of $20m or more, and all other entities with a turnover of $1bn or more
- 1 January 2017 for all other entities with turnover of $20m or more.
Entities, other than head companies or provisional head companies, that have a turnover of less than $100m and report GST on a quarterly or annual basis will not be required to pay PAYG instalments monthly.
This measure affects the timing of tax payments rather than the quantum of the tax payments.
Addressing aggressive tax structures
The Government has announced changes to several aspects of Australia’s international tax arrangements, including:
- Increasing the de-minimis threshold from $250,000 to $2m of debt deductions (interest). This will result in many businesses no longer being subject to the Thin Capitalisation regime and is a welcome change for small and medium sized businesses
- Changes to Thin Capitalisation calculations through modifying safe harbour limits and extending a worldwide gearing test to inbound investors. For general entities (which is most non-bank taxpayers) the permitted gearing ratio will be reduced from 3:1 to 1.5:1 debt to equity
- Targeting the exemption for foreign non-portfolio dividends received by Australian companies
- Removing the provision allowing a tax deduction for interest expenses incurred in deriving certain exempt foreign income. This will affect outbound investors in particular.
A consultation process will be held in respect of these changes. These changes are intended to come in to effect on or after 1 July 2014.
Businesses with international dealings (inbound or outbound) and any material level of debt funding (related party or third party) will need to review their debt funding arrangements to ensure interest costs remain deductible.
The Government have announced changes to the consolidation regime that were identified by the Board of Taxation. These changes include:
- Non-residents are not able to ‘churn’ (that is, buy and sell) assets between consolidated groups to allow the same ultimate owner to claim double deductions
- Certain deductible liabilities are not taken into account twice
- Consolidated groups cannot access double deductions by shifting the value of assets between entities
These amendments will apply from 1 July 2014.
Capital Gains Tax (CGT) for Foreign Residents
The Government will make a number of amendments to the foreign resident CGT regime.
Amendments to take effect from 14 May 2013 will remove the ability for foreign residents to use transactions between members of the same consolidated group to create and duplicate assets, and will value mining, quarrying or prospecting information and goodwill together with the mining rights to which they relate. This is essentially an anti-avoidance measure.
From 1 July 2016, a 10% non-final withholding tax will apply to the disposal of certain taxable Australian property (most commonly real estate) by foreign residents. This will not apply to residential property transactions under $2.5m or to disposals by Australian residents. It is proposed that the purchaser of the property will have the obligation to remit the withholding tax.
Currently, sophisticated investors can engage in “dividend washing”. This practice involves selling shares with a dividend entitlement and then immediately buying equivalent shares that still carry a right to the dividend. This can result in shareholders receiving two sets of franking credits for the same parcel of shares.
Government will consult on the development of legislation to prevent this practice.
Transfer pricing – business restructures
The Government will provide $109.1m over four years to the Australian Taxation Office (ATO) to increase compliance activities in the area of business restructures that are pursued with the objective of shifting profit between jurisdictions.
It is clear from the Budget that the Government is focused on addressing perceived abuses by taxpayers undertaking cross-border transactions with related parties. Transfer pricing and associated tax issues are likely to remain a high risk area for taxpayers over coming years.
Controlled Foreign Corporation (CFC)
Implementation of the long awaited rewrite of the CFC provisions has again been deferred. The draft legislation is to be reconsidered in light of a pending Organisation for Economic Co-operations and Development (OECD) review on related issues.
Research and Development (R&D)
As previously announced, the Government will limit access to the R&D tax incentive so that it only applies to companies with annual aggregate Australian turnover of less than $20 bn. The measure will apply to income years starting on or after 1 July 2013.