The Australian government delivered its 2019–20 Federal Budget on April 2, 2019, an unprecedented one month earlier than usual due to the upcoming 2019 Australian Federal Election on May 18, 2019. The Federal Budget came with a timely forecast surplus of AU$7.1 billion ($5 billion).
This article focuses on the tax measures that have relevance to global jurisdictions and highlights actions for overseas taxpayers, investors, trading partners and online retailers that engage in transactions, investment, trade and commerce with Australia.
Hybrid Mismatch Rules Slightly Modified
The Australian government announced amendments to the recently introduced Australian hybrid mismatch rules that took effect from January 1, 2019 (or July 1, 2019 if June 30 balancer).
These rules operate to prevent multinational corporations from exploiting differences in the tax treatment of an entity or a financial instrument under the laws of two or more jurisdictions through neutralizing mismatches by canceling deductions or including amounts in assessable income.
The amendments clarify their application of these rules to Australian multiple entry consolidated groups and trusts. They also seek to limit the definition of foreign tax (which could impact the deductibility of payments resulting in non-inclusion or deduction mismatches). No detail has been provided but the change is welcome.
The U.K. limited its definition of foreign tax to Federal tax in 2017 and Australia may follow suit.
The amendments also specify that, for income years commencing on or after April 2019, the integrity measure can apply where other provisions (such as thin capitalization or transfer pricing) have applied.
The integrity measure is the low tax lender rule that overrides the recommended Organization for Economic Co-operation and Development (OECD) hybrid mismatch rules and has the potential to effectively impose additional Australian tax on interest and derivative payments to foreign interposed zero or low rate (FIZLR) related parties, irrespective of whether the arrangement involves a hybrid element.
Two days after the Budget the Australian Taxation Office (ATO) released guidance on this integrity measure, however, many uncertainties remain on how to navigate the complex hybrid mismatch rules.
Action—Corporate taxpayers with cross-border financing arrangements including Australian entities should consider the impact of impending clarification of the hybrid mismatch rules including identification of any potential FIZLR entities.
List of Information Exchange Countries Updated
The government has announced that the list of countries whose residents are eligible to access a reduced withholding tax rate of 15 percent on certain distributions from Australian Managed Investment Trusts due to entering into effective information sharing agreements will be updated to include a further eight countries.
Under the managed investment trusts (MIT) withholding regime, nonresident investors are generally subject to a final withholding tax at a reduced rate of 15 percent on certain distributions from MITs and Attribution MITs (10 percent for certain distributions from clean buildings MITs) instead of the default rate of 30 percent—provided they are a resident of a country with which Australia has an exchange of information (EOI) agreement.
Curacao, Lebanon, Nauru, Pakistan, Panama, Peru, Qatar and United Arab Emirates will join the other 114 jurisdictions on the list and join the 54 jurisdictions which were added to the list with effect from January 1, 2019.
The updated list of countries will be effective from January 1, 2020. EOI agreements form an important part of Australia’s commitment to safeguard against offshore tax avoidance and evasion. Gabon and El Salvador did not complete the necessary legal arrangements, so they will not be included.
Action—Foreign investors that are residents of countries that enter into effective information sharing agreements with Australia, should factor in this favorable change when making investment decisions in Australia. MITs and their custodians and administrators will need to update systems.
Free Trade Agreements Progressed
The Budget referred to two recent and significant Free Trade Agreements. On March 26, 2019, the Australia–Hong Kong Free Trade Agreement was signed, which, upon ratification, will ensure a tariff rate of zero on all Australian exports to Hong Kong and eliminate tariffs on imports from Hong Kong. This measure is estimated to reduce revenue by AU$40 million over the forward estimates period.
On March 4, 2019, the Indonesia–Australia Comprehensive Economic Partnership Agreement (IA-CEPA) was signed, which will reduce non-tariff barriers to trade and over time will allow 99 percent of Australian goods exports to enter Indonesia duty free or with significantly improved preferential arrangements. This measure is estimated to have no revenue impact however, as the tariff reductions are in line with existing tariff reductions Australia committed to under the ASEAN–Australia–New Zealand Free Trade Agreement.
Action—Hong Kong is Australia’s sixth largest trading partner (AU$7.9 billion or 3.1 percent of total Australian exports). While exporters will benefit, the deal opens up better market access for services companies. Australian firms competing across the finance, construction, communications, hospitality, education, retail, logistics and professional services sectors will now get better access to Hong Kong.
Export Market Development Grants Funding Increased
There was additional funding of AU$60 million over three years from 2019–20 to the Export Market Development Grants (EMDG) scheme which reimburses expenses incurred for export promotional activities to existing and potential Australian exporters.
The EMDG is successful in helping start-ups expand overseas and allows Australian companies to raise awareness and get traction in a competitive global market. This additional funding will support the EMDG scheme in assisting Australian small and medium enterprise (SME) exporters to increase exports to new markets, gain exposure in international markets, develop brand recognition and form relationships with potential overseas customers.
Action—Overseas businesses should expect to see current and aspiring Australian SME exporters utilize FTAs to seek new offshore opportunities for their goods and services. Over the past five years, total trade covered by FTAs in Australia has increased from 26 percent to 70 percent, with this number expected to increase.
Expanded Accelerated Depreciation for SMEs
The Treasurer said in his Budget speech that “small businesses are the engine-room of our economy.”
In order to enhance business activity and investment the threshold for the instant asset write-off was increased from AU$25,000 to AU$30,000. Access to the write-off was also expanded to make it available to medium-sized businesses (aggregated annual turnover of AU$10 million or more, but less than AU$50 million), in addition to small businesses.
Availability of the instant asset write-off will also be extended to June 30, 2020; however the government resisted requests to make it permanent. Legislation giving effect to these changes was enacted less than one week after the Budget.
SMEs can continue to place assets which cannot be immediately deducted into a simplified depreciation pool and depreciate those assets at 15 percent in the first income year and 30 percent each income year thereafter. The pool balance can also be immediately deducted if it is less than the applicable instant asset write-off threshold at the end of the income year. Medium-sized businesses do not have access to the small business pooling rules.
Action—The changes to the instant asset write-off that result in SMEs having more funds to invest back into their businesses is hopefully the fuel required to propel Australia’s “small business engine economy” to be more competitive on both a local and global scale for the attention of international investors.
Commitment to Global Cooperative Approach on Digital Taxation
Digital taxation was missing in the Budget as the government heeds warnings for Australia to leave digital taxation alone and wait for global consensus.
A discussion paper was released in October 2018 canvassing views on options for digital taxation but in March 2019 the government revealed that after reviewing the submissions it had received, it would not be pursuing a unilateral interim tax on digitalized services. The government confirmed it would instead refocus on a more co-operative global agreement through the OECD and G-20.
Australia is still proceeding with its range of other digital taxes including the “Google tax” (a 40 percent Diverted Profits Tax levied on significant global entities with a global annual income of AU$1 billion), “Netflix tax” (Goods and Services Tax (GST) at a rate of 10 percent on digital products and services supplied to Australian consumers) and “Amazon tax” (GST at a rate of 10 percent on “low value imported goods,” sold by both Australian and overseas retailers, valued at less than AU$1000).
Action—Australia is willing to engage with its global counterparts and take a principled approach rather than resorting to populist measures. Australia will join other members of the OECD’s Inclusive Framework on Base Erosion and Profit Shifting to develop a consensus-based multilateral solution to the tax challenges presented by the digitalization of the economy, which is due to be discussed in May 2019 and progress towards a final report due in 2020.
SMEs should determine if the DPT applies to them to avoid being investigated by the ATO. Companies in the online retail industry that sell to Australian consumers should ensure they are registered for GST and collecting and remitting GST to the ATO to avoid penalties.
Lance Cunningham is a Tax Executive Director and Meera Pillai is a Tax Senior Manager at BDO Australia