Australian Federal Budget Brief – A NZ perspective of what you need to know about the 2017-18 Federal Budget

Some Important Information for Kiwis from Tuesday’s Australian Federal Budget.

On Tuesday 9th May, the Australian Federal Government released its latest budget. It was an attempt to squeeze more blood out of a stone and to try to balance its books.
Kiwi’s seem to have recently borne the brunt of the Australian Government’s attempts to balance its books with the removal of subsidised Australian university education as an example. The budget yesterday takes this a few more steps further and there are a couple of very important points that our clients need to be aware of:

1. Depreciation restrictions – it is proposed that for properties acquired subsequent to the budget, it will no longer be possible to depreciate plant and equipment apportioned out of the purchase price i.e. chattel split out. Previously there has been an ability to apportion out a part of the purchase price for a commercial property or commercial residential property and claim depreciation on the chattels at higher depreciation rates than building rates. In New Zealand, we continue to be able to depreciate these even though we cannot claim building depreciation.

Existing properties in Australia will be grandfathered. In future where a building is acquired, it will no longer be possible to apportion out the property, plant and equipment. However, where a property owner does spend money on these actual capital items, then they will still be entitled to depreciation.

2. Foreign residents and foreign temporary migrants – individuals who are foreign residents or foreign temporary migrants residing in Australia will no longer be eligible for the principal family home exemption from capital gains tax. When New Zealanders enter Australia, they generally enter as foreign temporary migrants (refer our “Tax Free Sunshine” paper on our Covisory website for the full background).
For foreign residents and temporary migrants moving to Australia from today’s date or acquiring a property after this date, they will no longer be eligible for the exemption. Those already in Australia with existing properties will be grandfathered until June 2019. However, it is not clear whether at June 2019 the properties will then be subject to capital gains tax from that point on subject to a valuation or the whole of the gain up to that point in time will fall to be subject to capital gains tax. More details to follow.

Naturally as Kiwi’s enter Australia as foreign temporary migrants, they are effectively permanently temporary. There is no comment yet from the Australian Government about whether New Zealanders will be specifically excluded from the removal of the principal residence exemption.

We will be arranging to have one of our Australian colleagues come to New Zealand in the next few months to run some specific updates for clients that are affected. In the meanwhile, if you are affected by these changes, please do not hesitate to contact us.

Insight | Tax Transparency Debate

There has been some interesting recent dialogue in Australia around whether large private companies should disclose the amount of income tax they pay. Proposed legislation would have required private companies with revenue over $100m to disclose their tax contribution. Public companies already have to do this.
The counter debate against this was that it would make the family members vulnerable to kidnapping and being held to ransom. However, interestingly, Dick Smith (former owner of the now defunct retail electronics chain), argued that these families do this already by their ostentatious displays of wealth. Simply saying how much they paid in tax was confirming what people always suspected, ie they had lots of money and probably paid little tax!.
For now, the proposal has been scrapped, but it was an interesting debate.

Australian Tax Update

One of our Australian CA colleagues, David Pritchard from ESV was visiting us earlier this week. While David was at our offices we organised for a number of our CA clients to come and attend a update session of Australian Tax – During the session David covered briefly the general environment structures etc for doing business in Australia and in more detail a tax update on what is changing and issues arising from these changes as well as a detailed look at tax residency rules including temporary residents.

As a number of you missed out attending we had David provided us with a copy of his presentation and he gave us a brief intro to the presentation.

Australia is currently experiencing significant changes in its tax law and compliance processes. The changes reach across public and private companies as well as individuals. Despite private companies and high net worth individuals continuing to experience scrutiny from regulatory authorities the fall in the corporate tax rate and rising individual rates provide planning opportunities. [Click here to look at the Australian Tax Update presentation]

If you would like to know more please contact either Nigel Smith or David Pritchard to discuss.

Family Business ~ Insight | The 2013 Australian Budget

The Australian treasurer, Wayne Swann, has stated that “Australia is facing the largest write down since the Great Depression”; as a result of which Swann has introduced a series of tax measures in the 2013 Budget. In addition to tax measures the Government will intensify its tax compliance program by allocating AUD$109M over the next 4 years. Some tax measures that may have relevance to New Zealand individuals and entities include the following:

Thin Capitalisation Rules

Thin capitalisation rules will be amended to set new safe harbour thresholds. The limit for debt to equity will be reduced from 5:1 to 3:1, debt to total asset ratio will be reduced from 75% to 60%. Different rules will apply to financial institutions and banks. For outbound investment, the gearing ratio will drop from 120% to 100%., It is proposed that the worldwide gearing test be extended to inbound investors and that the de-minimis threshold of debt reduction will rise from AUD$250,000 to AUD$2,000,000.

If you have business interests in Australia which are debt funded you may be affected by this proposal.

Capital Gains Tax (CGT)

Changes are also proposed to the foreign resident CGT regime. This is to ensure that gains from disposals of Australian real property are appropriately taxed. The “principal asset test” that is used to determine whether an indirect interest in Australian Real Property exists will be amended. This will ensure that the asset cannot be counted more than once in order to dilute the group’s true asset value.

A withholding regime will also be introduced to support the foreign CGT regime. This will be effective from 01 July 2016. A withholding under this regime does not represent a final tax. A withholding of 10% by the purchaser will be required from the disposal of certain Australian taxable property. The purchaser will be required to remit the amount withheld to the ATO.  The same withholding procedure will apply if the asset is held on revenue account. It is proposed that this withholding be applied to assets over AUD$2.5 Mil

If you have taxable Australian property that is subject to Australian CGT you will be affected by this proposal.

Consolidation regime

It is proposed that the existing loophole in the consolidation regime be closed. Consolidated groups will no longer be able to access double deductions by shifting the value of the assets between the various members of the group. Likewise non-residents will not be allowed to “churn” assets between the consolidated groups.

Dividend washing

A loophole that allows “dividend washing” will be closed. This enables shareholders to claim two sets of franking credits on the same parcel of shares. This happens when the shareholder sells the shares ex-dividend and immediately acquires equivalent shares that carry a right to a dividend.  It is proposed that the shareholder will be able to claim franking credits only once.

If you feel that these rules changes are going to have some impact on your business or personal situation please contact Nigel Smith discuss how he can help you respond to these changes.

Family Business ~ Insight | Australia – Transfer Pricing Developments

Taxpayers doing business in Australia or with Australia through associated entities should take note of the new Transfer Pricing Legislation that was introduced to Parliament. The effective date of the new legislation is 01 June 2013 or the date on which the legislation receives royal ascent whichever is the earlier. In light of the new legislation it is advised that transactions between related parties are carefully reviewed. The review should focus on correct documentation of the arm’s length standard. Particular attention should be given to intra-group financing arrangements as this is a complex area that interacts with the thin capitalisation regime. In essence there is the requirement to establish the arm’s length price of debt.

The main points covered by the proposed legislation are as follows:

Arm’s Length Principle

  • Whilst it is a well-accepted principle that transactions between associated persons must be at arm’s length, taxpayers will be required to assess that this in fact is the case in relation to their Australian operations.  Basically related party transactions must be carried out on same/ similar terms as if the transactions were carried out between independent parties.

 

Reconstructive Powers

  • The new legislation gives power to the Commissioner to disregard and reconstruct transactions. The reconstructive powers are available in “exceptional circumstances”. Exceptional circumstances will exist where the transaction would not be entered into between unrelated parties and where a difference exists between the substance and the form of the transactions. The term” exceptional circumstances” is broad enough to allow the Commissioner flexibility in interpretation. Given the current climate and government’s drive to collect revenue, one can be almost certain that this power will readily be used by ATO.

Documentation

  • Whilst there is no requirement to keep transfer pricing documentation in line with the new regulations, taxpayers who do not keep adequate transfer pricing documentation, will not be able to argue that they have adopted an acceptable and reasonable position. This will result in tax shortfalls and harsher penalties being imposed by the ATO. At a practical level, often the level of documentation required is not complex or hard to put together so if you don’t have documentation it is recommended that you contact us so we can advise you as to the minimums required to at least try and protect your position.

Statutory Limitation

  • New legislation proposes a shorter time limit of 7 years of assessment during which a transfer pricing adjustment can be made. This is a welcomed approach as the current transfer pricing legislation does not prescribe a time limit.

 

In summary, it is recommended that all intra-group transactions and policies be reviewed, carefully documented and carried out on arm’s length basis. If you wish to discuss and/or assess any potential exposures your business may be facing or require any further information on this topic, please do not hesitate to contact us.

Australian Tax Focus

DEBT FORGIVENESS

The Australian government has made an announcement in their Federal Budget to amend the Income Tax Assessment Act, whereby deductions for bad debts will be denied between related parties that are not members of the same consolidated group  where the bad debt written off will not be included as part of the debtor’s income.

It is proposed that in such situations the creditor will have a capital loss rather than a deduction for income tax purposes. This situation will arise where for example the creditor is resident in Australia and the debtor is resident in New Zealand. This has not yet been enacted, but once done it will be back dated to 8th of May 2012.

This will add further layer of complexity to the already complex rules. For example, there is already a tax adjustment when a debt is forgiven: the beneficiary of the forgiveness loses (in descending order) tax losses, capital losses, the tax cost of depreciating assets and the cost base of capital assets up to the extent of the amount forgiven. Related parties can currently choose to forego the losses and the tax consequences.

ATO’s COMPLIANCE PROGRAM

ATO’s annual compliance program was released in July 2012. It identifies areas of compliance risk where ATO’s focus will be directed. Namely:

  • Taxation of Financial Arrangements (TOFA):
    • Validity of elections made for the purposes of TOFA
    • Correct application of tax timing methods
  • Profit shifting  between jurisdictions,
    • Transfer pricing and thin capitalisation
    • Entities with significant asset revaluations that may not be able to meet the safe harbour debt values without these revaluations
  •  Corporate restructuring
    • Mergers and acquisitions
    • Complex and unusual financial arrangements
    • Pre-restructuring activities
    • Changes to the effective ownership and control where the result may be deferral or avoidance of taxation
  • Consolidations
    • Inclusion of foreign partnerships in consolidated groups aimed at achieving a deduction of interest  in two jurisdictions
  • Further Audit activity will be in areas of:
    • GST
    • Research & Development

 

Australia’s Living Away From Home Allowance Changes

Most New Zealanders working in Australia and receiving living away from home allowances (“LAFHA’s”) will not be eligible to benefit from the LAFHA tax concessions after 1 October 2012.

In May 2012, the Australian Treasurer announced major changes to the tax treatment of LAFHA’s removing most of the tax concessions available. As we predicted, there was significant resistance from large businesses and, after a period of consultation, the Government amended a number of the original proposals.

The principal change to the existing law is to the home which is used as the reference point for entitlement to the benefit. Currently, if your home is New Zealand (regardless of whether you maintain a home there or not) and you are required to live (away from home) in Australia for work purposes, you are entitled to a non-taxable LAFH Allowance. After the changes, you will need to maintain a home in Australia and your work must require you to live away from that Australian home before you can benefit from a LAFHA with no tax consequences.

The main features of the proposals which have now been passed by the House of Representatives are:

  • The new rules will apply from 1 October 2012.
  • There are major carve outs for fly-in fly-out and drive-in drive-out workers.
  • LAFH allowances and benefits will continue to be subject to the FBT system. (The original proposal was to tax the allowances in the hands of the employee.)
  • Employees will need to maintain a home in Australia from which they “live away” in order to qualify for concessions.
  • The ATO will publish LAFHA amounts that it considers to be “reasonable”.  Where LAFHA’s are paid to employees in excess of those ATO amounts, documentation substantiating the amount will be required.
  • The concessions are only available for 12 months for a particular employee in a particular location with a particular employer.
  • Transitional rules will be available until 30 June 2014 for employees with arrangements in place prior to 8 May 2012. Temporary residents and foreign residents must maintain a home in Australia during this period to qualify. Minor change such as a salary reviews or annual adjustment to food component should not affect continuity of the arrangements.

The politicians say that the changes are required to address rorting of the current system. In our opinion, they go much further than is necessary. Along with the removal of the 50% CGT (capital gains) discount for foreign residents, they seem to signal a shift in Australia’s attitude to encouraging foreign investment.

We expect the rules to continue through the Senate and receive Royal Assent. This means that employers with existing LAFHA arrangements need to talk to affected employees and determine their post-1 October 2012 policies.

Update provided by Sydney based Henderson Edelstein & Co partner – Weston Ryan.

http://www.heandco.com.au/