Instead, when Deputy Prime Minister and Treasurer, The Hon Wayne Swan MP, delivered his sixth Budget on 14 May, much of the focus was on targeting what the Government and ATO consider to be ‘loopholes’.
The major revenue measures announced in the Budget have been documented in our president’s and CEO’s report on page four. Here, we take a closer look at the detail behind some of those measures.
Tax reform road map
In last year’s Budget, the Government released details of what it called its ‘tax reform road map’, which it said built on the work already done by the Henry Review and the 2011 Tax Forum. In the 2013/14 Budget, the Government updated this roadmap, reiterating the principles for creating a stronger, smarter and fairer tax system. This was the general theme throughout the Budget.
The Government reviewed its record of tax reforms and foreshadowed tax changes still to come, including:
- the progressive increase in the super guarantee rate;
- reducing interest withholding tax paid by financial institutions on offshore borrowing;
- introducing non-resident CGT non-final withholding tax;
- gradually increasing the age pension qualifying age to 67 by 2023;
- applying normal age pension deeming arrangements to new superannuation account-based income streams in 2015.
Multinationals in the firing line
To help make up for falling revenues, Treasurer Swan said the Government would use its leadership of the G20 wealthy nations next year to drive a crackdown on tax loopholes and evasion by multinational companies, helping recoup as much as $4.2 billion.
The Government announced it would address profit shifting by multinationals through the disproportionate allocation of debt to Australia by tightening and improving the integrity of several aspects of Australia’s international tax arrangements, with effect for income years commencing on or after 1 July 2014. The Government expects this to have an estimated gain to revenue of $1.5 billion over the forward estimates period.
The Government said its action in announcing the measures was consistent with the OECD’s approach on base erosion and profit shifting and the Government’s role in the G20’s multilateral action to address these issues.
The Treasurer said the Government would release a Treasury Scoping Paper in June 2013 to examine the risks to the sustainability of Australia’s corporate tax base from base erosion and profit shifting. In particular, the changes announced in the Budget will involve:
- tightening and improving the effectiveness of the thin capitalisation rules, including changing all safe harbour limits;
- extending a worldwide gearing test to inbound investors;
- increasing the de minimis threshold from $250,000 to $2 million of debt deductions, which is designed to reduce compliance costs for small business;
- better targeting the exemption for foreign non-portfolio dividends received by Australian companies; and
- removing the provision allowing a tax deduction for interest expenses incurred in deriving certain exempt foreign income.
Thin cap changes
The Assistant Treasurer, The Hon David Bradbury MP, said the thin capitalisation rules would be changed by tightening all safe harbour limits as follows:
- for general entities, the limit will be reduced from 3:1 to 1.5:1 on a debt-to-equity basis (or 75 per cent to 60 per cent on a debt to total asset basis);
- for non-bank financial entities, the limit will be reduced from 20:1 to 15:1 on a debt-to-equity basis (or 95.24 per cent to 93.75 per cent on a debt to total asset basis);
- for banks, the capital limit will be increased from 4 per cent to 6 per cent of the risk-weighted assets of their Australian operations;
- for outbound investors, the worldwide gearing ratio will be reduced from 120 per cent to 100 per cent (with an equivalent change to the worldwide capital ratio for banks).
The Government said it would consult with industry on the implementation of these proposed changes. In addition, the Board of Taxation will conduct a review of the thin capitalisation arm’s length test. The ATO will also commence consultation with taxpayers and industry to progress any guidance material in relation to these changes.
The thin capitalisation regime aims to limit the capacity of multinational firms to move profits out of Australia by assigning an excessive amount of debt to their Australian operations.
When the Australian subsidiary’s borrowing exceeds a defined threshold, its interest expenses can no longer be deducted from its income. The regime applies to all of the debt of a relevant multinational and not just to the debt borrowed from foreign-related parties. Australian subsidiaries can apply one of a number of thresholds under the rules, including the ‘safe harbour’ limit, the ‘arm’s length’ debt limit and (for outward investors) a worldwide gearing ratio limit.
In its August 2012 discussion paper looking at ways of making ‘revenue neutral’ cuts to the company tax rate, the Business Tax Working Group (BTWG) noted that, “when assessed against other countries’ thin capitalisation regimes, the Australian rules could be seen as overly generous”.
According to the BTWG: “It should also be kept in mind that the gearing levels these rules allow are higher than the levels employed by those firms that have little capacity/incentive to shift profits out of Australia (that is, purely domestic firms or firms that rely on truly independent financing arrangements). This gives multinationals a tax advantage over their Australian market competitors.”
