PWC'S FEDERAL BUDGET INSIGHTS 2018 - WWW.PWC.COM.AU - PWC AUSTRALIA
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www.pwc.com.au PwC’s Federal Budget Insights 2018
Contents
01 Overview 2
02 Corporate Tax 3-4
03 Personal Tax 5-8
04 Research and Development 9 - 10
05 Private Business 11 - 12
06 Global Taxes 13 - 16
07 Indirect Taxes and Trade 17 - 19
08 Asset and Wealth Management 20
09 Superannuation 21 - 22
10 Other measures 23 - 24
11 Forward Tax Agenda 25 - 28
Insights| |PwC’s
Insights PwC’sanalysis
analysisof
ofthe
the2018 19 Australian Federal Budget | 1
2018--19
01
Overview
Three-quarters of one A return to surplus has gone figure in the 2018-19 budget. The
from being a mirage on the budget retains the bank levy on
percent doesn’t sound like
distant budget horizon, to almost liabilities, announced last year,
much. But, when it’s the within grasp. In only two more and reaffirmed the Government’s
difference between the rate years, and after 11 consecutive commitment to establishing
at which Treasury thought budget deficits spanning four the new Australian Financial
the Australian economy Treasurers, in 2019-20 we will Complaints Authority, which
see a modest, $2.2 billion surplus will stand-up on 1 November
would grow, and how much (which the Budget papers politely this year. There are consumer-
it actually did grow, it’s refer to as the budget being in friendly reforms flagged for the
quite a bit. balance). The realisation of the superannuation sector, intended
Government’s target of a budget to make it easier and cheaper
Economic growth this year will surplus of one per cent of GDP for Australians to change funds,
be 4.25 per cent (nominal), up will have to wait until beyond the and to cap fees on accounts with
from a forecast 3.5 per cent. forward estimates. low balances.
In the context of the 2018-19
Tax cuts amounting to $140 The black economy is also in the
Federal Budget, this translates
billion over the next decade – ATO’s sights, with an estimated
to a near $26 billion revenue
admittedly, the vast bulk of which tax dividend of $5.3 billion over
windfall to the Government’s
are significantly back-ended - and the next four years, along with a
coffers, compared to the Mid-Year
only modest further expenditures move to ‘level the playing field’
Economic and Fiscal Outlook
savings of $400 million over the for the digital economy. From
projections from December. Fully
forward estimates, are probably 1 July 2019, the Government
half of this increase is a result of
the clearest signal yet of an will extend GST to apply to
improvements in personal income
imminent Federal election. offshore sellers of Australia
tax receipts – more people in
accommodation – think here
more jobs, paying more tax. Indeed, you have to look closely
the many overseas-based web
to try to find any real losers
platforms – with a discussion
in Treasurer Morrison’s third
paper to come shortly on
budget. In addition to income
further options for taxing digital
tax cuts across the board, there
businesses in Australia.
are a host of new expenditure
programs. These include In what is clearly a pre-election
signature initiatives in the health budget, the Government has
sector and funding for medical certainly delivered with a wide
research, as well as significant range of announcements likely
spending on infrastructure to be favourably received by
(particularly transport), aged Australian individuals and
care, environmental protection, businesses. The immediate
education and training, spending hurdle will be navigating the
in the regions, a pensioner work Senate, and securing cross-bench
bonus, and investment in public support for any measures which
technology infrastructure. It really are not waved through by the
is budget generosity that would Opposition. From there, time will
make Oprah Winfrey blush! tell if the announced measures
will result in long-term and
Against the backdrop of a Royal
sustainable economic prosperity
Commission, though, financial
for the country.
services were always going to
Insights | PwC’s analysis of the 2018 - 19 Australian Federal Budget | 2
02
Corporate Tax
The Government is continuing to move forward with
its ten-year enterprise tax plan to progressively reduce
the corporate tax rate to 25 per cent by the 2026-27
income year.
Since it first announced its ten-year corporate tax rate reduction
proposal in the 2016-17 Budget, the Government has managed to
successfully enact a 25 per cent rate but only for companies with
an aggregated turnover of up to $50 million, with the globally
uncompetitive 30 per cent rate still applying to all other companies.
Insights | PwC’s analysis of the 2018 - 19 Australian Federal Budget | 3
02 Corporate Tax
Only time will tell whether there is political appetite to progress the
measures that are currently before Parliament to reduce the company
tax rate beyond those companies with aggregated turnover in excess
of $50 million, given the new revenue measures announced in this
year’s Budget.
There is a need to lower the rate to attract international investment
so as to drive domestic wage and economic growth. As illustrated by
Figure 1 below, a reduction in the corporate tax rate to a flat 25 per
cent for all companies will improve Australia’s ranking as compared to
other OECD countries.
Figure 1: OECD corporate tax rates
40
Australia
35
30
25
Percent
20
15
10
5
0
Hungary
Ireland
Latvia
Czech Republic
Poland
Slovenia
United Kingdom
Estonia
Finland
Iceland
Turkey
Slovak Republic
Switzerland
Denmark
Sweden
Israel
Norway
Korea
United States
Australia 26 - 27
Austria
Chile
Netherlands
Spain
Canada
Luxembourg
Italy
New Zealand
Greece
Portugal
Belgium
Japan
Mexico
Australia 17 - 18
Germany
France
Source: “ Lower taxes for a stronger economy”, Hon Scott Morrison MP, Treasurer, Address to Australian Business Economists,
26 April 2018. Originally sourced from 2017 OECD Revenue Statistics and Treasury.
Note: All listed rates are combined central and provincial government company tax rates. All listed rates are current as of the end
of 2017, except for the US with its lower rate having come into effect 1 January 2018 and Belgium with its lower rate having
come into effect for all companies in early 2018.
Insights | PwC’s analysis of the 2018 - 19 Australian Federal Budget | 4
03
Personal Tax
As expected, the will then further increase the on their level of taxable income,
threshold for the 32.5 per cent and in addition to the existing
Government has
personal income tax bracket and Low Income Tax Offset) the
announced a seven-year eventually remove the 37 per cent following non-refundable tax
Personal Income Tax Plan personal income tax bracket. offsets:
commencing from 1 July • Up to $200 for taxpayers with
Low and Middle Income
2018, with a particular taxable income of $37,000 or
Tax Offset
focus on low to middle less
The Low Income Tax Offset
income earners. Other for Australian tax residents • Up to $530 for taxpayers
integrity measures were earning less than $37,000 per with taxable income between
$37,000 and $48,000 ($200 for
also announced affecting year currently corresponds to
$445 per annum (and applies taxpayers with taxable income
some higher income of $37,000 with an increase
on a reducing scale until it is
earners. eliminated for those with taxable of three cents per dollar
income above $66,667). The thereafter up to $530), and
Changes to personal Government has announced a • $530 for taxpayers with
income taxes new Low and Middle Income taxable income between
The first phase in the Tax Offset which will apply in $48,000 and $90,000.
Government’s seven-year addition to the Low Income
For taxpayers with taxable income
Personal Income Tax Plan Tax Offset. This will result in a
between $90,001 to $125,333,
provides tax relief from 1 July combined offset of up to $975
the offset will phase out at a rate
2018 to low and middle income per year for some taxpayers from
of 1.5 cents per dollar.
earners (via a new Low and 1 July 2018.
Middle Income Tax Offset) and Specifically, from the 2018-19
an increase to the top threshold at income year and until the 2021-
which the 32.5 per cent personal 22 income year, Australian tax
tax bracket applies. Later phases residents will receive (depending
Insights | PwC’s analysis of the 2018 - 19 Australian Federal Budget | 5
03 Personal Tax
Change to the personal From 1 July 2022: • The highest marginal tax rate
income tax brackets of 45 per cent will apply to
• The top income level at which
The Government has also taxable income exceeding
the 19 per cent personal
announced its intention to $200,000 (increased from
income tax bracket will apply
eventually scrap the 37 per cent $180,000).
will increase from $37,000 to
tax bracket. In a welcome move $41,000. The changes planned from 1 July
to simplify rates, a flat tax rate of 2024 will see the 37 percent tax
• The top income level at which
32.5 per cent will be introduced bracket entirely removed. This
the 32.5 per cent personal
for all taxpayers earning between will mean the 32.5 per cent tax
income tax bracket will apply
$41,000 and $200,000. This bracket will then apply to taxable
will increase from $90,000 to
measure will apply in its entirety incomes ranging from $41,001 to
$120,000; and
from 1 July 2024, with gradual $200,000.
changes applying from 1 July • The Low Income Tax Offset will
The following table summarises
2018. be adjusted as a consequence.
the relevant changes as
From 1 July 2018: From 1 July 2024: announced.
• The top income level at which • The top income level at which
the 32.5 per cent personal the 32.5 per cent personal
income tax bracket will apply income tax bracket will apply
will increase from $87,000 to will increase from $120,000 to
$90,000. $200,000; and
Table 1: Income tax rates for Australian tax residents
Current tax Thresholds Thresholds Thresholds
Rate
thresholds from 1 July 2018 from 1 July 2022 from 1 July 2024
(%)
Income range ($) Income range ($) Income range ($) Income range ($)
Tax free 0 - 18,200 0 - 18,200 0 - 18,200 0 - 18,200
19 18,201 - 37,000 18,201 - 37,000 18,201 - 41,000 18,201 - 41,000
32.5 37,001 - 87,000 37,001 - 90,000 41,001 - 120,000 41,001 - 200,000
37 87,001 - 180,000 90,001 - 180,000 120,001 - 180,000
45 > 180,000 > 180,000 > 180,000 > 200,000
Table 2: Income tax offsets for Australian tax residents
Income tax Current From 1 July From 1 July
offsets 2018 2022
Low and Up to $530
Middle
Low Up to $445 Up to $445 Up to $645
Insights | PwC’s analysis of the 2018 - 19 Australian Federal Budget | 6
03 Personal Tax
Changes to the taxation additional $3,406 for each
of minor beneficiaries of dependent child or student
testamentary trusts (increased from $3,356)
From 1 July 2019, the • Single seniors and pensioners
concessional tax rates available $34,758 (increased from
for minors receiving income $34,244), and
from testamentary trusts will • The family threshold for
be limited to income derived seniors and pensioners will
from assets that are transferred be increased to $48,385
from the deceased estate or (increased from $47,670) plus
the proceeds of the disposal or $3,406 for each dependent
investment of those assets. child or student (increased
This ensures that minors will from $3,356).
be taxed at adult marginal tax
rates only in respect of income Private health insurance
a testamentary trust generates and Medicare levy
from assets of the deceased estate surcharge
(or the proceeds of the disposal The current private health
or investment of these assets). insurance rebate entitlements
This is intended to prevent and surcharge applicable to
taxpayers inappropriately individuals who do not have the
obtaining the benefit of the appropriate health insurance
lower tax rates by injecting assets hospital cover, from 1 April 2018
unrelated to the deceased estate to 31 March 2019 will be as
into the testamentary trust. follows:
Medicare levy Table 3: Private health insurance rebate entitlements and Medicare levy
The proposed increase in the surcharge from 1 April 2018 to 31 March 2019
Medicare levy that was included
in last year’s Federal Budget Full entitlement Tier 1 Tier 2 Tier 3
(proposed to apply from 1 July
2019) will no longer proceed. Taxable income
This means that for the 2019- Singles $90,000 or less $90,001 - $105,001 - > $140,000
2020 income year the Medicare $105,000 $140,000
levy will remain at 2 per cent of Families $180,000 or less $180,001 - $210,001 - > $280,000
taxable income. Consequential $210,000 $280,000
changes to other tax rates that Rebate
are linked to the top personal tax
rate, such as the fringe benefits Aged under 25.42% 16.94% 8.47% 0%
tax rate, will also not proceed. 65 years
Aged 65 - 29.65% 21.18% 12.71% 0%
The Medicare levy low-income 69 years
thresholds for singles, families
and seniors and pensioners will Aged 70 33.89% 25.42% 16.94% 0%
increase for the 2018-19 income or over
tax year as follows: Medicare Levy surcharge
• Individuals $21,980 (increased All ages 0.00% 1.00% 1.25% 1.50%
from $21,655) Note: For families with children, the thresholds are increased by $1,500 for each child
after the first.
• Families $37,089 (increased
from $36,541), with an
Insights | PwC’s analysis of the 2018 - 19 Australian Federal Budget | 7
03 Personal Tax
Taxing income derived from an individual’s
fame or image
Under a new integrity measure announced in this Federal
Budget, from 1 July 2019, high profile individuals, such as
sportspersons and actors, who licence their fame or image to a
related entity, such as a company or trust, will continue to be
assessed on all of the income derived from such use.
Under a draft Practical Compliance Guidline issued in 2017, the
Australian Taxation Office (ATO) had indicated that it would
accept that up to ten percent of lump sum payments for the
provision of a professional sportsperson's services and the use
and exploitation of their 'public fame' or 'image' under licence to
an associated resident third party can be treated as the income of
the associated licencee.
The introduction of this budget measure will effectively treat
all remuneration, including non-cash benefits, derived from the
exploitation of a person’s fame or image as assessable income to
the individual, to be taxed at their respective personal marginal
tax rates.
Pathway to Permanent Residency for Retirement
Visa Holders
The Government will introduce a pathway to permanent
residency for holders of Retirement (subclass 410) and Investor
Retirement (subclass 405) visas.
From 2018-19 financial year, permanent migration places
will be quarantined for retirement visa holders each year
and, consequently, the subclass 405 visa will be closed to new
applicants. The subclass 410 visa is already closed to new
applicants.
Insights | PwC’s analysis of the 2018 - 19 Australian Federal Budget | 8
04
Research and
Development
As expected, the A revised Research aggregated turnover of at least
and Development tax $20 million) who will see the
Government has
incentive net benefit of claims drastically
announced measures in reduce in most cases. Smaller
The Government’s response
this Budget that affect follows the 2017 R&D Tax
claimants have fared somewhat
the application of the Incentive Review conducted by
better although those paying the
research and development lower company tax rate of 27.5
Chair of Innovation Australia
per cent will still see their benefit
(R&D) tax incentive. These Bill Ferris, Australia’s Chief
drop from 16 per cent to 13.5 per
measures are scheduled to Scientist Alan Finkel, and
cent net benefit when in a tax
Secretary to the Treasury John
apply from as early as 1 Fraser. While a number of the
payable position.
July 2018 and are expected recommendations from this The only real winner appears to
to save the Government review have been ignored, the be medical research companies
$2.4 billion over the Government has picked up on the who have been carved out of a
themes of increasing the integrity new $4 million annual refund
forward estimates. of the programme and focusing cap. As such, their benefit will
on rewarding additionality remain largely unchanged.
by introducing a tiered R&D
The Government has indicated
intensity measure.
that it will undertake a
The proposed changes largely consultation process with
revolve around winding back industry to assess the impact of
the benefit available to larger the changes, prior to a proposed
claimants (those with an start date of 1 July 2018.
Insights | PwC’s analysis of the 2018 - 19 Australian Federal Budget | 904 Research and Development
Refundable R&D Tax Offset
(aggregated turnover less than $20 million)
The refundable R&D tax offset will be capped at $4 million annually,
however this will likely only apply to a small number of claimants. Any
claim in excess of $4 million will be carried forward as non-refundable
offsets to future years. Clinical trials will be excluded from the $4
million cap.
The net benefit of the refundable offset will be fixed at 13.5 per cent
by linking it to the company tax rate. The linking of the R&D benefit to
a company’s tax rate will seek to remove the complexity of a variable
benefit with changing corporate tax rates.
Non-Refundable R&D Tax Offset
(aggregated turnover of at least $20 million)
The Government will introduce a new ‘R&D Premium’ that has a tiered
rate of benefit to reward those claimants with higher R&D intensity
with higher rates of non refundable offsets.
The Government’s rationale for this change is that it will seek to better
reward those claimants who spend more on R&D. With the majority
of current large company claimants likely to sit in the lowest tier of
benefit (4 per cent net benefit) and facing increased ‘compliance’
and ‘integrity’, there is a strong chance that many participants in this
component will exit the program.
The tiers will be as follows:
Benefit above
R&D Intensity
claimant’s tax rate
0% - 2% 4%
2% - 5% 6.50%
5% - 10% 9%
10% and above 12.50%
Intensity will be measured as R&D expenditure as a proportion of total
expenditure for the year. The total expenditure cap on annual claims
will be increased from $100 million to $150 million.
Improved integrity
The Government will seek to increase the number of claims subject to
review by increasing compliance activities and giving the Australian
Taxation Office (ATO) and AusIndustry additional resources.
New transparency measures have also been flagged which will
allow the ATO to publicise the details and quantum of R&D claims
made by taxpayers.
The Government has also flagged technical changes to the feedstock
and clawback provisions of the program, as well as the general anti-
avoidance rules.
Insights | PwC’s analysis of the 2018 - 19 Australian Federal Budget | 1005
Private Business
The Government has Private company to Division 7A more broadly,
deemed dividends the start date has been deferred
again supported small
The deemed dividend rules from 1 July 2018 to 1 July 2019.
businesses by extending
(Division 7A) apply to treat We eagerly await the release of
the instant asset write off certain loans from private further details in relation to these
for a further year. This companies to its shareholders particular measures given the
will bring welcome cash as taxable dividends. need to reduce the complexity of
flow benefits for many However, currently certain Division 7A.
businesses. However, trust distributions to private
Immediate $20,000
the proposal to bring companies where the amounts
remain unpaid (referred to as write-off of depreciable
the treatment of unpaid ‘unpaid present entitlements’ assets
present entitlements within (UPEs)) have been subject to The Government has extended
the operation of the private administrative guidance provided the immediate deductibility of
company deemed dividend by the Australian Taxation Office assets costing less than $20,000
(ATO). for small business entities (those
rules may have significant with an aggregated annual
cash flow impacts for The Government will introduce
turnover of less than $10 million)
measures to ensure that from 1
taxpayers going forward to 30 June 2019.
July 2019 a UPE will come within
and the detailed impact of the scope of Division 7A and will The measure will provide
these measures will need to either required to be repaid to additional time for small
be carefully monitored by the private company over time businesses to access this
as a complying loan or will be concession, providing additional
those affected.
subject to tax as a dividend. incentive for many to increase
Presumably this will bring the their current capital expenditure
treatment of UPEs into line with spend. However, the after-tax
other Division 7A loans, requiring consequences of the proposed
a written loan agreement and immediate deduction for
repayments of principal and depreciating assets should be
interest over a seven year term considered. For example, if this
(or 25 years where secured over results in a tax loss, there is no
real property). immediate cash-flow advantage.
It is unclear however, whether
Extending specific
this change will apply only
anti-avoidance rules
to future UPEs, or will
also transition to existing to circular trust
arrangements in some form. To distributions
date, UPEs arising on or before 16 The Government has announced
December 2009 have effectively that from 1 July 2019 it intends
been quarantined according to to extend the operation of the
ATO guidance. Trustee Beneficiary Reporting
rules to family trusts that engage
In relation to the Government’s
in circular trust distributions (or
previous announcement from
‘round robin’ arrangements) in
the 2016-17 Federal Budget
a way that avoids any tax being
to introduce much needed
paid on the amount distributed.
simplification amendments
Insights | PwC’s analysis of the 2018 - 19 Australian Federal Budget | 1105 Private Business
The introduction of this measure
will allow the ATO to impose a
tax on such distributions at a rate
equal to the top personal tax rate
plus the Medicare levy.
Limiting tax deductions
for vacant land
From 1 July 2019, no deductions
will be available for expenses
associated with holding vacant
land, for example, interest
expense on loans, where the
land is not genuinely held
for the purpose of producing
assessable income. This will apply
to land held for residential or
commercial purposes.
The deductions denied cannot be
carried forward to offset against
income derived in future years.
However, the costs may still be
added to the Capital Gains Tax
(CGT) cost base of the land where
they would ordinarily be an
element of the cost base.
It is not clear what the tests
would be to determine whether
the land is “genuinely” held
for the purposes of producing There are no changes to the
Small business
assessable income. However, concessions themselves, which
the budget measures will not
CGT concessions
and assignments of will continue to be available
apply to: to provide relief relating to the
partnership interests
• Expenses associated with disposal of assets of eligible
The Government has announced
holding land that are incurred small businesses. Eligible small
an integrity measure focussed
after a property has been businesses are generally those
on access to the small business
constructed on the land, it with an aggregated annual
CGT concessions for partners in
has received approval to be turnover of less than $2 million
partnerships.
occupied and is available for or net assets less than $6 million,
rent; or From 8 May 2018, partners although there is generally
that alienate their income by further complexity in applying
• Land used by the owner
creating, assigning or dealing in the rules.
in carrying on a business,
rights to the future income of a
which includes primary
partnership will no longer be able
production businesses.
to access the small business CGT
However, the ‘carrying on a concessions on the capital gain
business’ test will generally made in relation to the right.
exclude land held for commercial
development.
Insights | PwC’s analysis of the 2018 - 19 Australian Federal Budget | 1206
Global Taxes
As part of this year’s Amending the definition Further tightening on
budget, the Government of significant global cross-border financing
has announced further entity and thin capitalisation
Broadly, a significant global Once again, thin capitalisation
measures to ensure that has featured in the Federal
entity (SGE) is an entity which
multinational businesses has annual global income of $1 Budget, with additional
are paying their fair share billion or more, or is part of a integrity measures to apply.
of tax. group of entities consolidated for It is clear that the practical
accounting purposes with annual application of Australia’s thin
Over the past five years, Australia global income of $1 billion or capitalisation rules continues to
has been a strong supporter of more. As part of the 2018-19 create confusion and potential
the Organisation of Economic Federal Budget, for income years compliance risks. No doubt
Cooperation and Development commencing on or after 1 July against that backdrop, and the
(OECD)/G20 Base Erosion and 2018, the definition of a SGE will continued Government focus on
Profit Shifting (BEPS) program, be broadened to include members multinationals and BEPS, the
which includes 15 Action items. of large multinational groups Government has announced a
headed by private companies, number of measures designed
Australia has already introduced
trusts and partnerships. It will to further restrict deductions for
a number of measures
also include members of groups interest in Australia under the
supported by the BEPS program
headed by investment entities. thin capitalisation rules.
in addition to a number of
unilateral measures which The broadened definition of
SGE may now result in foreign Preventing ‘double
appear to go beyond the BEPS
recommendations. Most recently, investment funds and foreign gearing’ structures
the Government has introduced pension funds being classified as The Government has already
legislation to implement the SGEs for tax purposes. announced (as part of its package
OECD Multilateral Instrument This measure will also ensure of integrity measures released
(MLI), and we also expect to see the Commissioner’s power to in March 2018 to ‘address the
legislation to give effect to the determine an entity to be a SGE sustainability and tax integrity
hybrid mismatch rules introduced parent operates as intended. risks posed by stapled structures
into Parliament in the current and limit the concessions
Winter sittings. Further measures SGEs are required to prepare currently available to foreign
were announced in this budget. Country-by-Country (CbC) investors for passive income’) that
reports and may be subject to the thin capitalisation rules will
Australia’s multinational tax be amended to prevent foreign
integrity rules, such as the investors from using multiple
Multinational Anti-Avoidance layers of flow-through entities
Law (MAAL) and the Diverted (i.e. trusts and partnerships),
Profits Tax (DPT), and also each issuing debt against the same
subject to enhanced penalties. underlying asset to convert trading
The expansion of those entities income into interest income which
that could qualify as a SGE will is taxed at a lower rate.
significantly increase the number Specifically, under these new
of multinational entities that are measures which are to apply
subject to Australia’s existing to income years commencing
reporting obligations and anti- on or after 1 July 2018, the
avoidance and integrity rules. threshold at which an entity
becomes an ‘associate entity’ for
Insights | PwC’s analysis of the 2018 - 19 Australian Federal Budget | 1306 Global Taxes
thin capitalisation purposes is International Financial Reporting commencing on or after 1 July
to be reduced from ownership Standards in 2005. 2019, the Government has
of 50 per cent or more to 10 per announced that it will ensure
As part of the 2018-19 budget
cent or more. No transitional foreign controlled Australian
package, the Government
period was provided for existing consolidated groups (including
announced that for income years
arrangements. multiple entry consolidated
commencing on or after 1 July
groups) that control a foreign
2019, the thin capitalisation rules
Tightening asset entity will be treated as both
will be tightened by requiring
valuations entities to rely on the asset values
outward and inward investment
The Australian Taxation vehicles. The proposed measure
contained in their financial
Office (ATO) has been actively will ensure that these entities
statements. Valuations that were
reviewing a number of issues cannot access the relevant tests
made prior to the 2018-19 budget
concerning the application of that were only intended to apply
announcement at 7.30PM (AEST)
Australia’s thin capitalisation for outward investors.
on 8 May 2018 may be relied on
laws over the past few years. One until the beginning of the entity’s
of the matters of concern for the Summary of BEPS Action
first income year commencing on
ATO has been the revaluation of or after 1 July 2019. items in Australia
assets for the purposes of the thin Table 4 below provides a
capitalisation safe harbour rule. Dealing with summary of Australia’s actions
consolidated entities to date in relation to each of the
The choice to revalue assets for
that are ‘inbound’ and 15 Action items, including the
thin capitalisation purposes was
‘outbound’ measures announced as part of
introduced by the Government in
the 2018-19 Federal Budget.
2008, following the adoption of With effect from income years
Table 4: Summary of BEPS Action items in Australia
BEPS Action item Australia’s actions to date
OECD Action 1: Tax challenges of The Australian Government has enacted measures to apply Goods
a digital economy and Services Tax (GST) to the supply of digital products and services
imported by Australian consumers with effect from 1 July 2017.
This year’s budget confirms Australia’s commitment to take further
steps in relation to the so-called ‘digital economy’ by extending the GST
to Australian hotel bookings made through offshore digital businesses,
so they face the same tax treatment as Australian businesses (for further
information, refer to our Indirect Taxes insights).
The Government also indicated that in the coming weeks it will release a
discussion paper that will explore options of taxing digital businesses in
Australia.
OECD Action 2: Neutralise hybrid On 7 March 2018, the Australian Government introduced exposure
mismatch across borders allowing draft legislation in relation to hybrid mismatches (refer to PwC’s TaxTalk
double non-taxation Alert: Australia’s hybrid mismatch rules - updated draft law released).
However, these proposed rules introduce a unilateral ‘integrity rule’
designed to discourage foreign interposed zero or low tax rate entities
lending to Australia. This measure is out of step with the BEPS
recommendations.
No further details were provided in relation to the exposure draft legislation
as part of the budget. However, it is expected that the commencement
date for the proposed rules is likely to be 1 January 2019.
OECD Action 3: Controlled foreign The Australian Controlled Foreign Company (CFC) rules currently meet
company rules OECD best practice guidance and no changes are expected.
Insights | PwC’s analysis of the 2018 - 19 Australian Federal Budget | 1406 Global Taxes
BEPS Action item Australia’s actions to date
OECD Action 4: Limit interest Australia has already tightened its thin capitalisation rules, including the
deductions reduction of safe harbour limits.
In addition, as noted above, the Government plans to deny deductions
for interest (and derivative) payments to foreign interposed zero or low
rate entities where certain other conditions are satisfied.
As part of this year’s budget, the Government announced a further
tightening of the thin capitalisation rules (see above).
OECD Action 5: Counter harmful The Australian Taxation Office (ATO) has commenced exchange of
tax practices information on tax arrangements by multinational enterprises with other
countries.
OECD Action 6: Prevention of On 28 March 2018 the Government introduced legislation into
treaty-shopping parliament to give force of law to the MLI. Based on provisional choices,
the MLI seems likely to impact 30 of Australia’s 44 tax treaties.
OECD Action 7: Prevent artificial The MAAL amended Australian anti-avoidance rules by introducing
avoidance of permanent targeted anti-avoidance laws that apply to SGEs that supply goods or
establishment services to Australian customers and record revenue from those sales
overseas. These rules have effect from 1 January 2016, and are viewed
internationally as a unilateral measure that is inconsistent with BEPS
recommendations.
This year’s budget proposes to broaden the definition of SGEs, thereby
expanding the potential application of the MAAL.
In addition, the MLI could change the definition of permanent
establishment in certain treaties. For example, based on provisional
choices, 11 of Australia’s tax treaties could introduce a clause to deal
with ‘contract splitting’ arrangements.
OECD Actions 8, 9 and 10: Australia has implemented a number of changes to strengthen its
Transfer pricing and value transfer pricing rules over recent years to ensure they are consistent
creation with OECD guidelines, including OECD BEPS amendments to the
OECD Transfer Pricing Guidelines approved by the OECD in May
2016. In addition, Australia introduced a new DPT which applies to tax
benefits arising in income tax years starting on or after 1 July 2017 (even
if the the scheme commenced in prior periods). The DPT is viewed
internationally as a unilateral measure that is inconsistent with BEPS
recommendations.
This year’s budget proposes to broaden the definition of SGEs, thereby
expanding the potential application of the DPT.
OECD Action 11: Methodologies to Further work is required to identify the methodologies to collect and
collect and analyse BEPS data analyse BEPS data.
OECD Action 12: Mandatory In May 2016 the Australian Government released a consultation paper
disclosure of aggressive tax seeking community input on the adoption of the OECD’s mandatory
planning disclosure rules for aggressive tax arrangements in Australia. Broadly,
these will require tax advisers and/or taxpayers to make early
disclosures of aggressive tax arrangements (often before income tax
returns are lodged), with a view to providing tax authorities with timely
information on arrangements that have the potential to undermine the
integrity of the income tax system.
Insights | PwC’s analysis of the 2018 - 19 Australian Federal Budget | 1506 Global Taxes
BEPS Action item Australia’s actions to date
OECD Action 13: Transfer pricing In line with the OECD BEPS project, the Australian Government
documentation and country-by- implemented CbC reporting for SGEs (broadly those Australian and
country reporting foreign multinationals with consolidated global annual income of more
than 1 billion). CbC reporting applies to income years commencing on
or after 1 January 2016.
This year’s budget proposes to broaden the definition of SGEs, thereby
expanding the potential reporting obligations for foreign entities.
Entities subject to the reporting requirements are required to ensure
a CbC report is filed in Australia, or in a tax jurisdiction that will
automatically exchange the CbC report with Australia. Australia has
signed the Multilateral Competent Authority Agreement (MCAA) for
the automatic exchange of CbC reports between tax authorities
in participating jurisdictions, and has entered a bilateral automatic
exchange agreement with the United States.
Reporting entities are also required to file a Master File and Local File
directly with the ATO. The format and content of the Australian Local File
is very different from a standard OECD Local File. The new requirements
apply in addition to the existing transfer pricing documentation reporting
requirements.
OECD Action 14: Dispute The MLI recently introduced into Parliament contains rules to implement
resolution the option of mandatory binding arbitration.
OECD Action 15: Multilateral On 7 June 2017, Australia signed the MLI. On 28 March 2018, the
instrument Australian Government introduced legislation into Parliament to give
force of law to the MLI.
Insights | PwC’s analysis of the 2018 - 19 Australian Federal Budget | 1607
Indirect Taxes
and Trade
Insights into announcements impacting Indirect Taxes,
GST & Trade in Australia’s 2018-19 Federal Budget.
GST to be extended to online hotel bookings from
offshore sellers
The Government has announced that the goods and services tax (GST)
will be extended to offshore sellers of Australian hotel accommodation
to ensure offshore sellers calculate their GST turnover in the same way
as local sellers from 1 July 2019. In particular, since 2005, offshore
sellers of Australian hotel accommodations have been exempt from
registering for and charging GST on these supplies. The new measure
will remove this exemption to ensure that the same GST treatment will
apply to Australian hotel accommodation regardless of whether the
accommodation is supplied by an Australian or offshore company.
This measure is intended to come into effect on or after 1 July 2019
with sales prior to that date still covered by the exemption, even where
the relevant hotel stay occurs after this date. This measure is expected
to increase revenue for the Government by $15 million, with increased
payments to States and Territories by the same amount over the
forward estimate period.
Insights | PwC’s analysis of the 2018 - 19 Australian Federal Budget | 1707 Indirect Taxes and Trade
Excise relief for craft The Australian Taxation Office To enable the Government to
brewers and distillers (ATO) also will be provided invest in biosecurity detection,
The Federal Budget has provided with additional resources to identification and response
excise relief to craft brewers combat domestic illicit tobacco measures, a new levy on sea
and distillers by increasing the and to upgrade their excise and imports will be imposed on port
alcohol excise refund scheme cap excise equivalent goods payment operators from 1 July 2019.
from $30,000 a year to $100,000, systems beginning from the 2020- The levy (as recommended by the
from 1 July 2019. In addition, 21 financial year. Intergovernmental Agreement
the concessional draught beer on Biosecurity Review) will be
excise rate will be extended to
Removal of luxury car tax imposed at $10.02 per twenty
apply to smaller kegs of 8 litres on re-imported cars foot container (or equivalent) or
(instead of the current 48 litres) From 1 July 2019, the $1 per tonne of non-containerised
or more, which are typically used Government will remove luxury cargo and payable on a quarterly
by craft brewers to distribute car tax on cars re-imported into basis.
their beer to pubs, clubs and Australia after being refurbished
restaurants. This seeks to level overseas. This measure will Other indirect measures
the playing field between craft ensure consistent treatment of • The Government has granted
and large breweries. luxury car tax on refurbished or extended access to refunds
cars regardless of whether they of indirect tax (including
Establishment of Illicit are refurbished in Australia or GST, fuel and alcohol taxes)
Tobacco Taskforce and overseas. This measure aligns for certain diplomatic and
tobacco duty measures with Australia’s trade obligations consular representations under
with foreign trading partners. the Indirect Tax Concession
Measures to combat illicit tobacco
Scheme.
trade were announced as part
Changes affecting • Changes to the agricultural
of the Budget. In particular, a
new multi-agency Illicit Tobacco
Australia’s biosecurity levies and export charges
Taskforce (to be led by the system at the request of industry to
Australian Border Force) will As part of the Australian meet changes in the funding
be established to enforce new Agriculture and Export Growth needs of the agricultural sector
tobacco rules and target illicit Plan, the Government will for macadamias, honey and
tobacco supply chains. provide $86.8 million over four mushrooms.
years from 2018-19 to enhance
Additionally, from 1 July 2019, • From 1 July 2018, customs
Australia’s biosecurity system
legislative changes will require tariffs will be removed from
through:
that importers obtain a permit placebos and clinical trial
to import tobacco and meet their • Developing national action kits imported into Australia.
duty and tax liabilities when plans for priority pest and This measure will reduce
tobacco first enters the country, disease management costs and regulatory burden
rather than when it enters the • Increasing the Government’s for companies conducting
domestic market from a licensed pest and disease incursion clinical trials.
warehouse. For tobacco products response capacity
held in a licenced warehouse Assistance to small and
at the commencement of the • Providing greater assurance medium exporters
new measures, transitional and verification of biosecurity The Government will provide $20
arrangements will apply for import conditions, and million from 2018-19 to establish
eligible entities to allow for the • Trialling innovative a Small and Medium Enterprises
payment of a relevant liability technologies to achieve Export Hubs program. The Hubs
on warehoused stock within biosecurity clearance will aim to enable cooperation
twelve months. efficiencies. and boost export capability of
local and regional businesses.
Insights | PwC’s analysis of the 2018 - 19 Australian Federal Budget | 1807 Indirect Taxes and Trade
Furthermore, $0.4 million will Other trade measures
be provided over four years from The Government will provide
2017-18 to extend the Package $80 million over four years from
Assisting Small Exporters 2018-19 to assist in supporting
program which will continue to Australia’s defence industry. This
provide grants to small exporters will include:
to support access to international
markets. • An additional $4.1 million per
year to expand the Centre for
Trade Modernisation Defence Industry Capabilities
agenda grant program and capability
amongst the Australian defence
To further the Government’s
industry’s small and medium-
Trade Modernisation Agenda,
sized enterprises to compete
$10.5 million has been allocated
internationally;
over the 2018-19 period. An
election commitment was made • $6.3 million per year to the
by the Government to work Australian Defence Export
towards developing a single Office, and
window for international trade • An additional $3.2 million
in Australia. Part of this measure to the existing Global Supply
will be to complete an initial Chain program administered
business case that will look to by the Department of Defence.
create a trade single window.
The Government will provide
Australian Trusted Traders will be $3.6 million over five years
provided with additional benefits from 2018-19 (including $0.7
through streamlined compliance million in 2022-23) to extend the
requirements with the removal, Indonesia-Australia Red Meat
under certain free trade and Cattle Partnership. This
agreements, of the requirement measure would allow continued
to produce certificates of origin. cooperation between government
and industry in Australia and
Progress on Free Trade Indonesia and boost trade and
Agreements investment in the red meat and
The Budget acknowledges cattle sector.
progress on the following Free
Trade Agreements:
• The Peru-Australia Free Trade
Agreement was concluded by
the Australian and Peruvian
governments on 12 February
2018. This measure will allow
Australian businesses better
access to one of the fastest
growing economies in South
America.
• On 8 March 2018, Australia,
together with 10 other nations,
signed the Comprehensive
and Progressive Agreement
for Trans-Pacific Partnership
(TPP-11).
Insights | PwC’s analysis of the 2018 - 19 Australian Federal Budget | 1908
Asset and Wealth
Management
Insights from the 2018-19 The proposed measures will rather than only the discount
prevent beneficiaries that are not capital gain.
Federal Budget for the Asset
entitled to the CGT discount in
and Wealth Management However, the measure would
their own right (e.g. corporates
align the treatment of discounted
industry include measures and non-residents) from getting
capital gains derived by AMITs
affecting the current a benefit from the CGT discount
and MITs with that proposed
Managed Investment Trusts being applied at the trust level.
for the Corporate Collective
MITs and AMITs that derive a
and Attribution Managed capital gain will still be able to
Investment Vehicle (CCIV) model.
Investment Trusts regimes. distribute this income as a capital Updating the list of
gain that can be discounted in the
information exchange
Removing the capital hands of the beneficiary.
countries
gains discount at the Practically, this change may result In a welcome move, the
trust level for Managed in a disadvantage to the members Government has announced in
Investment Trusts and of MITs and AMITs where: this year’s budget that it will
Attribution MITs • in allocating deductible update the list of countries whose
In order to ensure that Managed expenses against assessable residents are eligible to access
Investment Trusts (MITs) and income components, a MIT or a reduced withholding tax rate
Attribution Managed Investment AMIT is required to allocate of 15 per cent, instead of the
Trusts (AMITs) operate as deductions against gross default rate of 30 per cent, on
genuine flow-through vehicles, capital gains instead of only certain distributions from MITs
the Government has announced the discount capital gains and AMITs. The updated list of
that they will prevent MITs and component, or countries will be effective from 1
AMITs from applying the 50 per January 2019.
• in recouping prior year or
cent capital gains tax (CGT)
current year revenue losses, The update will add the 56
discount at the trust level. This
the MIT or AMIT recognises jurisdictions that have entered
measure will apply to payments
as assessable income the gross into information sharing
made by MITs and AMITs from 1
amount of the capital gain agreements since 2012.
July 2019.
Insights | PwC’s analysis of the 2018 - 19 Australian Federal Budget | 2009
Superannuation
The last two Federal Protecting
balances under $6,000, members
Budgets have resulted under the age of 25 and members
superannuation whose accounts have not received
in substantial changes entitlements a contribution in 13 months and
to our superannuation A range of measures were are inactive.
system that have largely announced to protect the
All of these measures will take
taken effect from 1 July balances of superannuation
effect from 1 July 2019. The
accounts belonging to
2017. While no major Australians, including a three
Government has released for
changes were announced consultation exposure draft
per cent cap on passive fees
legislation to implement these
this year, the Government charged by superannuation funds
measures. Comments are due by
has proposed a number on accounts with balances of
29 May 2018.
less than $6,000, and banning
of amendments to the exit fees on all superannuation
superannuation system Full cost recovery of
accounts. Furthermore, it will
superannuation activities
to ensure that it operates be a requirement to transfer
Although no level of detail has
as intended and to ensure inactive superannuation accounts
been announced, the Government
greater flexibility for to the Australian Taxation Office
(ATO) where the balance is below will be increasing the Financial
participants. $6,000. The ATO will also expand Institutions Supervisory
its data matching processes to Levies to fully recover the cost
reunite these inactive balances of superannuation activities
with active balances of those undertaken by the ATO. It
affected members. expects to raise an additional
$31.9 million over four years
To protect the superannuation from 1 July 2018.
balances of younger Australians,
insurance within a member Opt-out of
account must be opt-in, rather superannuation
than default for members with guarantee for high
Insights | PwC’s analysis of the 2018 - 19 Australian Federal Budget | 2109 Superannuation
income earners Increasing the number of
Individuals whose income members for SMSFs
exceeds $263,157 and have The Government confirmed
multiple employers will be able to an announcement made in
nominate that their wages from the lead up to the budget by
certain employers are not subject the Minister for Revenue and
to superannuation guarantee Financial Services to expand the
from 1 July 2018. This will maximum number of members in
ensure these individuals do not new and existing self-managed
breach the $25,000 concessional superannuation funds (SMSF)
contribution cap because of total and small Australian Prudential
employer contributions. This is a Regulation Authority (APRA)
welcome measure for those who funds from four to six. This
breached their cap because of change is welcome news as it
multiple employer arrangements, supports greater flexibility for
such as medical practitioners. larger families to aggregate their
retirement savings in one fund.
Integrity measures for
deducting personal Three year audit cycle
superannuation for some SMSFs
contributions The audit cycle for SMSFs with
The ATO will be provided with a history of good record-keeping
additional funding to improve and compliance will be extended
the integrity of the ‘notice of to three yearly. In order to qualify,
intent’ processes for claiming SMSFs must have a history
a tax deduction for personal of three consecutive years of
superannuation contributions. clear audit reports and on-time
This will ensure that where an lodgements. This measure will
individual claims a deduction for take effect from 1 July 2019.
a contribution, the contribution
is being appropriately taxed Miscellaneous
within the superannuation fund. amendments
Furthermore, this will enable The 2018-19 budget papers
the ATO to deny deductions to also made reference to minor
individuals who do not comply technical amendments to clarify
with notification requirements. the law, technical or drafting
defects and to remove anomalies
Work test exemption for and unintended consequences.
voluntary contributions
The amendments include changes
The Government will introduce to transition to retirement income
an exemption from the work test stream rules relating to the death
for voluntary contributions to of a member and addressing
superannuation for people aged double taxation in respect of
65 - 74 years with superannuation deferred annuities purchased
balances below $300,000, in the by a superannuation fund or
first year that they do not meet retirement savings account.
the work test requirements. This These amendments are currently
measure will take effect from 1 before Parliament.
July 2019.
Insights | PwC’s analysis of the 2018 - 19 Australian Federal Budget | 2210
Other measures
Other tax measures that would have previously arisen last year’s Federal Budget,
on the repayment of the principal the TPRS was extended to
in this year’s budget
of such concessional loans will the cleaning and courier
include incentives for the no longer be available to these industries, commencing from 1
Australian film industry, entities. July 2018.
measures to tackle the • From 1 July 2019, businesses
black economy, reforms to Measures to target the seeking to tender for Australian
combat illegal phoenixing, black economy Government procurement
and additional funds to The Government has released contracts over $4 million
its response to the Black (including the goods and
the Australian Taxation Economy Taskforce’s final services tax (GST)) will be
Office (ATO) to focus on report in the Federal Budget. required to provide a statement
compliance measures. The Government’s response to from the Australian Taxation
the Black Economy Taskforce’s Office (ATO) indicating that
final report endorses most of they are generally compliant
Incentives for Australian
the recommendations made with their tax obligations.
film industry
(including supplementary • The Government will consult
The Government has announced recommendations), and provides
a ‘Location Incentive’ for on and design a new regulatory
a whole-of-government blueprint framework for the ABN system
international films made in for tackling the black economy.
Australia, which is designed to in 2018-19.
bring in over $260 million of Some of the key tax-related • The ATO will be provided with
new foreign investment into the measures that were announced $318.5 million over four years
Australian economy. include: to implement new strategies
The Location Incentive will be • From 1 July 2019, businesses to combat the black economy,
delivered over four years from will no longer be able to claim including implementing a new
2019-20, and will effectively deductions for payments and enhanced enforcement
provide an increase to the to their employees, such as strategy, a Black Economy
Location Offset rate from 16.5 wages, where they have not Hotline, improved government
percent to 30 percent for eligible withheld any amount of Pay data analytics and educational
large budget international As You Go (PAYG) from these activities.
productions that are filmed in payments. The Government • Additional funding of $3.4
will also remove deductions for million will also be provided to
Australia from 1 July 2018.
payments made by businesses the ATO over four years from
to contractors where the 2018-19 to lead a multi-agency
Tax treatment of
contractor does not provide an Black Economy Standing
concessional loans Australian Business Number
between tax exempt Taskforce, which will facilitate
(ABN) and the business does a cross-agency approach to
entities not withhold any amount of combating the black economy.
Tax exempt entities that become PAYG as required.
taxable after 8 May 2018 will The Government will commence
• From 1 July 2019, the consultation seeking public
be required to value their
Government will further and stakeholder views on the
concessional loans as if they
expand the taxable payments announced measures.
were originally entered into on
reporting system (TPRS)
commercial terms. This is to
to security providers and
overcome issues which would
investigation services,
otherwise arise under the
road freight transport, and
taxation of financial arrangement
computer system design and
rules. In particular, this measure
related services. Note that in
ensures that any tax deductions
Insights | PwC’s analysis of the 2018 - 19 Australian Federal Budget | 2310 Other measures
Reforms to combat illegal • extension of the Director • $15 million over three years
phoenixing Penalty Regime to GST, luxury to support the modernisation
car tax and wine equalisation of payroll and superannuation
The Government will provide tax, making directors fund reporting. This funding
additional tools for regulators to personally liable for the will be used to support small
make it easier for them to deter company’s debts, and businesses with fewer than
and disrupt illegal phoenixing 20 employees during the
activities. The package of reforms • expanding the ATO’s power to
transitions to Single Touch
to corporations and tax laws retain refunds where there are
Payroll reporting from 1 July
include: outstanding tax lodgments.
2019.
• new phoenix offences to target Funding compliance
those who conduct or facilitate Funding of the Tax
measures
illegal phoenixing Practitioners Board
Additional funding will be
The Tax Practitioners Board will
• prevention of directors provided to the ATO from 1 July
be provided $20.1 million over
improperly backdating 2018 to assist with the following
four years from the 2018-19
resignations compliance activities:
financial year to enable it to meet
• limiting directors ability to • $133.7 million to enable the its broadened responsibilities to
resign when this would leave ATO to continue to deliver ensure that tax agent services
no other company directors on a range of strategies that are provided to the public in
sustain both an increase accordance with the appropriate
• restricting the ability of
in debt collections and an professional and ethical
related creditors to vote on
improvement in the timeliness standards.
the appointment, removal or
of debt collections
replacement of an external
administrator • $130.8 million to increase
compliance activities targeting
individual taxpayers and their
tax agents, and
Insights | PwC’s analysis of the 2018 - 19 Australian Federal Budget | 24You can also read
