Federal Budget 2014-15
As expected, from a business taxation perspective, the Treasurer has continued to reposition existing tax policies with no major surprises or changes.
The more important focus for business will be the White Paper on the Reform of Australia's Tax System, which will provide a longer term considered approach to tax reform and which is due prior to the next election.
Increase in the fringe benefits tax (FBT) rate
As the Government has introduced a 2% Temporary Budget Repair (TBR) levy payable by individuals whose taxable income exceeds $180,000 per annum, it is not surprising the Government has also announced an increase in the FBT rate from 47% to 49% in the Budget. This increase is applicable to FBT years commencing 1 April 2015 and onwards.
This change will ensure that the FBT rate remains aligned to the top marginal tax rate plus the Medicare levy plus the TBR levy, so that there is no advantage to an employee and no loss to the Government’s revenue if a benefit is provided by an employer instead of the employee acquiring it from the after-tax income. However, we note that there is a nine month window where the FBT rate (47%) will remain lower than the top marginal tax rate plus levies (49%).
The increase in the FBT rate will directly impact both the Type 1 and Type 2 gross-up factors. The Type 1 gross-up factor applies to employers who are entitled to claim GST input tax credits in respect of the fringe benefits provided and will increase from 2.0802 to 2.1463. The Type 2 gross-up factor applies to benefits where the provider is not entitled to claim a GST input tax credit and will increase from 1.8868 to 1.9608.
For the purpose of reporting fringe benefits on employee payment summaries, from 1 April 2015 the taxable value will be grossed-up by the new Type 2 factor of 1.9608. This will apply where the taxable value of the aggregate fringe benefits of an employee exceeds $2,000.
The Treasurer also announced that the cash value of benefits received by employees of rebateable employers (public benevolent institutions and health promotion charities, public and not-for-profit hospitals, public ambulance services and certain other tax-exempt entities) will be protected by increasing the annual FBT caps. These are currently $17,000 or $30,000 and the new cap levels have not been announced.
Rebateable employers are currently entitled to reduce their gross FBT payable by 48%. This rebate rate will be aligned with the FBT rate from 1 April 2015.
Integrity measures for consolidated groups
Changes to securitisation arrangements
The Government will add a new measure to the suite of technical consolidation amendments previously announced as part of the 2013-14 Budget. Specifically, the new measure will clarify that certain accounting liabilities relating to securitised assets held by an entity will be disregarded for the purposes of the tax cost setting regime if that entity joins a consolidated group or exits an existing consolidated group.
The Government’s announcement follows a report released by the Board of Taxation in April 2013 which highlighted potential anomalies arising where an accounting liability in respect of a securitised asset was recognised for Australian tax cost setting purposes, even though the securitised asset itself may not have been recognised. As indicated in the Board’s report, those anomalies could be particularly prevalent in the context of financial entities engaged in mortgage loan securitisation arrangements (involving equitable assignments of the original loans).
With the introduction of the Government’s new measure, the anomalies should no longer arise. In broad terms, this should mean that tax cost setting benefits previously available to joining entities with relevant securitised assets may no longer be available. By the same token, however, consolidated groups should receive a benefit on the eventual exit of such entities in the form of lower capital gains tax or other exit imposts.
The new measure will apply to arrangements that commence on or after 7.30 pm on 13 May 2014, with transitional rules applying to arrangements that commence before this time.
Modifications to previously announced measures
The Government has announced it will “refine” the consolidation integrity package previously announced in the 2013-14 Budget. That Budget proposed the following amendments:
Double deductions measure
The consolidation regime would be amended to remove the ability for a consolidated group to benefit from making a reduced taxable gain on sale of an encumbered asset (whose market value has been reduced due to the intra-group creation of rights over the asset) and at the same time be entitled to recognise a market value cost base in the rights it retains. In this regard, consolidated groups would no longer be able to access double deductions by shifting value of assets between entities.
The consolidation regime’s tax cost setting rules would be amended so that non-residents would no longer be able to buy and dispose of (or “churn”) assets between consolidated groups to allow the same ultimate owner to claim double deductions.
Deductible liabilities measure
The consolidation regime’s treatment of certain deductible liabilities held by a joining entity would be amended so that they are not taken into account twice. In its proposed form, the deductible liabilities measure would cause the head company of a consolidated group to recognise the amount of a joining entity’s deductible liabilities as assessable income, either over a 12-month period (for current liabilities), or a 48-month period (for non-current liabilities).
The 2014-15 Budget announced that the above measures will be amended to apply to arrangements that commence on or after the date of announcement of the original measure (14 May 2013) rather than to the exit or entry of a subsidiary that takes place on or after that date. One consequence of this amendment appears to be that the double deductions measure (which does not depend on an entry or exit event) will now be able to apply appropriately.
Deferral of MIT regime and other property measures
Managed Investment Trusts
The Government will defer the start date of the proposed new tax regime for Managed Investment Trusts (MITs) by 12 months to 1 July 2015. Exposure draft legislation in relation to the new tax regime is expected to be available for public comment in June 2014.
MITs (including trusts that are treated as MITs for the purpose of the capital election in Division 275) are currently exempt from the application of the interim trust streaming provisions for the 2010-11 to 2013-14 income years unless the trustee has made an irrevocable election to apply the streaming rules. The law will also be amended to allow MITs to continue to disregard the trust streaming provisions for the 2014-15 income year. The purpose of this change is to ensure that interim arrangements for MITs continue to apply until the commencement of the new tax regime for MITs.
One of the impacts of the deferral of the start date of the new tax regime for MITs is that an Australian unit trust that has 20 per cent or more of its units held by superannuation fund investors will continue to be treated as a “public unit trust” for the purpose of the public trading trust rules in Division 6C.
National Rental Affordability Scheme — discontinuing incentive allocations
Based on the recommendations of the National Commission of Audit, the Government will not proceed with Round 5 of the National Rental Affordability Scheme (NRAS). Funding for incentives from earlier rounds that are uncontracted or not used within agreed timeframes will be returned to the Budget.
Importantly, funding for tenanted NRAS properties is not affected.
Retirement village operators
The tax consolidation integrity measure announced in the 2013-14 Budget relating to future deductible liabilities will be amended so that retirement village residential loan liabilities are excluded.
This change was the result of submissions to Treasury and prevents the effective double taxation of resident loan liabilities that could otherwise arise under this measure in situations where a tax consolidated group acquires an entity that operates a retirement village.
R&D and government incentive announcements
Reduction in net tax benefit of R&D tax offsets
In an unanticipated move, the government announced a reduction in the rate of both the refundable and non-refundable research and development (R&D) tax offsets of 1.5 percentage points.
Although this matches the proposed cut in the company income tax rate to 28.5% from 1 July 2015, the R&D tax incentive cut will occur one year earlier from 1 July 2014, when the refundable R&D tax offset will be set at 43.5% and the non-refundable tax offset set at 38.5%.
This means that for all companies there will be a temporary one year reduction in the net tax benefit of the refundable and non-refundable R&D tax offsets to 8.5% and 13.5% respectively for the 2015 income year
For those companies with a taxable income of less than $5m, this will revert back to a net tax benefit of 10% and 15% respectively from 1 July 2015.
However for those companies who will be subject to the proposed paid parental levy (PPL) of 1.5% from 1 July 2015, the net tax benefit will remain at 8.5% and 13.5%.
This is an effective 15% reduction in support for companies entitled to the non-refundable R&D tax offset and a 10% reduction for those claiming the refundable offset, an outcome significantly at odds with the government’s statements that it will refocus effort on innovation.
The proposed restriction to deny access to the R&D tax offset to large groups with aggregate Australian assessable income in excess of $20bn is currently before the Senate and due to be debated this week.
From the perspective of direct government incentives, as anticipated, a number of programs have been discontinued including Commercialisation Australia, the Automotive Transformation Scheme and the Australian Renewable Energy Agency (ARENA).
In their place, $484.2m has been committed over 5 years to establish an Entrepreneurs' Infrastructure Programme to implement new approaches to industry policy and a $20bn Medical Research Fund will be funded in part by $5 of the new $7 doctor co-payment.
There is a proposed $200m boost to the Export Finance Insurance Corporation (EFIC) capital base, $50m to boost the existing Export Market Development Grant (EMDG) regime and $50m for a new scheme, the Manufacturing Transition Grants Programme.
Energy and Resources
The Budget included a range of changes that will affect the energy and resources sector.
Mining interest realignments. The Government will clarify the treatment of realignments of interests between joint venture partners (within a common project) in the minerals and petroleum industry. Such realignments often involve the exchange of interests in mining or petroleum rights to align the ownership of individual rights with the ownership of the overall venture. These transactions, which are often necessary for the joint venture participants to agree on a commercial project structure, can trigger taxable events and adverse tax implications, necessitating tax relief. These proposals, which were originally solely targeted at the petroleum industry, have been announced to also include the mining industry following consultation. While the announcement does not provide much clarity as to how broad the relief will be (e.g. will taxpayers in the production phase of the project qualify?), they will be welcomed by industry.
In respect of previously announced measures:
Introduction of an Exploration Development Incentive (EDI): consistent with the Government’s Policy for Resources and Energy Paper released in September 2013, the Budget has introduced an EDI capped at $100 million over three years starting from 1 July 2014. Broadly, the EDI will allow Australian resident shareholders who invest in Australian greenfield mineral (not oil and gas) exploration projects to claim a refundable tax offset against their Australian taxable income. The measure is currently subject to industry consultation (submissions closed on 4 April 2014).
Abolition of the Minerals Resource Rent Tax (MRRT) and Carbon Tax: it remains the Government’s policy to proceed with the repeal of the MRRT and Carbon Tax after 1 July 2014, despite having its initial Bill defeated in the Senate in March 2014.
There were no further announcements on the following issues:
Immediate deductions for exploration: it was announced in the 2013–14 Budget that the immediate tax deduction for exploration would now apply in limited circumstances. In addition, an amortisation period capped at 15 years was announced for certain exploration expenditure. However, with no further announcement in the 2014-15 Budget, uncertainty remains as to how the rules will be implemented and whether matters raised during consultation will be adopted.
Tax treatment of farm-out arrangements: The tax treatment of farm-out arrangements has been an area of contention, with the ATO and industry holding differing views for a number of years. It was announced in the 2013–14 Budget that the treatment of farm-out arrangements would be codified. However, with no further announcement in the 2014-15 Budget, it remains unclear when and how the rules will be implemented.
Other matters of interest to the Energy & Resources sector will be the changes to the Research & Development incentive and the inaction on employee share schemes.