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.
Extension of foreign resident CGT integrity measure
The Government will refine the 2013-14 Budget measure that amends Australia’s foreign resident Capital Gains Tax (CGT) regime. This measure was intended to strengthen Australia’s foreign-resident CGT regime in relation to disposals of indirect interests in Australian real property to address perceived flaws in the “principal asset test”, which (broadly) compares the value of land and non-land assets to determine whether a disposal of interests in an entity is subject to CGT. Under the previously announced measure, dealings (e.g. loans) between entities within the same tax consolidated group would be ignored to prevent multiple counting that would otherwise inflate the proportion of non-land assets.
The Budget announcement ensures that the measure will now apply to interests held by foreign residents in unconsolidated groups as well as in consolidated groups. For example, this should extend the measure to dealings within groups of trusts and within non-wholly owned groups.
For interests held by foreign residents in unconsolidated groups, the measure will apply to CGT events occurring on or after 13 May 2014.
For interests held in a consolidated group or a multiple entry consolidated group, the measure will continue to have effect from 14 May 2013.
The Government will defer the previous announcement relating to the principal asset test which would treat mining information and related assets as part of the mining rights. The Government has decided to defer the enactment of this matter so as to assess whether it is required pending the finalisation of the Resource Capital Fund III LP litigation. The Full Federal Court has recently handed down its decision. The taxpayer may seek leave to appeal to the High Court.
Multiple entry consolidated (MEC) groups
The Government announced that it will not proceed with certain changes to the MEC rules foreshadowed by the previous Government in the 2013-14 Budget. Those changes were intended to address inconsistencies that enable MEC groups to obtain certain tax advantages that are not available to ordinary consolidated groups.
A review conducted by a working group established to consider how to implement the 2013-14 Budget proposals concluded that there is limited scope to address the perceived tax advantages afforded to MEC groups without a reconsideration of broader international tax policy issues. Based on the recommendations of the review, the Government has decided not to proceed with targeted measures at this time on the basis that: there is insufficient data to assess the revenue risks posed by the inconsistencies; the options considered by the working group would not fully address those inconsistencies; and the proposed changes would introduce significant compliance costs and uncertainties.
However, Treasury will shortly start consultation on proposed amendments to extend a modified form of the unrealised loss provisions to MEC groups. The working group also suggested that MEC issues be considered in a broader review of consolidated groups scheduled for 2015.