Australian Budget – how might New Zealand’s budget compare?
Tax Alert - May 2016
On 3 May 2016, the Australian Federal Budget 2016 (“the Budget”) was handed down by Treasurer Scott Morrison. The Budget focuses on increasing employment and growth, addressing tax system challenges regarding multinationals and superannuation, and balancing Federal revenue and expenditure while paying down long term debt.
The key tax measures from the Budget include:
- A long term plan to reduce the company tax rate to 25%
- A modest personal tax rate cut for taxpayers earning over $80,000
- A new diverted profits tax applicable to significant global entities using artificial or contrived arrangements to reduce tax by diverting profits offshore
- A new tax avoidance taskforce led by the Commissioner of Taxation
- Changes to the superannuation system to promote flexibility and fairness
Given New Zealand’s proximity to Australia and the fact that comparisons will inevitably be made, how will this budget compare to New Zealand’s which is scheduled to be delivered on 26 May 2016?
With respect to the reduction in company tax rates, the staggered approach, while fiscally more appealing, will actually be a logistical nightmare to manage, as each time the tax rate changes (from 30% to 27.5% to 27% to 26% to 25%) there will be associated transitional rules for calculating what tax to pay and also working out to what extent dividends can be franked (the equivalent of imputing dividends in New Zealand). Not to mention implications for tax accounting in financial statements, where applicable. We know because we’ve been there and done that with our tax rate drops in 2009 (to 30%) and 2012 (to 28%). To date we have heard no murmurings of any further corporate tax rate drop in New Zealand and so the question is whether the New Zealand Government will come under pressure in the future to match these lower rates. It would be surprising at this late stage if the New Zealand National Government were to signal a similar move in Budget 2016. One reason it may not be on the cards at the moment is that overall the state of the New Zealand tax system is arguably in better shape than Australia’s because of our broad-based low-rate tax system. With respect to personal tax rates, Prime Minister John Key has already firmly indicated that New Zealand’s Budget 2016 will not reduce personal income tax rates.
Concerning issues of multinational tax avoidance, the Australian Budget delivers a comprehensive set of proposals in order to limit Base Erosion and Profit Shifting (“BEPS”) out of Australia. The measures proposed demonstrate a continued commitment by the Federal Government to practice its “first mover approach” concerning the OECD’s BEPS action plan. Key proposals include:
- A new diverted profits tax for significant global entities using artificial or contrived arrangements to reduce tax by diverting profits offshore, supported by a 40% penalty tax rate;
- A new 1,000 person tax avoidance taskforce within the Australian Tax Office that has the aim of raising an extra AUD 3.7 billion in revenue;
- New anti-hybrid rules to close cross-border tax arbitrage (for example, instruments or entities that are treated differently in different jurisdictions) from 1 January 2018;
- Increased disclosure expectations requiring financial advisors to report potentially aggressive tax planning schemes and a tax transparency code to encourage public disclosure of tax information;
- Better whistle-blower protections for people reporting tax misconduct to the Australian Tax Office;
- Updated transfer pricing rules that correlate with the OECD’s most recent guidance; and
- Penalties of AUD 450,000 (up from AUD 4,500) for a breach of tax reporting obligations for companies with over AUD 1 billion annual turnover.
With recent media attention in New Zealand on the ‘Panama papers’, foreign trusts and multinational taxation, it is likely there will be some commentary in this month’s New Zealand budget about how New Zealand is responding and whether it is doing enough.
Rather than going it alone like Australia, the Government has stated that this problem needs to be solved at the international level, with the Minister of Revenue, Michael Woodhouse asserting "the OECD is the best place in which to have that analysis".
What is often not mentioned in the media is that Inland Revenue Officials have been heavily involved in the OECD’s BEPS project over the previous two years and much work has been going on behind the scenes. In Budget 2016 we are likely to be reminded of the work that is being undertaken, such as:
- The imminent application of GST on remote services supplied in New Zealand by offshore parties which will start to apply from 1 October 2016.
- An Issues paper is expected to be introduced this year targeting multinationals using hybrid mis-match arrangements, plus a further paper is planned on interest limitation rules.
- Just last week, the Government introduced measures in a bill to tighten up the rules around withholding taxes on the receipt of passive income by certain non-residents (NRWT) which is a further base maintenance measure affecting multinationals.
- And, the Government no doubt will also reference the announcement of the recent foreign trust review in Budget 2016.
Suffice to say – these measures plus the international changes resulting from the OECD BEPS project alone are already significantly changing the landscape for multinationals operating in New Zealand. Based on this and comments to date we can’t see that the New Zealand Government will introduce a diverted profits tax. Of course the tougher multinational rules in Australia could in fact dissuade multinational companies and / or even Kiwi businesses from setting up businesses in Australia. It’s a balancing act between attracting investment and making sure the rules are fair for all.
And last but not least, Australia will be imposing GST on imported goods from 1 July 2017. Overseas suppliers will need to register for Australian GST if their supplies to Australian exceed A$75,000. Interestingly New Zealand Customs had been scheduled to release its own proposals on GST on imported goods by April 2016, but this is still awaited. Perhaps this will be announced as part of Budget 2016?
For further information about the Australian Federal Budget 2016, please read this report.