JobMaker Plan – temporary loss carry-back to support cash flow
The Government will introduce a measure to allow eligible businesses to carry-back losses to previous income years, in the hope that it will provide cash flow support to previously profitable Australian businesses which are now incurring tax losses as a result of the economic impact of COVID-19.
Businesses which do not elect to carry-back losses under this measure can continue to carry-forward losses to offset profits in future years (subject to satisfying the loss utilisation tests).
The measure is consistent with recommendations from the OECD regarding tax initiatives designed to assist companies seeking to navigate the economic damage caused by COVID-19. Similar measures have been introduced by several of Australian’s major trading partners, including New Zealand, the US, the UK, Germany, Austria and Japan.
The measure will be available to corporate tax entities (which include corporate limited partnerships and public trading trusts) with an aggregated turnover of less than $5 billion can apply tax losses against taxed profits in a previous income year.
It is stated to be temporary (for now) and will only permit tax losses from the 2019-2020 to 2021-2022 income years to be offset previously taxed profits made no earlier than the 2018-2019 income year.
The rules will operate by generating a refundable tax offset when an eligible business makes an election when lodging its 2021 and 2022 income tax returns. That is, eligible businesses looking to take advantage of the carry-back will not be required to amend previously submitted tax returns. Presumably, the same election will be available for eligible businesses wanting to make the election in their 2020 income tax return and entities who have already lodged that return will be able to amend.
There are limits on the offset amount to which eligible businesses will be entitled:
- the amount carried back cannot be more than the business’ taxed profits in the prior year; and
- the amount carried back cannot generate a franking account deficit (so it will be limited to the business’ franking account balance).
The announcement makes no reference to the existing loss utilisation rules which apply on a carry forward basis so it is not clear whether those rules will have any role to play in the proposed carry back regime. There is also no discussion about the loss utilisation rules that apply to tax consolidated groups, so the amending legislation will need to be closely scrutinised when it is eventually released.
This is somewhat of a ‘Back to the Future’ measure, as a loss-carry back regime along very similar lines was implemented, albeit briefly, by the Rudd Government in 2012 and then repealed by the Abbott Government.
Clarifying the corporate residency test
A significant technical amendment to the corporate tax residency test was announced that will provide that a company incorporated offshore will be treated as an Australian tax resident if it has a ‘significant economic connection to Australia’. This will require the company’s core commercial activities to be undertaken in Australia and its central management and control to also be in Australia. Accordingly, a foreign incorporated company that has its central management and control in Australia should not be an Australian tax resident if it does not also undertake core commercial activities here.
The proposed amendment to the central management and control test will ensure that the determination of the corporate tax residency of foreign incorporated companies will be consistent with the position prior to the Bywater Case and subsequent ATO ruling in TR 2018/5. Taxpayers will have the option of applying the new law from 15 March 2017 (the date from which TR 2018/5 applied), or from the first income year after Royal Assent.
International Tax — updating the list of exchange of information jurisdictions
Broadly, Tax Information Exchange agreements facilitate the cooperation between the ATO and the participating revenue authority in the administration and enforcement of their respective domestic tax laws by exchanging relevant information that has been requested. These agreements play an important role in safeguarding against offshore tax avoidance and evasion.
The Government has announced that the list of exchange of information jurisdictions will be updated effective from 1 July 2021 to:
- include Dominican Republic, Ecuador, El Salvador, Hong Kong, Jamaica, Kuwait, Morocco, North Macedonia and Serbia; and
- remove Kenya (as a result of not entering into an information sharing agreement with Australia as at January 2020).
The inclusion of Hong Kong in the updated list of exchange of information jurisdictions is significant given the current political climate.
Another important implication of being included in the list of exchange of information jurisdictions is that a foreign investor that resides in a country that is included in this list would be able to benefit from the concessional managed investment trust withholding tax rate when fund payments are made by a managed investment trust to this foreign investor.
The addition to the list of exchange of information jurisdictions is likely to encourage foreign investments from these newly added countries into Australian managed investment trusts.
JobMaker Plan — temporary full expensing to support investment and jobs
Businesses with aggregated annual turnover of less than $5 billion will be able to deduct the full cost of eligible capital assets (i.e. depreciating assets) acquired from 7:30pm AEDT on 6 October 2020 and first used or installed by 30 June 2022.
The proposed full cost expensing deduction will be available in the income year in which the eligible asset starts to be used or has been installed ready for use (consistent with the current instant asset write off provisions).
The proposed full expensing will apply to new eligible depreciable assets and the cost of improvements to existing eligible depreciable assets.
Small and medium businesses
- For businesses with aggregated turnover of less than $50 million, the proposed full cost expensing will also apply to second-hand assets.
- Small businesses (those with aggregated turnover of less than $10 million) will be able to deduct the balance of their simplified depreciation pool at the end of each income year in which the proposed full cost expensing applies (i.e. until 30 June 2022).
- The provisions that prevent a small business from re-entering the simplified depreciation regime for five years if the small business opts out from the regime will continue to be suspended.
- Under the enhanced instant asset write off measure that was introduced in response to COVID-19, businesses with aggregated annual turnover between $50 million and $500 million can still deduct the full cost of eligible second hand assets costing less than $150,000 which are purchased by 31 December 2020. Business that hold assets that are eligible under this measure will have an additional six months, until 30 June 2021, to first use or install those assets for use.
JobMaker Plan — Research and Development Tax Incentive — supporting Australia’s economic recovery
The Government has announced further refinements to the 2018-19 Budget measure 'Better targeting the research and development tax incentive', which build on the changes announced as part of the 2019-20 MYEFO.
For small companies (those with aggregated annual turnover of less than $20 million), the refundable R&D tax offset is being increased to 18.5 percentage points above the claimant's company tax rate. The previously announced $4 million cap on annual cash refunds has now been scrapped.
For large companies (those with aggregated annual turnover of $20 million or more), the Government will reduce the number of intensity tiers from three to two and increase the non-refundable R&D tax offset rates.
Although the categorisation of a taxpayer as a small company under the R&D tax incentive is nothing new, it is worth noting that this test remains inconsistent with the tests for determining whether a taxpayer is a small business under other tax concessions. Under the R&D tax incentive, a small taxpayer is one with an aggregated annual turnover of less than $20 million. This threshold is much higher than the aggregated annual turnover threshold of currently $10 million for most other concessions.
The R&D premium ties the rates of the non-refundable R&D tax offset to the incremental intensity of R&D expenditure as a proportion of total expenses for the year.
Previously, as part of the 2019-20 MYEFO, the Government announced that the number of intensity tiers would reduce from four to three, so that the marginal R&D premium was the claimant's company tax rate plus:
- 4.5 percentage points for R&D expenditure between 0-4% R&D intensity;
- 8.5 percentage points for R&D expenditure above 4-9% intensity; and
- 12.5 percentage points for R&D expenditure above 9% intensity.
The Government has now streamlined these intensity tiers from three to two, to provide greater certainty for R&D investment while still rewarding those companies that commit a greater proportion of their business expenditure to R&D. The marginal R&D premium will now be the claimant's company tax rate plus:
- 8.5 percentage points for R&D expenditure between 0-2% intensity; and
- 16.5 percentage points for R&D expenditure above 2% intensity.
The start date for these changes has been further deferred to income years starting on or after 1 July 2021 (previously on or after 1 July 2019) on the basis that it will provide businesses with greater certainty as they navigate the economic impacts of the COVID-19 pandemic.
All other aspects of the 2019-20 MYEFO measure will remain unchanged, including the increase to the R&D expenditure threshold for all claimants from $100 million to $150 million per annum.
This measure is estimated to have a cost to the budget of $2.0 billion in fiscal balance terms over the forward estimates period.
Strengthening Australia’s Foreign Investment Framework
The Government announced it will implement a new ICT platform to support more effective and efficient foreign investment application processing and compliance activities. The Government will also establish a new consolidated Register of Foreign Ownership of Australian Assets that will merge and expand the existing agricultural land, water and residential registers in order to increase the Government's visibility of foreign investments made in Australia. The Government will also simplify the foreign investment fee framework and adjust fees from 1 January 2021 to shift the cost of administering the foreign investment system from Australian taxpayers to foreign investors.
Additional funding to address serious and organised crime in the tax and superannuation system
The ATO will be provided with $15.1 million to target serious and organised crime in the tax and superannuation systems, extending an existing measure for a further 2 years until 2023. This measure is expected to increase the underlying cash balance by $18.9 and result in a gain to the budget of $136.8 million over the forward estimates.
JobMaker Plan — Digital Business Plan
The JobMaker Plan – Digital Business Plan provides $796.5 million over 4 years from 2020-21 to drive Australia's progress towards becoming a leading digital economy by 2030. This measure aims to improve productivity, income growth and jobs through the adoption of digital technologies.
Included in this measure is increased funding to the ATO of $44.7 million in 2020-21 and $52.6 million in 2021-22.
Funding is provided across various government departments and agencies in order to modernise the digital infrastructure, reduce regulatory barriers, support small and medium enterprises and improve government digital capabilities.
No digital services tax announced
One notable absence in the Budget is any measure associated with digital taxation, and accordingly, the existing Australian policy position to engage in the multilateral process through the G20 and the OECD is maintained.
It may have been opportunistic for the Budget to include a unilateral DST as a means of raising revenue, particularly as other jurisdictions that have implemented a unilateral DST have experienced negative political responses from their trading partners, most notably the United States.
Hybrid mismatch rules still not enacted
Australia's hybrid mismatch rules will be amended to provide greater certainty and to ensure that the rules operate as intended. The amendments are designed to negate the effect of a foreign tax deduction on franked additional Tier 1 Capital distribution by including an amount equivalent to the deduction in the assessable income.
These rules will apply from 1 January 2019 (aside from the change relating to the comparison of foreign hybrid mismatch laws which will commence on 1 July 2020) assuming the amendments are passed.