Corporate and international tax measures were focused on job creation and supporting businesses into making investments which will support the economic recovery.
Employee Share Schemes – removing cessation of employment as a taxing point and reducing red tape
In a welcome (and long overdue) move, the Government will remove the taxing point that happens when an employee leaves group employment and keeps tax-deferred shares and options.
These awards are usually taxed when they either vest or are exercised but that assumes the employee still works for the corporate group. An earlier taxable event will happen if the employee leaves the group and keeps the awards – for example, because they are a ‘good’ leaver – even where vesting conditions still have to be satisfied (which will often be the case where the retirement benefit rules in the Corporations Act 2001 apply). This can leave the employee in an unenviable position – having to fund a tax liability without the ability to sell the underlying shares to pay that liability. This artificial taxing point left Australia out of step with other major economies and its removal has long been identified as an easy ‘fix’ to ensure our employee share scheme regime is globally competitive and not a barrier to attracting talent. It also puts the federal tax laws at odds with the state tax laws, the latter don’t recognise termination of employment as a taxing point for payroll tax purposes.
In 2009, the ‘indeterminate right’ rule was introduced into the ESS regime and this helped provide a practical and relatively simple workaround, at least in relation to rights such as options. Allowing the company to settle the exercise of a right with a cash equivalent payment ‘switched off’ the ESS rules, which in turn meant no ‘tax on termination’ and no ‘dry’ tax charge. But if the vesting conditions were then satisfied, and the employee received shares, the rules were switched back on and a retrospective tax liability would arise. The employee would then need to request amended assessments and pay the outstanding tax, together with possible interest charges. So the ‘indeterminate right’ rule was not an elegant solution.
MinterEllison has lobbied numerous governments to have the tax laws amended to remove the ‘tax on termination’, so it is welcome that the first steps are being taken to make that a reality. What is surprising is that the changes (if passed) will only apply to ESS interests issued from the first income year after the amending legislation receives Royal Assent.
Employee share schemes are also subject to a wide range of regulatory requirements. The Budget also flagged the Government’s intention to ‘reduce red tape’ by streamlining the requirements for unlisted companies who charge employees to acquire ESS interests, or who lend money to them for that purpose (under a loan plan, for example). The streamlined requirements – which cover simplified disclosure requirements and exemptions from licensing, anti-hawking and advertising requirements – will apply to offers valued up to $30,000 per employee per year (up from the current $5,000 limit). This is a change that has been expected for some time. In addition, the Government has said that for employers who do not charge or lend to employees to acquire ESS interests, which would be most option plans and many share plans, the disclosure requirements will be removed and the offers will be exempted from licensing, anti-hawking and advertising prohibitions. The regulatory changes will apply three months after the amending legislation receives Royal Assent.
Corporate tax – corporate collective investment vehicle revised start date
To enhance the international competitiveness of the Australian fund management market, it had been previously announced in the 2016-17 Budget that a new form of passive investment vehicle would be introduced, that was an internationally understandable investment vehicle.
Following the 2016-17 Budget, in January 2019, the Australian Government released, for public consultation, two draft bills outlining the corporate collective investment vehicle (CCIV) tax and regulatory frameworks.
Broadly, under the proposed tax framework outlined in the January 2019 bill the CCIV regime would have similar tax treatments / benefits as the existing managed investment trust (MIT) and attribution managed investment trust (AMIT) regimes, such as 'flow through’ treatment and concessional withholding tax rates on certain distributions to eligible foreign investors but in a corporate structure. Similarly, it would be expected that the CCIV regime would have similar eligibility requirements to the MIT / AMIT regime, which include, but are not limited to, the entity being widely-held, not closely-held, limited to deriving passive income and an Australian tax resident.
Some 5 years after these measures were originally announced, it has been announced in the 2021-22 Budget that the CCIV regime would be finalised with the revised commencement date of 1 July 2022. It remains to be seen whether the announcement of the finalisation of these measures presents the Government with an opportunity to provide some certainty on the concept of control of trading businesses, which could also apply to existing MITs/AMITs.
No announcement was made as to whether the proposed tax and regulatory frameworks outlined in the two bills released in January 2019 would be amended.
Taxation of Financial Arrangements – hedging and foreign exchange deregulation
Technical amendments will be made to the Taxation of Financial Arrangements legislation to facilitate access to the hedging rules on a portfolio basis. Currently, the hedging rules apply to the gain or loss on each hedging financial arrangement which has been exposing taxpayers to taxation on unrealised positions.
These changes will take effect for relevant transactions entered into on or after 1 July 2022, which may give rise to a high level of complexity in assessing what comprises of the “portfolio” vis–a-vis individual positions.
Temporary loss carry-back extension
A welcome extension of the temporary loss carry-back measure by 12 months was announced.
In last year’s Budget, the Government introduced a measure to allow eligible businesses to carry-back losses to previous income years, in the hope that it would provide cash flow support to previously profitable Australian businesses which incurred tax losses as a result of the economic impact of COVID-19.
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.
Once extended, the measure permits tax losses from the 2019-20 to 2022-23 income years to be offset against previously taxed profits made no earlier than the 2018-19 income year.
Temporary full expensing extension
The Government will also extend the temporary full expensing measure announced in the 2020-21 Budget will be extended by a further 12 months to 30 June 2023.
Under the measure, 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 2023.
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 extension of the period in which the full expensing is available should allow relevant taxpayers additional time to make investments and access the incentive.
International Tax — removing the preferential tax treatment for Offshore Banking Units
Currently, the offshore banking unit (OBU) regime provides for a 10% effective tax rate for income derived from eligible offshore banking activities. Following the concerns raised by the OECD's Forum on Harmful Tax Practices in 2018 the OBU regime was closed to new entrants from 26 October 2018. Existing OBUs can continue to access the concessional 10% rate until the 2022-23 income year.
International Tax — updating the list of exchange of information countries
As has been Government policy to continue to negotiate Tax Information Exchange Agreements, the Government will update the list of jurisdictions that have entered into information sharing agreement with Australia. Residents of listed jurisdictions are eligible to access a concessional 15% Managed Investment Trust (MIT) withholding rate for certain distributions rather than the default 30% withholding rate. The updated list will be effective from 1 January 2022.
The jurisdictions to be added as having an effective exchange of information arrangement with Australia (effective from 1 January 2021) are as follows: Armenia, Cabo Verde, Kenya, Mongolia, Montenegro and Oman.
ATO 'early engagement service' for first time foreign investors
The ATO will introduce a new early engagement service designed to encourage and support new business investments into Australia. This announcement was not contained within the formal Budget papers themselves but in an information statement.
The early engagement service is said to:
- provide 'up front confidence' to investors about how Australian tax laws will apply;
- be 'tailored' to the particular needs of each investor;
- offer 'support' in relation to any or all federal tax obligations; and
- accommodate specific project timeframes, and other time sensitive aspects of a transaction (e.g. FIRB approvals); and
- incorporate access to 'expedited' private rulings and advance pricing arrangements.
The ATO will consult with business and other stakeholders to develop the early engagement service during May and June 2021. It is intended that the service will be available for 'eligible investors' (although it is not explained who these are) from 1 July 2021.