Australian Budget 2018–19: Tax Measures Impact Multiple Industries

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Lance Cunningham Meera  Pillai

Lance Cunningham and Meera Pillai BDO Australia

Lance Cunningham is National Tax Director and Meera Pillai is Senior Manager at BDO Australia

The 2018–19 Australian Federal Budget was released on May 8, 2018 and contained several taxation measures with implications for various industries.

R&D Offset and Intensity Threshold Measures and Agriculture, Manufacturing and Mining

The Federal Budget included a new R&D premium intensity test for companies with turnover of greater than AU$20 million. From July 1, 2018, such companies' R&D offsets will increase as their R&D expenditure increases as a percentage of total company expenditure. The new system appears to be equitable when compared to the current 38.5 percent non-refundable R&D tax offset. The current non-refundable tax offset is 8.5 percent above the 30 percent company tax rate and the new non-refundable R&D offset rates starts at only 4 percent above the company's tax rate, but the highest new offset rate is 12.5 percent above the company's tax rate, i.e. on average about the same as the current extra offset.

However, this new regime discriminates against companies in in high volume, low margin industries such as manufacturing, mining and agribusinesses including meatworks, regional engineering firms and farmers conducting new plant varietal or cropping technique research.

The new “intensity test” will be more favorably received by service industries, including the financial sector, biotechnology and software firms which usually have lower operational input costs for their margins. Companies in the high volume low margin industries will have to spend much more on R&D to get the higher R&D offset rates available to similar sized companies in other industries. There does not appear to be any policy reason why these industries are being targeted.

Companies with less than AU$20 million of aggregated turnover haven't escaped either. There will be a AU$4 million cap on R&D refunds and the refundable tax offset rate (currently 43.5 percent) will be effectively pegged at 13.5 percent above an entity's corporate tax rate from July 1, 2018. As these companies have a corporate tax rate of 27.5 percent they will receive a refundable tax offset of 41 percent, i.e. 2.5 percent less than what they currently receive. The only relief from the R&D changes in the Federal Budget is delivered to medical research with clinical trials by biomedical technology innovators exempted from the new AU$4 million cap on R&D refunds.

Managed Investment Trusts and Infrastructure

The Federal Budget confirmed the Australian government's package of measures addressing tax risks of stapled structures and limiting of certain foreign investor concessions announced on March 27, 2018.

These include removing the 15 percent concessional rate of Managed Investment Trust (“MIT”) withholding tax for distributions sourced from certain cross staple rental and other payments where the arrangement has the effect of converting business income into passive income. The effect of this measure is to subject those distributions to withholding at the corporate tax rate from July 1, 2019. Stapled securities have been used for decades to obtain foreign investor funding to invest in economic infrastructure assets such as ports, toll-roads and more recently electricity networks.

The move to tax some foreign investors at the corporate tax rate of 30 percent rather than 15 percent introduced at the start of the decade for MIT concessions will have impact on the infrastructure industry and affect the value of existing assets and the ability to source foreign money. Draft legislation was released on May 17, 2018 for consultation.

Managed Investment Trusts and Wealth and Asset Management

Following the Federal Budget MITs will be prevented from applying the capital gains discount at the trust level from July 1, 2019 to bring the MITs withholding regime in line with the Australian government's recent measures taxing nonresident property holders, including the removal of the capital gains discount for non-Australian tax residents. Whether it acts as a disincentive for foreign investors remains to be seen.

At first sight this change does not appear to be necessary as the current calculation of amounts that are subject to MIT withholding already reverses the CGT discount that is applied by the trust when it calculates the net income of the trust. However, the CGT discount is not completely reversed where the discounted capital gain has had deductible expenses and/or tax losses allocated against in the calculation of the net income of the trust.

These new rules will require the trust to include the gross capital gain in the net income of the trust instead of the discount gain and therefore a MIT or AMIT would have to allocate deductions and/or tax losses against gross capital gains instead of only the discount capital gains component. In these circumstances the amount that the 15 percent MIT withholding payment is calculated on will generally increase by the amount of the allowable deductions and/or tax losses that would otherwise have been allocated to reduce the discounted capital gain.

Removal of Luxury Car Tax on Reimported Cars and Automotives

Through the Federal Chamber of Automotive Industries, car manufacturers have been lobbying for years to remove the luxury car tax (“LCT”) which applies to vehicles costing more than AU$65,000 but the revenue windfall to the Australian government is too great with estimates LCT revenue will increase 7.9 percent to AU$650 million due to “strong sales of vehicles subject to LCT.”

As a slight compromise, from July 1, 2019, the Federal Budget contained a measure to remove LCT on cars re-imported into Australia after being refurbished overseas to ensure consistent treatment of LCT on refurbished cars regardless of whether they are refurbished in Australia or overseas.

Protecting Superannuation Entitlements and Financial Services

A range of measures were announced to protect the balances of superannuation accounts belonging to Australians, including a 3 percent cap on passive fees charged by superannuation funds on accounts with balances of less than AU$6,000, and banning exit fees on all superannuation accounts. It will further be a requirement to transfer inactive superannuation accounts to the Australian Taxation Office (“ATO”) where the balance is below AU$6,000.

The ATO will also expand its data matching processes to reunite these inactive balances with active balances of those affected members. These measures are proposed to take effect from July 1, 2019 and draft legislation was released as part of the Budget for consultation.

Immediate AU$20,000 Write-off of Depreciable Assets and Retail, Hospitality and Trade

The Australian government has extended the immediate deductibility of assets costing less than AU$20,000 for small business entities (those with an aggregated annual turnover of less than AU$10 million) to June 30, 2019.

The measure will provide additional time for small businesses including those in retail, hospitality and trade to access this concession, providing additional incentive for many to increase their current capital expenditure spend which includes cash registers, in-store security systems, new computers or laptops, retail furniture, tools, building materials and kitchen equipment. However, the after-tax consequences should be considered, e.g. if this results in a tax loss, there is no immediate cash-flow advantage.

Online Hotel Accommodation Providers and Tourism

Offshore digital businesses organizing bookings for Australian hotels such as Wotif, Expedia and Bookings.com that provide Australian hotel accommodation will be required to calculate their GST turnover in the same way as local accommodation providers from July 1, 2018. Online providers that produce sales of hotel accommodation in Australia over AU$75,000 per annum will be required to register for GST and charge GST on the sales. These changes recognizes the current uneven playing field between foreign online sellers and local sellers of Australian accommodation.

Location Incentive and the Technology, Media and Telecommunications

The Australian government used the Federal Budget to announce a “location incentive” for international films made in Australia, which is designed to bring in over AU$260 million of new foreign investment into the Australian economy. The location incentive will be delivered over four years from 2019–20, and will effectively provide an increase to the location offset rate from 16.5 percent to 30 percent for eligible large budget international productions that are filmed in Australia from July 1, 2018.

Black Economy Crackdown and Multiple Industries

Currently, under the Taxable Payments Reporting System (“TPRS”), businesses in the building and construction industry are required to report payments to contractors to the ATO.

Last year's Federal Budget extended the TPRS to the cleaning and courier industries from July 1, 2018 and this year the Australian government is further expanding the TPRS to include businesses in security providers and investigation services; road freight transport; and computer system design and related services from July 1, 2019.

The aim of this measure is to reduce the incidence of tax evasion by contractors and reduced the inequity between contractors and wage and salary earners by aligning the reporting obligations of these two income-earning groups, at least in the six industries that have now been targeted.

Action Required

  •  To qualify for the R&D tax offset companies should ensure they meet strict registration time limits and collate contemporaneous evidence at the time the R&D activities are undertaken and expenditure is incurred to demonstrate the eligibility of all registered activities.
  •  Entities involved in stapled trust projects should review the current status of ongoing and planned projects to determine whether transitional arrangements apply and review the draft provisions to identify issues that should be addressed in consultation.
  •  Offshore digital booking agencies for Australian hotels etc. need to consider registering for Australian GST if their Australian turnover exceeds AU$75,000 per annum.
  •  Eligible small businesses should plan asset purchases to take advantage of the extension of the instant asset write-off for assets costing less than AU$20,000 as well as lobby for the scheme to become a permanent feature of the tax system.
  •  Cleaning and courier industries should begin preparing now to lodge their first TPRS form in August 2019 and security providers and investigation services; road freight transport; and computer system design and related services should begin preparing soon to lodge their first form TPRS in August 2020.

For More Information

Lance Cunningham is National Tax Director and Meera Pillai is Senior Manager at BDO Australia.

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