This article was written by Tim Sherman, Justin Cherrington, Melanie Shaw and Melissa Simpson.
The Government will seek to press ahead with its broader agenda of corporate tax cuts but has introduced significant anti-avoidance measures to seek to capture lost revenue.
Corporate Tax Cuts
The Government has recommitted to the broader ‘enterprise tax plan’ beyond those already legislated for small and medium enterprises. This seeks to reduce the corporate tax rate and simplify the tax system for corporate entities.
Wind back of Research & Development
The Government has announced its intention to amend the research and development (R&D) tax incentive to better target the program and improve its integrity and fiscal affordability. The announcement has been made in response to the recommendations of the 2016 Review of the R&D Tax Incentive. The changes will apply for income years starting on or after 1 July 2018 and include the following:
Companies with aggregated annual turnover of $20 million or more
For companies with aggregated annual turnover of $20 million or more, the Government will introduce an R&D premium that ties the rates of the non-refundable R&D tax offset to the incremental intensity of R&D expenditure as a proportion of total expenditure for the year. The marginal R&D premium will be the claimant’s company tax rate plus:
- 4 percentage points for R&D expenditure between 0% and up to 2% R&D intensity;
- 6.5 percentage points for R&D expenditure above 2% and up to 5% R&D intensity;
- 9 percentage points for R&D expenditure above 5% and up to 10% R&D intensity; and
- 12.5 percentage points for R&D expenditure above 10% R&D intensity.
The maximum amount of R&D expenditure eligible for concessional R&D tax offsets will be increased from $100 million to $150 million per annum.
The 2016 report recommended that an “intensity threshold” be introduced, so that only companies directing a certain percentage of their total expenses to R&D would receive the non-refundable tax offset. However, the Government has opted to use a “scaling” method, with the incentive increasing with the intensity of the expenditure. A link to the intensity of the expenditure is a response to research stating that spillovers (i.e. R&D that benefits others) are more likely to flow from R&D in large companies with higher R&D intensities.
Companies with aggregated annual turnover below $20 million
For companies with aggregated annual turnover below $20 million, the Government is proposing to introduce:
- a refundable R&D offset which will be at a premium of 13.5% above a claimant’s company tax rate;
- a cap on cash refunds from refundable R&D tax offset. The cap will initially be set at $4 million per year (refundable R&D tax offsets from R&D expenditure on clinical trials will not count towards the cap); and
- R&D tax offsets not refunded will be carried forward as non-refundable tax offsets to future income years.
The Government will implement stronger compliance and administrative measures to further improve the integrity of the R&D program. These improvements include:
- increased resourcing for the Australian Taxation Office and Department of Industry, Innovation and Science, which will be used to undertake greater enforcement activity and provide improved program guidance to participants; and
- improving the transparency of the program by enabling the ATO to publicly disclose claimant details and the R&D expenditure they have claimed and limiting time extensions to complete R&D registrations and amendments to technical provisions (such as the feedstock and clawback rules and the general anti avoidance rules).
Confirmation of consolidation changes
This change simplifies two previously announced tax consolidation integrity measures. These measures, which are as follows, have now been enacted:
- Announced in the 2013-14 Budget, the Protecting the corporate tax base from erosion and loopholes — closing loopholes in the consolidation regime measure contained integrity rules which prevented non-residents from ‘churning’ assets between consolidated groups to generate double deductions. That measure applied from 14 May 2013. The Government has deferred the start date of one aspect of the measure, which requires grouping of associates when considering whether the integrity rules apply. These grouping rules now apply from the date of introduction of the enabling legislation.
- Announced in the 2016-17 Budget, the Tax Integrity Package — deferred tax liabilities measure removed adjustments relating to deferred tax liabilities from the consolidation entry and exit tax cost-setting rules. The measure contained complex transitional rules which required taxpayers to determine if any deferred tax liabilities were included in entry tax cost setting calculations — if so, the measure would not apply. Following consultation, those complex transitional rules have now been removed from the final legislation.
Deferral of TOFA Rules
The Government has deferred the start date of changes to the taxation of financial arrangements (TOFA) rules announced in the 2016‑17 Budget. The Ten Year Enterprise Tax Plan — business simplification — taxation of financial arrangements — regulation reform measure will reduce the scope of the TOFA rules, thereby decreasing compliance costs. The measure was announced originally to apply to income years commencing on or after 1 January 2018, but will now apply to income years commencing on or after the date of Royal Assent of the enabling legislation.
This measure has been deferred to allow additional time to design the simplified rules, to prevent unintended outcomes and to ensure compliance cost savings are realised.
Illegal phoenix activity
The Government will reform the corporations and tax laws and provide regulators with additional tools to help them deter and disrupt illegal phoenix activity. Illegal phoenixing involves the deliberate misuse of the corporate form, including – for example - scamming customers by not sending them goods or providing services paid for, or lost wages and superannuation entitlements. The package includes reforms to:
- introduce new phoenix offences to target those who conduct or facilitate illegal phoenixing;
- limit the ability of directors to resign when this would leave the company with no directors;
- restrict the ability of related creditors to vote on the appointment, removal or replacement of an external administrator; and
- expand the ATO’s power to retain refunds where there are outstanding tax lodgements.
For a full analysis of this year's Budget measures, please see Australian Federal Budget 2018-19.