Compared to previous years, this year's Federal Budget is light on regarding specific corporate tax announcements. The most significant change relates to the application of the OECD hybrid mismatch rules to regulatory capital. Many other changes are merely confirmations of previously announced changes.
Bank Hybrid Mismatches Cancelled
A popular funding tool for raising funds from Australian domestic investors by Australian Authorised Deposit Taking Institutions (ADIs) and insurers has been "deductible/frankable" instruments such as the CBA PERLS. In essence, the instrument allowed the ADIs and insurers to raise regulatory capital (Additional Tier 1 Capital or AT1 capital) through an offshore branch and provide a return which is deductible in the country where the branch is located but is also able to carry franking credits.
Another tool available to ADIs has been to use an offshore branch to raise funds from offshore investors. Even though it is technically an equity interest issued by the ADI, it nevertheless does not cause any reduction in the franking capacity of the Australian entity.
The Government has now announced that the hybrid mismatch rules proposed in last year's budget will also be applied to these arrangements. Until now the position of regulatory capital instruments under these proposals has only been under consideration.
Specifically, it is proposed that:
- Returns on AT1 capital instruments which are deductible in a foreign country will not be frankable; and
- Returns on AT1 capital instruments where the capital has not been wholly used in the offshore operations of the issuer will be made frankable.
These rules will apply to returns on AT1 capital instruments which are paid on or after 1 January 2018 or 6 months after Royal Assent to the amending legislation (whichever is the latter).
Importantly, the tax consequences for AT1 capital instruments which are on issue as at 8 May 2017 will continue to apply until the first call date for the instrument after 8 May 2017.
Whilst these measures do not raise the tax payable by banks and insurers (unlike the Major Bank Levy also announced in this evening's budget) they do affect the cost of their capital. Deductible/frankable instruments usually carried a lower rate of return due to the availability of franking credits. If that is no longer available then the capital raised will either be used entirely offshore (at a greater cost to the foreign country's revenue due to higher coupons being payable) or be used entirely onshore (where the franking credits will be used in any event). The measures may be seen as a further implementation of the OECD BEPS program, which considers that the availability of these tax outcomes amounts to a form of "State aid" to a particular industry.
It will also be interesting to see how these rules interact with similar rules proposed by other countries (e.g. New Zealand). Hopefully, the interaction will not produce a non-deductible/ non-frankable outcome.
As an immediate step it is recommended that existing instruments be examined to determine when the next call date arises and plan funding activities accordingly.
Business to pay levy on certain skilled visas
From March 2018, businesses that employ foreign workers on certain skilled visas will be required to pay a levy that will provide revenue for a new Skilling Australians Fund (Fund). The Fund will prioritise apprenticeships and traineeships for occupations in high demand, occupations with a reliance on skilled migration pathways, industries and sectors of future growth, trade apprenticeships, and apprenticeships and traineeships in regional and rural areas.
The levy will replace the current training benchmark financial obligations for employers of workers on Temporary Work (Skilled) (subclass 457) visas, which are being abolished, and permanent Employer Nomination Scheme (subclass 186) Direct Entry stream visas.
Businesses will be required to:
- make an upfront payment of $1,200 per visa per year (where their turnover is less than $10m per year) or $1,800 per visa per year (where their turnover is $10m or more per year) for each employee on a Temporary Skill Shortage visa; and
- make a one-off payment of $3,000 (where their turnover is less than $10m per year) or $5,000 (where their turnover is $10m or more per year) for each employee being sponsored for a permanent Employer Nomination Scheme (subclass 186) visa or a permanent Regional Sponsored Migration Scheme (subclass 187) visa.
Confirmations of previously announced measures
In addition to the new measures outlined above, the Government also:
- re-committed to further reduce the corporate tax rate for all companies to 25% by 2026-27
- confirmed that it would further consider changes to the Petroleum Resource Rent Tax scheme recommended by the Callaghan Review and that Treasury would report to the Government by the end of September 2017.
In the week leading up to the Budget, the Treasurer also announced that the comment period for the consultation paper on using stapled structures to re-characterise trading income into more favourably taxed passive income had been to the end of July 2017.
For a full analysis of this year's Budget measures, please see Australian Federal Budget 2017-18.