This article was written by Calum Sargeant and Alexey Monin.
The Government has generally seen the new MAAL rules taxing multinationals based on the country of source as successful in raising revenue and extended the rules to a wider class of entities. Further restrictions on foreign ownership of real property is meant to address concerns that such ownership is affecting housing affordability.
Expansion of the Multinational Anti-Avoidance Law
Over recent years, the government has introduced a succession of tough integrity measures targeted at multinational enterprises – including strengthened transfer pricing laws, a doubling of tax shortfall penalties for entities that are members of a group with revenues in excess of $1 billion, the Multinational Anti-Avoidance Law (MAAL) and the Diverted Profits Tax.
This year's budget largely refrains from introducing further substantial changes to Australia's international tax regime applicable to multinationals.
Of those measures which have been announced, the most significant is the expansion of the MAAL to capture structures that were thought to fall outside the application of the MAAL regime. Throughout 2016, the ATO released a series of taxpayer alerts expressing concern with a number of structures that it believed taxpayers had entered into for the purpose of avoiding the application of the MAAL. Although draft legislation is yet to be released, it is expected that the enhanced measures will be designed to target those schemes and to uphold the policy intent behind the MAAL – that is, to discourage multinational taxpayers from entering into schemes designed to avoid having a permanent establishment in Australia.
The government has announced that the new measures will ensure that the MAAL will apply to
- corporate structures that involve the interposition of partnerships that have any foreign resident partners;
- trusts that have any foreign resident trustees; and
- foreign trusts that temporarily have their central management and control in Australia.
Treatment of real property for non-residents
Rising prices of residential property in Australia's metropolitan cities have resulted in pressure being put on the Government to improve housing affordability. The Government has sought to encourage foreign owners of real property to use their properties in Australia efficiently by imposing a charge on underutilised residential property. This is predicted to increase the number of houses on the market and ease pressure on housing affordability.
In addition, the Government is seeking to improve local competitiveness in the property market by raising withholding taxes relating to CGT while reducing the associated threshold and denying the main residence exemption to non-residents and temporary residents.
A key focus of the 2017 Budget was the introduction of measures designed to ease pressure on housing affordability. These include measures that temper foreign demand for Australian property and discourage foreign investors from underutilising Australian property.
The measures aimed at foreign owners of Australian property include:
- The imposition of an annual charge of at least $5,000 on foreign owners of residential property where the property is not occupied or available on the rental market for at least six months per year. The charge will be equal to the foreign investment application fee imposed on the property when it was acquired.
- The removal of the CGT main residence exemption applicable to real property for foreign and temporary tax residents. The measure will apply to properties acquired after 9 May 2017 whilst properties held before this time will be grandfathered until 30 June 2019.
- An increase in the CGT withholding rate for foreign tax residents from 10% to 12.5% from 1 July 2017. The CGT withholding regime came into effect on 1 July 2016 and imposes a non-final withholding on the value of land sold by a foreign tax resident.
- A lowering of the threshold for CGT withholding which currently applies to Australian real property and related interests. The current threshold of $2 million will be lowered to $750,000 from 1 July 2017.
The government has also announced measures to strengthen the integrity of the foreign resident CGT withholding regime. The principal asset test will be changed so as to include associates. This is designed to ensure that a foreign parent company cannot avoid CGT by disaggregating its Australian land holdings among its associates.
For a full analysis of this year's Budget measures, please see Australian Federal Budget 2017-18.
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