Insight,

Australian Federal Budget 2018-19: Corporate

AU | EN
Current site :    AU   |   EN
Australia
Belgium
China
China Hong Kong SAR
Germany
Italy
Japan
Singapore
Spain
UAE
United Kingdom
United States
Global

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.

Compliance

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.

LATEST THINKING
Insight
On 2 August 2022, the Aged Care and Other Legislation Amendment (Royal Commission Response) Bill 2022 was passed (Aged Care Bill), introducing important regulatory changes to Australia’s aged care sector. The Bill makes numerous legislative amendments, including to the Aged Care Act 1997 (Cth) (Aged Care Act) and the Aged Care (Transitional Provisions) Act 1997 (Cth) (Transitional Provisions Act), and responds to various recommendations made by the Royal Commission into Aged Care Quality and Safety (Royal Commission) Final Report (Report). The Report identified the provision of substandard aged care services and perceived systemic failures in the aged care sector.[1]

08 August 2022

Insight
The Federal Court has refused an application to stay proceedings to quantify compensation for patent infringement (quantum proceedings) pending the outcome of separate parallel proceedings challenging the validity of the infringed patent on new grounds. The case is significant as intellectual property cases are regularly bifurcated with liability determined separately damages or an account of profits. A patentee may also bring consecutive infringement cases and therefore have two separate cases considering invalidity issues for the same patent running in parallel.

03 August 2022

Insight
Since the introduction of a nationwide Marketing Authorization Holder (MAH) system in 2019, licenses have linked directly to therapeutic products rather than manufacturers.

03 August 2022