This article was written by Calum Sargeant and Tom Wu.
Over several years the Government has introduced a significant suite of integrity measures targeted at multinational taxpayers, including the multinational anti-avoidance law (MAAL) and the diverted profits tax (DPT). This year’s Budget broadens the scope of entities to which the MAAL and DPT will apply. The Budget will also remove the ability of taxpayers to value assets for thin capitalisation purposes in a way that does not align with the valuation of those assets on the taxpayer’s financial statements.
Significant global entity definition
The Government has announced its intention to broaden the definition of “significant global entity” (SGE) under the tax rules. This definition is used for a range of tax purposes to identify entities:
- which are required to prepare Country by Country reports
- to which the MAAL applies;
- to which the DPT applies; and
- which may be subject to increased scheme shortfall penalties.
The current definition applies to an entity which is a member of a group that is consolidated for accounting purposes and which is headed by a public company or a private company required to provide consolidated financial statements, with annual global revenue of at least $1 billion. The definition will be broadened to include members of large multinational groups headed by private companies, trusts and partnerships. It will also include members of groups headed by investment entities.
The changes to the definition will also make amendments to the Commissioner’s power to determine that an entity is a global parent entity of an SGE, to ensure that power operates as intended.
The measure will apply to income years commencing on or after 1 July 2018.
Thin capitalisation assets valuations to be aligned with financial statements
The Government will restrict the ability of entities to make “thin capitalisation only revaluations” by requiring entities to align the value of their assets for thin capitalisation purposes with the value included in their financial statements.
Under the current thin capitalisation rules, taxpayers may in certain circumstances revalue assets for thin capitalisation purposes only, without also revaluing the assets for accounting purposes. Additionally, taxpayers may rely on concessions in the thin capitalisation rules, which allow for the recognition and revaluation of certain intangible assets not otherwise recognisable according to accounting standards. The ATO has previously expressed concerns about taxpayers using the existing rules to increase their maximum allowable debt.
Applying to income years commencing on or after 1 July 2019, all entities must rely on the asset values contained in their financial statements for thin capitalisation purposes. Valuations that were made prior to 7.30PM (AEST) on 8 May 2018 may be relied on until the beginning of an entity’s first income year commencing on or after 1 July 2019.
Thin capitalisation treatment of entities that are both outward and inward investing entities
The Government will ensure that foreign controlled Australian consolidated entities and multiple entry consolidated groups that control a foreign entity are treated as both outward and inward investment vehicles for thin capitalisation purposes. This will apply for income years commencing on or after 1 July 2019. This change will ensure that inbound investors cannot access tests that were only intended for outward investors.
Film industry location incentive
The Government has confirmed that it will provide a location incentive of $140 million to attract foreign investment in the Australian film industry. Specifically, the Government will provide $140 million over four years from 2019-20 to attract international investment to sustain Australian jobs in the film production and related industries through a competitive incentive program. This funding will complement the Government’s existing ‘Location Offset’ component of the Australian Screen Production Incentive tax rebate.
This additional funding was announced earlier this month by the Minister for Foreign Affairs. The proposed incentive effectively increases the existing Location Offset rebate from 16.5% to 30% for eligible large budget international productions that film in Australia.
For a full analysis of this year's Budget measures, please see Australian Federal Budget 2018-19.