Reforms to Part IVA 'general anti-avoidance' provision announced
On 1 March 2012, the Government announced its intention to amend the Australian general anti-avoidance rule (Part IVA) outlining that it "was mindful that any amendments should not interfere with genuine commercial transactions and activities of taxpayers."
In summary, the announcement proposes:
- that the changes, whatever they may be, will apply to schemes entered into or carried out after 1 March 2012;
- to appoint independent experts "about how best to implement the proposed clarifications, without unintentionally affecting genuine commercial and business activity" (the announcement mentions only how to implement, not whether change is needed);
- to consult publicly thereafter; and
- to introduce law in the spring sittings – i.e., August 2012 at the earliest and possibly over six months from now.
For taxpayers restructuring, altering their financial structure and/or undertaking transactions, the announcement provides uncertainty for taxpayers for a period of at least six months over the application of the Australian general anti-avoidance provisions.
It will have an impact on decisions regarding material transactions contemplated by business and taxpayers generally.
Taxpayers should carefully review their transactions entered into after the start date of 1 March 2012 as the announcement does not indicate any protection for transactions in progress or committed to or decided.
Transfer pricing law changes introduced into Parliament
On 24 May 2012, Tax Law Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012 was introduced into Parliament.
The new transfer pricing rules will apply to transactions with treaty countries for income years starting on or after 1 July 2004. For groups transacting with residents of multiple countries, the implementation of these changes might be complex.
While there are several technical changes from the exposure draft, the intent and mechanics of the law are largely unchanged.
The changes are intended to 'clarify' and confirm the Australian Taxation Office's (ATO) long standing and highly controversial view that Australia's tax treaties provide a separate and unconstrained taxing power.
These changes will have a significant impact on the transfer pricing landscape in Australia and for businesses which have based their tax positions and processes on the existing law.
The greatest impact will be for businesses which have international transactions and, in particular:
- Related party funding arrangements, with gearing near to thin cap limits or high interest expense
- Foreign owned businesses with related party transactions and overall low profit margins or losses
- Businesses that have moved or are planning to shift assets, functions or risks to overseas
- Related party financing arrangements and their transfer pricing benefits are covered by a specific provision. The Australian Taxation Office (ATO) will be able to reset the interest rate on related-party debt and financial support, consistent with the approach in Taxation Ruling TR 2010/7. Such rate is applied to the actual debt level in place.
Businesses need to factor these changes into their transfer pricing processes, strategy and documentation prior to their next tax return and, in some cases, retrospectively. In particular, businesses should:
- Review the quality of documentation maintained for transfer pricing purposes, as the law is likely to require increased documentation for 2012 and beyond
- Examine transfer pricing positions adopted back to the year 2004 and consider whether they need to raise a provision in respect of an uncertain tax provision and whether supplementary documentation is required to be maintained to support positions taken in prior years.
Investment Manager Regime – second exposure draft released
On 7 March 2012, the Government released the second exposure draft of legislation implementing the first and second stages of the Investment Manager Regime (IMR) for the:
- foreign fund ("FIN 48") tax amnesty (covering 2010-11 and earlier income years) – to provide certainty in respect of potential prior year Australian taxation of qualifying widely held foreign managed funds and their investors
- permanent establishment foreign conduit income measure (from 2010-11) – an Australian tax exemption where qualifying widely held foreign managed funds merely use Australian service providers in respect of their non-Australian investments
Note that these exposure drafts do not address the final element of the IMR which was announced on 16 December 2011 (the exemption for foreign investors which invest in eligible foreign managed funds that use Australian investment intermediary and advisory services to invest in Australian assets).
The announcement states that legislation for this measure has not yet been drafted and consultation on the development of this legislation will be undertaken at a later stage. However, we note that it has been the policy intention for these rules to apply from 1 July 2011.
Further consultation on potential thin capitalization changes recommended
A Business Tax Working Group (BTWG) was formed following the Australian October 2011 Tax Forum. As part of the process that followed, Treasury provided the BTWG with a list of savings options which focused on the largest business tax expenditures including changes to the thin capitalization rules.
The following list of potential thin capitalization changes was made public in the BTWG's final report on the tax treatment of losses released on 13 April 2012:
- removing the arm's length debt test (for general entities and non-bank financial entities) and the arm's length minimum capital amount (for banks) from the domestic law;
- reducing the safe harbour maximum debt limit for general entities from 75 per cent to 60 per cent on a debt-to-total assets basis (or from 3:1 to a 1.5:1 debt to equity basis);
- reducing the worldwide gearing ratio for general entities and non-bank financial entities from 120 per cent to 100 per cent; and
- increasing the worldwide capital ratio for banks from 80 per cent to 100 per cent.
However, the BTWG recommendation was that "the Government note the savings options identified in this report; and further analysis and consultation be undertaken before taking a decision to implement them", noting the impact of time restrictions in fully considering the options and the restricted opportunities to consult.
The Treasurer accepted the need for further consultation.
The transfer pricing changes mentioned above (giving the ATO the power to potentially reset interest rates) already make a review of debt funding important where related party funding involves treaty countries.
Whilst a rushed commitment to thin capitalization changes was averted, it is important that taxpayers are ready for potential changes to the thin capitalization regime in the near future.
As such, inbound and outbound taxpayers should review their existing thin capitalization debt capacity and the impact on this capacity should these new thin capitalization limits apply.
Mining Resource Rent Tax (MRRT) and Petroleum Resource Rent Tax (PRRT) laws enacted
On 29 March 2012, the Minerals Resource Rent Tax (MRRT) and expanded Petroleum Resource Rent Tax (PRRT) legislation received Royal Assent. These rules have a commencement date of 1 July 2012.
With the MRRT law enacted and the 1 July 2012 commencement date fast approaching, there are a number of important decisions that all companies with iron ore or coal projects must now turn their attention to.
This encompasses meeting financial reporting obligations, having the right systems in place, being ready to meet critical deadlines and understanding key decisions and obligations.
Australian shipping reforms
On 22 March 2012, the Government introduced two bills into the House of Representatives to give effect to the tax incentives announced as part of the Australian shipping industry reforms.
The reforms were first announced in September 2011 and are intended to revitalize the Australian shipping industry by allowing Australian shipping companies to compete more effectively on international routes.
In summary, the reforms take the form of an exemption for certain income being derived by Australian ship operators, accelerated tax depreciation for certain vessels, roll-over relief for the replacement of vessels, refundable tax offset for withholding payments made to Australian resident seafarers and exemptions from royalty withholding tax.
Whilst the reforms are intended to reduce the income tax payable by Australian ship owners or operators, there may be additional costs of meeting the requirements for these concessions.
Australian ship operators should carefully monitor the progress of these reforms and consider their potential application to their business.
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