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Australia: Australian Budget measures receive royal assent


Chris Neil

The Australian federal Budget was handed down last month. Of the announced Budget measures, the Bills relating to reducing the tax rate of small business entities from 30% to 28.5% and increasing the threshold for immediate asset deductions to $20,000 have received royal assent. As a part of the federal Budget, the government also announced that it will be extending Australia's GST (value added tax) regime to inbound supplies of intangibles. The reforms, which have been cited in media reports as the 'Netflix Tax', are expected to apply to digital content and software (including apps), online subscription services (including cloud based services and pay-TV services) and other intangible supplies made by non-residents from outside of Australia. If enacted, the reforms will apply from July 1 2017. Note that the reforms will only apply to supplies made to consumers. The reforms will not impact intangible supplies made to GST registered businesses in Australia.

The Australian Government has released a series of review papers prepared by the Board of Taxation on certain aspects of the Australian tax system, one of which is a review of tax arrangements applying to permanent establishments (PE). The review dissects the merits of implementing the 'functionally separate entity' (FSE) approach to determining profits attributable to a PE in Australia, as opposed to the existing 'relevant business activity' (RBA) approach, to more closely align with the OECD's article 7.

The report notes that the FSE approach enables more explicit and direct recognition of internal derivatives, making it an advantageous approach in the context of the Australian financial sector and sophisticated multinationals, however, it derides the potentially complex administrative burden adoption may have on non-financial sector entities. The Board of Taxation acknowledged that a selective approach in respect of the adoption of article 7 and the FSE regime may be the most beneficial way forward for Australia. Other reports issued by the Board of Taxation are in respect of the debt and equity tax rules, the thin capitalisation arm's-length debt test, Division 7A and collective investment vehicles.

In the courts, the Federal Court handed down its decision in the case of Channel Pastoral Holdings Pty Ltd v FCT (Channel Pastoral), providing much needed clarification as to how the Commissioner should apply the general anti-avoidance provisions in the context of a scheme involving the formation of a tax consolidated group. This decision was hotly anticipated after the question as to which entity, if any, should be the subject of determination and assessment for the 'tax benefit' obtained as a result of a consolidation scheme was left unanswered by the 2013 case of FCT v Macquarie Bank Ltd (Mongoose).

The majority judgement in Channel Pastoral provided that the only option available to the Commissioner was to make the determination and assessment of the tax benefit, obtained by virtue of the scheme, against the subsidiary in the group. The majority of the court further went on to label the former decision in Mongoose "wrong", deeming that it "should not be followed". Given the uncertainty that still exists in this space, it is highly likely that the decision will be appealed.

The Commissioner is required by Australia's tax transparency laws to publish certain details including total income and tax payable for every corporate tax entity that has a total income of at least $100 million. The government has cited privacy and personal security concerns relating to the ultimate owners and market environments as requiring the law to be amended and restricted in its application to non-Australian private companies. Exposure draft legislation removing the obligation to publish these details for Australian-owned private companies has been released by Treasury for comment.

In relation to public rulings, the Commissioner has finalised the earlier draft ruling on GST and development lease arrangements involving government agencies (GSTR 2015/2). The Commissioner also amended the public ruling on GST and going concern sales. The amendments clarify that in the context of the sale of leased commercial premises, it is not necessary for a vendor to transfer existing management or services contracts in order for the going concern exemption to apply.

Chris Neil (

DLA Piper Australia

Tel: +61 3 9274 5323


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