Australia: Reforms on the horizon as anti-avoidance action continues

James Newnham

After an intense month of tax-related Australian Senate Economics Committee hearings, namely an inquiry taking evidence on corporate tax avoidance, Apple, Google and Microsoft as well as leading Australian mining companies were in the spotlight to answer allegations around international profit shifting. In this context, the Australian tax regime is under increasing public pressure to keep up with the effects of ubiquitous digital disruption. In this regard, Australian Treasurer Joe Hockey has flagged plans for the so-called 'Netflix tax' to extend the reach of the GST to the online purchase of movies, songs, books and streaming services, consistent with the G20/OECD destination principle. The plan would update the GST to include intangible services such as online downloads and could set a precedent which extends to other digital and editorial content.

On March 30 2015, the Australian government released its 'Re:think' tax discussion paper, following on from the 2015 Intergenerational Report, contemplating a renewed tax system that supports higher economic growth and living standards, improves international competitiveness and adjusts to a changing economy. In releasing the paper, the Treasurer also said the government "does not support high tax rates to deliver these outcomes. As we have said on numerous occasions, our nation will never be able to tax its way to prosperity.". Hockey said the "challenge then is to reform our tax system so that we can raise necessary revenue without detracting from continued economic growth across the Australian economy". The key points of the paper discuss and consider reforms to the rate and base of the GST, the (high) corporate tax rate and inefficient taxes such as stamp duty.

Meanwhile, Treasury accepted submissions (until April 23 2015) regarding its proposed new tax system for managed investment trusts (MITs) which will modernise the tax rules for eligible MITs and increase certainty for both MITs and their investors. The new rules seek to enhance the international competitiveness of Australian managed funds and promote the greater export of Australia's funds management expertise. Key features will include an attribution model for determining member tax liabilities, which allows funds to retain their tax character as they flow through a MIT and to its members, and the ability to carry forward understatements and overstatements of taxable income, instead of needing to re-issue investor statements. The MIT regime is attractive for international investors as it allows a concessional 15% tax rate for non-residents located in certain exchange of information countries.

In early April, the Assistant Treasurer released the Board of Taxation's review into aspects of the tax integrity rules that distinguish debt finance from equity. The report prepared by the Board identifies and addresses uncertainty in relation to the related scheme provisions in ss 974-15 and 974-70 and the equity override integrity provision in s 974-80 of the ITAA 1997. The Board's recommendations aim to address the uncertainty around the operation of the related scheme and s 974-80 provisions by replacing the existing rules with a new provision based on principles the Board has identified. In this regard, last month the ATO released Taxation Determination TD 2015/3 which states that the "interest" referred to in the phrase: "… and if the interest does not form part of a larger interest that is characterised as a *debt interest in the entity in which it is held, or a *connected entity, under Subdivision 974-B" at the end of s 974-80(2) of the ITAA 1997, is the interest held by the "ultimate recipient" and not the interest held by the "connected entity". Section 974-80 is an integrity provision within 974 which deals with classifying an interest as debt or equity for certain tax purposes.

Legislation was introduced in relation to changes to the tax treatment of employee share schemes. This is the culmination of many months of consultation with start-up and non-start-up entities was due to an uproar by sectors affected by adverse amendments made in 2009. The new rules allow concessional treatment for employees and cure several unfair situations which can arise under the current rules.

Exposure draft rules were released to improve the rules around Offshore Banking Units (OBUs)

Finally, the Australian Taxation Office (ATO) released a consultative paper in relation to how they publish information under their tax secrecy and transparency reporting obligations. These obligations require the ATO to publish a report which includes a section on Australian companies which have more than A$100 million in revenue and state their total income, taxable income and tax payable. Interestingly, one objective of this legislation is to "discourage large corporate tax entities from engaging in aggressive tax avoidance practices".

James Newnham (james.newnham@dlapiper.com)
DLA Piper
Tel: +61 2 9286 8253
Website: www.dlapiper.com

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