Australia’s 2021 budget, delivered on May 11 by Treasurer Josh Frydenberg, was designed to reduce tax compliance costs, boost investment in digital operations, build certainty in the tax system, and encourage business investment. The country is able to invest in improvements because its revenue collection is in a healthy position despite the COVID-19 pandemic.
The most significant corporate tax measures for tax directors to note include:
- A patent box regime at a 17% rate for medical and biotechnology patents;
- An additional year of full asset write-offs and loss carry-backs;
- Changes to corporate residency rules to include trusts and corporate limited partnerships;
- A review of tax exemptions and treatments under the Venture Capital Limited Partnerships programme; and
- A delayed start to corporate collective investment vehicles (CCIV).
“Australia's federal budget shows tax receipts in rude health largely due to iron ore receipts with the deficit significantly less than expected, and GDP growth is significantly higher than peer countries,” said Stuart Landsberg, international tax partner at PwC Australia.
“The federal government is capitalising on that financial strength by investing in services and tax concessions,” he added.
Business concessions for COVID-19 relief
Frydenberg announced that the Temporary Full Expensing measure, introduced in the 2020 budget that addressed the initial effects of the pandemic, will be extended. The measure allows businesses with an aggregate turnover of under A$5 billion ($3.85 billion) to deduct the cost of depreciating assets that are installed by June 30 2023.
There is also an extension on temporary loss carry-backs for companies with an aggregate turnover of under A$5 billion. Eligible businesses can carry back losses from the 2022-23 income year to offset taxed profits starting from the 2018-19 income year on filing their next tax return.
However, one of the most important announcements for taxpayers is a patent box tax regime that will cover income earned from the medical and biotech sectors on patents developed in Australia. The scheme will launch on July 1 2022 but it will retrospectively cover patents granted after May 11 2021.
The patent income will be taxed at a 17% rate, lower than the headline corporate tax rate which sits at 30% for large businesses and 25% for smaller businesses. Frydenberg also noted in his budget speech that the regime could be extended to cover other areas in the near future, particularly clean energy.
“This should bring Australia more in line with other jurisdictions competing for intellectual property development activities, such as the UK with its 10% patent box,” said Jock McCormack, head of tax at DLA Piper Australia.
The government is also providing A$77.6 million over four years to extend the Junior Minerals Exploration Incentive programme from July 1 2021 to June 30 2025. This programme provides a tax incentive for investment in companies raising capital to fund green-fields exploration activity.
Eligible companies can hold ‘exploration credits’ by giving up a portion of their tax losses tied to exploration expenses, which can then be distributed to investors as a refundable tax offset or credit.
Amendments to Australian tax law
Following changes to the corporate tax residency rules announced in last budget in October 2020, Frydenberg said there will be an incoming consultation on broadening the amendments to bring in trusts and corporate limited partnerships.
There are also some technical amendments coming to the Taxation of Financial Arrangements (TOFA) legislation, including corrections to the taxation of foreign exchange gains and losses. These changes will take effect for relevant transactions after July 1 2022.
Meanwhile, Frydenberg announced changes to national tax law relating to intangible assets including patents, registered designs, copyright, and in-house software. Taxpayers will be able to claim tax depreciation for the assets by assessing and reporting their effective life.
“The ability to self-assess the effective life of intellectual property and similar assets provides flexibility to digital businesses, whose intellectual property assets are integral to their supply chain and organisational models,” said McCormack.
“This could be an important factor in takeovers and acquisitions of IP-rich targets,” he added.
Enhancing international competition
The government is implementing a corporate collective investment vehicle (CCIV) regime on July 1 2022 to introduce an internationally recognisable investment structure and provide a flow-through tax treatment for businesses.
Advisors expect this to enhance the competitiveness of the Australian funds management industry because CCIV is an internationally recognised regime and easily marketable to foreign investors.
Meanwhile, the government is updating its list of exchange of information countries to include Armenia, Cape Verde, Kenya, Mongolia, Montenegro, and Oman from January 1 2022. Residents in these jurisdictions will be eligible for the reduced Managed Investment Trust (MIT) withholding tax rate of 15% on certain distributions instead of the default 30% rate.
Alongside these changes, about A$6 million has also been made available for the Treasury and Australian Taxation Office (ATO) to accelerate and improve tax treaty negotiations.
Additionally, the Board of Taxation will review the administration of research and development tax incentives before the end of 2021. It will also undertake a review of tax incentives for venture capital investments as part of an approach to enhance the domestic digital economy.
While some countries are pressuring large businesses with higher long-term taxation in their 2021 budgets, Australia is going the other way. Frydenberg’s speech promised more tax incentives to increase economic growth and international competition, with a particular focus on protecting intangible assets in its economy.
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