2018-19 Federal Budget Report: Business Taxation - General

Various changes for Australian businesses including MIT and AMITs

A number of integrity measures have been announced by the Government to improve the collection of taxation relating to investment in Australian businesses.

What was announced

  • International Tax
    • updating the list of information exchange countries to allow access  to reduced withholding tax
    • Stapled structures — tightening concessions for foreign investors
  • Removing the capital gains discount at the trust level for Managed Investment Trusts (MITs) and Attribution MIT (AMITs)
  • Enhancing the integrity of concessions in relation to partnerships, particularly in relation to CGT small business concessions
    Combating phoenixing activity with strengthened powers in both the corporations and tax laws

Updating the list of information exchange countries to allow access to reduced withholding tax

From 1 January 2019 the Government will update the list of countries whose residents are eligible to access a reduced withholding tax rate of 15% on certain distributions from MIT, instead of the default rate of 30%. The update will add the 56 jurisdictions that have entered into information sharing agreements since 2012.
 
This measure supports the operation of the MIT withholding tax system by providing the reduced withholding tax rate only to residents of countries that enter into effective information sharing agreements with Australia.

Stapled structures — tightening concessions for foreign investors

The Government will introduce measures to address risks to the corporate tax base posed by stapled structures and similar arrangements. The package will also limit access to concessions for passive income utilised by foreign governments and foreign pension funds.
 
The key elements of the package are:
  • Applying a final withholding tax set at the corporate tax rate (currently 30%) to distributions derived from trading income that has been converted to passive income using a MIT, excluding rent received from third parties. A 15 year exemption is available from this element of the package for new, Government‑approved nationally significant infrastructure staples;
  • Lowering the associate entity threshold under the thin capitalisation rules from 50% to 10% to prevent foreign investors from using multiple layers of flow‑through entities (i.e. trusts and partnerships) to convert their trading income into favourably taxed interest income;
  • Limiting the foreign pension fund withholding tax exemption for interest and dividends to portfolio investments only. As a result interest and dividend income derived by foreign pension funds from non‑portfolio investments will be subject to withholding tax;
  • creating a legislative framework for the existing tax exemption for foreign governments (including sovereign wealth funds), and limiting the exemption to portfolio investments. As a result, income derived by foreign government investors from non‑portfolio investments will be taxed; and
  • investments in agricultural land will not be able to access the 15% concessional MIT withholding tax rate.
The thin capitalisation changes will take effect from income years commencing on or after 1 July 2018. The remaining elements of the package will take effect from 1 July 2019. To address concerns over the impact on existing arrangements, a transitional period of at least seven years is available for all the measures in the package except the thin capitalisation changes.

Removing the capital gains discount at the trust level

From 1 July 2019 MIT and AMIT will be prevented from applying the 50% capital gains discount at the trust level. The measure will ensure that MIT and AMIT operate as genuine flow‑through tax vehicles, so that income is taxed in the hands of investors, as if they had invested directly. This measure will prevent beneficiaries that are not entitled to the CGT discount in their own right from obtaining a benefit from the CGT discount being applied at the trust level.
 
Under the measure, MITs and AMITs that derive a capital gain will still be able to distribute this income as a capital gain that can be discounted in the hands of the beneficiary.

Enhancing the integrity of concessions in relation to partnerships

From 8 May 2018 partners that alienate their income by creating, assigning or otherwise dealing in rights to the future income of a partnership will no longer be able to access the small business capital gains tax (CGT) concessions in relation to these rights from May 8.
 
This measure will prevent taxpayers, including large partnerships, inappropriately accessing the CGT small business concessions in relation to their assignment to an entity of a right to the future income of a partnership, without giving that entity any role in the partnership.
 
There are no changes to the small business CGT concessions themselves. The concessions will continue to be available to eligible small businesses with an aggregated annual turnover of less than $2 million or a market value of net assets of less than $6 million.

Combatting phoenixing activities

Phoenixing involves a number of illegal actions in order to evade or avoid income tax, GST and employment obligations. This activity impacts a wider gambit of community and the Government intends to protect scammed customers, employees who lose wages or superannuation entitlements and the wider community as a result of lost tax revenue.
 
The proposed reforms include:
  • Introduction of new phoenix offences, specifically targeted at phoenixing activities;
  • Expand the Director Penalty Regime to make directors personally liable for GST, luxury car tax and wine equalisation tax;
  • Expand the ATO’s powers to retain refunds where there are outstanding tax lodgements;
  • Prevention improperly backdated directors resignations to avoid liability or prosecution;
  • Prevention of director resignations where the resignations would leave a company with no directors; and
  • Restrict the ability of related creditors to vote on the appointment, removal or replacement of external administrators.