A key focus of the Federal Budget was on compliance and tax integrity measures for large multinationals. In this article, our international tax experts break down what it means for businesses big and small who operate overseas and individuals who reside outside of Australia.
In all the noise of budget night and in the days that followed, most focus on the measures that impact local businesses and everyday Australians. We’ve already wrapped up what the 22-23 Federal Budget means for businesses, investors and individuals . Now, our expert international tax team shares what the budget has to say about anti-tax avoidance by global entities, improving tax transparency, Australia’s thin capitalisation rules, and individual and company residency measures.
Denying Deductions For Payments Relating to Intangibles Held in Low or No Tax Jurisdictions
The government will introduce an anti avoidance rule to prevent significant global entities (entities with global revenue of at least $1 billion) from claiming tax deductions for payments made directly or indirectly to related parties in relation to intangibles held in low or no tax jurisdictions.
For the purposes of this measure, a low or no tax jurisdiction is one with:
- a tax rate of less than 15 per cent or
- a tax preferential patent box regime without sufficient economic substance.
It’s unclear what will be included in the definition of intangibles for these purposes. The measure will apply to payments made on or after 1 July 2023.
Improving Tax Transparency
The government will introduce reporting requirements for relevant companies to enhance the tax information they disclose to the public, for income years commencing from 1 July 2023. This will require:
- large multinationals, defined as significant global entities (entities with global revenue of at least AUD$1 billion), to prepare for public release of certain tax information on a country by country (CbC) basis and a statement on their approach to taxation, for disclosure by the ATO
- Australian public companies (listed and unlisted) to disclose information on the number of subsidiaries and their country of tax domicile and
- tenderers for Australian Government contracts worth more than $200,000 to disclose their country of tax domicile (by supplying their ultimate head entity’s country of tax residence).
Amending Australia’s Interest Limitation (Thin Capitalisation) Rules
The government will amend Australia’s thin capitalisation rules to further limit the use of excessive debt deductions by multinational entities operating in Australia and any inward or outward investor. The new measure will result in a higher cost of doing business in Australia which may reduce the appeal of Australian businesses globally. It will apply to income years commencing on or after 1 July 2023.
The current thin capitalisation regime limits debt deductions up to the maximum of three different tests: a safe harbour (debt to asset ratio) test; an arm’s length debt test; and a worldwide gearing (debt to equity ratio) test. The Government will replace the safe harbour and worldwide gearing tests with earnings based tests to limit debt deductions in line with an entity’s activities (profits). This measure includes changes to:
- Replace the existing safe harbour test with a new earnings based test which limits an entity’s debt related deductions to 30 percent of profits (using EBITDA —earnings before interest, taxes, depreciation, and amortisation – as the measure of profit)
- Allow deductions denied under the entity level EBITDA test (interest expense amounts exceeding the 30 per cent EBITDA ratio) to be carried forward and claimed in a subsequent income year (up to 15 years)
- Allow an entity in a group to claim debt related deductions up to the level of the worldwide group’s net interest expense as a share of earnings (which may exceed the 30 per cent EBITDA ratio). This new earnings based group ratio will replace the worldwide gearing ratio
- Retain an arm’s length debt test as a substitute test which will apply only to an entity’s external (third party) debt, disallowing deductions for related party debt under this test.
Financial entities will continue to be subject to the existing thin capitalisation rules.
Boosting and Extending the ATO Tax Avoidance Taskforce
The Government will boost funding for the ATO Tax Avoidance Taskforce from 1 July 2022, in addition to extending this Taskforce for a further year from 1 July 2025. This will support the ATO in pursuing new priority areas of observed business tax risks, complementing the ongoing focus on multinational enterprises and large public and private businesses.
Individual and Company Residency Measures
The Labor Government’s Budget was silent on the former government’s proposed changes to the individual tax residency rules and the residency tests for companies, corporate limited partnerships and certain trusts. The Labor Government’s commitment to these measures is therefore unclear.
Meet BlueRock’s International Tax, Business Advisory and Legal Experts
BlueRock’s international business advisors offer specialised tax, business advisory and legal services for high-growth businesses or individuals operating in a global market. Talk to our international business advisors about how we can help you achieve your international growth goals and empower you to make commercial decisions by applying our technical expertise across multiple disciplines
