These changes do ensure consistency with the OECD’s BEPS proposals and will benefit multinationals operating in the intangibles-driven sectors, where such assets may be internally-generated and not recognised on-balance sheet. Furthermore, the ability for groups to carry forward any denied “excess” deductions for up to 15 years is to be welcomed, as the current rules permanently deny any such excess.

The impact on asset-intensive industries is arguably yet to be determined fully and industry participants may well be concerned at the haste of such profound changes. Arguably preserving an asset-based regime alongside an earnings-based regime would have better reflected the balance of Australia’s modern economy.  

There is no mention of whether the existing de minimis rule current – whereby taxpayers, who together with associate entities, have annual debt deductions of less than $2m are not subject to thin capitalisation – will be retained.

However, financial entities will be relieved to be unimpacted by these changes.

"LOW-TAXED ROYALTY" INTEGRITY MEASURE 

As foreshadowed, the Government is enacting an anti-avoidance rule that targets significant global entities, which will be denied deductions for royalties and licence fees, where the payments are made (directly or indirectly) to related parties in relation to intangibles held in low- or no-tax jurisdictions. A key issue for resolution since this policy was announced was where the threshold for “low tax” was to be drawn; the Budget now confirms that “low tax” will mean a jurisdiction with a tax rate of less than 15%, or with a tax-preferential patent box regime that does not require sufficient economic substance.

Allied with the ATO’s proposals to significantly expand the meaning of “royalty” (and therefore the remit of royalty withholding tax), there is now a potential for simple Australian distributors in the technology sector to be subject to effective tax rates well in excess of 100%. This state of uncertainity will further risk Australia’s negative perception amongst our key global trading partners.

TAX TRANSPERANCY

Furthering another previously announced measure, the Budget also sets out more details regarding its tax transparency initiative. For income years commencing on or after 1 July 2023, the Government will require:

• Significant global entities to prepare for public disclosure of certain tax information, including certain country-by-country information and also a statement on their “approach to taxation”.
• Australian listed and unlisted public companies to disclose information on the number of subsidiaries, and their country of tax domicile / residency.
• Those entities tendering for contracts with the Australian Government to disclose their tax domicile, including by reference to their ultimate head entity’s country of tax domicile / residence 

This is anticipated to leverage relevant standards published by the European Union and Global Reporting Initiative and could result in public information that is more meaningful to users, provided it is implemented in an appropriate manner.

Notably, the Government has not used this Budget as an opportunity to announce legislation to require mandatory compliance with the (currently voluntary) Tax Transparency Code. Given the relatively low uptake to date, such a move may not have been surprising, but it has not been intimated in this Budget.

You May Also Be Interested In...