How did the budget deal with international ties this year?

Compared to the last Budget where all multinationals were in the spotlight with a broad focus on tax avoidance and inappropriate profit shifting, this year’s Budget affecting multinationals has been narrowed to the following main areas:

• International Workers – New Employer Levy Imposed on Certain Skilled Visas
• Increase in Withholding Tax on Sales of Real Property to Non-Residents
• Tightening the Foreign Resident Capital Gains Tax Regime
• Crackdown on use of Foreign Trusts and Partnerships
• Crackdown on Certain Hybrid and Arbitrage Arrangements
• Other International Related Proposals

International Workers – New Employer Levy Imposed on Certain Skilled Visas

With effect from March 2018, businesses that employ foreign workers on certain skilled visas will be required to pay a foreign worker levy. The amount of the levy will depend on business turnover of the employer and the type of visa issued. The new levies can be summarised in the table below.

The above foreign worker levies are intended to replace the current training benchmark financial obligations on subclass 457 and 186 visas which the Government has indicated have been difficult to monitor effectively.

The revenue raised from the new foreign worker levies will be used to fund a new Skilling Australians Fund aimed at apprenticeships and traineeships in high demand sectors including regional and rural areas.

Increase in Withholding Tax on Sale of Real Property to Non-Residents

Currently, there is a 10% non-final withholding on payments made to foreign residents under contracts relating to sale of Australian real property, including land rich shares. The Federal Budget now proposes to increase the 10% withholding rate to 12.5% from 1 July 2017 and reduce the property value threshold from $2m to $750,000. The reduction in the value threshold appears to now increase focus on residential house sales, particularly in the major capital cities.

Tightening the Foreign Resident Capital Gains Tax (CGT) Regime

The foreign resident CGT regime will be tightened by applying the “principal asset test” on an associate inclusive basis for foreign residents with indirect interests in Australian real property (e.g. shares in Australian land rich companies). This is an integrity measure to ensure foreign residents cannot avoid CGT by disaggregating their indirectly held Australian real property interests.

Crackdown on use of Foreign Partnerships and Trusts

The “multi-national anti-avoidance law” (“MAAL”) introduced in 2015, targeting the use of foreign trusts and partnerships in corporate structures, will be expanded to counter the inappropriate use of those structures to circumvent the law. The MAAL will be enhanced so that it applies to:

• corporate structures that involve the interposition of partnerships that have any foreign resident partners;
• trusts that have any foreign resident trustees; and
• foreign trusts that temporarily have their central management and control in Australia.

The impact of these provisions to business structures generally remains to be seen until further details are released.

These amendments will apply retrospectively with effect from 1 January 2016.

Hybrid Mismatch Rules – Tax Arbitrage under the Spotlight Continues in the Finance Sector

Tax arbitrage continues to be a concern for the Government this time with the spotlight on multinational banks and financial institutions that use arbitrage opportunities involving regulatory capital called “Additional Tier 1 capital”.

The hybrid mismatch rules are broadly aimed at eliminating tax benefits which take advantage of tax arbitrage opportunities between two or more countries because of differing tax treatment of a financial instrument or entity. For example, funding between related parties that are structured to allow a tax deduction in Australia but which are not taxable to the related party in the overseas jurisdiction are potentially caught.

The new hybrid mismatch rules are intended to apply on certain returns of capital from the later of 1 January 2018 or six months after legislation receives Royal Assent.

Other International Related Proposals

Given the volume of legislation that has been introduced (and to be introduced) targeting multinational tax avoidance, the government will provide $8.1m over two years from 2016/17 to communicate the key tax integrity measures to the Australian business community and the general public.

Other international related proposals include clarifying and simplifying the foreign investment framework starting from 1 July 2017. The Government’s intention is to make foreign investor obligations clearer and to allow Foreign Investment Review Board screening resources to be directed to higher risk foreign investment cases.

What about innovation?

Innovation is a policy area that can encourage engagement and business activity with global counterparts.

Introduction of Advanced Manufacturing Fund

In line with the pre-budget announcement, the Government will provide $101.5m over the next five years to establish an Advanced Manufacturing Fund to promote research and capital development for high technology manufacturing businesses.

The new package contains the following elements:

• $47.5m for a new Advanced Manufacturing Growth Fund, committed over two years, to assist industry affected by the wind-down in automotive manufacturing. The funding will support up to one third of eligible expenditure on projects focussing on the establishment and expansion of high value manufacturing in South Australia and Victoria. As with similar programs in recent years, including the Next Generation Manufacturing Investment Program and the Automotive Diversification program, the new Fund is likely to be highly competitive and necessitate the development of a comprehensive business case that addresses the key criteria of the Fund;
• $4m for the Advanced Manufacturing Growth Centre, committed over two years, to support small scale and pilot research projects in advanced manufacturing, benefiting small firms and early stage researchers, allowing them to quickly move to larger scale research or commercialisation;
• $20m under the Cooperative Research Centre – Projects initiative, committed over two years, for larger scale advanced manufacturing research projects providing up to $3m in funding over three years;
• $10m to establish Innovation Labs in South Australia and Victoria to serve industry in a variety of roles including test centre facilities and business capability development, delivered through existing Government services such as the Entrepreneurs’ Programme, Industry Growth Centres and Austrade;
• $5m to maintain engineering excellence by investing in student research at universities, technology institutions and in industry to continue the flow of highly trained engineers to the automotive design and engineering sector; and
• $13.5m tariff reduction on imported vehicle prototypes and components used by Australian motor vehicle design and engineering providers that operate in a global network.

While this is a positive announcement, South Australia's Manufacturing and Automotive Transformation Minister, Mr Kyam Maher, was less excited noting that $785m remained in the Automotive Transformation Scheme and that this full amount should be allocated to assist companies affected by the cessation of automotive manufacturing.

R&D Tax Incentive stays as is

The Budget contained no announcement of any change to the R&D Tax Incentive. It is expected that tabled changes such as introducing an intensity threshold, placing a cap on refunds and introducing a collaboration premium are likely to be the subject of further debate with any changes forming part of a second National Innovation and Science Agenda (NISA) statement.

David Spurritt, executive director, taxation consultant, Bentleys SA