Contributed by Tony Frost (Managing Director), Adrian O’Shannessy (Director), Nick Heggart (Director) and Ryan Leslie (Senior Associate), Greenwoods & Herbert Smith Freehills
Calendar 2017 saw significant advances in the Australian Taxation Office’s armoury, both through court wins and new or pending legislation. The Tax Commissioner openly now claims the upper hand in corporate and multinational tax compliance. The Senate seems almost becalmed. This note outlines our selection of 10 key things that shaped the 2017 tax year.
1. CHEVRON — THE NEW PRICE IS RIGHT
The landmark Full Federal Court ruling in Chevron Australia Holdings Pty Ltd v FC of T 2017 ATC ¶20-615, that cross-border loan pricing must reflect implicit and unpaid for parental support, shed new and peculiar light on the internationally accepted pricing standard, “the arm’s length price”. The ATO estimated the court’s ruling “… will bring in more than $A10 billion dollars of additional revenue over the next ten years in the pricing of related party finance alone”, and backed it with an ambitious new risk weighting “guide” for multinationals.
2. DPT — ANOTHER BLACK DOG
Australia’s new diverted profits tax (DPT) commenced on 1 July 2017 for any Significant Global Entities inclined to shift profits to a lower tax environment. Like our general anti-avoidance rule (Pt IVA of ITAA 1936) originally, the DPT is not forecast to itself collect significant tax, despite its punishing 40% rate. It is instead to “encourage greater compliance” with other tax laws. But as the late Neil Forsyth QC noted in 1991, this was initially also the idea of Pt IVA, which he described as an increasingly impatient “black (guard) dog”. We might just have doubled-down on black dogs.
3. ANTI-HYBRID LEADER
With the release of draft anti-hybrid legislation in November 2017, Australia again stamped itself as a world leader in Base Erosion and Profit Shifting (BEPS) measures. The draft includes both general and specific rules targeting double deduction and deduction/non-inclusion outcomes, through either misalignment of entity recognition (hybrid entities) or mismatched characterisation of instruments (hybrid instruments).
4. PENALTIES WITH CLOUT
1 July 2017 saw extraordinary increases in Australian tax penalties, mainly for significant global entities (no surprise there). Late lodgment penalties were increased 500-fold in some cases, penalties for false statements were doubled, and harsh new penalties were introduced for significant global entities involved in profit shifting.
5. TAX GAP SWITCH
Tax Commissioner, Chris Jordan, reported during the year that the large corporate “tax gap” in Australia, at $A2.5b, is similar to the UK, around global best practice and yet “assailable” within current settings. The ATO will therefore switch tack somewhat to small business, the black economy, phoenix activity and the individuals market, where the ATO expects bigger gaps than in the large corporate market, eg $A2.5b in over-claimed work-related expense deductions alone.
6. PHOENIX CRACK DOWN
Prompted by a major PAYG scam that ultimately caught up one of the ATO’s own lieutenants, the government announced in September 2017 a package of proposed reforms to crack down on illegal phoenixing of companies, ie stripping their assets to avoid paying creditors, often the ATO. Among various contemplated new restrictions and offences, company directors will require unique Director Identification Numbers (DIN) to connect individuals with companies and identify serial offenders.
7. TOUGH YEAR FOR BIG BANKS
With limited justification beyond raising revenue, the May Federal Budget caused uproar with its surprise new levy to raise $A1.6b each year from Australia’s five largest banks. The move triggered a plunge in bank share prices, but also an attempt by the South Australian Government to introduce a bank levy of its own (which ultimately did not clear state parliament). And as if things could not get worse, in December the government announced a royal commission into various governance aspects of the major banks.
8. SUPER SQUEEZE FOR ALL
Changes to restrict access to superannuation system tax concessions took effect on 1 July 2017 to “better target” support for retirement rather than wealth accumulation more broadly. Wealthier Australians were perhaps hit hardest with new $A1.6m pension account balance caps, but the superannuation gateways for everyone were also narrowed significantly with a reduction in deductible (concessional) contribution caps to $A25,000 per year.
9. NON-RESIDENT SQUEEZE TOO
On the back of the federal government’s non-resident CGT withholding, numerous new state and federal government measures in 2017 increase the cost of non-resident investment in Australian residential property. The changes raise revenue at little political cost, and address locals’ complaints about rising capital city prices keeping young families out of home ownership. Key changes include stamp duty and land tax increases in mainly eastern seaboard states, a vacancy tax where foreign-owned property is not occupied or available for rent, and increasing restrictions on foreign ownership of new developments and subdivisions.
10. STAPLED SURGERY PENDING
In March 2017, the government announced a review of stapled company and trust structures following ATO concern that they allow artificial disaggregation of essentially single businesses for concessional tax treatment, eg access to lower managed investment trust withholding rates. Consultation on the amendment options is continuing, but word is that these taxpayers shouldn’t expect a happy ending.