To kick off the new financial year, we set out some important tax changes which took effect for many corporate taxpayers from 1 July 2019.
Contributed by Mary Hu, Senior Associate, Richard Hendriks, Director, Head of Corporate and M&A and Andrew Hirst, Director, Head of Financial Services, Greenwoods & Herbert Smith Freehills
1. Hybrid mismatch rules take effect
Australia has been at the forefront of implementing the OECD’s Base Erosion and Profit Shifting (BEPS) measures with its introduction of the hybrid mismatch rules, which generally apply to taxpayers for income years commencing on or after 1 January 2019.
Although the ATO has released a number of guidance products to assist taxpayers, the provisions remain extremely complex and require detailed consideration. One interesting practical point to note is that the 2019 version of the International Dealings Schedule (IDS) contains a new section which requires the disclosure of arrangements which may give rise to a hybrid mismatch. There is a clear onus on taxpayers to consider their arrangements to determine whether any hybrid mismatches exist.
2. MLI treaty changes
Australia is a signatory to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI), which was developed as part of the OECD BEPS project. Tax treaties which are covered by the MLI are modified, having regard to the MLI positions adopted by their respective jurisdictions. The MLI makes (or will make) a number of potentially significant changes to a number of Australia’s tax treaties. By way of example, the introduction of the general “principal purpose test” will significantly increase the ATO’s ability to attack what they consider to be “treaty shopping” structures.
The date of effect of the MLI for each treaty will depend on the actions of the treaty partner jurisdiction. The earliest start date for Australia’s treaties is 1 January 2019 for withholding taxes and income years starting on or after 1 July 2019 for all other taxes. By way of example, treaties that are affected from these dates include Australia’s treaties with the UK, New Zealand, France and Japan.
3. Proposed changes to thin capitalisation and SGE definition
The thin capitalisation asset revaluation measure which was previously contained in a Bill which lapsed in April as a result of calling the Federal Election has now been reintroduced by Parliament in a new Bill. If the new Bill is passed as it is currently drafted, taxpayers will no longer be able to revalue their assets specifically for thin capitalisation purposes and must comply with the accounting standards. This measure will generally apply from 1 July 2019, provided a compliant valuation supporting the revaluation of assets was prepared prior to 7:30 pm on 8 May 2018.
In addition, another measure contained in a lapsed Bill proposed to broaden the significant global entity (SGE) definition for income years starting on or after 1 July 2018 to include members of large multinational groups headed by private companies, trusts and partnerships. However to ensure that the increased SGE penalty obligations do not apply retrospectively, there is a transitional rule to ensure that SGE penalties will only apply from 1 July 2019 for entities that were not previously SGEs but which are SGEs under the expanded definition. The government has not indicated that this measure would not be reintroduced.
Increased ATO activity and disclosures
The 2019/20 Federal Budget flagged that there would be an additional $1b funding for the ATO over four years commencing in the 2019/20 year to expand its Tax Avoidance Taskforce, which is responsible for administering the Top 100 and Top 1,000 programs for large taxpayers, and the Top 320 program for private groups. This works out to be, on average, $704,000 of ATO funding per reviewed taxpayer! Taxpayers who are subject to these reviews should be prepared for a well-resourced ATO.
Companies will also be required to self-assess whether they need to lodge a reportable tax position (RTP) schedule under the extended requirements, for income years ending on or after 30 June 2019; not all taxpayers will be notified by the ATO of their RTP filing obligations anymore.
[This article was originally published in CCH Tax Week on 12 July 2019. Tax Week is included in various tax subscription services such as The Australian Federal Tax Reporter and CCH iKnow. CCH Tax Week is available for subscription in its own right. This article is an example of many practitioner articles published in Tax Week.]