The Australian Federal Election saw the Australian Labor Party (ALP) win a mandate to form the Government with Anthony Albanese as the new Prime Minister. The ALP, with some of the two candidate preferred recount still in progress, will soon know whether any support is required from the cross bench to form the majority of 76 seats or more in the House of Representatives of the 47th Parliament of Australia.
ALP's multinational tax plan (website link here) allows for consultation prior to implementation from 2023. The four international tax measures are:
Limitation on debt-related deductions by multinationals at 30% of profits
This measure is about replacing the existing safe harbor test for multinational enterprises of 60% of assets with an earnings before interest, tax, depreciation and amortization (EBITDA) test while retaining the arm’s-length debt test (ALDT) and worldwide gearing test (WWGT), costed to raise AU$1.45 billion (b)1 over the forward estimates. Net interest expense deductions will be limited to 30% of the entity’s taxable EBITDA. The EBITDA test will commence from 1 July 2023.
While not specified, there likely will be some sort of de minimis exemption but the proposal is silent on special rules for banks and insurance companies. The envisaged start date allows for consultation including a look at global best practices. At this stage no carryforward of disallowed interest expense is envisaged, as the ALDT and WWGT are fallbacks. It’s noticeable that in most countries where carryforward is allowed there is no ALDT fallback. It is expected that this measure will apply to companies with non-June tax year ends from their next year so from 1 January 2024 for December balancers, although this has not been confirmed.
A clear commitment to implement the OECD’s global Two-Pillar Solution
At the center of this plan from an Australian perspective is a proposal to ensure multinationals pay an effective tax rate of at least 15% on their profits, and aiming for a fairer distribution of profits by multinationals. The ALP made a statement that “Australia should also take action domestically to ensure we do not lose out when other jurisdictions are implementing these arrangements,” inferring a possible Domestic Minimum Tax, and notes that the Organisation for Economic Co-operation and Development (OECD) is expecting these arrangements will not begin before 2023. This represents no real change from the approach previously taken under the Coalition as neither party was expected to go against the strong push by the OECD to make this happen while also being reluctant to be an outright front runner.
Denial of tax deductions to SGEs for royalty payments for use of intellectual property (tax havens integrity)
This measure is designed to deny deductions to Significant Global Entities (SGEs – with global turnover > $1b) for use of IP when they are paid to a tax haven jurisdiction (known as “treaty shopping” – where entities indirectly access benefits of tax treaties between two jurisdictions without being a resident of one of those jurisdictions) from 1 July 2023. This impacts transactions that are subject to the “sufficient foreign tax test” aspect of the Diverted Profits Tax (<80% of corporate tax rate, i.e. 24%) or involve a harmful tax preferential regime. Royalty deductions would be denied unless firms can substantiate to the Commissioner of Taxation that the royalty payments are not for the dominant purpose of tax avoidance. The start date allows for consultation on the many questions this proposal raises such as how this policy will interact with existing tax avoidance measures such as Part IVA based on dominant purpose as proposed for this measure and the Diverted Profits Tax and treaty shopping rules integrated in tax treaties based on a principal purpose. This measure is costed to raise $445m over the forward estimates period.
Introduction of tax transparency measures
This involves: (i) adding public disclosure to existing regimes; (ii) creating beneficial ownership transparency; and (iii) dropping the value of government contracts drawing tax scrutiny of the tenderer.
Specific measures include:
- Public reporting of tax information on a country-by-country basis – how much tax large multinational firms pay in the jurisdictions they operate in, and the number of employees working there
- Public registry of ultimate beneficial ownership – showing who ultimately owns, controls or receives profits from a company or legal vehicle
- Mandatory reporting of tax haven exposure to shareholders – disclosing “material tax risk” to shareholders if the company is doing business in a jurisdiction with a tax rate below the 15% global minimum
- Requiring government tenderers to disclose their country of tax domicile (contracts worth >$200,000)
On the domestic front, the ALP explicitly discontinued a number of their previous tax policy measures. Tax policy measures announced were limited to:
- Extending and boosting existing ATO programs – extend the Australian Taxation Office (ATO) Tax Avoidance Taskforce (as originally included in the Coalition’s 2022 Federal Budget) and the Black Economy Taskforce (established in 2016 in a targeted response to black economy activities including non-reporting and under-reporting of income, cash payments, wage underpayment, GST fraud, money laundering), costed to raise $3b over the forward estimates period
- Stage 3 Personal Income Tax Cuts – The ALP has committed (media release here) to delivering the same legislated tax relief as the previous Coalition Government. Stage 3 personal income tax cuts are legislated to apply to income years 2024/25 onwards
- No other tax reform – The only tax reform the ALP is proposing is fairer taxes on multinationals. Various interview transcripts have indicated that ALP has no intention to implement any previous 2019 tax policies (e.g., negative gearing, Capital Gains Tax (CGT) discount reduced, 30% minimum discretionary trust tax).
The ALP has proposed its Electric Car Discount policy, which proposes to exempt some imported electric cars from 5% import tariff (mainly countries without a Free Trade Agreement) and to exempt eligible electric cars from the 47% fringe benefits tax. Both these measures will apply to all electric cars below the luxury car tax threshold for fuel efficient vehicles ($79,659 in 2021/22), and will apply from 1 July 2022. This measure will be reviewed after three years, in light of electric car take up at the time. This measure is expected to cost $388.3 million (m) over the forward estimates period.
We note the tax policies of the Greens Party which it might seek the Government to advance for its support to get Labor’s legislative program through Parliament, includes:
- 40% mining super profits tax – on mining projects (project-by-project basis)
- 40% corporate super profits tax – on non-mining companies with t/o > $100m
- 6% net wealth tax on billionaires – levied on net wealth > $1b
- Broader Petroleum Resource Rent Tax – removal of tax breaks for extracting offshore gas
- Multinational tax avoidance – stop artificial shifting of debt, deny deductions for royalties to related parties, beneficial ownership public register, publish basic info on tax paid
- Negative gearing/CGT – limit individuals to one negatively geared property, remove CGT discount, index asset’s costs base by CPI instead
Labor is already committed to multinational tax avoidance measures but it is unlikely that they will adopt other Greens measures since they committed to introducing no new taxes - and they will have enough seats to either possibly form Government on their own or with the support of one or two Independents.
Taxpayers will need to wait to see what tax measures, which were in Bills which lapsed with the election, will be reintroduced into Parliament, including the 17% Patent Box regime scheduled to commence from 1 July 2022 and intangible asset depreciation measures from 1 July 2023. There is also a back log of measures announced by the previous Government which are still at the policy development stage which need to be confirmed as still proceeding or not, including the corporate residency test rewrite, personal tax residency bright line test proposals, digital games tax offset, expansion of the patent box regime to green tech, partnership collective investment vehicle regime and Division 7A private company integrity rules reform.
Incoming Treasurer Jim Chalmers had previously stated that his preference is for the new Government’s first Budget to be delivered in October this year.
For additional information with respect to this Alert, please contact the following:
Ernst & Young (Australia), Sydney
- Alf Capito, Tax Policy | firstname.lastname@example.org
- Antoinette Elias, Financial Services | email@example.com
Ernst & Young (Australia), Perth
- Andrew Nelson, International Tax and Transaction Services | firstname.lastname@example.org
- Joe Lawson, Transfer Pricing | email@example.com
Ernst & Young (Australia), Brisbane
- Reid Zulpo, International Tax and Transaction Services | firstname.lastname@example.org
Ernst & Young (Australia), Melbourne
- Tony Merlo, Tax Policy | email@example.com
Ernst & Young LLP (United States), Australia Tax Desk, New York
- David Burns | firstname.lastname@example.org
Ernst & Young LLP (United Kingdom), Australia Tax Desk, London
- Naomi Ross | email@example.com
- Currency references in this Alert are to the AU$.