The Federal Government has focused on integrity measures to restrict deductions, increase penalties and enhance tax transparency for large multinationals, but refrained from providing certainty on key outstanding tax residency measures. These measures are aimed at collecting substantially more revenue from this taxpayer group.
Restricting royalty deductions for Significant Global Entities
In keeping with the commitment to multinational tax integrity, the Federal Government announced that it will introduce an anti-avoidance rule to prevent Significant Global Entities (SGEs) from claiming tax deductions for payments made directly or indirectly to related parties concerning intangibles held in tax havens (i.e. jurisdictions with a tax rate of less than 15% or a tax preferential patent box regime without sufficient economic substance).
This measure complements the ATO’s recent focus on the treatment of payments relating to intangibles and royalties.
The proposed integrity rule will apply to payments made on or after 1 July 2023, which is consistent with other proposed multinational integrity changes. As with the proposed changes to thin capitalisation, this is an ambitious start date and a lot of work will be required to draft the legislation and any transitional provisions.
The measure was part of the Federal Government’s election commitments, with broad details released for consultation in August 2022.
While this provided some clarity around the entities and types of payments that will be subject to the provision, there are still some uncertainties. Of particular interest will be what is included within the definition of ‘intangibles’.
There is also no mention of a purpose test, unlike many other anti-avoidance provisions in the tax law. This may result in many more payments being caught by the new anti-avoidance rule.
Tax Treaty between Australia and Iceland
The Government signed the Convention between Australia and Iceland for the Elimination of Double Taxation with respect to Taxes on Income and the Prevention of Tax Evasion and Avoidance on 12 October 2022.
The treaty will increase tax certainty for taxpayers in both countries, lower withholding tax rates and limit double taxation risks.
The new treaty is expected to enter into force once Australia’s domestic implementation requirements have been completed.
Residency measures
The Budget confirms that the measure previously announced in the 2021-22 Budget to relax residency requirements for self-managed superannuation funds (SMSFs) and small APRA-regulated funds (SAFs) by extending the safe harbour for the central control and management test from two to five years for SMSFs and removing the active member test for both fund types is still proposed. Failing the ‘residency’ requirement can render SMSFs and SAFs non-complying, which can have serious financial consequences.
These changes will make it easier for members to retain and contribute to such funds whilst they are temporarily overseas for work or education. The measure is now expected to come into effect in the first financial year after the proposed budget receives Royal Assent.
Unfortunately, the Budget was silent on proposed changes to Australia’s individual tax residency rules, and the proposed modernisation of Australia’s residency tests for companies, corporate limited partnerships and certain trusts. We presume that the Government remains committed to these measures.
Public reporting requirements for Significant Global Entities
The Budget has extended current tax transparency requirements to now include new public tax disclosure requirements. Specifically, for income years commencing from 1 July 2023:
- SGEs will be required to publicly release certain tax information as well as a statement on their approach to taxation;
- Australian public companies (both listed and unlisted) will be required to disclose information on the number of subsidiaries and their country of tax domicile; and
- Entities which tender for Australian Government contracts worth more than $200,000 will be required to disclose their country of tax domicile (by supplying their ultimate head entity’s country of tax residence).
The details concerning what information will require disclosure and how the information will be disclosed (i.e. through ATO publications or within existing financial accounts) is unclear.
However, it is our expectation that these measures will further increase compliance costs and present new challenges as taxpayers look to present and explain tax information in a simple and meaningful way.
Increase in penalty unit amount
The Federal Government will increase the amount of the Commonwealth penalty unit from $222 to $275, from 1 January 2023. These penalty units generally apply to offences ranging from making false or misleading statements to late lodgements.
SGEs will be most impacted as their administrative penalties are calculated based on double penalty units while late lodgements are multiplied by 500. This means that the current maximum failure to lodge penalty for any missed statement will increase from $555,000 to $687,500 for SGEs.
