Federal Budget 2013/14

Foreign resident capital gains tax targeted

Foreign residents have been targeted recently in CGT changes by having the 12 month 50% CGT discount removed.

Foreign residents are only subject to CGT in Australia on assets that are classified as 'taxable Australian property'. This includes shares in a company which pass the 'non-portfolio interest test' and the 'principal asset test'. These changes are designed to capture real Australian property interests indirectly held through related entities.

For more information, our recent factsheet Removing the CGT DIscount for non-residents.

Date of effect: From 14 May 2013

In addition, from 1 July 2016, a 10% non-final withholding tax will apply to the disposal by foreign residents of certain taxable Australian property.  This measure will not apply to residential property transactions under $2.5 million or to disposals by Australian residents.

Date of effect: From 1 July 2016

International business and large corporates targeted

A series of changes introduced as part of the Protecting the Corporate Tax Base from Erosion and Loopholes Package specifically target the concessions and tax minimisation capacity of large entities. Most SMEs will not be directly affected by these changes.

Changes to the thin cap
As part of the Government's Protecting the Corporate Tax Base from Erosion and Loopholes Package, perceived profit shifting by multinationals through the disproportionate allocation of debt to Australia will be targeted under a series of new measures.  A number of other changes to the international tax system will also be made.

The thin capital rule changes are summarised below:

  • Tighten all safe harbour limits:

  • Extend a worldwide gearing test to inbound investors.
  • Increase the de minimis threshold from $250,000 to $2 million of debt deductions. This will save many SMEs from having to comply with the thin capitalisation rules although they will still need to consider the transfer pricing provisions when it comes to funding arrangements with either foreign investors or foreign subsidiaries.

The Board of Taxation will also conduct a review of the thin capitalisation arm's length test to clarify in what circumstances the test should apply and address compliance with the test.

Foreign non-portfolio equity interests
The reforms to the exemption available to Australian companies for their foreign non-portfolio dividend income (that is returns to Australian entities on equity interests greater than 10% that they hold in foreign entities) announced in the 2009/2010 Budget will be implemented as part of this package. 

The exemption is intended to apply to returns on foreign non-portfolio equity interests.  The amendments will ensure that the exemption operates as intended and is not available to returns on debt interests or interests that are truly portfolio in nature.

The exemption will also be expanded so that it applies where an Australian company receives foreign non-portfolio dividend income through an investment in a trust or partnership.

Interest incurred in deriving foreign exempt income
The concession that allows a tax deduction for interest expenses incurred in deriving certain foreign exempt income will be removed. 

Controlled Foreign Company (CFC) rules
The OECD has recognised controlled foreign company (CFC) rules as a key pressure area in its work on base erosion and profit shifting.  The CFC rules reduce the incentive for businesses to adopt aggressive restructuring arrangements to shift profits.  Therefore, the remaining reforms to the CFC rules and foreign source income attribution rules announced in the 2009/2010 Budget will be reconsidered after the OECD's analysis is completed.

Date of effect:  Income years commencing on or after 1 July 2014

Closing consolidation loop holes
The Government has announced that changes aimed at closing consolidation loopholes that allowed companies to shift the value of assets between entities, and this is intended to remove double deductions. The Government is also considering simplified consolidation rules for SMEs, but that looks to be a long way off.

Date of effect: From 14 May 2013

'Dividend washing' – franking credit trading
Dividend washing occurs when shares are sold with a dividend and then the equivalent shares are immediately bought while they still carry the right to a dividend. This measure will ensure that investors are only entitled to use one set of franking credits, targeted to the two-day period after a share goes ex-divident and will apply to investors with franking credits of more than $5000.

Date of effect:
From 1 July 2013

Offshore banking unit regime activities tightened

The policy intent of the OBU regime is to encourage the development of highly mobile financial sector activity in Australia where it would otherwise take place abroad.  New measures mean that treat dealings with related parties will be ineligible for OBU treatment, as well as transactions between unrelated OBUs. The measure will also refine the current list of eligible OBU activity.

Date of effect: From income years commencing on or after 1 July 2013

Limiting the deduction for exploration

The immediate deduction for the cost of assets first used for exploration will be tightened to exclude mining rights and information.

ATO funding boosted for offshore marketing hubs and business restructures
And since you need to measure change, the ATO will get an extra $109.1m to enforce the 'loophole legislation.'  The net gain of their enforcement activity targeting restructuring activity that facilitates profit shifting opportunities is estimated to be $406m over the forward estimate period.

The ATO is particularly concerned with arrangements where Australian entities transfer items of intellectual property to a low tax jurisdiction for a relatively small amount of money and then pay considerable sums for the use of those assets on an ongoing basis. The new transfer pricing rules currently before Parliament are likely to play a key role in policing this area.


Quarterly R&D Credits
The previously-announced R&D tax incentive provides a 45% refundable tax offset to eligible companies with annual aggregate turnover of less than $20 million and a 40% non-refundable tax offset to all other eligible companies.  The Budget also funds R&D quarterly credits.  The opt-in R&D quarterly credits for the R&D tax incentive are for companies with an aggregated turnover of less than $20 million.

Import processing levy changes
The Import Processing Charge (IPC) will be restructured to recover the costs of all import related cargo and trade functions undertaken by the Australian Customs and Border Protection Service.

The new charges will come into effect on 1 January 2014. For consignments valued over $10,000, the IPC for electronic sea import declarations will be increased by $102.60 to $152.60 per consignment; and the IPC for electronic air import declarations will be increased by $81.90 to $122.10 per consignment.

For consignments valued over $1,000 and up to $10,000 the IPC will remain at current levels: $50.00 for electronic sea import declarations and $40.20 for electronic air import declarations. The IPC is not applied to consignments valued at $1,000 or less.

Date of effect:  From 1 January 2014

More from the Federal Budget 2013
Click through to the pages below for details about how the Budget affects you.

Federal Budget 2013 - A Swan song?
Tax Measures
Families & Community
Key economic highlights

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Last updated May 2013. This article is provided for information purposes only and should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.

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This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.

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