Anti-avoidance regime and OECD BEPS-related developments
Australia has a general tax anti-avoidance regime. The regime empowers the Commissioner to deny a tax benefit if, where a taxpayer obtains a tax benefit in connection with a scheme, the tax benefit would not have arisen without the scheme, and under an objective test there was a dominant purpose of entering into the scheme to obtain the tax benefit.
In an effort to tackle multinational anti-avoidance, Australia's general tax anti-avoidance regime was amended with the introduction of the Multinational Anti-Avoidance Law (MAAL) which was operative from January 1, 2016. The MAAL applies to multinational entities with an annual global income of AUD1 billion or more and is targeted at multinational entities entering into contrived arrangements to avoid a taxable presence in Australia.
Further, Australia's general tax anti-avoidance regime was amended with the introduction of the Diverted Profits Tax (DPT), which applied from July 1, 2017. The DPT is targeted at multinational entities with an annual global income of AUD1 billion or more that have entered into contrived arrangements to shift taxable profits out of Australia.
Under Australia's domestic law, protection under DTAs is not available for Australia's general tax anti-avoidance rules, which include the MAAL and DPT.
In addition, the Australian Government has introduced rules targeting hybrid mismatches, which has generally applied from January 1, 2019. These rules are generally in line with OECD's BEPS Action 2, with certain modifications including a specific integrity rule targeting interposed entity structures.
OECD Pillars One and Two
The OECD and the G20 Inclusive Framework have been directing their efforts to address various tax challenges arising from digitalization by introducing a Two-Pillar Solution:
- Pillar One: aims to ensure fairer distribution of profits and taxing rights among countries over the largest multinational enterprises. Pillar One is essentially focused on the reallocation of the consolidated profit of multinational enterprises to market jurisdictions where their users and customers are located, as well as the standardization of the remuneration of routine marketing and distribution activities; and
- Pillar Two: aims to impose a floor on tax competition on corporate income tax by introducing a global minimum corporate tax rate of 15 percent
The Australian government has indicated that it intends to implement the OECD’s Two-Pillar Solution. The implementation of Pillar One in Australia will be guided by the OECD’s progress on the multilateral convention; however, the government would have to introduce domestic legislation to implement Pillar Two. The Government has announced that it will introduce rules from:
- January 1, 2024 for the Income Inclusion Rule and the Domestic Minimum Tax; and
- January 1, 2025 for the Under-Taxed Payment Rule.
Thin capitalization
In the 2022 federal budget, the Australian government announced several measures to tighten Australia’s thin capitalization rules by:
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Replacing the current safe-harbor test limit with a test limiting debt deductions up to 30 percent of EBITDA. Any debt deductions denied under the 30-percent EBITDA test can be carried forward and claimed in a subsequent income year (for up to 15 years);
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Replacing the current worldwide gearing test with a test limiting debt deductions (for an entity in a group) up to the level of the worldwide group’s net interest expense as a share of earnings (which may exceed the 30-percent EBITDA ratio); and
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Amending the arm’s-length debt test so it is only available for an entity’s external (3rd-party) debt – this test will no longer be available for related party debt.
The proposed changes would apply to income years commencing on or after July 1, 2023, however the draft legislation has not yet been finalized by the Government.
Deductions of payments for intangibles
As part of the 2022 federal budget, the government also announced the introduction of a new rule limiting multinational enterprises’ ability to claim deductions for certain payments to related parties in relation to intangibles held in low or no tax jurisdictions. These jurisdictions are those with:
- A tax rate of less than 15 percent or
- A tax preferential patent box regime without sufficient economic substance.
The measures will have application to payments made on or after July 1, 2023; however, no draft legislation has been introduced into Parliament at this time.
Tax transparency
The Australian Government confirmed that it will introduce additional reporting requirements for certain types of taxpayers, increasing the level of tax related information they are required to publicly disclose:
- “Significant global entities” (broadly, those with global annual income of AUD1 billion or more) will be required to release to the public certain tax information on a country-by-country basis, including their approach to taxation. The precise details of the required information has not yet been announced
- Australian public companies (both listed and unlisted) will be required to disclose information regarding the number and tax domicile of their subsidiaries
- Entities tendering for Australian government contracts with a value of more than AUD200,000 will be required to disclose their country of tax domicile
These measures are to apply from July 1, 2023.
Superannuation
Employers must make superannuation contributions to their employees' nominated super fund, at the rate prescribed by the relevant legislation. The current superannuation rates for the years ended June 30, 2023 and June 30, 2024 are 10.5 and 11 percent respectively.
Workers' compensation
Employers are required to take out insurance with an approved insurer covering the employer's full liability for workers' compensation as well as damages.
Goods and Services Tax (GST)
GST is a form of value added tax (VAT). It applies at a rate of 10 percent to taxable supplies of goods, services and other things that are connected with Australia.
From July 1, 2017, GST has applied to inbound intangible supplies made to Australian Consumers, but GST will not usually apply if the same inbound intangible supply is instead made to an Australian business. This reform is referred to as the "Netflix Tax."
From July 1, 2018, GST has applied to inbound supplies of goods with a value of less than AUD1,000 which are made to Australian Consumers. This may capture online sales of goods made by non-residents to Australian consumers where the goods are shipped directly to Australian customers.
From July 1, 2019, offshore sellers of Australian commercial accommodation (including online sellers) are required to include sales of Australian accommodation in their GST turnover. Where the GST turnover totals AUD45,000 or move in a 2-month period, the offshore sells are required to register for, charge and pay GST.
