The MinterEllisonRuddWatts Tax Team works seamlessly with the MinterEllison National Tax Team in Australia. With a combined strength of 19 tax partners, we are uniquely placed to advise New Zealand clients on Trans-Tasman tax issues, whether you are investing in Australia or have Australian investors.
This update summarises recent Australian developments that have the potential to impact Trans-Tasman companies and groups. Our tax experts in Australia and New Zealand are happy to discuss the impact of these developments with you.
Expansion of Part IVA – Anti-Avoidance Rules
The Australian Government announced in the 2023/24 Federal Budget that it will expand the scope of the general anti-avoidance rule in Part IVA. The rule will now include:
- schemes that reduce tax paid in Australia by accessing a lower withholding tax rate on income paid to foreign residents; and
- schemes that achieve an Australian income benefit, even where the dominant purpose was to reduce foreign income tax.
The first measure expands the anti-avoidance rule from applying only to schemes that result in a taxpayer no longer being liable to pay withholding tax, to schemes that merely reduce the amount of withholding tax payable. The measure might be applicable to the clean building, datacentre and warehousing concessional Managed Investment Trust regime and the Build To Rent MITs.
The second measure brings the general anti-avoidance rule in line with the Multinational Anti-Avoidance Law and Diverted Profits Tax regimes in so far that taxpayers will no longer be able to rely on a scheme resulting in a larger (or otherwise more important) foreign tax benefit than the Australian tax benefit to avoid the application of Part IVA.
The measure will apply to income years commencing on or after 1 July 2024.
Changes to corporate tax residency - Australia
The Budget does not include any announcements in relation to the long awaited (and desired) changes to the corporate tax residency tests. The withdrawal of former Taxation Ruling (TR) TR 2004/15, and release of TR 2018/5, resulted in a significant change in the application of the corporate tax residency tests, and in particular, the central management and control (CMC) test for residency.
Prior to the 2016 decision of the High Court in Bywater Investments, the ATO administered the CMC test for residency as a two part test requiring that a foreign incorporated entity both carry on business in Australia and have its CMC exercised in Australia. In particular, the ATO previously accepted that, where a foreign incorporated company was carrying on its trading activities outside Australia, that company would not be a resident of Australia for tax purposes simply because its board of directors held meetings in Australia and made strategic decisions relating to contracts, finance and operational or investment policies in Australia.
In TR 2018/5, the ATO's position changed to align with the decision in Bywater Investments, such that, where a foreign incorporated entity's CMC is exercised in Australia, it will necessarily be carrying on business in Australia given CMC is factually part of carrying on business. That is, the CMC test for residency is not a two part test.
Recognising that this change in long standing practice could adversely impact many foreign incorporated companies with Australian based boards of directors (or Australian parent entities), a transitional compliance approach was included in PCG 2018/9. Under this approach, the ATO agreed that it would not apply compliance resources to review or seek to disturb a foreign incorporated company's status as a non-resident where, broadly, that entity relied on the position adopted in TR 2004/15. This approach was intended to give affected taxpayers the time to update their corporate governance arrangements to align them with the ATO's revised interpretation of the law.
Following multiple extensions to the initial transitional period, this transitional compliance approach now ends on 30 June 2023 and the ATO has indicated that it will not be extended beyond this date.
Against this background, amendments to the corporate tax residency test were announced as part of the 2020/21 Budget. The proposed amendments to the CMC test were to ensure that the determination of the corporate tax residency of foreign incorporated companies was consistent with the position prior to the Bywater Investments decision and subsequent position taken in TR 2018/5. The proposed change was to ensure that only corporate entities with a 'significant economic connection to Australia' would be residents of Australia for tax purposes.
Since this announcement, there has been a change in government, and it remains unclear whether this proposal will proceed. As the Budget is silent on this point, this uncertainty continues. Unfortunately, the 30 June 2023 deadline is around the corner.
As a result, many foreign incorporated companies will need to work out how to apply the principles in TR 2018/5 and PCG 2018/9 to their affairs. There is now an urgent need for these taxpayers to revisit their governance, systems and processes and act quickly in order to make any necessary changes prior to 30 June 2023. This is particularly the case for those taxpayers who may have been hoping for the previously announced measures to be retrospectively introduced prior to the end of the ATO's transitional compliance period, and who are yet to update their corporate arrangements.
Changes to corporate tax residency – New Zealand
Recently enacted legislation in New Zealand includes a number of amendments that impact dual-resident companies – in part, due to the changes to Australia’s corporate tax residency approach. While some are taxpayer-friendly, several integrity measures were introduced for dual resident New Zealand companies whose residency under a relevant double tax agreement (DTA) tie-break to the other jurisdiction.
Under previous rules, an Australian resident company (or a dual resident company that tie-breaks to Australia under a DTA) could only maintain a New Zealand imputation credit account if it elected to become an “Australian ICA company”. The new amendments now ensure that a New Zealand company automatically becomes an Australian ICA company when its residence tie-breaks to Australia under the Australia/New Zealand DTA. Imputation credits accumulated before the treaty residency change are preserved. Dual resident companies can now offset their New Zealand losses with other members of their New Zealand group and are eligible to enter into New Zealand tax consolidated groups (provided all other requirements are met).
An integrity rule has been introduced for dual resident companies whose residence tie-breaks to another country under a DTA. Specifically, New Zealand’s domestic dividend exemption (which generally exempts dividends within wholly owned New Zealand groups) has been removed for dividends paid to dual resident companies. However, several exceptions apply, including in circumstances where the dividend’s recipient is treated under the Australia/New Zealand DTA as not resident in New Zealand – in other words, this rule should not apply in Trans-Tasman dual residency situations.
Of particular concern is the new “deemed corporate migration rule”. Broadly speaking, where a dual resident company tie-breaks under a DTA to a country other than New Zealand, for New Zealand tax purposes, that company may be treated under this rule as:
- disposing of and reacquiring all its assets at fair market value (which may trigger income tax liabilities); and
- paying a distribution to its shareholders as if it were being liquidated (which may trigger withholding taxes).
The rule only applies to a New Zealand resident company who, on or after 30 August 2022, is treated under a DTA as not being a New Zealand resident and one of the following events occur:
- the company takes a tax position consistent with relief from New Zealand taxes under a DTA on the basis that it is not a resident of New Zealand for treaty purposes; or
- the company becomes a non-resident (i.e., undertakes an actual migration); or
- the company has been treated under the DTA as not being resident for a continuous period of two years starting on the day in which it receives a competent authority (e.g., in the Trans-Tasman context, the ATO and IRD) determination that it is treated under the DTA as not being a New Zealand resident.
These requirements are to give impacted companies sufficient time to rectify their residency position. Given the potential harshness of this rule in operation, there is clear pressure from both sides of the Tasman to rectify any inadvertent dual residency scenarios arising from the change in Australia’s corporate residency approach.
Interest non-deductible where funding non-portfolio foreign equity
Important changes have been proposed to Australia's thin capitalisation tax regime. A further proposed change is the repeal of the part of the provision allowing interest deductions relating to the derivation of non-assessable non-exempt distributions from foreign non-portfolio investments. These significant changes are set to apply from income years commencing on or after 1 July 2023.
The definition of debt deduction has been broadened to capture amounts which are economically equivalent to interest, even if they are not incurred in relation to a debt interest issued by the entity.
Entities will no longer be entitled to claim deductions for interest on borrowings to derive foreign dividends, where those foreign dividends are non-assessable non-exempt (NANE) income.
The de minimis exemption is retained for entities which (with their associates) have less than AUD2 million in debt deductions. Similarly, the exemption has been retained for entities whose average Australian assets are more than 90% of their total average assets.
There is no grandfathering for existing debts.
Public country-by-country reporting
As part of the October 2022/23 Budget, the Government announced a transparency measure for multinational entities with global income of AUD1 billion or more, to prepare for public release of certain tax information on a country by country (PCBC) basis and a statement on their approach to taxation. The measure is intended to "enhance the tax information entities disclose to the public (for income years commencing from 1 July 2023)". Exposure draft legislation was released in April.
The proposed rules build on the Global Reporting Initiatives’ (GRI) Sustainability Reporting Standards, but include additional information required under the Australian law. We have set out below what the PCBC covers and included a comparison of how it goes beyond the GRI and the OECD's country-by-country requirements. Importantly, while the rule only applies to the parent of the group (known as "Country by Country reporting parent entities"), the information to be disclosed is in relation to each member of the country-by-country reporting group - not just the Australian entities.
If the exposure draft becomes law, Australia will be the first country to make unrestricted world-wide mandated public reporting of country-by-country data and information by jurisdiction.
|Proposed PCBC Law||GRI 207||OECD CbC|
|Names of entities in CbCRG||Yes||Yes|
|Statement on the approach to tax||Yes||No|
|Description of main business activities||Yes||Yes|
|Number of employees||Yes||Yes|
|Revenue from unrelated parties||Yes||Yes|
|Revenue from related parties||Yes||Yes|
|Expenses from related party transactions||No||No|
|Profit/loss before income tax||Yes||Yes|
|List of (including the value of) intangible assets||No||No|
|List of (including the value of) tangible assets||No||No|
|Income tax paid (cash basis)||Yes||Yes|
|Income tax accrued (current year)||Yes||Yes|
|Effective tax rate consistent with BEPS Pillar Two rules||No||No|
|The reasons for the difference between:
(i) income tax accrued (current year); and
(ii) the amount of income tax due if the income tax rate applicable to the jurisdiction were applied to profit and loss before income tax
|The currency used in calculating and presenting the above information||No||Yes|
This article was co-authored by Adrian Varrasso (Partner, MinterEllison), Tim Lynch (Partner, MinterEllison) and Steven Liu (Senior Solicitor, MinterEllisonRuddWatts).
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