The ever-changing Australian tax landscape: an update

By Amy Sexton, Robyn Walker and David Watkins

Recently there have been several high-profile tax developments in Australia that may have a flow-on effect for New Zealand businesses. In this article, we take a look at four of the more topical issues that businesses operating in Australia should keep on their radar. 

Software distribution models

In January 2024 the Australian Commissioner of Taxation (the Commissioner) published the draft ruling TR 2024/D1 “Income tax: Royalties – character of payments in respect of software and intellectual property rights” (TR 2024/D1) for consultation. This replaced an earlier draft ruling issued for public consultation in 2021. 

The original draft ruling (TR 2021/D4) was an attempt to address methods of software distribution and use, whilst also expanding the scope of when payments for the licencing and distribution of software would constitute royalties. Concerns were raised by industry stakeholders through submissions on TR 2021/D4), however this latest iteration of the ruling perhaps just raises more concerns. We set out below some of the key elements of the draft ruling which will be of relevance to any New Zealand businesses selling software into Australia.

Treaty analysis

The Commissioner has addressed industry feedback on the original draft by acknowledging that, where a tax treaty applies then the royalty definition in that tax treaty is given primacy over the Australian domestic tax law definition.  For New Zealand, Article 12 of the Australia – New Zealand Double Tax Agreement is relevant. 

Apportionment of payments 

Where a payment relates to more than one thing apportionment is required and appropriate to ascertain the extent to which a payment is a royalty. While TR 2024/D1 states that apportionment should be done on a “fair and reasonable basis”, it does not provide any examples or methodologies that the Commissioner may consider to be “fair and reasonable” in most circumstances. 

Concerningly, TR 2024/D1 states the Commissioner does not accept that a payment for multiple “things” (i.e., intellectual property (IP) rights and other, non-IP rights) necessarily results in that payment being paid, in part, for each of those things equally or in some proportion. In other words, the Commissioner is of the view that an amount that is paid for multiple things may not necessarily warrant apportionment if those things (being both royalty and non-royalty items) are, from a practical and business point of view, inseparable. 

Categorisation of payments 

Broadly, the Commissioner’s view is that if a payment from a payer (A) to a copyright owner (B) enables A to do something that is the exclusive right of B, then that payment is a royalty for Australian domestic tax purposes. TR 2024/D1 sets out five categories of payments that are characterised as royalties for both domestic and tax treaty purposes:  

1. Payments for the grant of a right to use IP, regardless of whether that right is exercised.
2. Payments for the use of an IP right.
3. The supply of know-how in relation to certain IP rights.
4. The supply of assistance furnished as a means of enabling the application or enjoyment of the supply.
5. The sale by a distributor of hardware with embedded software, where the distributor is granted or uses rights in the IP of the software.

A full analysis of the substantive changes can be found in this January 2024 article published by Deloitte Australia.  

Intangibles migration arrangements

Also in January 2024, the Australian Taxation Office (ATO) released finalised Practical Compliance Guide PCG 2024/1 Intangibles migration arrangements (the PCG). The PCG applies to both new and existing arrangements and sets out where the ATO is likely to apply resources to consider the potential application of the general anti-avoidance rules (GAARs) or the transfer pricing rules to cross-border related party “intangibles migration arrangements” (defined as cross-border arrangements involving the migration of intangible assets, or arrangements with similar effect). 

The PCG highlights the ATO’s focus on the migration of Australian generated intangible assets and the mischaracterisation and non-recognition of Australian activities connected with intangible assets held offshore (as opposed to offshore activities concerning intangible assets held by an Australian entity where there is no intangibles migration). The ATO’s expectations around holding documentation for such transactions are very high.

The release of the PCG emphasises the importance of having a global intangible asset strategy. A global intangible asset strategy, within a broader corporate framework, ensures alignment of the intangible asset portfolio with long-term business objectives and helps drive overall value. Maintaining an intangible asset strategy that considers tax, transfer pricing, legal, and governance issues is imperative in the current challenging tax and legal landscape multinationals face, where tax authorities globally are increasingly scrutinizing intangible arrangements.

For a full analysis of the contents of the PCG, please refer to this Deloitte Australia article. 

Out with thin capitalisation rules, in with an EBITDA test

During the 2022 election campaign, the ALP proposed to replace existing thin capitalisation rules. Since then, there have been rounds of consultation and exposure draft legislation which have led many businesses to be concerned about the future ability to claim interest deductions in Australia. At its core, the Australian Government is seeking to replace the thin capitalisation rules with something more closely resembling the OECD EBITDA rules (which limit interest deductions to a portion of EBITDA).

The legislation is intended to apply on or after 1 July 2023, which is of concern to taxpayers given the legislation has not yet been passed into law. In fact, the bill has the uncommon distinction of being referred back to the Senate Economics Legislation Committee for a second time.  The Committee has since reported back to the Senate recommending the bill be passed. The dissenting Coalition report lists the many matters that business still has concerns with, in respect of the Bill.

The Bill was not debated during the February sitting weeks. Until new legislation is passed by the Australian Parliament, the existing thin capitalisation law remains as it is, albeit the intention was that the new legislation was to apply from 1 July 2023. Parliament will next sit again on 18-28 March 2024. 

In addition, additional debt deduction creation rules are to commence for years starting on or after 1 July 2024). These measures apply to existing borrowings and can effectively convert what is presently tax-deductible interest to non-deductible interest in respect of certain related party borrowings.

Public country-by-country reporting requirements 

And finally, in February 2024 the Australian Government released for consultation updated draft legislation that will require certain large multinational entities (wherever headquartered) that operate in Australia to publicly release certain tax and other information, on a jurisdiction-by-jurisdiction basis, as well as a statement on their approach to taxation. The proposed measures will operate separately from the existing OECD country-by-country (CbC) reporting requirements. The publishing of tax and other information in the public domain has potentially broad implications for multinational organisations and therefore awareness of these measures is important.

The draft legislation is a refinement of an earlier exposure draft released in April 2023 and reflects an intent to align the measures more closely with the European Union public CbC reporting directive (Directive (EU) 2021/2101). 

Key points to note from the draft legislation include:

• The removal of certain jurisdictional disclosure requirements proposed in the April 2023 exposure draft, such as international related party expenses, list of tangible and intangible assets, book value of intangible assets (but not tangible assets) and effective tax rate disclosures.
• Deferral of the start date of the regime by 12 months (to reporting periods starting on or after 1 July 2024).
• A de minimis threshold, such that the measures only apply if a relevant entity’s (the CbC reporting entity) aggregated turnover includes Australian-sourced income of AUD10 million or more.
• Jurisdictional-based country-specific reporting will be limited to Australia and certain specified jurisdictions (currently proposed to be 41, which differs from the EU non-cooperative jurisdictions for tax purposes), and aggregated reporting will be permitted for all other jurisdictions. New Zealand is not one of the specified jurisdictions.
• The requirement for an entity to describe the CbC reporting group’s approach to tax.
• The penalty regime has been updated to ensure that the Australian resident entity will be subject to penalties under the Taxation Administration Act 1953 if it commits an offence by refusing or failing to comply with its obligations to publish the tax information. 

For a more detailed analysis of the contents of the proposed Australian CbC reporting requirements, please refer to this Deloitte Australia article. 

If you wish to discuss any of these topics, or Australian tax issues generally, please contact your usual Deloitte advisor.