A banking perspective on the recent tax reform announcements
Banking on Tax, Issue 11
Summary of unenacted tax measures announcement related to banking
On 6 November 2013, the Treasurer and Assistant Treasurer announced the Government’s position on a backlog of 96 announced but unlegislated tax and superannuation measures. Of the unenacted measures, the Government identified seven measures that will not proceed, notably including the proposed repeal of section 25-90 and the proposed changes to the fringe benefits tax treatment of motor vehicles. The vast majority of outstanding measures were subject to further consultation, which has been expedited and undertaken in the two weeks following the announcement.
Some items that may be of particular interest to banks include:
- The proposed R&D eligibility cap has been retained at $20 billion, making this the final year of R&D eligibility for entities with Australian assessable income exceeding $20B
- Section 25-90 has been retained. A targeted anti-avoidance provision will be introduced following consultation
- The OBU changes that were announced in the Budget are proceeding, but with a narrower scope with some related-party transactions being permitted as OB activity (subject to a targeted integrity measure)
- The new managed investment trust regime will proceed as announced
- The integrity measure to prevent ‘dividend washing’ will proceed as announced and the re-write of the imputation integrity rules will be subject to further consultation
- FATCA is proceeding as previously announced, with the focus being on the signing and enactment of the intergovernmental agreement
- A number of tax consolidation changes will proceed as announced and others will be subject to further consultation
- A number of other measures were to be subject to consultation, but subject to the Government’s predisposition not to proceed with these measures. These include:
- TOFA, including hedging and foreign currency
- Review of the foreign-sourced income (i.e. Controlled Foreign Company) regime
- Limiting the scope of the debt/equity integrity rule (section 974-80)
- Changes related to scrip-for-scrip roll-over, demergers and share buy-backs.
Policy decisions on a number of matters should have been resolved by 1 December, for inclusion in the Mid-Year Economic and Fiscal Outlook.
Where banks have lodged tax returns based on an announced measure that will no longer proceed, the position adopted should be reviewed to determine if amended assessments (and potential refunds) are required.
Deloitte’s publication The Tax Road Ahead – Considerations and actions for business sets out further comments on the Government’s position and highlights the key considerations and actions now that there is a clearer view of the tax road ahead.
Phase-down of interest withholding tax not proceeding
As discussed in Banking on Tax #7, the previous Government had announced that interest withholding tax (IWHT) rates on borrowings by financial institutions from foreign financial institutions or offshore retail deposits would be reduced over time to 5 per cent and that the IWHT rate on head office funding for Australian branches of foreign banks would be reduced over time to nil. These reductions in IWHT rates were to be funded from revenue raised by the Minerals Resource Rent Tax.
Although not covered in the unenacted tax measures announcement on 6 November, the Coalition announced in the lead up to the federal election that these IWHT rate phase-downs would not proceed under a Coalition government. Both measures were included in the recommendations in The Report on Australia as a Financial Centre prepared by the Australian Financial Centre Forum chaired by Mark Johnson (the Johnson Report) and in the report by an Australian Parliamentary Senate Committee on Banking Competition in 2011 to improve the industry’s competitiveness in raising funds in domestic and global capital markets. Not proceeding with these IWHT rate reductions will have an adverse impact on funding costs for Australian banks that source funding from certain offshore markets. The impact of interest withholding tax rates on funding, amongst other tax considerations, may be considered as part of the Government’s inquiry into the financial system, which is due to commence in 2014.