By Paul McNab, Partner, DLA Piper Sydney
The Australian Treasurer, the Hon. Josh Frydenberg delivered Australia’s 2021–22 Federal Budget on 11 May. It was targeted to provide a significant economic stimulus and included a number of tax measures. Those most relevant to foreign investors in Australia are discussed below.
Patent box regime
A patent box regime will be introduced in Australia, providing a concessional effective tax rate of 17% (compared to 30% as the general corporate tax rate) for corporate income derived from medical and biotechnology patents (Australian owned and developed), applicable from income years starting on or after 1 July 2022.
The government announced that it would consult on the measures, and interested taxpayers should work with Treasury on the design of the provisions. The government has said that as part of the design phase, it will consider extending the proposal to “green” technology.
The government expects the cost of the measures to be approximately AUD 400m (USD 309m) over the next four years. The timing of the cost suggests the government believes it will take taxpayers some time to ramp up eligible activity.
We strongly recommend that taxpayers in these sectors conduct a review of their intellectual property portfolio in Australia to determine what might be eligible for patent coverage.
A digital games tax offset
The government will introduce a 30% refundable digital games tax offset for eligible businesses that spend a minimum of AUD 500,000 (USD 380,000) on qualifying Australian games. It will be available from 1 July 2022 to Australian resident companies or foreign resident companies with a permanent establishment in Australia.
Expenditure eligibility requirements are subject to industry consultation expected in mid-2021. Games with gambling elements or that cannot obtain a viewer classification rating will not be eligible.
The initiative will align digital game development incentives with those for other screen content.
Deductions for cost of intangibles
Taxpayers will have the ability to “self-assess” the effective lives of eligible intangible depreciating assets acquired from 1 July 2023. Currently, statutory effective lives must be used to work out the deductible tax depreciation on intellectual property (“IP”) assets such as patents (20 years), registered designs (15 years), copyrights (up to 25 years), and in-house software (5 years).
This change is limited to newly acquired IP assets and would not be available to existing IP assets. It may however be an important factor in takeovers and acquisitions of IP-rich targets.
Businesses would be expected to justify any self-assessment with appropriate evidence, which is likely to be reviewed by the Australian Taxation Office, which has an ongoing focus on IP development, exploitation, and migrations.
Tax incentives for venture capital
The Australian government also announced on 6 May that it will be undertaking a review of the tax incentives for venture capital investments as part of the broader digital economy strategy, to confirm that the current regime is fit-for-purpose.
Instant asset write-off extension
The government has, in this budget, extended the instant asset write-off to allow businesses with turnover of up to AUD 5 billion (USD 3.8billion) to deduct the full cost of assets that would have ordinarily been depreciable over time.
Assets must be acquired from 7.30 pm AEDT on 6 October 2020 and first used or installed ready by 30 June 2023.
Temporary loss carry-back measures extension
These measures will allow eligible companies to carry-back tax losses from the 2022–23 income year and to offset them against previously tax profits as far back as the 2018–2019 income year.
Combined with the existing loss carry-back rules, this means companies with an annual turnover of up to AUD 5 billion (USD 3.8 billion) can apply tax losses incurred during the 2019–20, 2020–21, 2021–22 and 2022–23 years to offset tax previously paid in the 2018–19 or later years.
To access the rules, an election must be made when filing the 2022-23 tax return.
Update to the list of exchange of information jurisdictions
The list of jurisdictions that attract a reduced withholding tax rate when receiving distributions from Australian managed investment trusts (a common passive investment vehicle in Australia) has been expanded.
Jurisdictions are added to the list when they have an “effective” information-sharing agreement with Australia. The rate of withholding is reduced from 30% to 15% for countries on the list.
Armenia, Cabo Verde, Kenya, Mongolia, Montenegro, and Oman have been added.
Corporate collective investment vehicle (CCIV) regime update
The government announced that it would now finalise the CCIV regime.
The CCIV regime is aimed at creating an internationally recognisable investment vehicle structure for investors into Australia.
The most common vehicle currently used is a unit trust, which is not widely recognised or used in other countries. This is seen as a discouragement to investors. The CCIV is proposed to be a corporate vehicle that allows flow-through tax treatment.
The CCIV regime was first announced in the 2016-17 Federal Budget. The most recent draft of legislation for the measures was released in 2019.
Offshore banking unit concession removal
Treasurer, the Hon. Josh Frydenberg MP on 12 March announced the removal of the offshore banking unit concessional tax regime’s 10% tax rate and/or interest withholding tax exemption. The government has now confirmed the regime’s removal and stated that it will consult on alternative measures to support the competitiveness of the financial industry to ensure these activities remain in Australia.
The OECD in 2018 identified Australia’s offshore banking unit tax concession to be a ‘harmful preferential tax regime,’ and Australia undertook to remove or limit the concession, subject to a two-year grandfathering provision for existing OBUs.
Review of the corporate tax residency rules
The government will consult on extending the changes to corporate tax residency rules announced in last year’s budget to trusts and corporate limited partnerships.
Simplification of individual residency tests
Currently, the individual residency tests consider and weigh a number of separate factors to determine if an individual is a resident of Australia for tax purposes. As a result, the ability to determine individual residency is somewhat difficult if certain factors are present but others are not.
In an effort to simplify the tests, the budget proposes a new primary test.
A person who is physically present in Australia for 183 days or more in any income year will be an Australian tax resident. Where the primary test is not met, secondary tests will be applied. These will use a combination of physical presence and other measurable objective criteria.
Employee share schemes
Australia’s employee share scheme rules have been criticised as not being best practice in an international market for key talent. Some amendments were made in 2015 to improve the situation.
The budget has addressed another complaint, that a change of employment triggers a taxing point. Current law is inconsistent with practice elsewhere, requiring separate rules for Australian employees.
The proposed amendments will also clarify and simplify the regulatory requirements where amounts are not lent to employees to participate, and where amounts lent to participate are under AUD 30,000 (USD 23,230) per annum.
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