The ATO has targeted foreign nationals and international clients over the past two budgets.
Last night they announced rules to further restrict interest deductions on loans to your Australian subsidiaries under the Thin Capitalisation rules.
The Assistant Treasurer said the thin cap rules would be changed by tightening all safe harbour limits as follows:
- for general entities, the limit will be reduced from 3:1 to 1.5:1 on a debt to equity basis (or 75% to 60% on a debt to total asset basis);
- for non-bank financial entities, the limit will be reduced from 20:1 to 15:1 on a debt to equity basis (or 95.24% to 93.75% on a debt to total asset basis);
- for banks, the capital limit will be increased from 4% to 6% of their risk weighted assets of the Australian operations;
CFC measures
The Assistant Treasurer said the OECD recognised CFC rules as a key "pressure area" in its work on base erosion and profit shifting. He said the CFC rules reduce the incentive for businesses to adopt aggressive restructuring arrangements to shift profits. Therefore, the Government announced that the remaining reforms to the CFC rules and foreign source income attribution rules announced in the 2009-10 Budget would "be reconsidered after the OECD's analysis is completed".
Principal asset test
The first change involves changes to the ''principal asset'' test in Subdiv 855-A of the ITAA 1997 to ensure that indirect Australian real property interests are taxable if disposed of by a foreign resident. This change consists of 2 components.
First, intercompany dealings between entities in the same tax consolidated group will not form part of the principal asset test calculations, ensuring that assets cannot in effect be counted multiple times (thereby diluting the true asset value of the group). The Assistant Treasurer's press release states that currently a foreign investor can pay no CGT where it disposes of an interest in a consolidated group that has significant interests in taxable Australian real property (TARP). The foreign resident investor who controls the group can use inter-company dealings between entities in the group (such as loans) to generate non-TARP assets, thereby diluting the proportionate value of the TARP assets of the group.
Second, in determining the value of the TARP assets of the entity in which the interest is held, intangible assets connected to the rights to mine, quarry or prospect for natural resources (notably mining, quarrying or prospecting information, rights to such information and goodwill) will be treated as part of the rights to which they relate. The Assistant Treasurer's press release states that there have been a number of cases in the mining industry where a foreign investor disposed of an interest in an Australian mining operation without being subject to CGT. In these cases, it was argued that the majority of the value of the mining industry was attributable to "mining information" (ie the knowledge of the minerals in the ground, which is not a TARP asset) - as opposed to the right to extract those resources (which is). This resulted in the foreign resident paying no CGT, even on gains that are attributable to the appreciation in the value of the mining right.
Foreign resident CGT withholding tax
The other change will apply a 10% non-final withholding tax to the disposal by foreign residents of certain taxable Australian property. In such cases, the purchaser will be required to withhold and remit 10% of the proceeds from the sale. Although to be implemented in the context of CGT, it will apply equally where the disposal of the Australian real property asset by the foreign resident is likely to produce gains on revenue account - and so be taxable as ordinary income rather than as a capital gain.
Non-residents (foreign residents)
The tax rates applying to non-residents were not changed by the Budget. From 1 July 2012, the first 2 marginal tax rate thresholds were merged into a single threshold. The marginal rate for this threshold aligned with the second marginal tax rate for residents (32.5%) and applies to all taxable income below $80,000. From 1 July 2015, the same marginal rate will again rise from 32.5% to 33%.
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