Big business is a major loser in this year’s budget as the Government plans to clamp down on loopholes to retrieve $4.2 billion over the next four years.

Key reforms are a crackdown on profit shifting, banning of dividend washing, reducing thin capitalisation safe harbour, removal of R&D and exploration incentives, and new requirements for all big businesses to move from quarterly to monthly PAYG tax instalments.

Companies most hit by reforms include multinationals and companies operating in highly geared industries such as infrastructure, resources and private equity. Moreover, there are some concerns that new reforms may discourage foreign investment in Australia.

Key initiatives:

• As previously announced, the superannuation guarantee charge will increase from 9% to 9.25% from 1 July 2013 and will progressively increase to 12% by 1 July 2019.
• The monthly PAYG tax instalments will be extended to trusts, superannuation funds, sole traders and large investors, with all entities with turnover of $20 million or more moving to monthly PAYG from 1 January 2017.
• A 10% new withholding tax on the proceeds from the sale of certain taxable Australian properties by foreign residents (including property and mining rights) will be introduced (the measure will not apply to residential property transactions below $2.5 million).
• As widely anticipated the Government has announced changes to the current thin capitalisation rules to restrict the level of gearing that multinational companies can use.  This will generally see the current safe harbour limit for non-bank entities reduced from 3:1 to 1.5:1. This will reduce the thin capitalisation safe harbour level from 75% to 60% of debt to total assets. For business, these changes are designed to restrict interest deductions and will create a need for current gearing levels to be reviewed and potentially restructured.
• Interest deductions will no longer be allowed for loans that are used to fund the acquisition of foreign investments, where the income from the investment is not subject to tax inAustralia.
• The Offshore Banking Unit (OBU) concession at the rate of 10% will no longer be available for related party transactions and certain financial activities.
• Deductions for the purchase of mining rights and information have been tightened.
• Investors with franking credit tax offset entitlements of more than $5,000 will be prevented from engaging in ‘dividend washing’, which involves a trading strategy that allows an investor to double the amount of dividend franking credits earned from franked dividend by selling the shares after they go ex-dividend and immediately buying the shares back while trading cum-dividend.

Industry view:

The Business Council of Australia (BCA) said “the business tax changes announced today represent another lost opportunity to do tax reform properly, which risks reducing our competitiveness and affecting business confidence.” In particular, the BCA cites changes to thin capitalisation rules as a risk that could “(impact) foreign investment, and potentially deterring companies from locating and investing in Australia. Piecemeal tax changes can add to perceptions of country risk when it comes to investing in Australia.”

For further analysis download the fact sheet.

• What the Federal Budget means for business (PDF 686KB)

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