Australia: Australia proposes several legislative changes

December 15 2016

James Newnham

Recent updates to Australian tax law have included significant court rulings, the release of several proposals and draft guidance for public consultation, and the submission of legislation in parliament.

During October, the government released new GST legislation regarding low value imports and a discussion paper regarding collective investment vehicles for consultation. Meanwhile, the Australian Taxation Office (ATO) published draft guidance (PCG 2016/D16) for consultation regarding fixed trusts under the trust loss provisions. It also released legislative guidance (ATO TD 2016/17) regarding employee share scheme rights, while major superannuation reforms were introduced into parliament.

Elsewhere, the High Court handed down its decisions in Bywater Investments Limited v Commissioner of Taxation, Hua Wang Bank Berhad v Commissioner of Taxation and Blank v Federal Commissioner of Taxation. Below, we briefly discuss these court decisions.

Court rulings

The case in Bywater Investments and Hua Wang Bank Berhad, which were heard together, involved an analysis of the residency of companies incorporated outside of Australia and whether the location of their directors and board meetings triggered Australia residency (and if so, whether any double tax treaty applied, and the impact of a tie-breaker provision).

The case confirmed the Federal Court's view that if the power of a company's board is usurped by an outsider, and the board is effectively a rubber stamp, its effective management and control is in Australia, and it will be treated as a resident of Australia for tax purposes. The cases also reaffirmed the position that was established via a long line of previous decisions.

This is a timely reminder to make sure that the decision making process of a company follows specific protocols so that the relevant company is only a tax resident of one jurisdiction, or can rely on a DTA.

In the case of Blank v Federal Commissioner of Taxation (2016 HCA 42), the High Court unanimously dismissed a taxpayer's appeal and held that payments of $160 million made to the taxpayer pursuant to an incentive "profit participation plan" after termination of his employment were income according to ordinary concepts.

In particular, the court found that the payments were "deferred compensation" for the services the taxpayer had performed. At the same time, the court dismissed the taxpayer's claim that the amount was assessable as a capital gain on the basis of finding that it did not represent the proceeds for the disposal of the future right to receive a proportion of company profits he was entitled to.

GST and low-value imports

Proposed amendments to the GST Act intend to ensure that goods and services tax (GST) is payable on certain supplies of low value goods that are purchased by consumers and are imported into Australia. The amendments would apply to the supply of goods valued at A$1,000 ($740) or less at the time of sale.

The goods will be taxable if they are connected with the indirect tax zone (ITZ) (i.e. generally, Australia) if the goods that are supplied are brought to the ITZ with the assistance of the supplier. This is designed to ensure that such supplies are subject to GST, consistent with equivalent supplies made within Australia.

A supply of goods will be a supply of low value goods if the customs value of the goods, at the time when the consideration for the supply was first agreed, would have been A$1,000 or less had they been exported at that time.

Collective investment vehicle non-resident withholding tax

The government has also released a consultation paper on a revised withholding tax regime for non-residents who use collective investment vehicles (CIVs).

This follows the government's announcement on May 4 2016 that it would consider non-resident withholding taxes on CIVs in this financial year to ensure that the Australian funds management sector is internationally competitive.

The paper sets out key policy considerations in evaluating tax policy and puts forward a number of broad policy proposals for public comment. These include:

Proposal A: No policy change to the existing tax settings;
Proposal B: Single non-resident withholding tax rate of 5% for CIVs and managed investment trusts (MITs) under the Asia Region Funds Passport; and
Proposal C: Uniform non-resident withholding tax rate of 5% for all CIVs and MITs excluding property.

Tax treatment of trusts

Separately, the ATO has released draft guidelines (PCG 2016/D16), which outline the factors that the Commissioner of Taxation will consider when deciding whether to exercise the discretion to treat an entitlement as being a fixed entitlement, which results in a trust being treated as a fixed trust under the trust loss provisions contained in subsection 272-5(3) of Schedule 2F of the Income Tax Assessment Act 1936. The factors which will be considered include:

The circumstances in which the interest is capable of not vesting or being defeated;
The likelihood of the interest not vesting or being defeated;
The nature of the trust; and
Any other relevant factors the commissioner deems significant.

Indeterminate rights

The ATO has also released Taxation Determination TD 2016/17, which outlines the circumstances in which a contractual right (subject to the satisfaction of a condition) becomes a right to acquire a beneficial interest in a share for the purposes of section 83A-340(1) of the ITAA 1997.

Broadly, TD 2016/17 states that a contractual right becomes a right to acquire a share when a condition of the contract is satisfied and is enforceable against the other party under the terms of the contract, even if only to the extent of the condition. It notes that the condition's satisfaction must directly cause an employee to have a right to acquire a share (i.e. a condition that is "precedent to performance").

Superannuation reforms

Three new bills have also been introduced into parliament, which together would have wide ranging effects, including enshrining the principles of superannuation policy into law, imposing a A$1.6 million transfer cap on the amount of capital that can be transferred into superannuation tax free earnings, reducing the concessional contributions cap available to those under the age of 49 and reducing the non-concessional contributions cap, as well as numerous other amendments. The three pieces of legislation are the: