Bills Digest No.
13, 2019–20
PDF version [566KB]
Phillip Hawkins and Robert Anderson
Economic Policy Section
30
July 2019
Contents
The Bills Digest at a glance
Structure of the Bill
Committee consideration
Statement of Compatibility with Human
Rights
Policy position of non-government
parties/independents
Schedule 1 – Thin Capitalisation
Schedule 2 – Online hotel bookings
Schedule 3 – Non-taxable
re-importations of refurbished luxury cars
Date introduced: 4
July 2019
House: House of
Representatives
Portfolio: Treasury
Commencement: The
first 1 January,
1 April, 1 July or 1 October after Royal Assent.
Links: The links to the Bill,
its Explanatory Memorandum and second reading speech can be found on the
Bill’s home page, or through the Australian
Parliament website.
When Bills have been passed and have received Royal Assent,
they become Acts, which can be found at the Federal Register of Legislation
website.
All hyperlinks in this Bills Digest are correct as
at July 2019.
The Bills Digest at a glance
The purpose of the Treasury
Laws Amendment (Making Sure Multinationals Pay Their Fair Share of Tax in
Australia and Other Measures) Bill 2019 (the Bill) is to implement three
distinct tax related measures that the Government announced in the 2018–19
Budget, namely:
- tightening
the thin capitalisation rules for multinational entities
- requiring
offshore online hotel booking providers to include hotel room bookings in
calculating their business turnover for the purposes of the GST and
- removing
the luxury car tax on re-imported cars sent overseas for refurbishment.
History of
the Bill
The Treasury
Laws Amendment (Making Sure Multinationals Pay Their Fair Share of Tax in
Australia and Other Measures) Bill 2018 (the 2018 Bill) was introduced into
the House of Representatives on 20 September 2018. The 2018 Bill lapsed
when the House was dissolved on 11 April 2019.
The current Bill differs from the 2018 Bill substantially.
The 2018 Bill consisted of seven schedules, while the current Bill consists of
three. Proposed reforms to the Research and Development (R&D) Tax Incentive
and to the definition of Significant Global Entity (SGE) which were in the 2018
Bill are not included in this Bill. The status of these reforms, which were
also announced in the 2018-19 Budget, is unknown.
The previous Bill was considered by the Senate Standing
Committees on Economics (the Economics Committee) and its final report was
released on 11 February 2019.[1]
The Economics Committee noted significant concerns raised by stakeholders on
the proposed changes to the R&D tax incentive in the previous Bill and
recommended that the Senate defer consideration of the 2018 Bill until further
examination and analysis of the proposed R&D changes could be undertaken.[2]
The Committee supported changes to the SGE definition which were in Schedule 7
of the 2018 Bill.[3]
The three schedules contained in this Bill that were in
the 2018 Bill have not changed and the Economics Committee supported these
changes.[4]
Structure of
the Bill
The Bill consists of three schedules:
The Bills Digest is structured to discuss each of these
schedules separately.
Committee
consideration
Senate Selection of Bills Committee
The Senate Selection of Bills Committee determined that
the Bill should not be referred to a committee for inquiry.[5]
As discussed in the History of the Bill section of this Digest, the Bill’s
provisions were considered and supported by the Senate Standing Committees on
Economics, in the context of the 2018 Bill.[6]
Senate
Standing Committee for the Scrutiny of Bills
The Senate Standing Committee for the Scrutiny of Bills
had no comment on the Bill.[7]
Statement of Compatibility with Human Rights
As required under Part 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the
Bill’s compatibility with the human rights and freedoms recognised or declared
in the international instruments listed in section 3 of that Act. The
Government considers that the Bill is compatible.[8]
Parliamentary Joint Committee on Human Rights
At the time of writing this Digest, the Parliamentary
Joint Committee on Human Rights had not yet reported on the Bill.
Policy position of non-government parties/independents
At the time of writing, the position of non-government
parties and independents on the Bill are not known. The Senate Economics
Committee, which had members from the Australian Labor Party and the Australian
Greens, supported the schedules in the 2018 Bill that are retained in the
current Bill and there were no dissenting reports.
Schedule 1 –
Thin Capitalisation
Background
What are thin capitalisation rules
Australia’s thin capitalisation rules are a multinational
tax avoidance rule under Division 820 of the ITAA97 that operate to
limit the amount of interest expenses a foreign controlled Australian entity,
an Australian entity that operates internationally or a foreign entity that
operates in Australia can claim as a deduction against their taxable income.[9]
This applies to both entities investing into Australia (‘inward investing
entities’) and Australian entities investing overseas (‘outward investing
entities’). The rules are designed to prevent multinational entities from
reducing their taxable income in Australia by loading their Australian
operations with excessively high levels of debt.[10]
Broadly, these rules seek to set a ‘maximum allowable
debt’ amount, according to prescribed tests. Where an entity exceeds this
maximum allowable debt amount they are considered thinly capitalised and will
not be able to claim interest deductions on the interest amounts that exceed
the prescribed test.
There are three prescribed tests for determining whether
an entity is thinly capitalised (an entity only needs to satisfy one). These
can be broadly described as follows:
- The
safe-harbour limit ratio: this
sets out the amount of deductible debt that an entity can hold as a percentage
of its asset holdings.[11]
For example, for non-financial entities this ratio is three to five, in other
words, the maximum allowable debt amount is $3 of debt for every $5 of assets.[12]
- The
arm’s length test: requires an entity to establish that the amount of debt
that the entity has, and consequently the deductions arising from that debt
amount, have been entered into on arm’s length terms. That is, an independent
party would have lent that amount to the entity.[13]
- The
worldwide gearing limit: An amount that represents the average gearing
ratio (debt to equity) of the entity’s worldwide group. Generally, debt
deductions would be allowed so long as the Australian entity’s debt to equity
ratio does not exceed the debt to equity ratio of the entity’s global group.[14]
Interest deductions on debt levels in excess of a maximum
allowable debt amount are denied. These tests vary depending on whether an
entity is an inward investing entity or an outward investing entity (or both).
It also varies if the entity is a financial entity, recognising that a higher
level of leverage is consistent with the nature of their business. Different
tests also apply for authorised deposit taking institutions.[15]
Proposed changes
Asset revaluations for thin capitalisation purposes
Generally an entity is required to comply with the
accounting standards set by the Australian Accounting Standards Board (AASB) in
measuring its assets, liabilities and capital for the purpose of calculating
the relevant tests under the thin capitalisation rules. However, an entity may
be able to depart from the accounting standards when revaluing assets for thin capitalisation
purposes, or for the purpose of valuing assets which are internally generated
by the entity and/or for which there is not an active market. [16]
This treatment can result in a difference in the valuation of these assets for
tax purposes compared to what the entity reports in its financial statements.
The ATO has previously identified, in taxpayer alert TA
2016/1, circumstances where entities have been using revaluations or intangible
asset valuations to inappropriately increase their maximum allowable debt
amounts under the safe harbour limit ratio. The ATO advised that it was:
... reviewing arrangements where internally generated
intangible items have been inappropriately recognised as assets, or have been
over valued or inappropriately re-valued, with the consequence of increasing an
entity's maximum allowable debt limit for thin capitalisation purposes.[17]
The ATO has also noted that the value of asset
revaluations has increased substantially since reforms to thin capitalisation
rules in 2014 that tightened the prescribed tests for thin capitalisation.[18]
The changes proposed by the Bill would require entities to
use the asset values in their financial statements and no longer permit
entities to revalue assets specifically for thin capitalisation purposes.
A transitional rule would allow entities to rely on
revaluations of assets made prior to the announcement of this measure in the
2018–19 Budget on 8 May 2018 up until 1 July 2019.
Classification
of head companies of tax consolidated groups
Current tax rules allow certain foreign head companies or
multiple entry consolidated (MEC) groups that control groups in Australia to be
classified as outward investing entities, if, in addition to controlling
Australian entities, the foreign head company also controls foreign entities or
has foreign permanent establishments. This allows these foreign companies to
benefit from thin capitalisation rules that are intended for Australian entities
investing overseas.
Under the proposed changes, these foreign controlled
companies will be treated as both outward and inward investing entities.
Position of
major interest groups
In a submission to the Senate Economics Committee review
of the 2018 Bill, the Tax Justice Network stated that it supported measures to
strengthen Australia’s thin capitalisation rules.[19]
Financial
implications
The changes to thin capitalisation rules are estimated to
increase revenue by $240 million over the 2018–19 Budget forward estimates
period.[20]
Table 1: Thin
capitalisation—financial implications
| 2017–18 |
2018–19 |
2019–20 |
2020–21 |
2021–22 |
| - |
- |
- |
$120.0m |
$120.0m |
Explanatory
Memorandum, Treasury Laws Amendment (Making Sure Multinationals Pay Their
Fair Share of Tax in Australia and Other Measures) Bill 2019, p. 3.
Key issues
and provisions
Subsection 820-680(1) of the ITAA97 provides that
for the purposes of the thin capitalisation rules in Division 820 of the ITAA97
an entity must comply with Australian accounting standards in valuing its
assets, liabilities and equity capital.
However, subsections 820-680(2) to 820-680(2E) of the ITAA97
provide that assets can be revalued to a value that is different to that
disclosed in financial statements and the requirements for doing so.
Item 11 of Schedule 1 proposes to repeal
subsections 820-680(2) to (2E) ITAA97 and require that all valuations
for thin capitalisation purposes be aligned with those disclosed in financial
statements.
Item 11 would replace subsections 820-680(2) to
(2E) with proposed subsections 820-680(2) and 820-680(3). Proposed
subsection 820-680(2) provides that where an entity is required by
Australian law to prepare financial statements in accordance with accounting
standards, then the asset, liability and capital values in these financial
statements must be used for thin capitalisation purposes.
Proposed subsection 820-680(3) provides that where
a valuation period for thin capitalisation purposes overlaps multiple periods
for which financial statements are prepared, then the method for valuing assets,
liabilities and capital for thin capitalisation purposes must be the same as
the method used in most recent of these periods.[21]
Item 13 of Schedule 1 also
proposes to repeal both sections 820-683 and 820-684 of the ITAA97
thereby removing the ability of entities to revalue intangible assets
differently for thin capitalisation purposes.
Items 4 and 5 of Schedule 1 amend subsection
820-583(5) of the ITAA97 to remove existing provisions which provide
that a head company of a consolidated group or of a MEC group is not an inward
investing entity if it is also classified as an outward investing entity. Items
6 and 7 amend subsection 820-583(6) of the ITAA97 to make the
same amendment for financial entities. This provides that these entities can be
classified as both inward and outward investing entities. These changes would
prevent affected entities from applying certain modifications to the thin
capitalisation rules that only apply to entities which are classified as either
inward investors or outward investors, but not both. For example, section
820-37 of the ITAA97 which provides that the thin capitalisation rules
do not apply to entities whose average Australian assets make up more than 90
per cent of the entities average total assets.[22]
Part 2 of Schedule 1 contains application
and transitional provisions for the proposed changes to thin capitalisation
rules.
- Item
17 provides that the proposed changes to valuation rules in Schedule
1 apply to valuations made after 7.30 p.m., on 8 May 2018 – the release of the
2018–19 Budget. Any valuations made prior to this time can only be relied on
for income years beginning before 1 July 2019.
- Item
18 provides that the amendments at items 4 to 7 of Schedule 1 (the changes
to rules for consolidated groups and MECs) apply in relation to financial years
commencing after 1 July 2019.
Schedule 2 –
Online hotel bookings
Background
Goods and Service Tax (GST) is applied on the supply of
commercial accommodation when the supply is (amongst other things) made by an
entity that is registered or required to register for GST. An entity carrying
on an enterprise is required to register if their GST turnover equals or
exceeds the registration turnover threshold of $150,000 (for non-profit bodies)
and $75,000 (for other bodies who are not non-profit).[23]
Currently offshore suppliers of rights or options to use
commercial accommodation (such as online hotel booking services) are not
required to include these supplies in calculating their GST turnover. This can
mean that these offshore providers are not required to register for GST and consequently,
do not have to apply GST to the mark-up they charge for booking accommodation
in Australia.
In the 2018–19 Budget, the Government announced that
offshore sellers of hotel accommodation in Australia will be required to
calculate their GST turnover in the same way as local sellers, thereby
subjecting these transactions to GST.[24]
The amendments would not apply to supplies of hotel
accommodation where the offshore provider is merely acting as an agent on
behalf of a hotel in Australia. Under these arrangements the hotel is the
supplier of the accommodation and has the obligation to apply GST to the sale.[25]
Position of major interest groups
The Accommodation Association of
Australia (‘AAoA’) made a submission to the Senate Economics Committee inquiry
into the 2018 Bill (whose provisions in relation to this reform are identical
to this Bill). The AAoA did not support the changes proposed by the 2018 Bill
arguing that the additional tax on online hotel booking operators will be
passed on to domestic accommodation providers. In the AAoA’s view this would
amount to an additional tax on accommodation and have negative impacts on
domestic tourism.[26]
Further, the AAoA argued that it would be unlikely that
any additional GST will be collected by the Australian Government under the
proposed arrangements. The AAoA suggests that since the proposed amendments do
not apply to agents operating on behalf of domestic hotel providers, online
travel agents will use their superior market position to re-negotiate their
arrangements with hotels such that they act solely as agents. However, in such
circumstances the requirement to charge GST would apply to the hotel provider.[27]
A number of online accommodation providers made submissions
to the Senate Economics Inquiry into the 2018 Bill and raised no significant
objections.
Booking.com stated that under its current business model, it
acts only as an agent between accommodation providers and guests and as such does
not anticipate being affected by the amendments.[28]
Likewise, Airbnb stated that the proposed changes would not affect it as it operates
under an agency model.[29]
Expedia Group raised no objections to the proposed changes
and stated that it was already making necessary changes to comply with the
proposal.[30]
Financial
implications
The changes to GST arrangements
for online hotel bookings are estimated to increase revenue by $15 million over
the 2018–19 Budget forward estimates period.[31]
Table 2: Online
hotel books—financial implications
| 2017–18 |
2018–19 |
2019–20 |
2020–21 |
2021–22 |
| - |
- |
$5.0m |
$5.0m |
$5.0m |
Explanatory
Memorandum, Treasury Laws Amendment (Making Sure Multinationals Pay Their
Fair Share of Tax in Australia and Other Measures) Bill 2019, p. 4.
Key issues
and provisions
Item 3 of Schedule 2 of the Bill proposes to
repeal paragraphs 188-15(3)(c) and 188-20(3)(c) of the GST Act. This
would remove the exception for supply of a right to use commercial accommodation
in the ‘indirect tax zone’[32]
by a supplier not carrying on a business in the indirect tax zone, from the
calculation of current and projected GST turnover.
Item 4 of Schedule 2 provides that the
amendments made by Schedule 2 of the Bill apply to supplies where consideration
is provided on or after 1 July 2019, or where the invoice for the supply is
issued on or after 1 July 2019.
Schedule 3 –
Non-taxable re-importations of refurbished luxury cars
Background
The Luxury Car Tax (LCT) applies to the importation of
cars over a certain value. The tax is levied at a rate of 33 per cent on the
value in excess of the LCT threshold. The current LCT threshold for 2019–20 is
$67,525, or $75,526 for certain fuel efficient cars.[33]
In the 2018–19 Budget, the Government announced that the
luxury car tax (LCT) would no longer apply when cars are exported overseas for
refurbishment and then reimported into Australia with no change in ownership.[34]
Position of major interest groups
Automotive groups such as the Australian Automotive
Aftermarket Association, the Australasian New Car Assessment Program and the Australian
Historic Vehicle Interest Group welcomed the proposed amendments as a small
step, but have also argued that the LCT should be abolished altogether.[35]
The Motor Trades Association of Australia (MTAA) does not
support the Bill, as it considers that removing the LCT for refurbishments
overseas may discourage refurbishments being undertaken in Australia:
MTAA advocates for a tax system that promotes the use of
services provided by the Australian automotive industry including vehicle
modification and refurbishment. MTAA opposes any tax concessions (such as the
LCT concessions proposed) that may promote vehicle importers to use automotive
modification and refurbishment services provided overseas.[36]
The MTAA also supports the removal of the LCT in its
entirety.[37]
Key issues and provisions
The Bill inserts proposed subsection 7-20(1A)
of the A New Tax
System (Luxury Car Tax) Act 1999, which provides that an importation of
a luxury car tax is a ‘non-taxable re-importation’ if it satisfies the
following criteria:
- the
car is exported from the indirect tax zone and reimported into the indirect tax
zone
- the
car has been subject to any treatment, industrial processing, repair,
renovation, alteration or any other process since its export and
- the
ownership of the car did not change in the period between export and after re-importation.
The impact of this proposed provision would be that
re-importations of refurbished luxury cars would no longer be subject to LCT.
[1]. Senate
Economics Legislation Committee, Treasury
Laws Amendment (Making Sure Multinationals Pay Their Fair Share of Tax in
Australia and Other Measures) Bill 2018 [Provisions], The Senate,
Canberra, February 2019.
[2]. Ibid.,
p. 34.
[3]. Ibid.,
p. 33.
[4]. Ibid.
[5]. Senate
Selection of Bills Committee, Report,
3, 2019, 24 July 2019.
[6]. Senate
Economics Legislation Committee, Treasury
Laws Amendment (Making Sure Multinationals Pay Their Fair Share of Tax in
Australia and Other Measures) Bill 2018 [Provisions], op. cit., p. 33.
[7]. Senate
Standing Committee for the Scrutiny of Bills, Scrutiny
digest, 3, 2019, 24 July 2019, p. 29.
[8]. The
Statement of Compatibility with Human Rights can be found at pages 27–28 of the
Explanatory
Memorandum to the Bill.
[9]. Section
820-1 of the Income
Tax Assessment Act 1997 (ITAA97).
[10]. Australian
Taxation Office (ATO), Taxpayer Alert, ‘Inappropriate recognition of internally
generated intangible assets and revaluation of intangible assets for thin capitalisation
purposes’, TA
2016/1, ATO website, 26 April 2016.
[11]. ITAA97,
sections 820-95, 820-100, 820-195, 820-200, 820-205 and 820-210.
[12]. Ibid.,
sections 820-95, 820-195 and 820-205.
[13]. Ibid.,
sections 820-105 and 820-215.
[14]. Ibid.,
sections 820-110, 820-111, 820-216, 820-217, 820-218 and 820-219.
[15]. Ibid.,
subdivisions 820D and 820E.
[16]. ITAA97,
sections 820-680, 820-683 and 820-684.
[17]. ATO,
Taxpayer Alert, ‘Inappropriate recognition of internally generated intangible
assets and revaluation of intangible assets for thin capitalisation purposes’, TA
2016/1, op. cit.
[18]. Nexia
Australia and New Zealand, ‘Proposed
changes to Australia’s thin cap rules’, Nexia website,
25 February 2019.
[19]. Tax
Justice Network Australia, Submission
to Senate Standing Committee on Economics, Treasury Laws Amendment (Making
Sure Multinationals Pay Their Fair Share of Tax in Australia and Other
Measures) Bill 2018 [Provisions], [Submission no. 13], 5 November
2018, p. 1.
[20]. Explanatory
Memorandum, Treasury Laws Amendment (Making Sure
Multinationals Pay Their Fair Share of Tax in Australia and Other Measures)
Bill 2019, p. 3.
[21]. There
appears to be a drafting error in item 11 of Schedule 1 to the
Bill. It inserts subsection 820-680(3) into the ITAA97, but such a
provision already exists and is not repealed by the Bill. Current subsection
820-680(3) provides that the requirement in subsection 820-680(1) for an entity
to comply with accounting standards in valuing its assets, liabilities and
equity capital applies whether or not accounting standard would otherwise apply
to the entity.
[22]. Section
820-37, ITAA97.
[23]. Section
23-15 of the A
New Tax System (Goods and Services Tax) Act 1999; sections 23-15.02 and
23-15.01, A
New Tax System (Goods and Services Tax) Regulations 2019.
[24]. Australian Government, Budget measures: budget paper no. 2: 2018–19, 2018, p. 29.
[25]. Explanatory
Memorandum, Treasury Laws Amendment (Making Sure Multinationals Pay Their
Fair Share of Tax in Australia and Other Measures) Bill 2019, p. 21.
[26]. Accommodation
Association of Australia (AAA), Submission
to Senate Standing Committee on Economics, Treasury Laws Amendment (Making Sure
Multinationals Pay Their Fair Share of Tax in Australia and Other Measures)
Bill 2018 [Provisions], [Submission no. 62], 6 November 2018, p. 4.
[27]. Ibid.,
p. 8.
[28]. Booking.com,
Submission
to Senate Standing Committee on Economics, Treasury Laws Amendment (Making
Sure Multinationals Pay Their Fair Share of Tax in Australia and Other
Measures) Bill 2018 [Provisions], [Submission no. 74],
24 December 2018, p. 2.
[29]. Airbnb,
Submission
to Senate Standing Committee on Economics, Treasury Laws Amendment (Making
Sure Multinationals Pay Their Fair Share of Tax in Australia and Other
Measures) Bill 2018 [Provisions], [Submission no. 73],
17 December 2018, p. 2.
[30]. Expedia
Group, Submission
to Senate Standing Committee on Economics, Treasury Laws Amendment (Making
Sure Multinationals Pay Their Fair Share of Tax in Australia and Other
Measures) Bill 2018 [Provisions], [Submission no. 75],
18 January 2019, p. 1.
[31]. Explanatory
Memorandum, Treasury Laws Amendment (Making Sure Multinationals
Pay Their Fair Share of Tax in Australia and Other Measures) Bill 2019, p. 4.
[32]. ‘Indirect tax zone’ is defined at section 195-1 of the A New Tax System
(Goods and Services Tax) Act 1999 as Australia.
However, it excludes external territories, offshore areas for the purpose of
the Offshore Petroleum and Greenhouse Gas Storage Act 2006 and the Joint
Petroleum Development Area.
[33]. Australian Tax Office (ATO), ‘Luxury car tax rate thresholds’, ATO website.
[34]. Australian Government, Budget measures: budget paper no. 2: 2018–19, 2018, p. 38.
[35]. S Murray, ‘Government to scrap Luxury Car Tax on “re-imports”’, Autotalk.com.au, 2 August 2018.
[36]. Motor Trades Association of Australia, Submission by the Motor Trades
Association of Australia Limited (MTAA), Removing the Luxury Car Tax on
Re-imported Cars Refurbished Overseas, 8 August 2018, p. 8.
[37]. Ibid.
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