Australia's 2016 Budget: A Snapshot for Businesses

By Tom Lickess, Director, International Tax

The Australian Government issued its 2016 Federal Budget yesterday, and there are significant implications for multinationals operating there. This post is a summary of important points covered in the announcement, with an emphasis on foreign businesses.

Overview

The Australian economy is growing at 3%, with low inflation and 5% unemployment. Despite these healthy numbers, resources exports remain subdued, with the budget forecast to remain as a deficit for another five years. Against this backdrop of a slow but steady Australian economy, yesterday’s budget is largely measured, responsible and unsurprising, particularly for domestic businesses, which face the welcome prospect of a reduced corporate tax burden. Small and medium-sized business, for example, will enjoy almost immediate tax cuts.

Despite longer term tax reduction proposals, the budget is less promising for corporate taxpayers with inbound and outbound operations, including of course businesses with HQs based outside Australia. The budget includes a new “diverted profits tax,” which does little to resolve the ongoing uncertainty associated with cross-border related-party transactions. Moreover, an additional AU$679 million will be allocated to enhance the compliance actions of the Australian Tax Office’s (ATO’s) international enforcement activities area.

Business Tax Reductions and Anti-Avoidance Measures

In line with other developed economies and popular public sentiment, the newly released budget offers the quid pro quo of reduced corporate income tax rates along with the expectation (through enforcement if necessary) that multinationals pay their “fair share” of the tax burden. This effort — commonly called a “Google tax” — is part of a global trend to prevent multinationals from shifting their tax presences and taxable incomes to low tax jurisdictions so that they are not taxed on profits where economic activity is performed and value created.

Bowing to Treasury pressure, the Turnbull Government has agreed to a reduction in corporate income tax rates from 30% to 25%, which will be staggered over the next decade. For smaller businesses, with annual turnovers below AU$10 million, there will be a more immediate corporate income tax rate reduction to 27.5%, starting on July 1 of this year.

This reduction brings Australia’s corporate tax rate in line with other developed economies. It will be funded by new, specifically focussed multinational tax integrity measures, in particular the “diverted profits tax” mentioned earlier, which is similar to the UK model. This targets arrangements lacking economic substance and involving transactions whereby the ultimate tax paid is less than 80% of that which would be paid in Australia. The new diverted profits tax will complement Australia’s existing general anti-avoidance provisions targeting perceived multinational tax avoidance, particularly those companies engaged in aggressive transfer pricing and cross-border structuring.

The budget also allocates substantial resources to the ATO’s Tax Avoidance Taskforce. The new initiative boosts the ATO’s international tax avoidance specialist capabilities by an additional 1,000 staff. These individuals are charged with raising an additional revenue of AU$3.7 billion. This initiative will of course significantly increase the uncertainty and ongoing tax risk for multinationals operating in Australia, regardless of their level of cross-border tax compliance.

Finally, penalties for noncompliance with tax lodgement obligations will substantially increase under the new budget. For large global organisations, for example, the fine will increase a hundredfold, from AU$4,500 to AU$450,000.

GST Application to Low Value Imports

The Australian goods and services tax (GST) will be extended to low value imported goods. Starting in July, overseas suppliers with an Australian turnover of greater than AU$75,000 will be required to register for, collect and remit GST under a vendor registration model.