• Federal Budget 2021

    Business

Business

Temporary Full Expensing Extension

The Government has announced a 12 month extension to the temporary full expensing measures until 30 June 2023. These measures initially announced as part of the previous budget, provide eligible businesses with an immediate deduction for the full cost of depreciating assets.

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Temporary Full Expensing Extension

The Government has announced a 12 month extension to the temporary full expensing measures until 30 June 2023. These measures initially announced as part of the previous budget, provide eligible businesses with an immediate deduction for the full cost of depreciating assets.

Under the current law, eligible businesses with aggregated turnover of less than $5 billion are entitled to an immediate deduction for the cost of depreciating assets purchased after 7:30pm AEDT on 6 October 2020, and first used or installed ready for use by 30 June 2022.

For those entities with aggregated turnover exceeding $5 billion, they may also be entitled to an immediate deduction under the ‘alternative test’. The ‘alternative test’ requires Australian income of less than $5 billion, and the cost of depreciating assets for the 2017, 2018 and 2019 income years to exceed $100 million.

The proposed measure extends the immediate deduction for a further 12 months to apply to assets that have been first used or installed ready for use by 30 June 2023.

BDO Comment

We welcome the extension of this very generous concession by the Government. As Australia recovers from the economic impacts of COVID-19, it will be critical businesses can continue to invest in capital assets to ensure a smooth economic recovery.

However, the continued use of the aggregated turnover definition in the legislation adds complexity to the eligibility requirements. Particularly for those entities with foreign parents, it will be critical that all connected entities and affiliates are appropriately identified in order to assess the eligibility for the write-off. For entities with aggregated turnover exceeding $5 billion, all may not be lost as they may still be eligible under the ‘alternative test’. The requirements of such a test should be carefully considered by businesses.

Extension of the Loss Carry Back Rules for companies

The Government has announced an extension to the temporary loss carry-back rules announced in the 2020 Federal Budget.

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Extension of the Loss Carry Back Rules for companies

The Government has announced an extension to the temporary loss carry-back rules announced in the 2020 Federal Budget. This extension will allow eligible companies to carry back and use tax losses from the 2022-23 income year to offset tax paid on profits from the 2019 and subsequent income years. This refund of tax paid in previous income years when a loss is incurred in a later year is described as a ‘loss carry-back’.

Currently, companies with an aggregated turnover of less than $5 billion may only carry-back losses incurred in the 2020-2022 income years to the 2019 income year onwards. Companies that do not elect to use the loss carry-back rules will continue to carry forward losses as normal. The extension of the loss carry-back provisions will provide further support to companies for an additional year.

The following limitations will continue to apply with respect to the loss carry-back measure:

  • Losses carried back cannot be more than the earlier taxed profits
  • The loss carry-back amount must not generate a franking account deficit.

Companies that elect to apply this measure will receive a tax refund in the loss making year equal to the amount which has been offset by the losses carried back.

BDO Comment

BDO is pleased the Government has chosen to extend this measure providing much needed support to companies experiencing a delayed downturn from the COVID-19 pandemic. This should also allow companies to better use the extended temporary full expensing measures which the Government announced as part of the 2021 Federal Budget.

Patent Box Regime

A patent box tax regime will be introduced as a tax concession for Australian medical and biotechnology innovations.

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Patent Box Regime

A patent box tax regime will be introduced as a tax concession for Australian medical and biotechnology innovations. The introduction of patent box regimes in other countries (e.g. UK) has led to companies keeping and commercialising the intellectual property (IP) in that country.

In Australia, despite the R&D tax incentive regime, the ownership of IP (especially at the later stages of development and commercialisation) has frequently moved offshore. This tax concession will apply from 1 July 2022 and includes taxing corporate income derived directly from Australian owned and generated patents at a corporate tax rate of 17%.

This change will see a decrease in the current corporate tax rate of 13% for large businesses and 8% for small to medium enterprises. Income from manufacturing, branding and other attributes will still be taxed at up to 30%. We note, however, details of the regime are yet to be finalised pending consultation with industry experts. 

BDO Comment

BDO welcomes the introduction of a patent box regime and believes it has been the missing link in the incentive regime. In particular, it acts as an incentive for the international commercialisation of Australian developed technology to be retained in Australia, leading to numerous flow-on benefits, including further investment and development activities.

However, limiting the regime to medical, biotechnology and potentially clean energy innovations is not in line with similar regimes in other jurisdictions which are rightfully industry agnostic.

Extension of powers for the Administrative Appeals Tribunal in relation to small business taxation decisions

The Administrative Appeals Tribunal (AAT) will be given the power to pause or modify ATO debt recovery action in relation to disputed debts under review by the AAT’s Small Business Taxation Division (SBTD).

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Extension of powers for the Administrative Appeals Tribunal in relation to small business taxation decisions

The Administrative Appeals Tribunal (AAT) will be given the power to pause or modify ATO debt recovery action in relation to disputed debts under review by the AAT’s Small Business Taxation Division (SBTD). The measure applies to tax debts disputed by small businesses with annual turnover of less than $10 million.

Under current laws, a stay on ATO debt recovery action, such as garnishee notices, can only be obtained through the court system. This is an expensive and time consuming process for small businesses, and provides no guarantee as to whether the stay will be granted.

The changes come following a recommendation from the Australian Small Business and Family Enterprise Ombudsman in April 2019, which called for a legislative amendment extending the AAT’s powers to pause tax debt recovery action. The measures are intended to reduce legal fees and red tape for small businesses.

Under the new laws, taxpayers who file an application before the SBTD will be able to apply for a pause or modification of ATO debt recovery actions until the underlying dispute has been decided. In determining applications, the AAT will be required to consider the effect on the integrity of the tax system and ensure the underlying dispute is genuine.

BDO Comment

The power for the AAT to pause or modify ATO debt recovery actions makes sense where a debt is genuinely disputed and paying the debt prior to the resolution of the dispute would place an undue financial burden on the small business taxpayer.

BDO would like to see the AAT ensure disputes are genuine and consider the taxpayer’s prospects of success in determining applications to modify debt recovery actions. It will be important taxpayers are not able to use this power to effectively delay debt recovery in cases where the taxpayer does not have reasonable prospects of success.

Self-assessed effective lives for intangible assets

Currently, the effective lives for intangible depreciating assets such as patents, registered designs, copyrights and in-house software are prescribed in the tax legislation. Unlike tangible depreciating assets, taxpayers do not currently have the option of self-assessing the effective life of intangibles and thereby increasing their depreciation deductions.

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Self-assessed effective lives for intangible assets

Currently, the effective lives for intangible depreciating assets such as patents, registered designs, copyrights and in-house software are prescribed in the tax legislation. Unlike tangible depreciating assets, taxpayers do not currently have the option of self-assessing the effective life of intangibles and thereby increasing their depreciation deductions.

This measure allows taxpayers to self-assess the effective lives of eligible intangibles giving businesses a greater ability to align the tax treatment with the actual economic benefits provided from the asset. The new rules will apply from 1 July 2023 (after the temporary full expensing measures cease).

BDO Comment

Some industries are facing technological advances that are rapidly replacing products well before some of the lengthy effective lives currently hardwired in the legislation. This is a welcome amendment to the law.

Junior Minerals Exploration Incentive extension

The Government has announced it will invest an additional $100 million of funding over a four year period to extend the Junior Minerals Exploration Incentive (JMEI) to the end of June 2025.

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Junior Minerals Exploration Incentive extension

The Government has announced it will invest an additional $100 million of funding over a four year period to extend the Junior Minerals Exploration Incentive (JMEI) to the end of June 2025.

The JMEI commenced in the 2017/2018 financial year, and allows eligible entities undertaking greenfield exploration to convert a portion of their tax losses into an exploration credit, which can be distributed to new investors. The regime aims to incentivise new investment into the natural resources sector, with a view to create more employment opportunities within junior explorers.

BDO Comment

BDO can see the value in creating exploration credits for new investors. However, we would like to see a revitalised exploration incentive regime which is simpler to apply and easier for junior explorers to understand.

Notably the JMEI replaces the previously failed Exploration Development Incentive. It is possible the JMEI may also need to be replaced – in which case we hope it will be third time lucky for the Government in terms of exploration regimes.

Taxation of Financial Arrangements – Hedging and foreign exchange deregulation

The Government has announced it will make technical amendments to the Taxation of Financial Arrangements rules to facilitate access to hedging rules on a portfolio hedging basis.

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Taxation of Financial Arrangements – Hedging and foreign exchange deregulation

The Government has announced it will make technical amendments to the Taxation of Financial Arrangements rules to facilitate access to hedging rules on a portfolio hedging basis.

Under the current rules, if a taxpayer elects to apply the hedging financial arrangements method, the ‘one-in, all-in’ principle applies, and the taxpayer must apply the election to all of its hedging financial arrangements. The tax gain or loss must then be calculated on each hedging financial arrangement.

Although the details on the technical amendments are limited, the proposed amendment is intended to reduce compliance costs and correct unintended outcomes so taxpayers are not subjected to unrealised taxation on foreign exchange gains and losses, unless an election is made. Therefore, we expect the amendments to simplify the application of hedging rules.

The amendments will apply to relevant transactions entered into on or after 1 July 2022.

BDO Comment

BDO welcomes any technical amendments to the Taxation of Financial Arrangements rules that results in simplifying the application of an unnecessarily complex set of provisions that produce anomalous outcomes.

Alignment of the excise refund scheme for brewers and distillers

The Government will be increasing support to brewers and distillers by aligning the excise refund scheme for alcohol manufacturers with the Wine Equalisation Tax Producer Rebate (WET Rebate).

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Alignment of the excise refund scheme for brewers and distillers

The Government will be increasing support to brewers and distillers by aligning the excise refund scheme for alcohol manufacturers with the Wine Equalisation Tax Producer Rebate (WET Rebate).

From 1 July 2021 eligible brewers and distillers will be able to receive full remission of any excise paid up to a cap of $350,000 per financial year.

The Government has indicated there will be no requirement for the excise duty to be paid when the excise return is lodged, with the remission equating to a full offset of the excise duty liability until the maximum amount has been reached.

Current scheme

Currently, eligible manufacturers can obtain a refund of 60% of the excise duty paid on products up to a cap of $100,000 per financial year. This can be obtained by:

  • Calculating and paying full excise duty liability
  • Applying for a 60% refund (up $100,000) via a separate form.

Wine Equalisation Tax Producer Rebate

By comparison, the WET Rebate provides a credit to wine producers up to $350,000 by:

  • Calculating the WET liability on the Business Activity Statement at label 1C ‘Wine equalisation tax’
  • Claiming the producer rebate in the same tax period (up to $350,000) on the Business Activity Statement at label 1D ‘WET Refundable’.

BDO Comment

This scheme is aimed at providing additional support to small distillers and brewers to keep more of what they earn, helping them to invest, grow and support around 15,000 Australians that are currently employed in the sector.

The WET Rebate has attracted criticism on the basis it distorts the economics of the industry, and has been open to abuse in order to maximise claims. BDO applauds the Government supporting small to medium enterprises, however, questions the efficacy of a rebate mechanism.

Instead, BDO considers these aims may be more efficiently achieved through the implementation of either a targeted grant scheme to eligible producers, or a reduction in the rate of excise. A grant scheme could allow eligible producers access to upfront cash for activities. Alternatively, a reduction in the rate of excise would allow for an enduring benefit to producers and not require any administrative changes.

The road to International Tax coherency and transparency

In line with the global push to safeguard against offshore tax avoidance and evasion, the Government has introduced two measures promoting international tax coherency and transparency.

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The road to International Tax coherency and transparency

In line with the global push to safeguard against offshore tax avoidance and evasion, the Government has introduced two measures promoting international tax coherency and transparency.

Offshore Banking Units

In response to the Organisation for Economic Cooperation and Development’s (OECD) designation of Australia as a harmful tax regime, the Government has introduced measures to abolish the Offshore Banking Unit (OBU) regime. Under the proposed changes, the OBU regime:

  • Removes the preferential tax rate of 10% currently available to participants on eligible activities
  • Removes the interest and gold withholding tax exemption for OBUs from 1 January 2024
  • Closes the OBU regime to new entrants from 26 October 2018
  • Allows existing participants of the OBU regime to continue to have access to the preferential rate up until the end of the 2022/23 income year.

Under this proposal, existing participants of the OBU regime will not be immediately impacted. Concessional tax rates and withholding tax exemptions will continue to exist up to the end of the 2023 income year. After that time, OBUs will no longer enjoy special tax concessions.

Exchange of information

Jurisdictions around the world have collectively moved towards greater tax transparency and the exchange of information. The Government will update the list of jurisdictions that have an Effective Information Sharing Agreement (EISA) with Australia.

Residents of jurisdictions with an EISA are eligible to access the reduced Managed Investment Trust (MIT) withholding tax rate of 15% on certain distributions, instead of the default tax rate of 30%. Effective from 1 January 2022, the list of countries will be expanded to include Armenia, Cabo Verde, Kenya, Mongolia, Montenegro and Oman.

BDO Comment

In the hope of tackling international tax avoidance and evasion, Australia has proposed to amend and update its international tax regime. We will wait to see whether Australia remains a competitive centre for financial services following its contribution to a more coherent international tax regime – and if we don’t, then we may see a reduction in offshore investment.

Finalised regime for Corporate Collective Investment Vehicles

The Government has announced they will finalise the corporate collective investment vehicles (CCIV) measure titled Ten Year Enterprise Tax Plan – implementing a new suite of collective investment vehicles, with a revised commencement date.

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Finalised regime for Corporate Collective Investment Vehicles

The Government has announced they will finalise the corporate collective investment vehicles (CCIV) measure titled Ten Year Enterprise Tax Plan – implementing a new suite of collective investment vehicles, with a revised commencement date.

Originally, the Government had announced its intention to introduce a new tax and regulatory framework for CCIVs from 2017 as part of the 2016-17 budget, however, this did not eventuate.

2016-17 Budget

To recap, as part of the 2016-17 budget, the Government committed to introducing a new tax and regulatory framework for two new types of collective investment vehicles. Specifically, one of these collective investment vehicles was a CCIV which was intended to be introduced for income years starting on or after 1 July 2018.

The CCIV was to be an investment vehicle with a corporate structure providing flow through tax treatment. It would have allowed investors to pool their funds together and have them managed by a professional funds manager. These CCIVs would have been required to meet similar criteria as managed investment trusts - such as being widely held and engaging in primarily passive investment. Investors in these new CCIVs would generally be taxed as if they had invested directly.

Changes finally taking place

The Government will now finalise the CCIV component of the 2016-17 Budget with a revised commencement date of 1 July 2022. This investment vehicle will enhance the international competitiveness of the Australian managed funds industry by allowing fund managers to offer investment products using vehicles more familiar to overseas investors.

BDO Comment

Having been on the drawing board for five years, professional fund managers will be relieved to see this measure finally being introduced.

We trust that this measure can now be introduced quickly to allow Australia to reap the benefits of managing more funds from overseas investors.

Temporary levy on offshore petroleum production

The Government will impose a temporary levy on offshore petroleum production to recover the costs of decommissioning of the Laminaria-Corallina oil fields and the associated infrastructure northwest of Darwin in the Timor Sea.

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Temporary levy on offshore petroleum production

The Government will impose a temporary levy on offshore petroleum production to recover the costs of decommissioning of the Laminaria-Corallina oil fields and the associated infrastructure northwest of Darwin in the Timor Sea. The measure is designed to ensure taxpayers are not left to pay for the decommissioning and remediation of the fields and is part of the continued response to Northern Oil & Gas Australia being placed into liquidation and requiring Government intervention.

The Government has not quantified the specific impact of the levy citing commercial sensitivities. However, the Government has committed to consultations with the industry and has promised further announcements to come. The levy was one of a number of options being considered to try and avoid a repeat of the abandonment risks around the Northern Endeavour production ship in the Timor Sea.

The levy will terminate on 30 June of the year in which all costs associated with the decommissioning have been recovered.

BDO Comment

BDO welcomes the Government’s initiative to responsibly decommission the Laminaria-Corallina oil fields and ensure Australian taxpayers are not left out-of-pocket.

However, given the lack of detail which has been released, it will be vital for the Government to engage with relevant stakeholders to ensure the levy is implemented in an appropriate manner. It will be critical to maintain a balance between implementing safeguards for taxpayers while also still encouraging investment in the sector. No doubt the levy will draw criticism from industry participants, with a number of prominent figures proposing the funds could be raised through operational efficiencies, deeper collaboration, or asset sales.