Business tax

The company tax rate

The Australian company tax rate remains unchanged at 30 per cent.

Although maintenance of the status quo would not normally be regarded as particularly newsworthy, the Tax Reform Review announced by Mr Swan “should take into account recent international trends to lower headline rates of tax and apply them across a broader base, as well as domestic and global economic and social developments and their impact on the Australian economy”.

The recent trend amongst OECD countries - such as the United Kingdom (28 per cent) - has been to reduce corporate tax rates. Tax competition in the Asia Pacific region is particularly intense with Singapore boasting a company tax rate of 18 per cent.

Scrip for scrip roll-over and corporate restructures

The ‘scrip for scrip’ capital gains tax (CGT) roll-over provisions for corporate restructures are to be modified. In making this announcement, the Federal Government has stated that the new measure will replace the former Government’s announced changes to the consolidation rules following certain CGT roll-overs, which caused significant disruption to the operation of Australia’s capital markets.

If an arrangement involves a listed company, the modifications will apply where an intention to undertake a corporate action, by takeover bid or scheme of arrangement, is announced by either party to an approved stock exchange after 7.30pm (AEST) on 13 May 2008. If the arrangement involves an unlisted company, the modifications will apply to the corporate action by takeover or scheme of arrangement where it is made to shareholders of the target company after the above time.

The new provisions will apply where:

• an (acquiring) entity acquires membership interests of another (target) entity
  
  
• one or more shareholders dispose of their membership interests in the target entity and receive similar interests, or an entitlement to similar interests, in the acquiring entity (or its holding company)
  
  
• the existing integrity rules in the scrip for scrip CGT roll-over provisions do not apply in respect of these membership interests (and as a result the acquiring entity would obtain a CGT cost base for the membership interests equivalent to the market value of the shares issued), and
  
  
• the arrangement is taken to be a restructure (where, under the arrangement, the market value of net assets of the acquiring entity immediately before the arrangement, is less than 20 per cent of the market value of its net assets immediately after the completion of the arrangement).

In the case where the acquiring entity acquires the membership interests of two or more target entities simultaneously under an arrangement, the target entities will be taken to be acquired sequentially, in the order elected by the acquiring entity. The details of this aspect of the announcement are not explained, but it is presumably intended to ensure that the shares of only one of the entities will be treated as acquired for their market value.

Where an arrangement is taken to be, in substance a restructure, the first element of the CGT cost base and reduced cost base of the shares acquired by the acquiring entity in the target entity (other than shares acquired for cash) will be worked out having regard to the cost bases of the target entity’s assets less its liabilities in respect of those assets. Alternatively, the acquiring entity can make an election to prevent the scrip for scrip CGT roll-over from being available to original shareholders of the target entity who exchange their shares in the acquiring entity (or its holding company). Where this election is made, the normal cost base rules will apply for determining the CGT cost base and reduced cost base of shares acquired in the target entity.

Withholding tax on managed investment trust distributions

A new withholding tax regime will be introduced to reduce the rate of withholding applying to distributions to foreign investors of Australian source net income (other than dividends, interest and royalties) of Australian managed investment trusts (MITs). It will cover distributions made directly from MITs to foreign residents as well as distributions made through other intermediaries (including custodians).

The nature of the new withholding arrangements will vary depending upon where the foreign investor is resident. Where the foreign investor is a resident of a jurisdiction with which Australia has effective exchange of information (EOI) arrangements on tax matters (a list of such jurisdictions will be specified in regulations), the investor will be subject to the following:

• in the first income year after the enabling legislation receives Royal Assent, a 22.5 percent non-final withholding tax on the net amount of the fund payments (ie after allowing a deduction for expenses relating to fund payments)
  
  
• in the second income year, a 15 per cent final withholding tax on fund payments, and
  
  
• in the third and later income years, a 7.5 per cent final withholding tax on fund payments.

The measure will have effect for fund payments made in relation to the first income year after the date of Royal Assent of the enabling legislation, intended to be the 2008-09 income year.

Distributions of dividends, interest and royalties will continue to be covered by the existing final withholding tax arrangements.

In-house computer software write-off

The depreciation period for capital expenditure incurred on ‘in-house computer software’ (ie expenditure incurred on acquiring, developing or having someone else develop computer software which is mainly used by the taxpayer) will be extended from 2.5 years to 4 years, with effect for expenditure incurred on or after 7:30pm (AEST) on 13 May 2008.

Fringe Benefits Tax (FBT) - integrity measures

The Federal Government will make three changes to improve the integrity of the FBT law.

FBT exemption for eligible work-related items

The FBT exemption that currently applies to certain work-related items will be tightened to ensure that it only applies to items that are provided by an employer to an employee for work purposes.

The changes are intended to restore the original intent of the legislation, and the list of eligible work-related items currently includes:

• laptops or similar portable computers
• briefcases
• calculators
• mobile phones
• tools of trade
• protective clothing
• computer software
• electronic diaries
• personal digital assistants or similar items, and
• certain portable printers

The FBT exemption will be limited to one item of each type per employee, per FBT year unless it is a replacement item. The list of FBT-exempt work-related items will also be clarified to deal with advances in technology and this amendment will extend the exemption to all work-related portable electronic devices, including those with multiple functions.

The changes to the FBT exemption for work-related items will apply to items purchased after 7.30 pm (AEST) on 13 May 2008.

Meals on an employer’s premises

The FBT exemption for private use of business property will be tightened by excluding meals provided as part of a salary sacrifice arrangement (so-called ‘meal card arrangements’).

Originally intended to exempt benefits provided from an employer to an employee that were modest in amounts, the rationale does not apply to meal card arrangements which allow employees to enter into arrangements to purchase meals out of their pre-tax income.

The changes will take effect from 7.30 pm (AEST) on 13 May 2008. Existing balances on meal cards as at 7.30 pm (AEST) on 13 May 2008 will remain eligible for the FBT exemption provided they are used by 31 March 2009. Any supplementation of existing balances after 7.30 pm (AEST) on 13 May 2008 will be subject to FBT.

The measure will not affect subsidised canteens that are provided to all staff and that are not part of a salary sacrifice arrangement.

Jointly held assets

The FBT law will be amended to ensure that it applies appropriately where an employer provides an employee, and their associate, with a fringe benefit in relation to a jointly held investment asset (for example, a low interest loan or reimbursement of expenses related to a rental property or shares).

The amendments to the FBT law are intended to overcome the decision in National Australia Bank Ltd v Federal Commissioner of Taxation 93 ATC 4919 (‘the NAB case’) to ensure that the ‘otherwise deductible’ rule applies appropriately in the case of jointly held assets. That is, the rule does not apply to reduce the taxable value of the associate’s share of the expenses from that time. The measure will re-establish the principle that income and deductions arising from jointly held assets should be allocated between joint owners according to their legal interests and restore equity of treatment between taxpayers who incur expenses on jointly held investment properties.

The measure will take effect as from 7.30 pm (AEST) on 13 May 2008 with respect to new arrangements.

Employees who have already entered into salary sacrifice agreements with their employer involving a reimbursement of expenses related to the investment will be able to utilise current arrangements until 31 March 2009 (ie the end of the FBT year).

Transitional arrangements for employees who have entered into a loan arrangement (such as the arrangement that was the subject of the NAB case) with their employer will be the subject of consultation.

Entrepreneurs’ Tax Offset

From 1 July 2008, a family income test will apply to the entrepreneurs’ tax offset to restrict eligibility for singles from $70,000 and families from $120,000 adjusted taxable income per year.