Last month, Treasury released exposure draft legislation to give effect to an integrity measure announced in December 2016. If enacted, it will prevent a company from making franked distributions to shareholders where the distributions are funded by capital raising activities that result in the issue of new equity interests. Our alert on this measure is available here.
One of the most concerning aspects of the proposed measure is that it will apply not only to future distributions, but also to previous distributions made as far back as December 2016.
This serves as a reminder that there are many other announced but unenacted tax measures, many of which are expected to apply retrospectively. There has been no indication from Treasury or the new Labor government as to whether these measures will be enacted or scrapped, nor of the commencement dates of the measures if they are enacted.
With the 2022–23 October Budget being released on 25 October 2022, we expect that further new tax measures will be announced by the government. It is also hoped that clarity will be provided regarding previously announced but unenacted measures. We will address such matters in our Federal Budget report to be issued on Budget night. It is important that taxpayers are aware of already-announced but unenacted tax measures.
Uncertainty for taxpayers
The change in Federal government earlier this year has not brought with it any indication as to whether the new government will proceed with measures as announced, amend them, or abandon them (as last happened en masse in 2013/2014). The government appears more intent on prioritising its election promises (such as amendments to the thin capitalisation rules) at the expense of arguably more important announced but unenacted measures.
The existence of this open-ended legislative to-do list causes a significant degree of uncertainty for taxpayers.
The proposed measure on franked distributions is a good – perhaps the best – example of the issues taxpayers face when announced measures are not legislated in a timely manner. This measure was first proposed by a Liberal government led by Malcolm Turnbull, and is now being progressed by a Labor government led by Anthony Albanese. What’s more, in some of the more recent industry roundups of announced but unenacted tax measures, this measure did not even make the list, perhaps indicating that few taxpayers or advisers expected it to be resurrected.
It is well understood that developing policies, drafting legislation, and passing new laws through Parliament takes time and is inevitably subject to delays. However, it is important that taxpayers and their advisers have the highest possible level of tax certainty, ensuring that Australia remains a desirable place for companies to do business.
Measures to watch
Below we set out several announced but unenacted tax measures that you should be aware of, including many that would have retrospective application if enacted. Should you wish to discuss any of them, please contact one of the authors or your KWM contact.
TOFA reforms
As part of the 2016–17 Federal Budget, the government announced an update to the taxation of financial arrangements (TOFA) rules. The update will ensure that the rules only apply to large taxpayers as intended and reduce compliance costs and distortions to decision-making under the current implementation of the TOFA rules. Specifically, this measure will align the tax treatment of gains and losses from financial arrangements with accounting standards, simplify accruals and realisation rules, and make a broader range of financial instruments eligible for treatment under the TOFA rules.
This measure has a proposed start date of 1 January 2018.
Corporate and individual tax residency
Between 2020 and 2021, the government announced several measures to resolve uncertainty over tax residency rules for corporations, trusts and corporate limited partnerships. Such uncertainty led to high compliance costs for taxpayers and increasing disputes with the Australian Taxation Office (ATO). It is proposed to amend the law so that a company incorporated offshore will be treated as an Australian resident for tax purposes if it has a ‘significant economic connection to Australia’.
For similar reasons, the government also announced legislative changes to individual tax residency rules that would replace the individual tax residency rules with a new, simpler, modernised framework.
Both sets of reforms are proposed to start when the relevant amending legislation receives royal assent.
Division 7A
First announced in the 2016–17 Federal Budget, the government proposed changes to reduce the complexity of Division 7A of the Income Tax Assessment Act 1936. The changes include a self-correction mechanism for inadvertent breaches, safe-harbour rules relating to the use of assets that would provide certainty for taxpayers and simplified loan arrangements.
The proposed start date is the first 1 July after receiving royal assent.
Debt-equity integrity rules
On 14 May 2013, the government announced reforms to the debt-equity integrity rules in Division 974 of the Income Tax Assessment Act 1997. The current equity override integrity provisions do not consistently reflect the commercial substance of the arrangements in question. The reforms are designed to provide taxpayers with transparency about the tax consequences of their arrangements and reduce the need for taxpayers to obtain private rulings for their funding arrangements. Treasury released an exposure draft of the Tax Superannuation Laws Amendment (Debt and Equity Scheme Integrity Rules) Bill and an associated draft legislative instrument, the Income Tax Assessment (Debt and Equity Examples) Declaration 2016, on 10 October 2016. Neither have been legislated.
This measure has a proposed start date of six months after receiving royal assent, or the proclamation date, whichever is later.
CGT roll-over rules
In a press release dated 12 December 2019, Treasury announced that the Board of Taxation (Board) would undertake a review of the CGT roll-over rules. In December 2020, the Board released a consultation paper. The Board submitted its final report to the previous government on 22 April 2022, although this has not yet been tabled and is not publicly available. This measure aims to provide greater transparency on the cost of transactions, reduced compliance time and, importantly, to mitigate against permanent CGT deferral.
There is not a proposed start date attached to these changes.
PRRT compliance and administration
In the 2018–19 Mid-Year Economic and Fiscal Outlook, the government announced plans to align Petroleum Resource Rent Tax (PRRT) reporting with income tax reporting, to reduce the complexity of the PRRT regime and reduce taxpayers’ compliance costs. This measure will require taxpayers to start lodging annual returns as soon as they hold an interest in an exploration permit, retention lease or production licence, rather than when a project first earns receipts.
This measure has a proposed start date of 1 July 2019.
Three-year audit cycle for some SMSFs
In the 2018–19 Federal Budget, the government suggested changing the annual audit requirement to a three-yearly requirement for self-managed super funds with a history of good record-keeping and compliance. Treasury undertook a consultation process in 2018 and received a large number of submissions.
This measure has a proposed start date of 1 July 2019.
