This guide provides corporate counsel and international practitioners with a comprehensive worldwide legal analysis of the laws and regulations of fintech. Peter Reeves authored the Australia chapter of the inaugural edition.

Corporate Advisory

Gilbert + Tobin has developed a comprehensive and forward-looking overview of “green finance” products and mechanisms available for use in developing renewable energy, climate resilience and other environmental projects, with a strategic focus on Australia.

Our team explains the rapid increase in opportunities for investment in green projects, presenting a suite of new instruments including green bonds and other structured products, blended finance models, and some innovative fintech solutions.

We also examine these developments through the lens of environmental, social & governance risk, given increased awareness of the commercial materiality of these factors.

This overview presents our “state of the green finance market” view, with a particular focus on the leading role of China, and implications for the Australian market.

Corporate Advisory, Energy and Resources

The Retail Leases Act 1994 (NSW) (RLA) regulates retail leasing relationships in New South Wales. The intention of the legislation is to ensure fair and efficient dealings between parties to retail leases.

The RLA has been the subject of reviews in 2004, 2008 and 2011, with amendments to the legislation made in 2005 and 2006 to improve the functioning of the Act, including the creation of a retail bond scheme, improved processes for assignments of lease, access to information and an expansion of the Act to include more leases. The proposed amendments to the RLA in 2011 (which included mandatory lease registration, clarification of the assignment process and new conditions relating to recovery of outgoings and fit out costs) did not proceed, partly due to a State election and a change in government at the time the Bill was drafted.

The current changes to the legislation are the result of the Registrar and the Office of the NSW Small Business Commissioner identifying a number of problems in the administration of the RLA.

On 1 July 2017, changes to the RLA will take effect under the Retail Leases Amendment (Review) Act 2017 (NSW) (RLA Changes).

Real Estate and Projects

Smart contracts have the potential to significantly alter the commercial, legal and regulatory landscape. Bernadette Jew and Peter Reeves of Gilbert + Tobin, and George Samman of Sammantics consultancy, analyse the opportunities smart contracts could bring, the challenges that need to be addressed, and how smart contracts could enable corporate digitisation.

This story first appeared in Digital Business Lawyer

TMT

Following the March introduction of the long awaited Corporations Amendment (Crowd-sourced Funding) Act 2017 (Cth) (CSF Act), the Government has moved to extend the reach of its crowd-sourced equity funding (CSF) reforms to proprietary companies. 

Currently, only public companies can access the new regulatory framework, due to commence in September 2017.  In our previous update discussing the passage of legislation establishing a crowd-sourced equity funding regulatory framework, we noted the likely introduction of a bill extending the crowd-funding regime to proprietary companies. 

As part of the Budget, an exposure draft of further proposed legislation, the Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017 (Cth) (Bill), was released for consultation.  The Bill effectively expands the application of the CSF Act to proprietary companies.  The Bill imposes increased governance and reporting requirements for proprietary companies accessing the CSF scheme.

Proposed operation of the CSF regime for proprietary companies

The Bill proposes to achieve the extension of the CSF regime via a strengthened eligibility criteria for proprietary companies wishing to access the CSF regime, including by introducing novel reporting requirements for participating companies and requiring participating companies comply with audit obligations where more than $1 million in funds is raised from CSF offers.

Consistent with the resulting increase in shareholder numbers, the Bill also proposes to subject CSF shareholders to Chapter 2E of the Corporations Act 2001 (Cth) (Corporations Act), being the related party transaction rules, and record the nature of the offer and accepting shareholders in the company register.  The Bill provides that Chapter 6 of the Corporations Act, being the takeover provisions, will not apply to a company that has made an allowance in its constitution for CSF exit arrangements.  

Key features of the Bill are:

  • Eligibility requirements:  A CSF eligible company includes proprietary companies with at least two directors that also satisfy any other prescribed regulatory requirements.  
  • Disclosure requirements: CSF offers must be made via a CSF offer document, which will involve reduced disclosure requirements (when compared with existing disclosure requirements under Chapter 6D of the Corporations Act).
  • Relaxation of prohibition on fundraising:  The Corporations Act is amended to permit proprietary companies to make CSF offers, which would otherwise be prohibited as a fundraising activity requiring disclosure to investors.
  • CSF shareholders not to counted toward member limit:  A CSF shareholder, being an entity that holds securities of a company as a result of being issued with such securities pursuant to a CSF offer, is not counted toward the 50 member statutory limit for proprietary companies.  Once sold or transferred, the new holder will not be a CSF shareholder and the CSF reforms do not apply to such shareholding.  
  • Reporting and record keeping obligations:  Companies issuing CSF offers will be required to complete annual financial and directors’ reports, to have the financial report audited if the amount of funds raised from a CSF offer exceeds $1 million and to notify ASIC of the commencement and cessation of the membership of CSF shareholders.
  • Restrictions on related party transactions:  It is proposed Chapter 2E of the Corporations Act will apply to proprietary companies that use CSF funding, reflecting the increased risk of fraud and bias with a broader shareholder base.  The usual arms-length commercial dealing exception applies to ensure the restrictions do not jeopardise ordinary commercial decision making.
  • Takeovers:  It is proposed that the takeover rules in Chapter 6 of the Corporations Act will not apply to a company that has CSF shareholders, provided the constitution of the company protects investors participating in the exit event.

Consultation

The Bill is open for comment until 6 June 2017, with the Treasury inviting comment from all interested parties.

Corporate Advisory

The Federal Budget 2017/18 has a significant focus on increasing competition in the financial services sector.  While some of these changes reflect sector-wide reforms, such as an inquiry into ‘open banking’, a Productivity Commission inquiry into competition in Australian financial services and funding for Australian Competition and Consumer Commission oversight of financial services (discussed in our Financial Services budget update), there are also specific initiatives focused on fintech and financial services innovation. 

The fintech and innovation focused reforms include reduced barriers to entry to the banking industry, removing double taxation of digital currency and enhancing existing regulatory sandbox initiatives.  A summary of these changes is set out in this update.

Reduced barriers to entry to establish a bank

These changes focus on easing existing legislative and prudential requirements which prohibit the establishment of banks.  These changes include:

  • Government consideration of a relaxation of the legislated 15% ownership cap, which applies under the Financial Sector (Shareholdings) Act 1998 (Cth), for innovative new entrants.  Currently, this cap prevents a person from holding a stake in a financial sector company of more than 15% without approval.  Under the existing regime, approvals can be sought to exempt shareholders from the 15% cap, so presumably some form of class exemption will be made available for innovative new entrants.
  • The current prohibition on authorised deposit-taking institutions (ADIs) using the term “bank” to describe their activities, will also be lifted in certain circumstances.  This will expand the range of institutions which can use “bank” in branding and marketing.  For instance, certain credit unions and building societies may now be able to brand themselves as a “bank”, while newly registered ADIs will also be able to use “bank” branding. 
  • The Australian Prudential and Regulation Authority will review prudential licensing arrangements for banks and consider how best to licence banks.

The Government believes these measures will increase competition in the banking sector, leading to more choice and lower prices for Australian consumers.

Removing double taxation of digital currency

From 1 July 2017, purchases of digital currency (i.e. crypto-currency, such as tokens) will not be subject to GST.  Previously, consumers making purchases using digital currency would suffer double taxation, paying GST on the purchase of the digital currency and paying GST on the purchase of any goods or services using the digital currency.

Instead, GST will only be charged on purchases made with digital currency.  The effect of this reform is that a key impediment to the competitiveness of digital currencies will be removed.

Enhancing the regulatory sandbox

The Government will legislate an enhanced regulatory sandbox that encouraging testing of a wider range of financial products and services without a licence.  The Government has stated that this regulatory sandbox will include providing more holistic financial advice, issuing consumer credit, offering short-term deposit or payment products, and operating a CSEF intermediary.  The regulatory sandbox will include an extended 24 month testing timeframe, providing eligible businesses with a greater window to test their products.

There are currently multiple regulatory sandboxes operating. The Australian Securities and Investments Commission operates one with a class exemption for eligible businesses (as discussed in a previous update) and the Australian Transaction Reports and Analysis Centre also offers a separate regulatory sandbox within its Innovation Hub (as discussed in our April fintech update).

Other developments

The fintech and financial services innovation agenda announced in the Budget includes:

  • an investment in optical astronomy to facilitate international collaboration;
  • the development of a 2030 Strategic Plan for Australia’s Innovation, Science and Research System to be completed by Innovation and Science Australia;
  • a Research Infrastructure Investment Plan, to be developed by Government and which will inform research infrastructure facilities and projects; and
  • amendment of the recently enacted crowd-sourced equity funding legislation to extend the framework to proprietary companies (as discussed in a separate update here).

Observations

This Budget targets fintech businesses with a range of initiatives, incentives and mechanisms to encourage greater competition in the financial services sector from new entrants.  It is unprecedented for an Australian Government to specifically cater to fintech businesses in this manner in a Federal Budget.  This is proof of the emergence of fintech as a force in both Australian business and the Australian economy more broadly. 

Many of these initiatives address gaps or issues in the existing regulatory framework, which have been identified by industry participants and communicated to regulator stakeholders in the context of a recent trend towards encouraging industry consultation and dialogue.  For instance, extending access to the crowd-sourced equity funding framework to proprietary companies and removing double taxation of digital currencies.  However, some of these commitments are merely promises to inquire, such as those relating to prudential licensing, and whether these commitments will actually lower barriers to entry remains to be seen. 

Nonetheless, this Budget is particularly promising for innovative financial services businesses.

Corporate Advisory

Much ink will be spilt on the 2017 Federal Budget’s targeting of the big banks by way of a liabilities levy, however the sector may be subject to much greater structural reform by virtue of other measures introduced in the Budget to target dispute resolution, accountability and competition in the financial services sector.  This update unpacks those various features of the Budget.

There are three streams to the Government’s Budget initiatives in financial services. These are dispute resolution reforms, increased bank accountability and measures to enhance competition in the financial services sector.  In addition to these measures, there have been initiatives announced which specifically target the fintech sector and innovation in financial services (these are discussed in our fintech budget update).

Dispute resolution reforms

These changes have been in part driven by the recently released final report of the Ramsay review on external dispute resolution schemes.  The central recommendation of the Ramsay review was the establishment of the Australian Financial Complaints Authority (AFCA) as the sole external dispute resolution scheme for the financial sector, replacing the Financial Ombudsman Service, the Credit and Investments Ombudsman and the Superannuation Complaints Tribunal.  Licensed firms will be required to be a member of AFCA.

AFCA will be funded by industry with an independent chair and an equal number of directors drawn from industry and consumer backgrounds.  It will commence on 1 July 2018, with the existing external dispute resolution bodies to continue to work through existing complaints until they are resolved.

Other key reforms which the Government has adopted from the Ramsay review include ASIC being provided with oversight powers over AFCA, including ASIC having the power to give a general direction to ensure AFCA complies with legislative and regulatory requirements.  The Government will also introduce legislation requiring financial firms, presumably licensees, to report to ASIC on internal dispute resolution outcomes.

The Ramsay review envisaged that a body such as AFCA would have a broader mandate than only providing an external dispute resolution mechanism.  Some key features of the Ramsay review likely to be adopted include:

  • lodging complaints will be free;
  • firms will be required to comply with AFCA determinations as a condition of membership. AFCA will report firms that fail to comply and AFCA will have power to expel firms that do not comply (causing a breach of licence conditions);
  • AFCA will monitor, address and report systemic issues in the disputes which it adjudicates;
  • panels will be used to resolve some disputes, such as complex disputes, with clarity for consumers as to when panels will be used; and
  • AFCA will have a community engagement focus, aimed at raising awareness amongst consumers and financial firms.

The AFCA will also likely have an expanded jurisdiction compared to existing external dispute resolution services.  This will feature:

  • a monetary limit of $1 million (a 100% increase on the current limit) on the size of disputes AFCA may hear and a compensation cap of no less than $500,000 (a 62% increase on the current cap), with consultation on whether disputes relating to certain products (i.e. mortgages) should have a compensation cap of $1 million;
  • small businesses to bring claims where the credit facility is of an amount up to $5 million (a 250% increase on the current limit) and a compensation cap of $1 million (a 224% increase on current limits); and
  • no monetary limits and compensation caps for disputes about whether guarantees should be set aside when guarantees are made in relation to mortgages or other security relating to a person’s primary residence.

The Ramsay review recommended the unlimited jurisdiction for superannuation disputes be maintained.  It should be noted that the Ramsay review is continuing and is considering the establishment, merits and design of a last resort compensation scheme, as well as the merits and issues involved in providing access to redress for past disputes.  It will report in June 2017.

Increased bank accountability

These measures are focused on expanding the powers which the Australian Prudential Regulation Authority (APRA) will exercise and are targeted at bank executives.  These measures include implementing a register of senior executives and directors of authorised deposit-taking institutions (ADIs), this register will:

  • require ADIs to advise APRA before making a senior appointment and provide accountability maps of senior executives’ roles and responsibilities to enable greater scrutiny;
  • result in a failure to meet expectations by a bank executive leading to the removal of the bank executive from the register and render those executives unable to apply for senior roles; and
  • require ADIs to provide APRA with oversight of problems that emerge under their executives’ management.

APRA will also have stronger powers to remove and disqualify senior executives and directors from being employed in the institutions it regulates.  These decisions can be appealed to the Administrative Appeals Tribunal.

The Government will introduce new accountability measures including establishing “expectations” on how ADIs, their executives and directors conduct business.  These expectations will include requiring that ADIs conduct business with integrity, due skill, care and diligence and act in a prudent manner.  Civil penalties for enforcement of these expectations will be significant, with large ADIs faced with civil penalties up to $200 million and smaller ADIs facing civil penalties up to $50 million.  Penalties will also be able to be imposed on ADIs that do not appropriately monitor the suitability of executives to hold senior positions.  APRA will receive a $1 million per annum fund dedicated to enforcing breaches of these civil penalty positions.

Finally, the Government will also intervene directly in the pay of bank executives.  The Government will mandate that a minimum of 40% of an ADI executive’s variable remuneration (60% for certain senior executives such as the CEO) be deferred for a minimum period of four years.  The Government intends this reform to place the focus of executives on the longer-term consequences of their decisions, which may take many years to materialise. 

Measures to enhance competition

There are three limbs to the reforms to enhance competition contemplated by the Government.  These limbs are:

  • an open data inquiry:  following the release of the Productivity Commission’s report recommending an open data regime, the Government has responded by announcing an inquiry to recommend the best approach to implement an open banking regime;
  • Productivity Commission inquiry:  the Productivity Commission will conduct an inquiry into the state of competition in the financial system, fulfilling a recommendation of the Murray Financial System Inquiry; and
  • regular ACCC inquiries:  the ACCC will be provided with $13.2 million over four years to establish a dedicated unit to undertake regular inquiries into financial system competition issues.
Corporate Advisory

On 9 May 2017, the Australian Treasurer announced that the Government would be introducing a new exemption certificate for certain ‘low risk’ business acquisitions. 

Background

Under the current law in Australia, virtually all acquisitions by ‘foreign government investors’ must be notified to the Foreign Investment Review Board, and may not proceed until the applicant has received a statement of no objection from the Australian Treasurer (FIRB approval).  A foreign government investor includes:

  • a foreign government;
  • an individual, corporation or corporation sole that is an agency or instrumentality of a foreign country but is not part of the body politic of that foreign country (referred to below as a ‘separate government entity’);
  • a corporation, trustee of a trust or general partner of a limited partnership in which (1) a foreign government, separate government entity or foreign government investor from one country holds a 20% or more interest, or (2) foreign governments, separate government entities or foreign government investors from more than one country hold a 40% or more interest.

The definition of foreign government investor captures not only state-owned enterprises and sovereign wealth funds, but also things like public sector pension funds, the investment funds into which state-owned enterprises, sovereign wealth funds and public sector pension funds invest and, due to tracing rules, portfolio companies for such investment funds.

These rules have had a significant effect on private equity funds, many of which are considered to be foreign government investors as a result of passive investment by public sector pension funds or sovereign wealth funds.  A private equity fund that is deemed to be a foreign government investor will generally be required to obtain FIRB approval in respect of its Australian investments (regardless of value), and its Australian portfolio companies will be deemed to be foreign government investors and will also be required to seek FIRB approval for their smaller bolt-on acquisitions.

Aside from the delays associated with seeking FIRB approval, the application fees (usually A$25,300 per transaction, eligible for fee reductions for very small transactions) for all of these applications are a significant burden. 

Announced changes – low risk business acquisitions

The Government has announced the introduction of a new exemption certificate for low risk acquisitions of securities.  This certificate will allow foreign investors, including private equity funds that are deemed to be foreign government investors, acquiring securities to obtain pre-approval for multiple investments in one application, rather than having to apply separately for each investment.  This is in line with the proposals we have advocated since the law changed in December 2015 and should provide relief for private equity funds and their portfolio entities that currently have to lodge a multiplicity of FIRB applications (and pay the associated fees) for low dollar value transactions.  While it can take some time to negotiate exemption certificates for land acquisitions in our experience, we will continue to work with relevant industry bodies to ensure this new exemption certificate operates in a practical and effective manner.  The application fee for the exemption certificate will be A$35,000.  Further guidance on the types of transactions that will be eligible for the exemption certificate will be released prior to 1 July 2017.

Other changes

Most of the other announced changes relate to land acquisitions, some of which come into effect immediately.  Of most relevance to private equity:

  • The concept of ‘commercial residential premises’ (which are treated as developed commercial land and generally benefit from higher monetary thresholds) currently excludes some kinds of property that are generally commercial in nature, such as student accommodation at the tertiary level and aged care facilities (which have a A$0 threshold).  These will now be treated as developed commercial property rather than residential property, which should mean that acquisitions in these areas are more likely to be exempt (effective from 1 July 2017).
  • Currently developed commercial land is subject to different thresholds depending on whether it is sensitive (and therefore subject to a low threshold of A$55m) or not (generally subject to a A$252m threshold).  The range of properties subject to the low threshold is currently very broad, in particular due to the fact that any land under prescribed airspace is caught, which includes most developed commercial land in major Australian cities.  This means a significant portion of the developed commercial land transactions are subject to the low threshold, which was not the intention when Australia’s foreign investment laws were amended in late 2015.  The Government has announced that the range of land captured as ‘low threshold’ developed commercial land will be reduced (effective 1 July 2017).

Other changes relate to residential land, as noted below:

  • Developers who have obtained a New Dwelling Exemption Certificate (authorising sales of new dwellings in a development to foreign persons) will be subject to a cap of 50% on the number of dwellings the developer can sell to foreign persons under the exemption certificate (effective for applications made after 7:30pm on 9 May 2017).
  • The Government will introduce an annual ‘vacancy charge’ on new foreign owners of residential property where the property is not occupied or genuinely available on the rental market for at least six months each year (effective for applications made after 7:30pm on 9 May 2017).
  • Two new Residential Exemption Certificates will be introduced (effective 1 July 2017) to deal with technical difficulties under the current law:
    • first, an exemption certificate will be introduced to allow developers to re-sell off the plan dwellings that fail to settle and would as a result be considered to be established dwellings (and therefore generally ineligible for sale to non-resident foreign persons);
    • second, an exemption certificate will be introduced to enable foreign persons to consider a number of residential properties with the intention to only purchase one. This exemption certificate is currently available for purchases of established dwellings and this will be extended to new dwellings.

 

 

Corporate Advisory

The 2017/18 Federal Budget was marketed as one of "security, fairness and opportunity"; however, it will likely be remembered as the budget of new taxes and big spending! Yet, the Government is forecasting a return to surplus in 2020/21. 

The big ticket items this year include a new levy on banksadditional tax integrity measures, some tinkering around housing affordability, small business measures, an increase to the Medicare levy, amendments to GST and finally a range of infrastructure spending

The real success of this year's budget will be determined by whether the forecast to surplus actually stacks up.  Remember, the $24 billion deficit created by the small business tax cuts passed by Parliament yesterday has to be made up before the new spending measures are covered. 

Does it deliver on the dreams of families, as the Prime Minister promised?  Certainly not in the short term.  As for the long term, we will have to wait and see.

 

Key Budget Measures

The new major bank levy

The five biggest Australian banks (having liabilities of at least $100 billion) must pay the new major bank levy from 1 July 2017. The rate of the levy is 0.06% of a range of a bank's liabilities, raising $6.2 billion over the forward estimates period. On average, this is in effect an increase in the tax impost on the five banks from 30% to 35%.

Rightly or wrongly, the Australian banks have faced extensive criticism in recent years for extraordinary profits and the Government believes the major bank levy represents a fair additional contribution. It is also key to note that this new levy is not a tax on bank profits, and so does not result in franking credits for shareholders. The Budget papers imply that the levy will be deductible and, if so, the levy will reduce the corporate tax intake (so the headline $6.2 billion is actually $4.3 billion) and will further reduce franking credits for shareholders.

Australian families may also be affected if the levy is passed on to consumers despite the rhetoric of the Government. To this end, the Government is placing its bets on healthier competition to reduce the price of borrowing and is encouraging the mobility of customers from the big banks to other financial institutions.

These measures complement the packages to increase accountability in the financial sector, including a residential mortgage pricing inquiry by the ACCC, the creation of a new Australian Financial Complaints Authority for dispute resolution and a new Banking Executive Accountability Regime which will make senior bank executives subject to APRA oversight.

Housing Affordability

The Budget proposes a range of new housing affordability measures. It is always difficult to predict the impact of these measures, but initial impressions are that they will not have a material positive impact on housing affordability. Some of these measures are outlined below.

Capital gains tax for foreign investors 

The foreign resident capital gains tax (CGT) withholding rules will be tightened from 1 July 2017, with the withholding rate set to increase from 10% to 12.5%, and the value at which land will be caught by the rules to drop from $2 million to $750,000.  Whilst this will have an obvious impact on the owners of residential property, the announcement seems to reach much further to capture all transactions (including, importantly, business transactions where there is underlying Australian land). 

Unoccupied property charge 

Foreign investors who own property that is left unoccupied for at least 6 months will be subject to a yearly charge which will broadly equal their FIRB application fee; as little as $5,000 a year. The charge will only apply to new foreign investors. There is potential for some unoccupied homes to be double-taxed (ie. under the Victorian unoccupied property measures).  

Affordable housing investment through MITs 

From income years starting on or after 1 July 2017, managed investment trusts (MITs) will be eligible to acquire, construct, or redevelop affordable housing. Non-resident investors in MITs are generally subject to a 15% final withholding tax on all distributions. To be eligible, the MIT must hold the investment for at least 10 years and must derive at least 80% of its assessable income from affordable housing, which must be provided to low to moderate income tenants for below market rate rent. The remaining 20% of income must be derived from other eligible investment activities under the MIT rules. Otherwise, distributions will be subject to a 30% final withholding tax rate. 

Increase in CGT discount for affordable property 

The CGT discount for investments in affordable property will be increased from 50% to 60% from 1 January 2018. The affordable property must be managed through a registered community housing provider and must be held as an investment for at least three years. We have significant reservations with maintaining the CGT discount at the current level, let alone an increase.

First Home Super Saver Scheme  

First home buyers will be eligible from 1 July 2017 to salary sacrifice their earnings (ie. pre-tax) into a superannuation account which they can later withdraw to help fund their first home deposit. Contributions are taxed on the way in at 15%. Withdrawals include a deemed rate of return (currently at 4.78%), and will be subject to the individual's applicable marginal tax rate less 30%. Contributions will be capped at $15,000 per year, and $30,000 overall.

Limiting deductions for owners of investment properties  

From 1 July 2017, property investors cannot claim deductions for depreciation on existing assets acquired with a property (where the contract of purchase is entered into after 7:30pm on 9 May 2017) and travel expenses related to inspecting, maintaining or collecting rent (unless incurred to a third party performing property management services). These changes will no doubt reduce deductions available to investors, however the impact is expected to be limited given the narrow range of expenses to which the measures apply. The treatment of assets with new home purchases is yet to be determined. 

Tax integrity measures

The Budget introduces a range of tax integrity measures targeting various aspects of the economy and increases funding to the ATO. 

Expansion of the MAAL 

The "Multinational Anti-Avoidance Law" (MAAL) will be amended to negate the use of foreign trusts and partnerships in corporate structures that circumvent the current law. For the most part, these changes are uncontroversial and remedy some of the MAAL's teething issues. The ATO previously released a Taxpayer Alert (TA 2016/11) which identifies this issue and the ATO's intention to deny such practices.  

Black economy 

The ATO will receive additional funding to target the black economy. This includes measures specifically targeting businesses of under $15 million turnover and extensions to the taxable payments reporting system (TRPS) to contractors in the courier and cleaning industries.   

Other measures 

Treasury has also announced other tax integrity measures, including:  

  1. Self-Managed Superannuation Funds (SMSFs): Tightening the "related party transaction" rules to ensure SMSFs pay an arm's length rate for expenses (from 1 July 2017). 
  2. Mismatches re Additional Tier 1 (AT1): Eliminating hybrid tax mismatches that occur in cross-border transactions relating to regulatory capital known as AT1.

Small to medium business

Immediate write-off for assets 

The Government has extended the small business $20,000 asset instant write-off measure for another year to 30 June 2018, which should be welcomed by the small business community. This measure continues to allow businesses with turnover of up to $10 million to claim an upfront deduction when they acquire eligible assets that cost up to $20,000.  

Restriction of CGT concessions 

The Government will introduce an integrity measure to prevent taxpayers from accessing small business CGT concessions which are unrelated to their small business. The concessions will only be available to taxpayers in respect of assets used in their eligible small businesses (rather than other assets). The measures will apply from 1 July 2017.

Individuals and families

From 1 July 2019, the Government will increase the Medicare Levy from 2% to 2.5%. These measures apply following the expiration of the Budget Repair Levy on 30 June 2017. A family with a single income earner of $150,000 will then have to pay an additional $750 of tax per year under this measure. The increased Medicare Levy will be used to fund the NDIS and Medicare. 

Goods and Services Tax (GST)

The GST announcements in this year’s Budget are as follows:

GST treatment of digital currency

From 1 July 2017, the Government will align the GST treatment of digital currency (such as Bitcoin) with money to ensure that consumers are no longer subject to “double taxation” when using this digital currency. In addition, this will remove an obstacle to the growth of the Financial Technology (Fintech) sector in Australia.

Combatting fraud in the precious metals industry

The Government is amending the GST law with effect from 1 April 2017 to provide that entities buying gold, silver and platinum that have been supplied by way of a taxable supply are required to reverse charge the GST - that is, the buyer will be liable to remit the GST to the ATO instead of the seller. Changes are also made to clarify that gold, silver and platinum are not second-hand goods.

Improving the integrity of GST on property transactions

As another GST integrity measure, from 1 July 2018, the Government will strengthen compliance with the GST law by requiring purchasers (rather than developers, as per the current law) of newly constructed residential properties or new subdivisions to remit the GST directly to the ATO as part of settlement. The Government anticipates that the purchasers' lawyers or conveyancers will bear the administrative burden of this measure.

Hey big (infrastructure) spender... 

The Budget has allocated $75 billion in big ticket infrastructure spending, most announced prior to the release of the Budget.  This includes: 

  • The Western Sydney Airport; 

  • The Melbourne to Brisbane Inland Rail Project; 

  • Snowy Mountains Hydro Scheme 2.0, with acquisition of ownership interests held by the States; 

  • Roads in Queensland; 

  • Fiona Stanley Hospital precinct in WA; 

  • Regional rail and the Tullamarine Airport rail connection in Victoria; and 

  • $10 billion in other rail projects across the country, subject to a proven business case (is major infrastructure not already a proven business case?). This may (potentially) include the Western Sydney Airport Rail Link (although most would say that is an essential part of a successful Western Sydney Airport).  

These are extremely commendable projects and some are long overdue.  Speed of delivery will be important to economic development, and the Government must ensure that the projects are future-proofed.  To ensure the benefits of this expenditure flow through to Australia, careful choices of development partners will need to be made.

 


Key announced but unenacted measures

It is also worthy to note the key measures currently in the pipeline. These measures have previously been announced by the Government but are yet to be fully enacted: 

Reforming the tax consolidation rules 

There are a number of outstanding tax consolidation measures, including the churning, value shifting, TOFA, deductible liabilities, deferred tax liabilities and securitised assets measures, which are yet to be enacted.

Reducing the company tax rate 

The Government announced its plan in the 2016/17 Budget to reduce the corporate tax rate progressively to 25% by 1 July 2026. Although only the first phase of the measure has been implemented, the Government remains committed to the full 10-year plan.

Reforming taxation of financial arrangements (TOFA) rules 

As part of the 2016/17 Budget, the Government proposed to reform the TOFA rules to reduce the scope, decrease compliance costs and increase certainty.

Implementing a new suite of collective investment vehicles (CIVs) 

Investors should keep an eye out for the introduction of two new types of CIVs which were announced by the Government in the 2016/17 Budget.

Enhancing access to asset backed financing 

Diverse sources of capital should be more accessible once barriers to the use of asset backed financing arrangements are removed (such as deferred payment arrangements and hire purchase arrangements). This was announced in the 2016/17 Budget.

Applying GST to low value goods imported by consumers 

On 9 May 2017, the Senate Committee recommended that the Bill applying GST on low value goods be passed, but that the implementation date be deferred to 1 July 2018.


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