Thursday, 20 September 2018
Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Bill 2018; Second Reading
That this bill be now read a second time.
This bill, the Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Bill 2018, implements measures announced by the government to protect the integrity of Australia's corporate tax system.
Most taxpayers comply with Australia's tax rules and pay their fair share of tax here.
However, some foreign investors have been using complex arrangements known as stapled structures and other broader tax concessions to extract profits from Australian businesses almost tax free.
This is done by converting trading income into more favourably taxed passive income in land-rich sectors such as infrastructure.
Combined with existing tax concessions for foreign pension funds and sovereign wealth funds, some foreign investors can achieve tax rates well below 15 per cent on all their Australian business income—in some cases, tax free.
These tax benefits are only available to foreign investors and place Australian investors and businesses at a competitive disadvantage. Because these concessions are only available to foreign investors, it results in a two-tiered tax system that distorts investment decisions and biases investment towards land-rich industries.
Staples and these broad tax concessions pose serious threats to the integrity of Australia's corporate tax system. Use of staples has spread in industries such as infrastructure, property, renewable energy and agriculture. Meanwhile, access to a concessional withholding tax rate for foreign investors has spread much further than ever intended, especially in the agricultural and residential housing sectors.
Hundreds of millions in revenue is being forgone. Left as is, this could grow in the order of billions.
Australia has some of the strongest taxation integrity rules in the world. The government has already introduced a raft of key initiatives, such as the multinational anti-avoidance law, the diverted profits tax and country-by-country reporting.
The measures in this bill build on the government's work in protecting the integrity of Australia's corporate tax system.
It is important that everyone pays their fair share of tax to ensure the government is able to fund the vital infrastructure and services that Australians deserve.
The bill neutralises the tax benefits delivered by staples by ensuring active business income is taxed at the top corporate rate.
The government's intention in introducing this package is clear—active income that is converted to passive income should not have access to concessional rates. The Australian Taxation Office will closely monitor this area to ensure that this is the case and will take strong action if necessary. Consistent with the Australian Taxation Office's taxpayer alert, the government expects that our anti-avoidance tax laws, known as part IVA of the tax legislation, will continue to apply to egregious tax-driven arrangements such as royalty staples.
The bill introduced today delivers on our promise to protect the integrity of the Australian corporate tax system and ensure taxpayers' dollars are spent prudently.
Schedule 1 to the bill ensures that trading income that is converted to passive income via a stapled structure, and income from agricultural land and residential housing (other than affordable housing) will be taxed at the corporate tax rate.
It neutralises the tax benefits of stapled structures and prevents trading businesses from accessing a 15 per cent tax rate on active business income distributed to foreign investors. It also ensures that foreigners that invest in Australian agricultural and residential property don't get a tax advantage over domestic investors.
The government recognises that there are some sectors where incentives are justified to attract foreign investment in the Australian economy.
Accordingly, a 15-year exception is available from this element of the package for new, government approved nationally significant infrastructure staples.
Support is also provided to improve housing affordability by encouraging foreign investment into affordable rental housing.
Schedule 1 will apply from 1 July 2019.
To manage the impact on existing investments, transitional arrangements are available for existing staples of seven years for ordinary business staples and 15 years for economic infrastructure assets. Managed investment trusts investing in residential housing will have access to a transitional arrangement until 1 October 2027.
Schedule 2 amends the thin capitalisation rules to prevent foreign investors from using 'double gearing' structures to convert their active business income to interest income, which is taxed at 10 per cent or less.
These structures undermine our thin capitalisation limits. They use layers of trusts or partnerships to convert, frankly, equity to debt, resulting in overall gearing levels in excess of the thin capitalisation limits. The changes will group together these structures so they cannot double gear their investments.
Schedule 2 will apply to income years commencing on or after 1 July 2018 with no transitional period as the amendments close a clear technical loophole in the law.
Schedules 3 and 4 limit the existing tax exemptions for foreign pension funds and sovereign wealth funds. Australia's current tax exemptions in these areas are too generous.
Most countries do not provide reciprocity through such broad tax concessions. This means that foreign sovereign investors and foreign pension funds generally receive a much greater benefit when they invest in Australia than we receive when our sovereign wealth funds and super funds invest in other countries.
Schedules 3 and 4 will limit these exemptions to passive income and portfolio investments only—typically interests of less than 10 per cent. These changes will take effect from 1 July 2019.
A seven-year transition period will be available for existing investments held by foreign pension funds, and foreign government investors that held a valid ruling on 27 March 2018 in respect of their investments.
The bill is estimated to have a gain to revenue of $400 million over the forward estimates. Moreover, the package protects the revenue base going forward.
These measures have been carefully developed through extensive consultation with industry groups, businesses and state governments throughout 2017 and 2018.
Together the measures being implemented by this bill strengthen and protect the integrity of Australia's corporate tax base.
Full details of the measures are of course contained in the explanatory memorandum.
I commend the bill to the House.