The Budget represents a mixed bag for businesses, with regional employers being winners on the payroll tax front but businesses with property assets looking to undertake corporate restructures losing out with an increase to the stamp duty cost.
Changes to the corporate reconstruction duty exemption rules
The current corporate reconstruction duty exemption rules can operate to fully exempt a transaction involving Victorian real property from duty, if the transaction involves companies or unit trusts that are within the same corporate group. The Treasurer has announced that the current rules will be changed so that they operate as a partial concession instead of a full exemption (where duty would be payable at the rate of 10% of the duty otherwise payable in the absence of a concession), with broader qualifying provisions. The new rules should take effect from 1 July 2019.
It is currently unclear which aspects of the rules will be relaxed. One such aspect could be the post-transaction association requirement, which currently stipulates that parties to the relevant transaction must remain members of the same corporate group for at least three years post-transaction, or otherwise the exemption can be revoked. Another might be the time limit for the application for an exemption, which is currently up to three years after the transaction occurs.
While the change has been promoted as a measure targeted towards promoting business efficiency by facilitating business restructuring and reducing compliance costs, this is questionable as the change effectively converts potential zero-duty outcomes to ones where duty would be payable. This would unfairly impose another round of duty in relation to a business group, in addition to the duty initially paid on the acquisition of interests in property.
In conjunction with the announced increase in the Foreign Purchaser Additional Duty rate from 7% to 8%, genuine restructures will now be subject to duty at the rate of up to 1.35% (assuming that the concession will also apply to the Foreign Purchaser Additional Duty component). By way of example, a restructure involving property assets totalling $15 million , the duty payable under the new concession would be $82,500 provided the transferee is not a foreign purchaser. If they are a foreign purchaser the duty payable would increase to $202,500. Accordingly, the change could significantly impact a wide range of businesses as they look to undertake genuine restructures for efficiency reasons. The impact of the change on proposed restructures should be carefully considered by such businesses.
Overall, this change is not welcomed and is one that is out of step with the operation of equivalent rules in other states in Australia, as well as the grouping rules for Payroll Tax, Income Tax and Goods and Services Tax purposes.
Payroll tax changes
Victoria currently lags well behind the other States and Territories as the jurisdiction with the lowest tax-free threshold; resulting in many businesses paying payroll tax in Victoria who would not if they operated elsewhere in Australia. The announcement of three key changes to Victorian payroll tax will not significantly reduce the payroll tax burden on businesses that operate in the metropolitan area. .
The Government’s three key changes to Victorian payroll tax are:
An increase in the tax-free threshold to $700,000 in 2022-23.
A reduction the payroll tax rate for Victorian regional employers to 25% of the rate paid by metropolitan employers by 2022-23.
A broadening of the exemption for wages paid to employees on maternity leave to include all types of parental leave from 1 July 2019.
Whilst the reduction in the payroll tax rate for regional employers and the extension of the parental leave exemption are welcome reforms, the increase in the tax-free threshold is disappointing. Victoria’s proposed threshold of $700,000 in 2022-23 is well under the thresholds in other states: New South Wales’ threshold will be $1 million and Queensland’s $1.1 million in the same period.
In addition, the proposed increase from the current $650,000 to $700,000 in two $25,000 steps in 2021-22 and 2022-23 does not even keep pace with expected wages growth over the forward estimates, meaning even more business will be caught in the payroll tax net.