After years of significant amendments to international tax provisions, this year’s budget is relatively quiet from an international perspective.
Technical amendments to the hybrid mismatch rules
Australia has introduced hybrid mismatch provisions that generally apply to international transactions seen to provide double benefits to taxpayers, with effect for income years commencing on or after 1 January 2019. These double benefits can include claiming deductions in two jurisdictions or claiming a deduction in one jurisdiction with no income taxed in another. The hybrid mismatch rules do not contain any exceptions for individuals or small or medium sized business and can potentially apply to almost all international tax transactions. While the provisions state they are targeted at “multinational corporations”, the provisions can potentially apply to an individual with a foreign rental property where the deductions claimed are as little as $100.
Instead of addressing the middle market’s concerns regarding the complexity and potential unintended reach of the rules, the Government has announced it will make technical corrections that will likely expand the application of the provisions. The announcements are aimed at dealing with more complex arrangements such as those involving Multiple Entry Consolidated (MEC) groups and trusts, will seek to further limit the meaning of foreign tax, and will specify that the integrity rule (targeting the use of interposed low-rate lenders) can apply where other provisions have applied.
It is disappointing that the Government has not taken the opportunity to provide a carve out for unintended impacts on the middle market, meaning businesses will incur significant compliance costs in assessing the scope of these provisions.
Australia and Israel tax treaty
Australia and Israel signed an income tax treaty on 28 March 2019, which will come into effect in Australia when the relevant approvals are obtained. Features of the treaty include reduced rates of dividend, interest and royalty withholding tax.
Given the volume of trade and investment that exist between the two jurisdictions, Australia’s 45th income tax treaty is a welcome addition to our existing tax treaty network. We believe this will further encourage significant investment in technology and start-up businesses throughout both jurisdictions.
Updating the list of information exchange countries
The Government has added eight new exchange of information agreements, increasing the number of information exchange countries from 114 to 122. Australia first entered into these agreements in 2018. The update will be effective from 1 January 2020.
The new jurisdictions are Curaçao, Lebanon, Nauru, Pakistan, Panama, Peru, Qatar and the United Arab Emirates.
From 1 January 2020, fund payments made by withholding Managed Investment Trusts (MITs) to investors in these jurisdictions should generally be eligible to access the reduced 15% MIT withholding tax rate, instead of the default rate of 30%.