Leading into the most recent Budget there were approximately 70 previously announced measures that had not yet been enacted. The Federal Government has provided clarity in respect to only 12 of these measures, leaving taxpayers in the middle market uncertain as to the Federal Government’s position on the remaining measures.
Taxation of financial arrangements
The Federal Government will not proceed with previously announced measures to amend the Taxation of Financial Arrangements (TOFA) rules.
The original announcement primarily concerned the re-write of the TOFA provisions to allow financial institutions to better align with accounting principles, and to provide simplified rules for non-financial institutions.
However, that announcement also contained measures on the foreign currency rules dating back to 2004.
While not proceeding with the general re-write of the TOFA provisions is not overly concerning, the failure to follow through on amendments to the foreign currency rules will leave a number of provisions unworkable.
Given the detail of the required amendments contained in the 2004 press release, it is surprising that they have not been progressed.
On the other hand, the Federal Government has confirmed that it intends to proceed with minor technical amendments to facilitate access to hedging on a portfolio basis.
This measure was set to commence from 1 July 2022 but has been deferred to commence in the income year after the legislation introducing the measure receives Royal Assent.
The integrity rule on back-to-back equity and debt financing
The Federal Government announced that it does not intend to proceed with reforms to the integrity rule (section 974-80) that seeks to recharacterise debt interests in a company as equity interests where debt is funded by related party equity. The operation of this provision can result in a non-deductible interest.
The ATO has historically taken a very broad view of this integrity provision, which led to an announcement in the 2011-12 Budget that the law would be amended to remove unintended consequences.
While the proposal was welcome, the Treasury released Exposure Draft legislation which differed significantly from the proposed amendments.
By not proceeding with the measure, there is a risk that the ATO may return to their original views expressed on section 974-80. It will therefore be critical for the ATO to clarify how they will seek to apply this integrity rule going forward.
Limited partnership collective investment vehicles
The Federal Government has chosen not to proceed with previous announcements to introduce a Limited Partnership Collective Investment Vehicle (LPCIV).
LPCIVs are a globally recognised investment vehicle and, in addition to Collective Investment Vehicles (CIVs) that were introduced from 1 July 2022, would have completed a suite of collective investment vehicle structures available in Australia.
The Federal Government has stated that it will not proceed with the proposal to allow taxpayers to self-assess the effective life of intangible depreciating assets.
This means that effective lives of intangible depreciating assets (such as in-house software, copyrights and patents) will continue to be set by statute.
Other measures not confirmed in the Budget
There are a significant number of other measures that were previously announced but not yet legislated, including proposed changes to Division 7A, corporate and individual tax residency measures.
It is disappointing that the Federal Government has not confirmed its position with respect to these measures, which leaves taxpayers in the middle market uncertain of the Government’s position going forward.