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Top 5 corporate tax developments of 2022

2022 11 16 ABL Lawyers 228
With 2022 now well and truly behind us, our Tax team has reflected on the most significant developments in corporate tax over the past 12 months and some to watch out for in 2023.

Corporate Collective Investment Vehicles

The Corporate Collective Investment Vehicle Framework and Other Measures Bill 2021 received royal assent on 22 February 2022 with the regulatory and tax regime commencing from 1 July 2022. The Corporate Collective Investment Vehicle (CCIV) regime is designed to internationalise the Australian funds management industry and incorporates elements of similar regimes present internationally in Singapore, Hong Kong, the United Kingdom and other jurisdictions.

The CCIV regime introduces flow-through corporate entities that, despite being an incorporated company paying legal form dividends, will effectively be treated as a trustee of one or more unit trusts (referred to as sub-fund trusts) for all tax law purposes. The tax regime operates through a series of complex deeming principles to create this tax law fiction. For tax law purposes, a CCIV may be a trustee of an ordinary unit trust, a Division 6C public trading trust, a managed investment trust/Attribution Managed Investment Trust (AMIT) or a combination depending on the nature of each sub-fund trust.

To find out more, see our article which considers the tax and regulatory benefits and disadvantages of the regime here.

For information about alternative vehicles for investing in Australia, see our publication here.

Changes to employee share schemes

2022 was a big year for the ESS tax and regulatory framework.

Effective 1 July 2022, the cessation of a participant's employment was removed as a taxing point for tax-deferred ESS interests. This had long been a source of frustration for participant taxpayers, as leaving a job does not generally line up with a liquidity event. Participants were thus often unable to sell their ESS interests to fund the corresponding tax liability and were forced to independently fund the tax liability. The removal of this taxing point has fixed a problem which had positioned Australia poorly in terms of ESS offerings by comparison to other jurisdictions.

Wide ranging ESS regulatory reforms also took effect from 1 October 2022. Although there have been a few teething issues with the new regulatory regime, we envisage that it will be game-changing for unlisted companies. As featured in the AFR, Shaun Cartoon discussed how unlisted companies had been unable to offer meaningful equity incentives to anyone other than sophisticated investors, senior managers and a small group of other participants. For those participants who didn't fall into one of these defined categories, unlisted companies had been forced to rely on the class order relief, which restricted the value of offers to $5,000 per participant each year.

Employee/Contractor Shakeup

On 9 February 2022, the High Court handed down its highly anticipated decisions in Construction, Forestry, Maritime, Mining and Energy Union & Anor v Personnel Contracting Pty Ltd (2022) 398 ALR 404 (Personnel Contracting) and ZG Operations Pty Ltd v Jamsek (2022) 398 ALR 603 (Jamsek). Broadly, these decisions held that terms of the written contracts in each case, and rights and obligations of the parties govern the nature of the relationship.

The characterisation of a worker was traditionally determined by examining the totality of the working relationship rather than being limited to the contractual terms governing the relationship. These decisions have upended the process for characterising a worker as an employee or independent contractor and reinforced the need for businesses to have formal and comprehensive written contracts in place.

In response to the decisions, the Australian Tax Office (ATO) has released its draft guidance in Taxation Ruling TR 2022/D3 and Practical Compliance Guidelines PCG 2022/D5 on its approach to classifying workers as employees or independent contractors. The ATO now considers that whether a person is an employee of an entity within the ordinary meaning is a question of fact determined by reference to an objective assessment of the totality of the relationship between the parties, having regard only to the legal rights and obligations (actual or implied) which constitute that relationship.

Practitioners should be aware that the Personnel Contracting and Jamsek decisions will have a tax impact in the context of superannuation, PAYG and FBT to name a few. As well as in respect of any penalties that may apply to non-compliance.

For more information, we attach a paper prepared by our tax and employment teams which considers the employee/contractor developments in detail here.

Offshore multinational companies remain on notice

Announced in the Federal Labour Government’s first budget in October, multinational companies will be targeted in a series of proposed measures to tackle inappropriate offshore debt gearing levels and deductions related to royalty payments to offshore related entities.

The most significant of the proposed changes concern Australia’s thin capitalisation rules and involve the replacement of the existing safe harbour and worldwide gearing tests with an earnings-based test, which will limit deductions to 30% of an entity’s profits, and a new earnings-based group ratio test. This measure affects all entities currently subject to Australia’s thin capitalisation rules. It is proposed that the existing arm’s-length test will also no longer be available for related party debt and will be restricted to an entity’s third-party debt. Any deduction denied under the 30% profits test could potentially be be carried forward for up to 15 years, subject to the normal tests that apply to prior year tax losses..

The other measures are aimed at ‘significant global entities’, which are members of a global group with gross revenue of at least $1 billion. The first is a new anti-avoidance provision which will prevent deductions for payments made directly or indirectly to related parties in relation to intangibles held in low-tax or no-tax jurisdictions. The second measure will require entities to prepare certain information for public release by the ATO.

These measures are something to look out for in 2023 and should be kept in mind together with the ATO’s finalisation of its transfer pricing guidance in PCG 2021/D4 and TR 2021/D4 expected for release in 2023.

Treaty Shopping

In July 2022, the ATO released Taxpayer Alert TA 2022/2 on treaty shopping arrangements to obtain reduced withholding rates in relation to royalty and dividend payments from Australia. Treaty shopping is commonly understood as being “the attempt by a person to indirectly access the benefits of a tax treaty between two jurisdictions without being a resident of one of those jurisdictions”.

The Alert targets arrangements being adopted by taxpayers for the principal or main purpose of obtaining a reduced withholding tax rate on royalty and unfranked dividend payments from Australia to which they would not otherwise be entitled. International transactions with the following features are likely to be scrutinised by the ATO:

  • Structures and restructures involving the interposition of an existing or newly incorporated entity between Australia and the ultimate recipient of royalties or unfranked dividends.
  • Circumstances where the interposed entity may have significant existing operations and employees and the taxpayer may contend the commercial benefits and/or synergies flow to the Australian operations or the interposed entity.

Taxpayers should ensure they have contemporaneous documentation and substantial objective evidence on file to support the principal purpose for structuring their arrangement(s) in a particular way. Superficial or overarching statements or assertions will not be sufficient.

For more information, see our publication on the alert, here.

If you have any questions about the information in this article, please contact one of our team members below.

View our predictions below for some corporate tax developments to watch out for next year.


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