Monday, 28 November 2011

And consolidation makes three...

The Federal Government’s announcement last week (in the media killing-zone that is Friday afternoon) that it plans to introduce retrospective legislation to reverse consolidation tax laws rolled out only last year, further erodes the integrity of the tax system.

The Government’s announcement of yet another retrospective change to tax laws is extremely disappointing. It serves to further undermine the principles on which the tax system is based.

A fundamental principle of the legislative process is that laws which adversely affect taxpayers should not apply retrospectively except in extremely rare situations, such as addressing significant tax avoidance. This is not the case with these changes.

Taxpayers enter into transactions on the basis of the law as it is, not the law as it is rewritten after transactions have occurred. Retrospective changes in tax law are likely to interfere with bargains struck between taxpayers who have made every effort to comply with the prevailing law as at the time of their agreement.

The Government’s changes relate to the way a consolidated group can deduct the costs allocated to particular assets following a corporate acquisition. The changes will reverse amendments to the tax law passed by Parliament in May 2010 and further restrict the operation of the consolidation regime.

The changes will have a significantly adverse impact on some taxpayers back to 2002, when the law first commenced. They will also create inequitable treatment between taxpayers who are in similar situations, but applied the law as it stood at different times.

The Government’s announcement is the latest in a very concerning trend of retrospective legislation. We have recently seen amendments to the Petroleum Resource Rent Tax backdated to 1990 and proposed changes to the transfer pricing laws that will apply from 2004.

Whilst these changes stand alone on their own particular factual circumstances, the trend towards retrospectivity in legislation, particularly this latest reversal of tax provisions on which the Government consulted widely prior to introducing only last year, is a disturbing one.

During this period of significant market volatility the last thing that business needs is another hit to their profit and loss account from such a significant change.

Even the prospective part of the changes has the perverse effect of undermining the attractiveness of the consolidation regime, as taxpayers are skewed towards asset purchases rather than share purchases, hence eroding one of the key objectives of consolidation.

While the Federal Government consulted widely with tax experts and key industry bodies including The Tax Institute ahead of the announcement, the substance of the consultation was focussed on refinements. The Government did not countenance any changes to their policy decision to retrospectively change the law.

Do you like the Government's penchant for retrospective tax changes? Does it give you the certainty required to operate your personal and business affairs?

Robert Jeremenko
Robert Jeremenko is Senior Tax Counsel of The Tax Institute.

The Tax Institute is Australia’s leading professional association in tax. Its 13,000 members include tax agents, accountants and lawyers as well as tax practitioners in corporations, government and academia.

Sunday, 20 November 2011

A transfer pricing overhaul but with more retrospective law changes

The Government's 1 November announcement of an overhaul of transfer pricing laws came as a great surprise to many, including transfer pricing specialists. Since the SNF case, practitioners had expected legislative change but had not expected it to arrive in quite so dramatic a fashion.

To start the onslaught was of course the announcement that the Government would be amending the law (from 1 July 2004) to "clarify that transfer pricing rules in our tax treaties operate as an alternative to the rules currently in the domestic law".

Many taxpayers and tax practitioners who had taken the view that our double tax treaties are a shield, not a sword, may be unpleasantly surprised by any increase in tax payable as a result of this change. Taxpayers that face such an increase will be hoping that the ATO will at least assist in negotiating with overseas revenue authorities in relation to the resulting instances of double taxation.

These issues and more were discussed at a meeting of specialist advisers and Treasury officials in Canberra this week. Amongst these concerns, The Tax Institute will again express our disappointment at the retrospective nature of this announcement and the lack of certainty in relation to the interaction between tax treaties, domestic transfer pricing rules and taxpayer obligations caused as a result.

As always, the devil will be in the detail as consultations progress.

Feel free to share your views on the transfer pricing overhaul.

Robert Jeremenko
Senior Tax Counsel

Friday, 11 November 2011

The Green light for carbon pricing

This week the Australian Government successfully passed the Clean Energy legislative package through the Parliament. Whether you call it a ‘carbon tax’ (which it isn’t, despite the Government describing it as such) or a ‘carbon price’, the changes will have economy-wide effects. They also reinforce the public perception that the Greens are a powerful political force in the finely balanced minority Government.

Will the Greens succeed in harnessing the momentum of the carbon package to end the use of fossil fuels and halt coal seam gas extraction? Or will the Opposition succeed in gaining a mandate from the electorate to implement its ‘pledge in blood’ to repeal the legislation?

What is certain is that barring an early election, a carbon price will apply to the 500 largest polluters from 1 July 2012, moving to an emissions trading scheme in 2015. The cost impact on consumers will be either fully, partially, or not at all offset through the tax and transfer system. Low-income households (including pensioners) will receive assistance to fully offset price rises, while households earning more than $150,000 (a level that some seek to portray as ‘well-off’) will bear the full effects of the carbon price and are expected to change behaviours to account for this.

The tax thresholds and rates will be changed in two stages, such that up to a million people will be removed from the tax system, which is a good outcome. The effective tax-free threshold will increase from its current level of $16,000 to $20,542 on 1 July 2012 and then to $20,979 in 2015. When this is combined with some marginal rate increases at the lower end, it will ensure that no tax cuts are received for those earning $80,000 or more (clearly they must be ‘well-off’ too).

What do you think?

Robert Jeremenko FTIA
Senior Tax Counsel