Australia’s 2020 budget updates residency rules

Australia’s 2020 budget updates residency rules

Australia clarifies its corporate residency test, and introduces other tax measures


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Australia's government tabled its 2020 budget on October 6, 2020. The budget, which is focused on economic recovery following the COVID-19 pandemic, clarifies Australia's corporate residency test and introduces temporary changes to allow loss carrybacks and an immediate deduction for the cost of capital assets, among other significant tax measures.

International tax changes

Australia proposes to clarify its corporate residency test so that a company incorporated outside Australia will only be treated as an Australian tax resident if it has a "significant economic connection to Australia." Specifically, a company will only satisfy the "significant economic connection" test where both:

  • Its core commercial activities are undertaken in Australia, and
  • Its central management and control is located in Australia

Australia's proposals are intended to provide certainty for taxpayers and restore the well-accepted residency tests which prevailed prior to the High Court of Australia's 2016 decision in Bywater Investments Ltd v Federal Commissioner of Taxation. The proposals will apply from the first income year after the enabling legislation receives Royal Assent, but taxpayers will also have the option of applying the measures retroactively to March 15, 2017.

In addition, Australia announced it will update its list of Exchange of Information countries so that more investors are eligible for the reduced 15% Managed Investment Trust withholding tax rate, effective July 2021.

Corporate tax changes

Australia proposes to allow corporate tax entities with an aggregated turnover of less than AUD$5 billion to carry-back certain tax losses generated in the 2019-20, 2020-21 or 2021-22 income years to offset previously taxed profits in 2018-19 or later income years. These optional carry-back rules, which effectively allow a capped refund of tax previously paid, will be implemented by way of a refundable tax offset that is generated in the year the loss is made.

Australia also proposes to allow businesses with turnover up to AUD$5 billion to deduct the full cost of eligible depreciable assets of any value in the year they are first used or installed ready for use, until June 30, 2022. Due to the turnover thresholds, large capital-intensive industries, such as those in the mining and metals sector, will not be eligible. The cost of improvements made during this period to existing eligible depreciable assets can also be fully deducted. Full expensing for second-hand assets will be limited to businesses with aggregated turnover of less than AUD$50 million.

Australia also announced measures to:

  • Withdraw previously proposed reductions to the research and development (R&D) incentive and increase the incentive, beginning July 1, 2021
  • Introduce a specific fringe benefits tax exemption for retraining benefits provided to redundant or soon to be redundant employees
  • Treat state government COVID-19 business assistance grants as Non-Assessable Non-Exempt income

For more information, contact your KPMG advisor.

Information is current to October 13, 2020. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500

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