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Federal Budget 2021 Insights: Attracting global business and talent

Recognising that Australia is an attractive place to live and to do business, the Government has put together a package of Federal Budget measures to attract global business and talent to Australia. This includes reforms to Australia’s individual tax residency rules, employee share scheme measures and new measures to attract foreign investors.

Modernising Australia’s individual tax residency rules

As part of the Government’s plan to attract global business and talent, the Government has announced that it will replace and modernise the tax rules for determining individual tax residency.

This announcement follows the recent work that the Board of Taxation has undertaken following its self-initiated review of the current individual tax residency rules which started in May 2016 and which culminated in its final report Reforming Individual Tax Residency Rules – A Model For Modernisation (March 2019).

Based on the recommendations made by the Board of Taxation, the Government proposes a new primary ‘bright line’ test. An individual would become an Australian tax resident if they are physically present in Australia for 183 days or more in any tax year (i.e. between 1 July to 30 June of the following year). Where an individual does not meet this primary test, secondary tests may apply. These secondary tests would set out objective criteria, e.g. whether an individual has the right to reside permanently in Australia, whether they have Australian accommodation, family located in Australia or Australian economic connections.

It is clear that the existing rules for determining the tax residency of an individual no longer reflects global work practices in the context of a progressively increasingly globally mobile workforce and more recently, in the context of the COVID-19 pandemic which has left many individuals stranded due to international travel restrictions. This not only has imposed an inappropriate compliance burden on many individual taxpayers, but also on their employers who have to consider the resulting Superannuation Guarantee and Pay-As-You-Go (PAYG) withholding obligations.

The Government’s decision to make legislative change in order to provide certainty and lower compliance costs when it comes to determining the Australian tax residency status of individuals is welcome. The new rules will no doubt go a long way to remove the often subjective and inconsistent outcomes, particularly for outbound individuals, but will also support and simplify matters when it comes to Australia’s need to attract global talent in the pursuit of economic growth.

The new individual tax residency rules will apply from 1 July following the enactment of the enabling legislation which is not yet available. If legislation can be enacted before 30 June 2021, the new Australian individual tax residency rules will apply as early as the 2021-22 tax year. It is however worth noting that the Board of Taxation recognised that a period of transition should be considered during the implementation process.

Enhancements to the Employee Share Scheme rules

The 2021-22 Budget announces a number of changes to the existing employee share schemes (ESS) rules and regulatory requirements which are intended to remove unnecessary impediments and compliance burdens.

Employee share schemes provide an opportunity for employees to share in the productivity and growth of businesses - aligning employee and shareholder interests. In light of the current skills shortage, where the need to attract, retain and incentivise employees is critical for business (especially for small business and start-ups), the Government’s focus on ESS is a positive move. However, the reforms whilst welcomed, could have gone further to drive a much higher take-up in the use of ESS.

Specifically the Government has announced:

  • Removal of cessation of employment as a taxing point. Tax will no longer be payable on tax-deferred ESS when an employee leaves the business.

    In the current regulatory environment, many awards do not vest on termination of employment but instead remain on foot and retain their original vesting conditions and dates. Employees have therefore been left with a tax liability on cessation of employment but with no access to the underlying equity to fund the tax liability. The removal of this taxing point will avoid significant cash-flow issues for employees and allow for the simplification of equity plans.

    By removing the cessation of employment taxing point, the measure will result in tax being deferred until the earliest of the remaining taxing points:
    • In the case of shares, when there is no risk of forfeiture and no restrictions on disposal
    • In the case of most options/rights, when the employee exercises the option/right and there is no risk of forfeiting  the resulting share and no restriction on disposal,
    • The maximum period of deferral of 15 years.

This change will apply to ESS interests issued on or after 1 July following Royal Assent of the enabling legislation, which is not yet available.

  • Simplifying disclosure and licencing requirements. The current regulatory landscape requires companies to satisfy disclosure requirements (such as having to issue a prospectus, product disclosure statement or other disclosure document) and licencing requirements in order to offer ESS, unless an exemption in the Corporations Act or Australian Securities and Investments Commission (ASIC) relief is available.

    Although the ASIC relief available for listed companies is appropriately flexible and commonly accessed, the utility of the ASIC relief available for unlisted companies is extremely limited and as a result is rarely used. The upshot of this is that disclosure and licencing requirements are very commonly a significant impediment for unlisted companies when establishing an ESS.

    The Government has announced the removal of disclosure and licencing requirements for many companies where they do not charge or lend to the employees to whom they offer ESS. While the Corporations Act does provide exemptions to disclosure for offers of securities for no consideration, ASIC has consistently adopted the unhelpful position that any requirement for ongoing service effectively amounted to the provision of consideration by the employee. We anticipate that ASIC will drop this interpretation in light of the Budget announcements so that any ESS arrangements that do not involve charging or lending to employees (the majority of ESS) but do have vesting conditions relating to ongoing service will be subject to much less disclosure and regulatory red tape.

    For unlisted companies that do charge or lend to employees when making ESS grants, the value of “eligible products” that can be issued under the simplified disclosure/licensing requirements offered by ASIC Class Order 14/1001 will increase from $5,000 to $30,000 per employee per year. This is significant as the take up of relief under ASIC Class Order 14/1001 was severely inhibited by the $5,000 limit. While the Budget documents are silent on it, we would be keen to see the rise in limit applied to all eligible products that can be issued under ASIC Class Order 14/1001 and not just those that involve charging or lending to participants. It should also be noted that there is currently no such monetary cap for listed companies to access the simplified disclosure requirements under ASIC Class Order 14/1000.

    We consider the proposed changes to be an excellent start on reform in the ESS space. They will allow more companies to consider the grant of shares and options to their employees without the imposition of significant compliance costs. They will also cause the ESS start-up concessions to better serve the purpose they were intended to serve when introduced in 2015.

These regulatory changes are intended to apply three months after enactment of the enabling legislation.

Corporate Collective Investment Vehicles back on the agenda

The Government has committed to finalising the tax and regulatory arrangements for a new flow-through Corporate Collective Investment Vehicle (CCIV) with a commencement date of 1 July 2022. These measures were originally announced in the 2016-17 Federal Budget.

The CCIV regime will provide flow-through tax treatment to a corporate structure and is intended to enhance the international competitiveness of the Australian funds management industry by allowing fund managers to offer a vehicle familiar to foreign investors.

ATO Early Engagement Service for inbound investors

The Government also indicated that the Australian Taxation Office (ATO) will introduce a new early engagement process to provide inbound investors with certainty for new investments in Australia. The new process is intended to be tailored to the particular needs of each investor and offer support in relation to all federal tax obligations.

The new early engagement process will incorporate access to expedited private rulings and advance pricing agreements. It will integrate with the tax aspects of the Foreign Investment Review Board approval process and timeframes (if applicable) so that an investor is only required to provide information once.

The ATO will consult with business and other stakeholders during May and June 2021 so that the service will be available from 1 July 2021.

 

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Norah Seddon

Australia and Asia Pacific People & Organisation Tax Leader, PwC Australia

Tel: +61 2 8266 5864

Michelle Kassis

Partner, PwC Australia

Tel: +61 (3) 8603 5676

Shane Smailes

Partner, PwC Australia

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Ken Woo

Partner, PwC Australia

Tel: +61 2 8266 2948