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Australian Lawyers and Consultants

Australian Expats Face Israel Tax Changes

April 1999

BACKGROUND

New Australian income tax laws are aimed to hit harder at Australian taxpayers having dealings with non-residents in a number of respects:

1. "THIN CAPITALISATION RESTRICTIONS"

The Australian thin capitalisation rules prior to 1 July 1997 have provided that where an Australian borrower's interest-bearing debt to a "foreign controller" exceeds the foreign controller's equity by a ratio of more than 3:1 (6:1 in the case of financial institutions), a tax deduction for the interest on that debt is disallowed to the extent of that excess.

New changes will commence on 1 July 1997 and will provide for a reduced gearing ratio of 2:1 for non-financial institutions and the definition of "in-house" debt is broadened to include foreign debt guaranteed by, or secured against the assets of, foreign controllers of their resident associates, thus increasing both the excess amount that can be disallowed as a deduction as well as broadening the number of situations that will be hit by the thin capitalisation rules.

In general terms, a non-resident "foreign controller" is defined as an entity that has, either alone or with associates, a 15% or more interest in an Australian resident company, partnership or trust.

Allegedly because the level of foreign equity of a discretionary trust cannot be calculated but depends on the discretion of the trustee, all discretionary trusts may well find that from 1 July 1997 they may be denied an income tax deduction for interest paid to offshore parties where it can be said any of them is either a "foreign controller" or a non-resident associate of a foreign controller. In our view, this basis for denying a tax deduction to all discretionary trusts is wrong as it is contrary to the finding of the Administrative Appeals Tribunal in Case 29/96.

2. DENIAL OF TRUST TAX LOSSES

Dealings with non-residents are also specifically targeted in a number of respects; wide information gathering powers are to be given to the Australian Tax Office to collect information about non-resident entities in order to ensure that they comply with the rules of these provisions. The Australian Tax Office is also given the power to recover so-called unpaid "family trust distributions tax" (which is a new tax imposed on certain non-resident beneficiaries) from their Australian-based relatives.

3. COMMERCIAL DEBT FORGIVENESS

The new Schedule 2C of the Australian Income Tax Assessment Act aims to increase the tax burden of entities that are released from debt owing to non-residents by attributing a higher value to the debt forgiven by them than if the creditors were residents. When a debt is released, the value attributed to the release is applied to reduce tax deductions on account of revenue losses, capital losses and depreciation deductions.

4. WITHHOLDING TAX CHANGES

The general anti avoidance provisions (in Pt IVA of the Income Tax Assessment Act) are to be expressly extended to arrangements for withholding tax on interest, dividends and royalties paid or credited to non-residents. Amendments have also been made to ensure that withholding tax is also payable if tax exempt bodies are interposed between an Australian resident payer and a non-resident recipient or where dividends consist of bonus shares.

5. NON-RESIDENT CHARITIES

The Australian government has also amended the status of tax exemptions for charities in order to counter alleged tax avoidance arrangements. It is proposed that an Australian charitable trust will only be allowed to distribute its funds, without losing its income tax exemption, to a non-resident charity if it is listed as a tax deductible charity in Australia. In addition, certain organisations located overseas that were exempt from Australian tax on their Australian sourced income, will now have their tax-exempt status removed, irrespective of whether they are subject to tax in their home country.

For further information, contact Joe Lederman at BALDWINS, Australian Lawyers & Consultants.

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