The head of the Australian Tax Office, Chris Jordan, has described a tax lurk for multinational companies that is being retained by the Abbott government as having been “abused” by foreign corporations at a cost of “hundreds of millions of dollars” a year to the Commonwealth.
As revealed by Fairfax Media, Treasurer Joe Hockey has backed away from a pledge to introduce a targeted “anti-avoidance provision” to tighten generous deductions available under the Income Tax Assessment Act 1997.
The deductions have been used most ruthlessly by foreign-based companies that load debt into their Australia entities and then claim deductions from the tax man on the interest paid on those borrowings.
Following consultation with stakeholders, which largely included tax experts from the big four accountancy firms and the Corporate Tax Association, which represents the biggest listed companies, the government was convinced not to tinker with section 25-90 of the act because it would, tax experts said, “hit the wrong target”.
The biggest multinationalshave the muscle to refinance to keep enjoying deductions whereas medium-sized Australian businesses expanding overseas would be punished, even those not highly geared.
Amid claims of favours to the big end of town, Mr Hockey insisted on Wednesday that the government’s “thin capitalisation” rules largely precluded the need for the promised anti-avoidance measure, citing Treasury advice that Australian companies would be penalised from legitimate expansion offshore.
But Mr Jordan said publicly during the stakeholder consultation period that an anti-avoidance measure was on the table to prevent ongoing “mischief” and “abuse of section 25-90”.
He told a parliamentary committee in February that section 25-90 was the only one under the tax act that allows companies to make deductions against tax-free income from overseas subsidiaries.
He said the provision was imposed by the Howard government to reduce compliance costs. “What happened, though, is that Australian companies that were owned by foreign companies who were mature and profitable and had high taxable incomes here in Australia moved things around within their international groups that effectively dumped debt here in Australia – they created debt,” he told the committee in February.
He said the cost to the public purse “would be in the hundreds of millions”.
Frank Drenth, executive director of the Corporate Tax Association, said the anti-avoidance provision and Labor’s pledge to abolish section 25-90 was “policy overreach”.
“It would have caused enormous damage to companies who are not even highly geared but who have expanded overseas,” he said.
Robert Jeremenko, a senior tax counsel at the Tax Institute, said it found the proposed changes would “significantly increase complexity and compliance costs” for businesses.
“Further consultation found that even a targeted anti-avoidance provision was not feasible,” he said.
“The bottom line is that the legislation appropriately allows companies to claim deductions for these costs.”
When Labor announced its push against tax avoidance by multinationals, the Minerals Council of Australia complained that it would cost “jobs and the broader economy”.
Acting Greens Leader Adam Bandt MP said Mr Hockey had “handed the big end of town an early Christmas gift”.
“Mr Hockey is no Scrooge, he’s left a gift for his corporate mates under the giving tree,” he said.