Treasury's updated offshore banking tax rules

Yesterday, The Treasury released draft legislation that it said was intended to modernise the Commonwealth's Offshore Banking Unit regime. The draft explanatory material states that the proposed changes would implement some of the recommendations from Mark Johnson's 'Australia as a Financial Centre' report, as well as plug some integrity shortcomings of the existing regime and ensure "the OBU regime targets mobile financial sector activity."

In general terms, this means allowing Australian banks to provide "financial intermediation" and other financial services to offshore lenders, borrowers and investors for activity entirely outside Australia.  

Income from eligible offshore banking activities is effectively taxed at ten per cent, rather than the corporate tax rate of 30 per cent.

According to The Treasury's media release, amendments in the draft Bill are intended to:

•    limit the availability of the OBU concession in certain circumstances where it could otherwise be used to convert ineligible activity into eligible activity by trading in an offshore subsidiary;
•    codify the 'choice principle', where companies chose how a transaction was to be treated, to a new definition of their own, their own  to remove uncertainty for taxpayers;
•    introduce a new method of allocating certain expenses between the operations of a taxpayer's domestic banking unit and the OBU;
•    modernise the list of eligible activities, which have not been revised since 1998; and
•    treat internal financial dealings (for example, between an Australian bank and its offshore branch) as if they were on an arm's length basis.

The closing date for comments on the draft legislation and draft explanatory memorandum is Wednesday, 8 April 2015. Email: taxlawdesign@treasury.gov.au