- Australian Shipping Industry: Tax and Other Reforms Full Steam Ahead
- March 14, 2012
- Law Firm: Norton Rose Canada LLP - Montreal Office
The Australian government is proposing a package of reforms aimed at revitalising the Australian shipping industry.
These reforms involve the following four elements:
- Tax reform — first exposure draft legislation involving five new tax concessions was released on 20 February 2012, and is discussed in this update.
- Creation of an Australian International Shipping Register (AISR) — first exposure draft legislation was released on 20 February 2012, and is discussed in this update.
- A new licensing regime for the Australian coastal trade — in December 2011, we provided details of the new coastal trade licensing regime proposed under exposure draft legislation: see our update Australian Shipping Industry Reform - Coastal Trading Bill. Second exposure draft legislation was released on 20 February 2012, and key changes from the first draft are discussed in this update.
- Workforce skills development — this element of the reform package will not involve legislation. The government has announced it intends to establish a Maritime Workforce Development Forum made up of industry, unions and education providers.
On 20 February 2012, the Government released for public consultation exposure drafts and explanatory materials of a Shipping Reform (Tax Incentives) Bill and a Tax Laws Amendment (Shipping Reform) Bill.
The proposed tax reforms encompass five tax concessions to be available to the shipping industry as from 1 July 2012:
- income tax exemption for income from certain shipping activities
- accelerated tax depreciation for expenditure on certain vessels
- balancing charge deferral and roll-over relief on disposal of certain vessels
- a tax offset for Australian employers of Australian seafarers
- royalty withholding tax (WHT) exemption for non-Australian residents chartering certain vessels to Australian charterers.
The following discussion is based on the released exposure drafts — any tax concessions eventually enacted may, of course, differ from those set out below.
Certificates and notices
The Department of Infrastructure and Transport will be responsible for issuing two types of certificate. To obtain the income tax exemption, the taxpayer will need a “shipping income exemption certificate” (exemption certificate). To obtain accelerated depreciation, balancing charge deferral or roll-over relief, the taxpayer will need a certificate which is not an exemption certificate (depreciation certificate). The tax offset for employers requires that some person (not necessarily the employer) holds a certificate (of either type) in relation to vessels on which the seafarers are employed.
Certificates and requirements
Each certificate issued will relate to a specific entity, vessel and income year. The certificate will set out the number of days during the year in which the requirements for the certificate have been met.
The requirements for a certificate are as follows:
- The entity must be a trading or financial corporation (Australian or foreign).
- The vessel must:
- have a gross tonnage of at least 500, or between 200 and 500 if the Minister for Infrastructure and Transport is satisfied the vessel is to be used mainly for carrying cargo to, from or within regional or remote Australia
- be registered on the Australian general register or the new AISR
- not be any one of a list of excluded types of vessel, for example, fishing vessels, vessels mainly used in exploiting mineral resources of the seabed, salvage vessels, tugboats and barges
- be used, or be available for use, wholly or mainly for commercial activities involving carrying cargo or passengers on voyages.
- The exemption certificate has additional requirements as to the entity conducting a certain level of management and training activities in Australia. These requirements are to be included in regulations, of which drafts are not yet available.
An application for a certificate is to be made at least 30 days before the applicant’s tax return is due for the income year.
Notices — initial entry of a vessel into the regime
In the first year for which an entity wishes to apply tax concessions relating to a specific vessel, it should obtain a notice for that vessel. The entity will not be able to obtain a certificate for a new vessel which covers any day in the first nine months of the income year if it has not first obtained a notice for that vessel in that year. A notice has the same requirements and will contain the same information as a certificate, except that it will not state the number of days in the income year for which the requirements have been met.
An application for a notice must be made at least three months before the end of the income year.
Income tax exemption
Income from “core shipping activities” and its “incidental shipping activities” relating to vessels and days for which the taxpayer holds an exemption certificate is exempt from Australian income tax. Core shipping activities are “activities directly involved in operating a vessel to carry shipping cargo or shipping passengers for consideration”. There is an extensive (but not exhaustive) list of activities which are core shipping activities, including crewing the vessel, providing containers that carry cargo, loading and unloading cargo from the vessel and activities generating onboard income from passengers.
Incidental shipping activities are defined simply as activities incidental to core shipping activities. Total incidental shipping income may not exceed 0.25 per cent total core shipping income in any accounting period.
Existing loss wastage rules require a taxpayer to deduct current year losses from, and apply carry forward losses against, exempt income, before those losses can be applied to reduce assessable income. Under the shipping income tax exemption, 90 per cent of exempt shipping income may be disregarded when deducting or applying losses.
Where an entity holds an exemption certificate for a vessel in any year, and then fails to obtain an exemption certificate for that vessel in a subsequent year, that entity and its associates are locked out of the income tax exemption for that vessel for a period of 10 years, subject to a discretion of the Minister of Infrastructure and Transport to reduce the period.
Currently, a taxpayer can generally choose to depreciate a vessel for tax purposes either over the period the taxpayer determines to be the effective life of the asset, or over the period determined by the Commissioner for that type of vessel (which is likely to be between 15 and 30 years). The new concession introduces a statutory cap of 10 years on the effective life of a vessel covered by a depreciation certificate. It will still be open to taxpayers to make their own determination of effective life (whether more or less than 10 years).
A taxpayer and its associates cannot claim both accelerated depreciation and income tax exemption in relation to the same vessel in the same year. A taxpayer may choose to switch between applying accelerated depreciation or income exemption treatment in relation to any vessel on a year-by-year basis, subject to the 10-year lockout period discussed above in relation to income tax exemption.
Balancing charge deferral and roll-over relief
The balancing adjustment arising from a disposal of a vessel covered by a depreciation certificate will be deferred to the second income year after the year of the disposal. Additionally, a new roll-over relief may be available to remove all or part of any positive balancing charge.
A taxpayer may choose the roll-over relief if:
- on the day occurring two years after the date on which the taxpayer disposed of the original vessel, the taxpayer holds another vessel
- the taxpayer acquired the new vessel within the period starting two years before and ending one year after disposal of the original vessel
- the new vessel must be covered by a depreciation certificate at the time the roll-over relief is chosen. The roll-over relief must be chosen within six months of the end of the second income year after the year of the disposal of the old vessel, or a longer period allowed by the Commissioner.
Seafarer tax offset
An employer of Australian seafarers is to be entitled to a refundable tax offset equal to 27 per cent of salary, wages and allowances paid to those seafarers in respect of which the employer has paid withholding tax under the PAYG system.
The requirements of the offset are as follows:
- The individual employee must be an Australian resident, who for at least 91 days in the income year:
- is employed as master, engineer, integrated rating or deck officer
- on certified vessels. It is not necessary that the employer holds a certificate — it is sufficient that any entity holds a certificate in respect of those vessels
- for overseas voyages, being voyages between a port in Australia and a port outside Australia or into water above the continental shelf of another country, or between ports or places outside Australia’s continental shelf.
- If an employee is employed on any day during a voyage, then all days starting on the day on which cargo or passengers are to be carried and ending on the day on which cargo or passengers have been completely unloaded are counted towards the 91 days.
- The employer entity must be an Australian trading or financial corporation, or a foreign corporation.
Royalty WHT exemption
Under Australian domestic law, charterhire paid to a non-resident owner or lessor may be subject to Australian royalty WHT at the rate of 30 per cent, although the rate is sometimes reduced or the WHT precluded by application of a double tax treaty. The new exemption from royalty WHT will apply where:
- the lessee is an Australian resident company, and has possession and control of the vessel (including the right to appoint master and crew)
- the vessel is:
- not one of the excluded types of vessel discussed above in relation to certificates and requirements (for example, fishing vessels, tugboats and barges), and
- used, or available for use, wholly or mainly for commercial activities involving carrying cargo or passengers on voyages.
Australian International Shipping Register
One of the key reforms to revitalise the Australian shipping industry is the establishment of a second shipping registry being the Australian International Shipping Register (AISR).
The first exposure draft of the Shipping Registration Amendment (Australian International Shipping Register) Bill (AISR Bill) was released for public consultation on 20 February 2012. The AISR Bill deals with the:
- type of vessels that may be registered on the AISR
- labour law requirements applicable to AISR ships
- enforcement regime in relation to AISR ships.
Type of vessels that may be registered on the AISR
Under the proposed regime, “Australian-owned” trading ships or Australian-based companies with bareboat charters will be able to register on the AISR. The definition of “Australian-owned” or operated by an “Australian operator” remains unchanged from the current position under the Shipping Registration Act 1981 (Cth) (Shipping Registration Act).
The eligibility for registration on the AISR is limited to Australian owned or operated ships in order to satisfy Australia’s obligations under the United Nations Convention on the Law of the Sea that there “must be a genuine link between the State and the ship registered in its territory” and to minimise any risk that the AISR is viewed as a Flag of Convenience registry.
Unlike a number of the other international registration regimes such as the Danish International Registry, the AISR does not allow a “dual flag” arrangement. It is a condition of registration that a ship is not registered on a foreign registry before it can be registered on the AISR, that is, it must have its foreign registration “closed” prior to being registered on the AISR. Under the proposed regime, there is no ability to suspend ‘Australian’ nationality should a ship be bareboat chartered to a foreign charterer.
The Registrar retains discretion whether to register a ship on the AISR. The Registrar’s refusal to register on the AISR may be informed by:
- the age of the ship
- the port state control history of the ship
- any pre-registration inspection that AMSA may have made of the ship
- the classification society records for the ship.
The Registrar must provide, in writing, the reasons for a refusal to register a ship on the AISR.
Labour law requirements
Two senior seafarers that are Australian citizen or resident
Under the proposed regime, it is a condition of registration on the AISR that at least two senior seafarer positions are occupied by an Australian citizen or permanent resident. The preference is as follows:
- one Master and one Chief Engineer
- Master or one Chief Mate together with one Chief Engineer or one First Engineer.
Australia recently ratified the Maritime Labour Convention (MLC), which provides international labour standards for seafarers. Although the MLC has not yet come into force, the labour requirements set out in the proposed AISR regime (while the AISR ship is conducting an international trade) is based on the MLC requirements and Australia’s other international obligations.
The types of labour standards provided under the proposed regime include:
- minimum paid annual leave
- minimum wages set according to standards specified by the International Transport Federation
- requirement for a work agreement in place for seafarers when a ship at sea
- ability for seafarers to negotiate a collective agreement
- protection to seafarers against victimisation
- compulsory insurance by AISR shipowners for death or long-term disability of seafarers as a result of sickness or injury while on board the ship.
The AISR Bill also introduces a civil penalty and infringement enforcement scheme.
The proposed regime provides that the Australian Maritime Safety Authority may issue infringement notices for contravention of a civil penalty provision. According to the AISR Exposure Draft Stakeholder Discussion Paper, an infringement notice may be appropriate for lesser and/or first time offences. For example, if an AISR shipowner refuses to allow a seafarer to take paid annual leave, which is a contravention under the proposed regime, the shipowner will face either:
- a civil penalty of up to a maximum of A$165,000 in the case of a body corporate and A$33,000 in the case of an individual; or
- pay a maximum penalty under an infringement notice for an amount equal to one-fifth of the maximum penalty that may be imposed for the offence. This amounts to a maximum of A$33,000 in the case of a body corporate and A$6,600 in the case of an individual.
Relevance of PPSA to Shipping Registration Act
The proposed regime does not deal with ship mortgages, priorities between competing ship mortgages and powers of mortgagees of ships. In accordance with the recent repeal of sections 38 to 44A of the Shipping Registration Act, ship mortgages are to be registered under the Personal Property Securities Act (2009) as a ‘security interest’.
Key changes to the new coastal trading regime
The second exposure drafts of the Coastal Trading Bill (Coastal Trading Bill) and Coastal Trading (Consequential Amendments and Transitional Provisions) Bill (Coastal Trading Consequential Amendments Bill) have proposed the following key changes to the proposed new coastal trading regime.
Applying for a licence
A shipper may no longer apply for a general or temporary licence. However, shippers may later be allowed to apply for a general licence if it is later prescribed in the regulations.
An application for a temporary licence must be for at least 10 voyages.
At the time of making an application, an applicant for a general or temporary licence must now clearly identify the name of the vessel and the IMO number of the vessel. Applicants for a temporary licence must also clearly identify the name of the ports (of loading and unloading) and the type of cargo to be carried at the time of making an application.
There is no longer a requirement to identify the shipper of the cargo at the time of the application. This change may mean that the new regime may give rise to a type of “licence market” whereby an applicant may be able to obtain a temporary licence and sell the freight task permitted by the terms of the licence on an open market.
Mandatory reporting requirements
The timeframe for general licence holders to submit mandatory information to the Department of Infrastructure and Transport (Department) has been extended from 10 business days to 20 business days after the end of a financial year.
Comments in relation to an application made
The Coastal Trading Bill provides a mechanism for third parties directly affected by a temporary licence application to provide comments within two business days of an application being published, with the intention that such comments will be considered by the Minister in deciding an application.
The time frame for the Minister to decide an application for a variation of a temporary licence has been decreased from 15 business days to seven business days.
Under the proposed framework, a breach of condition of general temporary licences may be subject to a civil penalty to a maximum of A$5,500 in the case of an individual and A$27,500 in the case of a body corporate. Previously, this had only applied to breaches of conditions of emergency licences.
Temporary licence: right of review to the Administrative Appeals Tribunal
The Coastal Trading Bill now provides a right of review to the Administrative Appeals Tribunal (AAT) in relation to the granting or refusing of a temporary licence application, which is consistent with the current regime provided under the Navigation Act. The merits review regime was removed in the first exposure draft Coastal Trading Bill, with judicial review under the Administrative Decisions (Judicial Review) Act (Cth) or common law, being the only review mechanism available.
Under the proposed merits review regime, the Minister’s decision may be reviewed on the following bases:
- a temporary licence was granted for a period of less than 12 months
- a temporary licence application was refused
- a temporary licence was granted despite notice being provided by a general licence holder.
A new Part 5, “Investigative Powers” has been inserted into the Coastal Trading Bill and provides powers to ‘authorised persons’ to investigate any contravention of the Bill.
Inspection and searching powers may be used so long as the powers are used to determine whether the Coastal Trading Bill has been complied with or the accuracy of information provided. Such powers may be exercised without a warrant or consent of an occupier of the premises.
Special inspection, searching and seizure powers may be exercised so long as an ‘authorised person’ has “reasonable grounds” to suspect that there is:
- a thing which has contravened or is suspected to have contravened an offence or civil penalty provision under the Coastal Trading Bill
- a thing that provides evidence as to the contravention of an offence or civil penalty provision under the Coastal Trading Bill
- a thing that is suspected to be used for the purpose of contravening an offence or civil penalty provision under the Coastal Trading Bill.
The power to seize may only be exercised with warrant.