By Stephen Thompson and Philip Diviny, Partners*
Australia is an island nation, and is largely reliant on sea transport to take its export goods to the world, and for the delivery of its import requirements. Our prosperity has depended, to a large extent on the export of commodities – iron ore, coal, gold, oil and gas products and wheat. The overwhelming majority of those products are exported by sea.
However, while more than 99 per cent of Australia’s international trade is carried by ship, only 0.5 per cent of our export trade is carried on Australian flagged vessels. On the domestic front, while around 25 per cent of the domestic freight task (on a tonne kilometre basis) is carried by ships, over the last 15 years, the amount of this cargo carried by foreign vessels, employing foreign crews, has increased from 6 per cent to 30 per cent.
Decades of policy neglect by successive governments of all persuasions have created an investment and operational environment for shipping in Australia which, relative to the rest of the world, is high cost and high tax. Lack of policy action has disadvantaged the Australian shipping industry compared to other nations with a more favourable tax and operating regime. This has led to a significant decline in the industry, measured by:
In recognition of the lost economic opportunities brought about by the decline of the Australian shipping industry, the current federal government commissioned a series of inquiries and reports on a range of topics, including the tax regime, manning requirements for Australian ships, control of coastal shipping, and streamlining the state-based safety regulatory functions.
Following those inquiries and reports, a series of measures were announced by the Minister for Transport in September 2011, designed to reverse the trend away from Australian owned and operated ships.
As at the date of writing (4 November 2011) no draft legislation has been released. This article therefore relies on, and borrows heavily from, the announcements made over the last two months by the Minister for Transport.
No tonnage tax
Although the earlier discussion papers had mooted the possibility of introducing a UK-style tonnage tax on shipping, that reform had fallen by the wayside by the time of the official announcement.
Zero tax on shipping income
Instead, the cornerstone of the tax package is the introduction of a tax exemption regime for Australian ship operators, which delivers an effective tax rate of zero on the qualifying elements of corporate income tax. Although this measure has attracted criticism as being a retrograde, protectionist step, the policy recognises the reality that a great many countries subsidise their shipping industries, for domestic economic reasons. These subsidies are one reason Australia’s shipping industry has ceased to be internationally competitive.
The exemption will only apply to the qualifying ship owning/operating revenues, although the government promises that there will be a broad, inclusive definition, to match the treatment offered by UK, Singapore and other jurisdictions.
To obtain the benefits of the exemption, companies will need to:
a. “lock-in” to a 10 year commitment to owning Australian registered ships and meeting Australian maritime safety conditions; and
b. meet a minimum training requirement; ensuring that industry plays its part in securing a stable maritime skills base.
Shipowners operating under the scheme will be able to take advantage of accelerated depreciation, with the effective life of vessels being reduced from 20 to 10 years for depreciation purposes. This, it is hoped, will shorten the life cycle of Australian ships, to something more in line with the international average age. The reform package will also include a balancing charge deferral allowing shipowners to defer taxation on, or roll-over, recouped depreciation and capital profits on the disposal of vessels. These measures are intended to encourage regular updating and modernising of the Australian fleet.
Royalty Withholding Tax
Under current arrangements, where a vessel is hired under a bareboat charter to an Australian company, that Australian company may be obliged to retain and remit to the Australian Tax Office Royalty Withholding Tax (RWT) of up to 30% of the hire paid. The liability for, and rate of, tax will depend on whether the owner is domiciled in a jurisdiction with which Australia has a tax treaty, or maintains a permanent establishment in Australia.
RWT on such arrangements is to be abolished under the tax reforms announced.
Many Australians working overseas enjoy the benefits of Australia’s many double tax treaties, meaning that they do not pay Australian income tax on income which will be taxed at source in a treaty country.
Australian seafarers, who may work offshore for much of the year, do not work “in a tax treaty country”, have long been outside this arrangement, and so disadvantaged. This has been a contributing factor to the decline in the number of qualified Australian sea farers.
The reforms will now provide a seafarers’ tax concession for resident employers of Australian resident seafarers, who spent 91 days or more on international voyages on qualifying vessels in an income year.
Consistent with the Australian Government’s objectives to increase the size of the national fleet, registration on the Australian primary or international shipping register will be a pre-requisite for access to these tax incentives.
Coastal Shipping Licensing
“Cabotage” is the term given to the reservation of a state’s coastal shipping task to the vessels of that state’s flag.
In countries like Australia, although the cabotage principle is observed in theory, there is insufficient Australian-flagged tonnage to fulfil the domestic coastal task.
To fill the gap in capacity, Australia has developed a permit system, allowing either single, or continuing, voyage permits to be issued to foreign flagged shipping where there is no suitable locally licensed ship available within a three day window of the required shipping time.
Over the years, the issue of permits in most cases has become routine. In some instances, the permits have been highly controversial.
The government’s policy documents recognise that “it is important that Australian coastal shipping is competitive and that shippers can access foreign registered vessels where Australian registered ships cannot service their trades. The new licensing regime will support Australian shipping while establishing clear boundaries around the necessary role of foreign vessels in our coastal trade. Licensing requirements and conditions will be clearly established in legislation to provide certainty and clarity to all industry operators.”
The new framework will comprise a three tier licensing regime:
a. a General Licence will provide Australian flagged vessels with unrestricted access to the coastal trades for a period of up to five years at a time. Most of these vessels will also be eligible for the tax incentives;
b. a Temporary Licence will enable foreign flagged vessels to operate in the coastal trades, subject to time, trade and/or voyage conditions. These licences will be available for a period of up to 12 months; and
c. an Emergency Licence limited to cargo or passenger movements in emergency situations only such as a natural disaster or other critical emergency.
In addition, there will be new reporting and publishing arrangements, which will improve transparency in the operation of the regulatory processes.
Existing foreign-registered vessels will have five years to transition to Australian registration.
Australian International Shipping Register
Until now, Australian flagged ships had to operate either with Australian crews, or foreign crews working under Australian rates of pay.
Australia’s high wage costs were another reason for the domestic shipping industry falling behind in international competitiveness.
The establishment of the Australian International Shipping Register (AISR) will provide a more flexible alternative for Australian ship owners and operators, and an alternative to registering overseas.
Key features of the AISR include:
a. access to the tax exemption and other tax incentives;
b. mixed crewing arrangements enabling employment of foreign seafarers at internationally competitive rates and conditions, consistent with the Maritime Labour Convention and other international labour treaties;
c. requirement for a minimum of two Australian seafarers, preferably in the positions of Master and Chief Engineer;
d. workers’ compensation arrangements consistent with Maritime Labour Convention requirements; and
e. application of the same maritime safety, environmental and occupational health and safety standards as apply to primary Australian register vessels.
The stated objectives of the AISR are to “address the cost disadvantages currently experienced by Australian companies operating in the global shipping market, while maintaining high safety and environmental standards.”
Maritime Workforce Development Forum
The government’s reform announcement makes the observation that the “maritime industry is confronting a dual challenge; an ageing workforce and an increase in shipping volumes, requiring more seafarers, safety professionals, harbour masters and pilots to ensure Australia’s maritime safety and environmental standards are maintained. Securing a long-term skills base is essential to a viable Australian shipping industry.”
The Maritime Workforce Development Forum, comprising experienced representatives from across the maritime and skills industries and unions will work with the Australian Government to improve skills outcomes. In undertaking its work, the Forum will work closely with the proposed National Workforce and Productivity Agency.
Harmonisation of Commercial Vessel Safety Regulation
Australia is governed under a federal constitutional system, comprising the Commonwealth, its territories, and the six states (former colonies). Not only does this structure give rise to considerable inefficiency, by duplicating resources, it also presents a significant compliance challenge to any business that operates across state boundaries.
Until now, commercial vessel safety regulation has been a matter of state law, so that any vessel operator conducting business in more than one state or territory would face different regulatory requirements.
Following extensive negotiations, an historic agreement has been reached under which the states will adopt a single National Law for the regulation of commercial vessel safety, covering construction, operations, crewing, crew qualifications and safety equipment.
The National Law will be supervised and implemented by the Australian Maritime Safety Authority, which will in turn delegate certain local functions to the existing state-based safety organisations.
Once established, the new regime should facilitate significant efficiencies in commercial operations and regulatory control for the Australian commercial shipping industry.
The reforms discussed in this paper have the potential to invigorate the Australian shipping industry. Once established, the new regime should create a favourable investment and employment environment for shipowners and operators.
*Stephen Thompson is a partner at Middletons, and has been providing legal services to the transport industry for more than 20 years. Stephen advises clients in the industry on negotiation and drafting of contracts and agreements, carriage of goods by sea, air and land, ship arrest and Admiralty, and salvage issues.
Philip Diviny is a partner at Middletons and leads our tax and revenue team. He advises a broad range of clients including Australian and foreign based corporates, partnerships, joint ventures and governments. His main areas of expertise include mergers and acquisitions, due diligence, tax structuring, property and construction, project and structured finance and tax audits and investigations.