House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. P.J. Keating, M.P.)

GENERAL OUTLINE

This Bill will amend:

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the Income Tax Assessment Act 1936:

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to clarify the application of the capital gains tax provisions on the disposal of a partner's interest in a partnership asset;

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to relax the rules for capital gains tax rollover relief on the transfer of assets between group companies;

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to prevent artificial timing advantages from early realisation of capital losses or deferral of tax on gains where assets are transferred between companies sharing 100 per cent common ownership;

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to modify the application of the dividend imputation arrangements for life assurance companies and government insurance offices (proposal announced in the Budget on 21 August 1990) by:

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cancelling the franking surplus of all mutual life assurance companies and government insurance offices at 21 August 1990, and denying them the right to maintain a franking account from that date; and

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reducing the franking credits arising to non-mutual life assurance companies by the application of a formula from the beginning of the first franking year of a company following the introduction of this Bill into Parliament;

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to provide a franking credit of 20 per cent of the franked amount of dividends derived by non-mutual life assurance companies from assets included in their insurance funds from the commencement of a company's first franking year following the introduction of this Bill into Parliament;

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to provide for the taxation treatment of the various bereavement payments that have replaced the special temporary allowance and funeral benefit;

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to reduce the level of rebate of tax for net medical expenses over $1,000 from 21 per cent to 20 per cent, effective for the 1991-92 and subsequent income years. The level of rebate for the 1990-91 income year will remain at 25 per cent.

Amendments to the foreign income measures

The amendments in this Bill that relate to the taxation of foreign source income complement the measures proposed in the Taxation Laws Amendment (Foreign Income) Bill 1990 ("the Foreign Income Bill").

In broad terms, that Bill proposes the introduction of an accruals system of taxing the income of certain controlled foreign companies and non-resident trusts.

This Bill contains provisions to amend the Income Tax Assessment Act 1936, as proposed to be amended by the Foreign Income Bill, as follows:

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to ensure that a deduction is not allowable for bad debts of a foreign branch of a money-lender where the income from the debt would not have been included in the assessable income of the taxpayer because of the operation of the exemption available to Australian companies under the new foreign income measures for profits of foreign branches located in comparable tax countries;

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to extend the special deductions for capital expenditure in connection with mining and petroleum activities in Australia to activities outside Australia that generate assessable income;

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to extend the special deductions available for industrial property (e.g., patents, copyrights and designs) granted, registered or subsisting in Australia to such property granted, registered or subsisting outside Australia that generates assessable income;

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to extend the special deductions incurred on the construction, extension, alteration or improvement of certain buildings in Australia to those outside Australia which are used to generate assessable income;

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to provide that certain deemed dividends paid by a controlled foreign company in a year of income will qualify for foreign tax credits and exemptions that are available for dividends if the taxpayer notifies the Commissioner of Taxation within one year of the end of that year of income that the deemed dividend was paid;

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to make technical corrections to the provisions that deny foreign tax credits and exemptions for certain deemed dividends that are paid by a CFC, but not disclosed by a taxpayer;

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to provide that income of a CFC will not be attributed to resident taxpayers who hold interests in the CFC through another entity that is a resident of a listed (comparable-tax) country if that country taxes that income under its accruals tax measures;

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to ensure continuity in the capital gains tax treatment of assets owned by a company or a trust that changes its residence;

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to make amendments of a technical nature to add certainty as to the time at which certain tests must be met to gain the benefit of exemptions for capital gains of listed country branches of resident companies;

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to align the treatment of foreign source capital gains and losses of an overseas branch of a resident company by providing that a foreign capital loss is not available for offset against capital gains where, had that loss been a gain, it would have been exempt from tax;

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to exclude premiums paid for insurance or reinsurance out of Australia, in cases where only 10 per cent of which is subject to tax in Australia, from being treated for accruals tax purposes in the same way as income that has been subject to full rates of Australian tax;

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to permit the deduction of the interest payable on certain convertible notes in calculating the attributable income of a CFC; and

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to insert anti-avoidance provisions for the attribution of income from a CFC to close potential avoidance avenues which may arise by the use of interposed partnerships and trusts;

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the Fringe Benefits Tax Assessment Act 1986, to effect minor technical changes consequential upon the proposed introduction of a new system for the quarantining of foreign losses; and

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the Income Tax Rates Act 1986 to reduce the lowest marginal rate of tax from 21 per cent to 20 per cent, effective from 1 January 1991, applying for resident individuals and trustees generally in the income range $5,401 to $20,700 (proposal announced on 20 November 1990).

A table comparing the proposed rates of tax to apply from 1 January 1991 with the previously announced rates to apply from that date is set out below.

A composite rate scale will apply for the 1990-91 financial year. That scale will comprise a weighted average of one-half of the rate scale that previously applied from 1 July 1990 to 31 December 1990 and one-half of the new rate scale that is to apply from 1 January 1991 to 30 June 1991.

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the Taxation Administration Act 1953:

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to ensure the protection of taxation records in the possession of the Commissioner of Taxation; and

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to prohibit persons from using personal taxation information that is obtained without proper authorisation;