House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

General outline and financial impact

Inter-entity loss multiplication

Schedule 1 to this Bill introduces measures into the ITAA 1997 to prevent multiple recognition of losses of a company where:

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there has been a change in ownership or control in the company; or

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a liquidator has declared the company's shares to be worthless.

Date of effect: The measures apply where substantial changes of ownership occur after 1 pm, by legal time in the Australian Capital Territory, on 11 November 1999.

Proposal announced: This proposal was announced in Treasurer's Press Release No. 74 of 11 November 1999 (refer to attachment E).

Financial impact: The financial impact of this measure is included in the estimate for measures to prevent inter-entity loss multiplication. The financial impact of these measures is set out in the following table:

Compliance cost impact: There are compliance costs associated with determining the tax value adjustments to affected equity in debt interests. However, special relief is provided to minimise the costs associated with complying with this measure.

Company losses and bad debts and technical amendments

Schedule 1 to this Bill amends the ITAA 1997 to provide an appropriate link to the inter-entity loss measures by:

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amending the continuity of ownership test applying to company losses and bad debts; and

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aligning the application date of the unrealised loss measures (contained in the Integrity and Other Measures Act) with that of the inter-entity measures.

This Bill also makes technical amendments to measures dealing with the continuity of ownership test, unrealised losses, excess mining deductions and 13-month prepayments, all of which are contained in the Integrity and Other Measures Act.

Date of effect: Technical refinements to the continuity of ownership tests take effect for losses claimed in an income year ending after 21 September 1999. The other losses measures apply where substantial changes of ownership occur after 1pm by legal time in the Australian Capital Territory on 11 November 1999. Technical amendments to prepayments rules apply in relation to assessments for an income year ending after 21 September 1999. The amendment relating to excess mining deductions applies to assessments for the 1999-2000 income year and later. The amendments only apply to expenditure incurred by a taxpayer after 11.45 am, by legal time in the ACT, on 21 September 1999.

Proposal announced: The measures linked to the inter-entity measures were announced in Treasurer's Press Release No. 74 of 11 November 1999 (refer to Attachment E). The technical refinements give effect to the measures announced in Treasurer's Press Release No. 58 of 21 September 1999 (refer to Attachment Q).

Financial impact: The financial impact of this measure is included in the estimate for measures to prevent inter-entity loss multiplication.

Compliance cost impact: Reduced compliance costs are expected from linking the continuity of ownership test to the new inter-entity measure, as this will streamline the rules that apply to entities. Reduced compliance costs are also expected in relation to the unrealised loss measures from various rules providing compliance relief. The measures may increase record-keeping requirements regarding the direct and indirect ownership in a loss company.

Losses amendments to Subdivisions 170-C and 170-D

Schedule 1 to this Bill makes amendments to the following provisions in the ITAA 1997:

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Subdivision 170-C, which prevents loss transfers between wholly-owned company groups from being duplicated (loss duplication measures); and

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Subdivision 170-D, which defers capital losses or deductions in certain cases (linked group transfer measures).

Date of effect: The amendments clarifying the application of Subdivision 170-C apply from 22 February 1999, the original application date of application of the loss transfer measure.

Amendments to Subdivision 170-D apply to deferral events happening on or after 21 October 1999, the original date of application of the Subdivision.

The amendments restricting cost base uplifts will apply from the date of introduction of this Bill.

Proposal announced: These amendments arise from the loss duplication and linked group transfer measures, announced in Treasurer's Press Release No. 58 of 21 September 1999 (refer to Attachment Q).

Financial impact: The financial impact of this measure is included in the estimates reported under the following measures:

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preventing a deduction and a capital loss arising from a single economic loss; and

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transfer or creation of assets by companies that are members of linked groups;

dealt with in the Integrity and Other Measures Act.

Compliance cost impact: There are no additional compliance costs associated with amendments to these measures.

Life insurance companies

Schedule 2 to this Bill amends the ITAA 1936 and the ITAA 1997 to:

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broaden the tax base for life insurers by largely taxing the various businesses of life insurers on a comparable basis to those types of businesses generally; and

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broadly tax the current pension business of superannuation funds consistently with that of life insurers.

Date of effect: 1 July 2000.

Proposal announced: This proposal was announced in Treasurer's Press Release No. 58 of 21 September 1999 (refer to Attachment N).

Financial impact: The following financial impact includes the impact of Review proposals affecting policyholders, which will be included in a later Bill:

Compliance cost impact: Broadening the tax base for life insurers should reduce ongoing compliance costs by increasing certainty and integrity of the tax base. However, there are some implementation and transitional costs that will arise.

Imputation - PAYG instalments

Part 1 of Schedule 3 to this Bill amends the ITAA 1936 to make consequential amendments to the dividend imputation regime to provide for franking credits and debits to arise for:

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the payment and refund of income tax under the PAYG instalments system; and

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PAYG rate variation credits.

Date of effect: The amendments to the dividend imputation provisions apply from the 2000-2001 income year.

Proposal announced: This proposal has not previously been announced.

Financial impact: There is no financial impact arising from the introduction of these measures.

Financial impact: There is no financial impact arising from the introduction of these measures.

Compliance cost impact: If this measure has any impact on compliance costs, it will involve a small increase in those costs.

Imputation - life assurance companies

Part 2 of Schedule 3 to this Bill amends the dividend imputation system of the ITAA 1936 as it applies to life insurers so that:

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franking credits and debits arise in relation to tax paid on income actually allocated to shareholders; and

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the imputation system applies to virtual PSTs of life insurance companies.

Date of effect: 1 July 2000.

Proposal announced: This proposal was announced in Treasurer's Press Release No. 58 of 21 September 1999 (refer to Attachment O).

Financial impact: The financial impact of this measure is included in the overall estimates reported under the measure broadening the tax base for life insurers.

Compliance cost impact: This measure may impose some additional compliance costs on life insurers by requiring calculations that reflect the true underlying circumstances rather than applying an arbitrary rule. However, the application of accepted accounting practices will limit any additional complexity.

Imputation - conversion of franking account balances

Part 3 of Schedule 3 to this Bill amends the ITAA 1936 to ensure that the reduction in the company tax rate from 36% to 34% is correctly reflected in the dividend imputation system in relation to:

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life insurance companies;

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PAYG instalments payable by early balancing companies; and

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estimated debit determinations.

Date of effect: 1 July 2000.

Proposal announced: These measures have not been announced. However, they arise from the proposal to reduce the company tax rate from 36% to 34%. This was announced in Treasurer's Press Release No. 58 of 21 September 1999 (refer to Attachment A).

Financial impact: The financial impact of this measure is included in the overall estimates reported under the measure reducing the company tax rate, dealt with in the Income Tax Rates Act No. 1.

Compliance cost impact: The amendments to the conversion of franking account provisions will cause a small, one-off cost for companies affected by the measure arising from implementing changes to their systems. However, the method adopted in the conversion of franking account provisions minimises ongoing compliance costs.

Imputation - thresholds for franking credit trading rules

Part 4 of Schedule 3 to this Bill amends the franking credit trading provisions in Division 1A of Part IIIAA of ITAA 1936 to increase the threshold for the small shareholder exemption under the holding period rule from $2,000 to $5,000.

Date of effect: This change will apply to assessments for the 1999-2000 income year, and later income years.

Proposal announced: This proposal was announced in Treasurer's Press Release No. 74 of 11 November 1999 (refer to Attachment F).

Financial impact: A minimal loss to revenue.

Compliance cost impact: There is expected to be a reduction in compliance costs mainly arising from individual taxpayers entitled to a franking rebate between $2,000 and $5,000 no longer having to consider the application of the 45 day rule.

CGT: capital payments for trust interests (CGT event E4)

Schedule 4 to this Bill amends the ITAA 1997 so that the cost-base adjustment that is made where a capital payment is received for a trust interest (CGT Event E4) reflects the CGT discount and CGT small business concessions.

Date of effect: The amendments apply to assessments for the income year including 21 September 1999, and later income years.

Proposal announced: This measure was foreshadowed in the explanatory memorandum to the Capital Gains Tax Act, but was otherwise not announced.

Financial impact: The financial impact for these changes is included in the estimates reported under the measures providing small business relief dealt with in the Capital Gains Tax Act.

Compliance cost impact: None.

Scrip for scrip roll-over

Schedule 5 to this Bill amends the scrip for scrip roll-over provisions in the ITAA 1997 by:

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clarifying the circumstances in which roll-over can be used;

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providing cost base rules for acquired equity; and

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limiting the availability of roll-over where both the original and acquiring entities are non-residents.

Date of effect: The amendments generally apply from 10 December 1999. The amendments affecting non-resident companies apply from 14 April 2000.

Proposal announced: This proposal has not previously been announced.

Financial impact: The financial impact for these changes is included in the estimates reported under the measures providing scrip for scrip roll-over dealt with in the Capital Gains Tax Act. The amendments in this Bill do not have any further revenue impacts. The changes to the cost base rules and the non-resident roll-over measure are revenue protection measures.

Compliance costs: Negligible.

PAYG instalments: anti-avoidance rules

Schedule 7 to this Bill inserts rules in Part 2-10 of Schedule 1 to the TAA 1953 to support the integrity of the PAYG instalments regime. The rules penalise entities who obtain a tax benefit or tax benefits from a scheme to avoid, defer or reduce PAYG instalments. The rules do this by imposing a penalty by way of the GIC on twice the tax benefit or tax benefits arising from the scheme. The Bill also amends the object of the PAYG instalments regime to clarify the objects and purposes of that regime.

Date of effect: The amendments apply to the 2000-2001 income year and later income years.

Proposal announced: The PAYG system was announced in ANTS and the need for rules to support the integrity of the PAYG instalments regime was identified in the explanatory memorandum to A New Tax System (Pay As You Go) Act 1999.

Financial impact: No gain to revenue. The amendments will protect the PAYG instalments base and prevent significant deferral of instalments.

Compliance cost impact: Taxpayers will need to be aware of how the measures operate. However, taxpayers who are not engaged in tax avoidance activities will not be affected by these measures.

Summary of Regulation Impact Statement

Regulation Impact on Business

Impact: The measures in this Bill are part of the Government's broad ranging reforms which will give Australia a New Business Tax System. These reforms are based on the Recommendations of the Review that the Government established to consider reforms to Australia's business tax system.

The New Business Tax System is designed to provide Australia with an internationally competitive business tax system that will create the environment for achieving higher economic growth, more jobs and improved savings, as well as providing a sustainable revenue base so that the Government can continue to deliver services for the community.

Main points:

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The potential compliance, administrative and economic impacts of the measures contained in this Bill have been carefully considered, by both the Review and the business sector. The Review focussed on the economy as a whole and concluded that there would be net gains to business, Government and the community as a whole from business tax reform.

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The measures in this Bill will reduce compliance costs as part of providing a more consistent and easily understood business tax system.

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Most of the measures in this Bill impact on a particular group of taxpayers (e.g. the life insurers imputation amendments will impact on life insurance companies) or taxpayers that undertake a particular transaction (e.g. technical amendments to the scrip for scrip roll-over provisions apply to companies involved in takeovers undertaken by way of a scheme of arrangement).

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Some of the measures have a wider impact (e.g. the measure amending the imputation system to take account of PAYG instalments will affect all entities who make instalments and have franking credits and debits arise under the imputation system).

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Most of the measures are expected to decrease compliance costs (e.g. increasing the threshold for the exemption from the franking credit trading rules). In many cases, the only increase in compliance costs is in the transition and implementation of the measure (e.g. broadening the tax base for life insurers).

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The administration costs of implementing the measures in this Bill are expected to be minimal.