House of Representatives

Explanatory Memorandum

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

General outline and financial impact

Thin capitalisation

Schedule 1 to this bill amends the thin capitalisation provisions in Division 820 of the ITAA 1997 and amends the ITAA 1936 to:

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exclude assets that are used principally for private or domestic purposes and exclude non-debt liabilities that are principally of a private or domestic nature;

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ensure that the Australian assets threshold rule operates as intended;

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ensure consistent treatment of interest-free loans and prevent manipulation of the thin capitalisation calculations through the use of these loans;

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clarify the record keeping requirements in relation to the arms length debt amount and arms length capital amount;

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remove the unintended consequences of the associate entity provisions on the control rules;

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ensure that associate entity equity, associate entity debt, controlled foreign entity equity and controlled foreign entity debt have their intended meanings; and

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clarify the operation of the law.

Date of effect: The amendments will apply from the start of a taxpayers first income year beginning on or after 1 July 2001.

Proposal announced: Not previously announced.

Financial impact: The measures will prevent revenue leakage of $50 million in 2002-2003 and $30 million annually from 2003-2004 onwards.

Compliance cost impact: Overall, the amendments will involve a net reduction in compliance costs.

Trust to company roll-over

Schedule 2 to this bill inserts into the ITAA 1997 a CGT roll-over for a trust restructuring into a company. The roll-over is available for the trust and the beneficiaries of the trust. The roll-over is not available for discretionary trusts.

The benefit of the roll-over is reversed if the trust does not cease to exist within 6 months from the time the first asset is transferred to the company. The 6 month period may be extended if the reason for failing to cease to exist was outside the control of the trustee.

Date of effect: Assets disposed of under a trust restructure starting on or after 11 November 1999.

Proposal announced: Treasurers Press Release No. 77 of 5 October 2001.

Financial impact: For trust restructures completed between 11 November 1999 and 4 October 2001 inclusive there will be an insignificant impact on revenue. For trust restructures commencing on or after 5 October 2001 it is anticipated that the additional cost is likely to be small but unquantifiable.

Compliance cost impact: It is estimated that these amendments will not significantly increase the compliance costs for taxpayers.

Summary of regulation impact statement

Regulation impact on business

Impact: This measure will provide greater commercial flexibility for those businesses restructuring to increase efficiency of the business and to take full advantage of its future potential.

Main points:

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The roll-over is optional and available for both the trust and the beneficiaries of the trust.

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Compliance costs for taxpayers that own units or interests in the trust are expected to be minimal. There may be some compliance costs associated with a trust restructure, such as compliance requirements under the Corporations Act 2001 and possible changes to accounting and record keeping systems.

Foreign income exemption for temporary residents

Schedule 3 to this bill amends the ITAA 1936 and the ITAA 1997 to provide certain exemptions from Australian tax for individuals who are considered to be temporary residents of Australia for tax purposes. This measure will:

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define who is considered to be a temporary resident;

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exempt all foreign source income of temporary residents from assets regardless of when they were acquired;

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ensure that no capital gain or loss would arise on the disposal by temporary residents of assets not having the necessary connection with Australia, other than portfolio interests in Australian publicly listed companies and resident unit trusts;

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remove interest withholding tax obligations in respect of liabilities of temporary residents regardless of when incurred; and

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amend the existing exemption from the FIF rules for exempt visitors to remove the 4 year restriction for taxpayers holding temporary entry visas.

Date of effect: The amendments will apply from 1 July 2002.

Proposal announced: This proposal was originally announced in Treasurers Press Release No. 74 of 11 November 1999 (in particular, refer to Attachment G of that Press Release). Changes to the proposal were announced in Treasurers Press Release No. 82 of 15 October 2001.

Financial impact: The revenue cost of this measure is estimated to be between $40 to $50 million per annum.

Compliance cost impact: Overall, the amendments will involve a net reduction in compliance costs.

Summary of regulation impact statement

Regulation impact on business

Impact: This measure providing a foreign income exemption for temporary residents is part of the Governments broad ranging reforms that will give Australia a New Business Tax System. These reforms are based on the recommendations of the Review of Business Taxation that the Government established to consider reforms to Australias business tax system.

For businesses and intermediaries affected by this measure there may be initially a small cost associated with the training of staff and the modification of internal systems that deal with executive remuneration planning. However, given that this is a sought after measure, this is not seen as significant. Also, once any necessary training or changes have been implemented, this measure will also lead to reduced compliance costs for these businesses and intermediaries.

Main points:

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The foreign income exemption for temporary residents is designed to achieve 2 related objectives. The measure seeks to attract internationally skilled mobile labour to Australia. It also seeks to assist in the promotion of Australia as a business location, by reducing the costs to Australian business of bringing skilled expatriates to work in Australia.

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The New Business Tax System will provide Australia with an internationally competitive business tax system that will create the environment for achieving higher economic growth, more jobs and improved savings. The measure contained in this bill will contribute to this, reducing the tax burden on people who are considered to be temporary residents of Australia for taxation purposes.

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Potential compliance, administrative and economic impacts of this measure were considered by the Review of Business Taxation and the business sector. Specific compliance issues raised in relation to the taxation of temporary residents subsequent to the release of A Tax System Redesigned have been considered in implementing this measure.

Effective life of depreciating assets

Under the current capital allowances system, the Commissioner is progressively reviewing, and making updated determinations of, the safeharbour effective lives that taxpayers may choose to use in working out the decline in value of depreciating assets. Under an anticipated Commissioners Determination of effective lives, expected to have effect from 1 July 2002, it is expected that there will be significant increases in the safeharbour effective lives of assets used in gas transmission and distribution, oil and gas production, and for aeroplanes and helicopters.

Schedule 4 to this bill amends the ITAA 1997 to introduce statutory caps that will be the effective life used to calculate the decline in value of those depreciating assets if:

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the taxpayer chooses to adopt the effective life determined by the Commissioner for a particular asset; and

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the cap, if any, that applies to that asset is shorter than the effective life determined by the Commissioner.

Schedule 4 also contains the amendments consequential upon this measure.

Date of effect: This measure will apply to a depreciating asset if its start time is on or after 1 July 2002. In practice, the statutory caps will have effect in relation to revised Commissioner determined safeharbour effective lives that are expected to have effect from 1 July 2002.

Proposal announced: Minister for Revenue and Assistant Treasurers Press Release No. C44/02 of 14 May 2002.

Financial impact: The effect of this measure is to limit the revenue gain arising from the expected revised Commissioners Determinations to around $150 million for the period 2002-2003 to 2005-2006 and $675 million over the 10 year period 2002-2003 to 2011-2012. If these statutory caps were not introduced, taxpayers could be expected to pay an extra $465 million over those 4 years and $2.5 billion over those 10 years as a result of the revised determinations. This is because the statutory caps provide significantly shorter effective lives than the anticipated revised Commissioners Determinations. The proposed statutory effective life caps will, therefore, provide subsidies to affected industries of $315 million for the period 2002-2003 to 2005-2006 and $1.9 billion for the period 2002-2003 to 2011-2012.

Compliance cost impact: Industry will not incur additional compliance costs where a capped life applies to an asset.

Summary of regulation impact statement

Regulation impact on business

Impact: Industry will not incur additional compliance costs where a statutory cap applies to an asset. This is because the cap will be the effective life and will be used in place of the safeharbour effective life determined by the Commissioner.

Main points:

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Only certain industries and assets will be affected by these rules.

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The statutory cap will only apply where the taxpayer chooses to use an effective life determined by the Commissioner and that effective life is greater than the cap. In such cases, the cap will be the effective life.

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If a taxpayer does not wish to use an effective life determined by the Commissioner for a particular depreciating asset or, does not wish to use the statutory cap, they will continue to be able to self-assess an effective life for that asset based on their own circumstances of use under the existing capital allowances system.