Senate

Revised Explanatory Memorandum

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

General outline and financial impact

Company rate changes (franking account consequentials)

Schedule 1 to this bill amends the imputation rules in the ITAA 1936 to take account of the reduction of the company tax rate from 34% to 30%.

Date of effect: The amendments apply from 1 July 2001.

Proposal announced: Former Assistant Treasurers Press Release No. 25 of 25 June 2001.

Financial impact: The financial impact of this measure has been factored into the revenue estimates for the reduction in the company tax rate made by the New Business Tax System (Income Tax Rates) Act (No. 1) 1999 .

Compliance cost impact: The franking account conversion legislation will impose a small, generally once only, compliance burden on those taxpayers affected.

Summary of regulation impact statement

Regulation impact on business

Impact: The franking account conversion legislation will impose a small, generally once only, compliance burden on those taxpayers affected. The conversion process that a taxpayer will be required to follow will be substantially similar to that required when the tax rate was reduced previously, so taxpayers are familiar with the conversion process.

Main points:

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The taxpayers affected by these rules are those resident taxpayers that are required to maintain franking accounts. They are:

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all resident companies (including non-mutual life assurance companies);

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all resident public trading trusts;

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all resident corporate unit trusts; and

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all limited partnerships.

Friendly societies

Schedule 2 to this bill amends the ITAA 1997 to defer the commencement date of the Review of Business Taxation proposals to tax friendly societies on investment income received that is attributable to funeral policies, scholarship plans and income bonds sold after 30 November 1999. Friendly societies will remain exempt from tax on that investment income until 31 December 2002.

Schedule 2 also ensures that life insurance companies do not have to change the basis for working out the deduction for the capital component of ordinary life insurance investment policies.

Date of effect: 1 July 2001.

Proposal announced: Minister for Revenue and Assistant Treasurers Press Release No C46 of 14 May 2002.

Financial impact: The cost to revenue of the deferral is expected to be $1 million in 1999-2000, and $2 million per annum in 2000-2001 and 2001-2002.

Compliance cost impact: Nil.

Prescribed dual residents

Schedule 3 to this bill amends the ITAA 1936 to make corrections so that:

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the intercorporate dividend rebate is not available in respect of any unfranked dividends paid to or by a dual resident company, including dividends paid within a wholly-owned group; and

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the deduction allowed to certain non-resident owned companies to offset the removal of the rebate from 1 July 2000 is not available in respect of unfranked dividends paid to or by a dual resident company.

Date of effect: These amendments will apply retrospectively to dividends paid on or after 1 July 2000. These are the dividends in relation to which the rebate and deduction would otherwise be allowed in error.

Proposal announced: Introduced in Taxation Laws Amendment Bill (No. 4) 2001.

Financial impact: Nil. There could be a significant cost to revenue if the amendments were not made.

Compliance cost impact: The amendments are corrections and will not have any impact on compliance costs for taxpayers.

Refundable tax offsets

Certain trustees and beneficiaries

Part 1 of Schedule 4 to this bill amends the ITAA 1997 to make a correction to the refundable tax offset rules so that double claiming of a refund of excess imputation credits by both a trustee and a beneficiary will not be possible. It also makes a consequential amendment to the ITAA 1936.

Date of effect: The amendments will apply to all refunds of excess imputation credits, which are payable in respect of dividends paid on or after 1 July 2000.

Proposal announced: Introduced in Taxation Laws Amendment Bill (No. 4) 2001.

Financial impact: None. There would be a cost to revenue if these amendments were not made.

Compliance cost impact: Some beneficiaries who currently do not have to lodge a tax return will now have to lodge in order to receive a refund of excess imputation credits.

The alternative would be to maintain the existing law and give the refund to the trustee except where the beneficiary is entitled to claim the refund, for example, where the beneficiary is a beneficiary in another trust estate or has income from other sources. This alternative would place an unacceptable burden on trustees because they would not know in many cases whether a beneficiary was a beneficiary of another trust or had income from other sources and therefore whether they or the beneficiary should claim a refund.

Non-complying superannuation funds and non-complying ADFs

Part 2 of Schedule 4 to this bill amends the ITAA 1997 to deny refunds of excess imputation credits to non-complying superannuation funds and non-complying ADFs.

Date of effect: The amendments will apply to assessments for income years ending on or after 22 May 2001.

Proposal announced: Former Assistant Treasurers Press Release No. 19 of 22 May 2001.

Financial impact: The measure will protect the revenue. The gain to revenue from denying refunds of imputation credits to currently lodging non-complying superannuation funds and non-complying ADFs would be less than $1 million.

Compliance cost impact: Nil.

Franking rebate on indirect distributions to exempt institutions

Schedule 5 to this bill will make technical corrections to the franking rebate provisions in the ITAA 1936 to clarify that registered charities and gift-deductible organisations which are trusts are eligible for refunds of excess imputation credits in respect of distributions attributable to franked dividends received indirectly through another trust.

Date of effect: The amendments to the franking rebate provisions will apply to trust amounts that are attributable to dividends paid on or after 1 July 2000, that is, from the commencement of the refund of imputation credits measure.

Proposal announced: Introduced in Taxation Laws Amendment Bill (No. 4) 2001.

Financial impact: Nil.

Compliance cost impact: The proposed amendments are corrections and will not have any impact on compliance costs for taxpayers.

Senior Australians Tax Offset and minor amendments of the MLA 1986

Schedule 6 to this bill amends the ITAA 1936 to extend the eligibility criteria for SATO to ensure that all seniors who are eligible for either an age or service pension (whether or not they receive one) are entitled to receive SATO.

Schedule 8 to this bill makes a technical amendment to the MLA 1986 to correct references to the ITAA 1936.

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

Proposal announced: Governments 2001-2002 Federal Budget.

Financial impact: Nil.

Compliance cost impact: Nil.

Demutualisation of Tower Corporation

Schedule 7 to this bill amends the ITAA 1997 to:

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ensure that taxpayers who received shares in Tower Limited as a consequence of the demutualisation of Tower Corporation (a former New Zealand resident mutual company) in October 1999 are not subject to CGT at the time their membership rights ceased to exist; and

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specify the cost base for shares received in Tower Limited as a consequence of giving up those membership rights.

Consequently, depending on the circumstances, the CGT taxing point for taxpayers who received shares in Tower Limited as a consequence of the demutualisation of Tower Corporation is deferred until a CGT event happens to the shares in Tower Limited.

Date of effect: The amendments will apply from 23 September 1999. The amendments are beneficial to taxpayers because they defer the CGT liability that arises as a consequence of giving up their membership rights in Tower Corporation. The Tower Corporation demutualised on 1 October 1999 and relied on the announcement of these measures to advise Australian taxpayers about the consequences of accepting the demutualisation proposal.

Proposal announced: Former Assistant Treasurers Press Release No. 43 of 23 September 1999.

Financial impact: The financial impact is outlined in the following table:

Compliance cost impact: Nil.

Income tax deduction for gifts

Schedule 9 to this bill amends the ITAA 1997 and the ITAA 1936 to allow income tax deductions for certain gifts of $2 or more made to the new organisations listed below. This bill also amends the names of some organisations, extends the period of deductibility for 2 organisations and ends the period of deductibility for another organisation.

Date of effect:

Gifts to new organisations :

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National Breast Cancer Centre Gift Fund after 24 September 2001.

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The Bionic Ear Institute after 4 October 2001.

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Australian Primary Principals Association Education Foundation after 1 October 2001.

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Australian Human Rights Education Fund after 24 September 2001.

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Sir Hughie Edwards VC Foundation Incorporated after 21 August 2001 and before 23 August 2003.

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Warringah, Australia Remembers Trust after 8 November 2001 and before 9 November 2003.

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Bowral Vietnam Memorial Walk Trust Incorporated after 15 August 2001 and before 16 August 2003.

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The Albert Coates Memorial Trust after 30 January 2002 and before 31 January 2004.

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Tea Gardens/Hawks Nest War Memorial Committee after 30 January 2002 and before 31 January 2004.

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Australian Red Cross Society American Disaster Fund after 9 September 2001 and before 11 September 2003.

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Young Endeavour Youth Scheme Public Fund after 24 September 2001.

Gifts to organisations that have changed their name :

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H.R.H. The Duke of Edinburghs Commonwealth Study Conferences (Australia) Incorporated changes to Commonwealth Study Conferences (Australia) Incorporated after 19 February 2001.

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The Australian Administrative Staff College changes to Monash Mt Eliza Graduate School of Business and Government Limited after 21 July 1994 and further changes to Mt Eliza Graduate School of Business and Government Limited after 4 April 2000.

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Amnesty International changes to Amnesty International Australia after 30 June 1985.

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National Safety Council of Australia changes to National Safety Council of Australia Limited after 13 September 1993.

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Royal Queensland Society for the Prevention of Cruelty changes to Royal Society for the Prevention of Cruelty to Animals, Queensland Incorporated after 22 December 1999.

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Victorian National Parks Association changes to Victorian National Parks Association Incorporated after 17 March 1985.

Gifts to organisations that have ceased to exist :

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Katherine District Business Re-Establishment Fund ceases after 17 November 2000.

Gifts to organisations whose period of deductibility has been extended :

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Australian Ex-Prisoners of War Memorial Fund for an additional 2 years until 20 October 2003.

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Royal Australian Airforce (RAAF) Memorial Trust Fund for a further year until 18 November 2002.

Proposal announced: Gifts to new organisations and extensions to the period of deductibility for the specified organisations were announced by the Minister for Revenue and Assistant Treasurer and the former Assistant Treasurer in press releases during 2001 and 2002.

If an organisation has changed its name only or has ceased to exist, no public announcement was made.

Financial impact: Unquantifiable, but insubstantial, cost to the revenue.

Compliance cost impact: Nil.

Demutualisation of mutual entities other than insurance companies

Schedule 10 to this bill amends the income tax law to recognise a new demutualisation method for non-insurance mutual entities. Members of non-insurance mutual entities that demutualise using the new method will qualify for the concessions in Schedule 2H to the ITAA 1936.

Date of effect: 17 November 1999.

Proposal announced: Former Assistant Treasurers Press Release No. 56 of 17 November 1999.

Financial impact: This measure is expected to result in a small but unquantifiable gain to revenue as it will facilitate the demutualisation of non-insurance mutual entities that elect to use the new demutualisation method.

Compliance cost impact: Nil.

Same asset rollover

Schedule 11 to this bill amends the ITAA 1997 to allow CGT rollover for a policyholder/member of a mutual insurance company who becomes absolutely entitled to a share held on trust as part of a demutualisation and exchanged by the trustee under scrip for scrip rollover for another share.

Date of effect: The rollover applies to CGT events happening on or after 10 December 1999, being the relevant date for scrip for scrip rollover.

Proposal announced: The proposal was announced in former Assistant Treasurers Press Release No. 9 of 21 March 2001.

Financial impact: Nil, given the amendment is directed at ensuring the scrip for scrip rollover applies as intended.

Compliance cost impact: It is expected there should be no impact on compliance costs, as trustees have to keep the same records under the current law.

Technical amendments

Schedule 12 to this bill makes a number of technical amendments to the ITAA 1936, the ITAA 1997 and other tax-related legislation.

Date of effect: The amendments have various dates of effect.

Proposal announced: Not previously announced.

Financial impact: Nil.

Compliance cost impact: Nil.