House of Representatives

Explanatory Memorandum

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

General outline and financial impact

Medicare levy and Medicare levy surcharge low income thresholds

Schedule 1 to this bill amends:

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the MLA 1986 to:

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increase the Medicare levy low income thresholds for individuals, married couples and sole parents. The dependent child/student component of the family threshold will also be increased. The increases are in line with movements in the CPI; and

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increase the Medicare levy low income threshold for pensioners below age pension age so that they do not have a Medicare levy liability where they do not have an income tax liability;

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the A New Tax System (Medicare Levy Surcharge-Fringe Benefits) Act 1999 to:

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increase the Medicare levy surcharge low income threshold in line with movements in the CPI.

Date of effect: The increased Medicare levy and Medicare levy surcharge low income thresholds apply from the 2002-2003 year of income and later years of income.

Proposal announced: This measure was announced in the 2003-2004 Federal Budget.

Financial impact: This measure will cost the revenue $34 million in 2003-2004, $17 million in 2004-2005, $17 million in 2005-2006 and $17 million in 2006-2007.

Compliance cost impact: Compliance costs will be negligible.

Value shifting: transitional exclusion for certain indirect value shifts relating mainly to services

Schedule 2 to this bill will amend the IT(TP) Act 1997 to modify the general value shifting regime so that, as a transitional measure, the consequences arising under that regime do not apply to most indirect value shifts involving services.

Date of effect: The transitional measure will apply to relevant indirect value shifts that occur before:

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the beginning of a losing entity's 2003-2004 income year; or

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if a losing entity's 2002-2003 income year ends before 30 June 2003, the beginning of the entity's 2004-2005 income year.

Proposal announced: This measure was announced in Minister for Revenue and Assistant Treasurer's Press Release No. C014/03 of 6 March 2003.

Financial impact: The amendments will have a cost to revenue of $5 million in 2003-2004 and a negligible cost to revenue in 2004-2005.

Compliance cost impact: This measure will reduce compliance costs for affected taxpayers.

Consolidation: refinements

With the introduction of the consolidation regime, a number of refinements (included in Schedules 3 to 8 to this bill) are being made to further clarify the following:

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cost setting rules for linked assets;

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cost setting rules for partners and partnerships;

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membership rules for subsidiaries of MEC groups held through an interposed non-resident entity; and

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minor technical amendments.

Date of effect: The consolidation measure took effect on 1 July 2002. The refinements made by this bill will also take effect from 1 July 2002.

Proposal announced: These measures were foreshadowed in Minister for Revenue and Assistant Treasurer's Press Release No. C014/03 of 6 March 2003.

Financial impact: None.

Compliance cost impact: These refinements are aimed at reducing the compliance costs stemming from the cost setting rules and the membership rules. The measures either align new rules with existing rules or clarify the existing rules' application.

Release from particular liabilities in cases of serious hardship

Schedule 9 to this bill amends the ITAA 1936, FBTAA 1986, TAA 1953, ITAA 1997 and the Administrative Appeals Tribunal Act 1975 to streamline the procedures under which an individual taxpayer can be released from a tax liability where payment would entail serious hardship. Consistent with contemporary review practices, the amendments will also introduce a new right to have tax relief decisions reviewed internally under the ATO objections process, and externally by the AAT sitting as the Small Taxation Claims Tribunal.

Date of effect: The new arrangements will commence on the later of 1 September 2003 or Royal Assent.

Proposal announced: Not previously announced.

Financial impact: No effect on revenue is expected, as the amendments do not alter the existing eligibility and decision making criteria.

Compliance cost impact: The amendments impose additional administrative costs on the ATO. Taxpayers should only incur increased compliance costs where they make use of the new review rights that the amendments afford.

Trans-Tasman (triangular) imputation

Schedule 10 to this bill inserts new Division 220 into Part 3-6 of the ITAA 1997 so that NZ companies may choose to enter the Australian imputation system. The Australian imputation rules will generally apply to a NZ company in the same way as they apply to an Australian company. This means that a NZ company will be able to maintain an Australian franking account and attach Australian franking credits to dividends.

Where a NZ company receives a franked dividend from an Australian company or pays Australian income tax or withholding tax, the NZ company will receive a franking credit and be able to frank dividends to its shareholders. Accordingly, Australian shareholders of NZ companies with Australian operations may receive franking credits reflecting Australian tax paid on Australian-sourced income and therefore be eligible for a tax offset.

NZ will make reciprocal changes to its imputation system to allow Australian companies to maintain a NZ imputation account.

Australian shareholders of NZ companies that earn Australian income are currently unable to receive Australian franking credits arising from company tax paid on that income. The same problem exists with NZ shareholders of Australian companies that earn NZ income. In effect, both groups of shareholders are taxed twice on such income. This is known as 'triangular taxation'. This measure will generally remove triangular taxation.

Date of effect: A NZ company may choose to maintain an Australian franking account from 1 April 2003. However, a NZ company will not be able to attach Australian franking credits to dividends until 1 October 2003.

Proposal announced: This measure was announced jointly by the Australian Commonwealth Treasurer and the NZ Minister for Finance and Revenue on 19 February 2003 (Treasurer's Press Release No. 7 of 19 February 2003).

Financial impact: This measure will have a cost to revenue of $5 million in 2003-2004, $20 million in 2004-2005, $20 million in 2005-2006 and $25 million in 2006-2007.

Compliance cost impact: NZ companies that choose to enter the Australian imputation system will incur a minor increase in compliance costs in maintaining an Australian franking account.

Summary of regulation impact statement

Regulation impact on business

Impact: This measure will have implications for a NZ company that chooses to enter the Australian imputation system.

Main points:

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NZ companies that choose to enter the Australian imputation system will incur a minor increase in compliance costs. They will have to maintain an Australian franking account and amend their distribution statements to give Australian shareholders information about the franking credit attached to dividends.

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This measure will increase administrative costs for the ATO. Forms and systems changes will be required to enable NZ companies to enter the Australian imputation system. Information and promotional material will be prepared to advise NZ companies and Australian shareholders about the changes. The ATO will also need to undertake specific compliance activities in relation to NZ companies.

GST amendments relating to compulsory third party schemes

Schedule 11 to this bill amends the GST Act to:

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modify the GST insurance provisions to apply to an insurer that makes payments or supplies in relation to CTP insurance policies and to apply similar provisions to payments and supplies that are made in relation to CTP compensation and other CTP non-insurance related matters; and

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ensure that the GST insurance provisions apply to payments and supplies made by CTP insurers and others pursuant to CTP settlement sharing arrangements.

Schedule 11 also amends the GST Transition Act to ensure that no adjustment or taxable supply arises in relation to the settlement of a claim under a CTP scheme, to the extent that the event giving rise to the claim happened before 1 July 2000.

Date of effect: 1 July 2000.

Proposal announced: These measurers were announced in the 2002-2003 MYEFO.

Financial impact: For the measures relating to settlement sharing arrangements, the expected cost to revenue is as follows:

For the remaining CTP measures the cost to revenue has not been quantified but is expected to be minimal.

Compliance cost impact: These measures are expected to reduce compliance costs.

Register of harm prevention charities

Schedule 12 to this bill amends the ITAA 1997 to establish a new category of DGR, namely, a register of harm prevention charities. Harm prevention charities are charitable institutions whose principal activity is to promote the prevention or the control of behaviour that is harmful or abusive to human beings.

Date of effect: The amendment applies to gifts made on or after 1 July 2003.

Proposal announced: This measure was announced in Treasurer's Press Release No. 49 of 29 August 2002.

Financial impact: Cost to revenue of $5 million per annum for 2004-2005, 2005-2006 and 2006-2007.

Compliance cost impact: Nil.