House of Representatives

Revised Explanatory Memorandum

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

General outline and financial impact

General outline and financial impact

Interest withholding tax exemptions

Schedule 1 to this bill amends the IWT provisions of the ITAA 1936 to:

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exclude certain associates from the associates prohibitions contained in section 128F;

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restore the concessional treatment under section 128F to certain securities by exempting from IWT gains deemed to be interest under section 128AA; and

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exempt from IWT interest derived by a non-resident on nostro accounts held by financial institutions.

Date of effect: The amendments to exclude certain associates will apply to all new debentures issued after 29 August 2001 and to pre-existing issues that did not fail the public offer test. The amendments to restore the concessional treatment under section 128F to certain securities caught by section 128AA will apply to amounts of deemed interest paid on or after 29 August 2001. The nostro account amendments will apply to interest paid on nostro accounts on or after 29 August 2001.

Proposal announced: The proposal was announced by former Assistant Treasurer and former Minister for Financial Services and Regulation in Press Release No. 42 of 29 August 2001.

Financial impact: The revenue cost of these measures is estimated to be $10 million per annum.

Compliance cost impact: The amendments will reduce and eliminate compliance costs.

Summary of regulation impact statement

Regulation impact on business

Impact: These proposals will enhance Australia's development as a centre for financial services in the region by removing tax impediments and reducing and eliminating compliance costs.

Main points:

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Excluding certain associates from the associates prohibitions contained in section 128F will remove a perceived impediment for companies issuing debentures under that section in Australia. This will make it easier for companies to issue IWT-free debentures in Australia and thereby encourage this activity. This will further assist in integrating the domestic and offshore corporate debt markets.

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Restoring the concessional treatment under section 128F to certain securities by exempting from IWT gains deemed to be interest under section 128AA will benefit Australian entities which issue these securities under section 128F, non-residents who acquire them and residents who acquire the securities from non-residents before their maturity.

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Exempting from IWT interest paid on nostro accounts will benefit Australian banks and financial institutions which provide finance on a commercial basis as it will eliminate the compliance costs imposed in meeting the IWT obligation associated with these accounts.

CGT exemption for certain compensation payments

Schedule 2 to this bill amends the CGT provisions of the ITAA 1997 to provide a CGT exemption for payments received by Australian residents under the GFLCP.

Date of effect: The amendment will apply to assessments for the 2001-2002 income year and later income years.

Proposal announced: The amendment was announced by the former Assistant Treasurer, Senator the Hon. Rod Kemp, in Assistant Treasurer's Press Release No. 52 of 18 October 2001.

Financial impact: The amendment is expected to cost less than $1 million per year.

Compliance cost impact: Nil.

Friendly society investment products

Schedule 3 to this bill amends the ITAA 1936 and the ITAA 1997 so that, from 1 January 2003, friendly societies will be allowed a deduction for investment income paid or credited to recipients of special purpose investment products (income bonds, scholarship plans and funeral policies) where that income has been included in the assessable income of the friendly society.

Schedule 3 also clarifies the taxation treatment of distributions paid from these products.

Date of effect: 1 January 2003.

Proposal announced: Minister for Revenue and Assistant Treasurer's Press Release No. C46/02 of 14 May 2002.

Financial impact: None. There may be a small unquantifiable bring forward of revenue.

Compliance cost impact: The compliance costs will be minimal.

Summary of regulation impact statement

Regulation impact on business

Impact: Low.

Main points:

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Friendly societies will need to make minor system changes to allow deductions for investment income when they are paid or credited to recipients of affected policies.

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Friendly societies will incur some compliance costs notifying recipients of the changes to the taxation treatment of their product.

Goods and services tax

Government amendments to the Taxation Laws Amendment Bill (No. 6) 2002 adds Schedule 4 to this bill. Schedule 4 amends the GST Transition Act, so that an entity is not entitled to claim an input tax credit for the acquisition of CTP insurance where the acquisition relates to a period of insurance that commences before 1 July 2003. That is, input tax credits will be denied because of the commencement date of the CTP insurance rather than payment date for the acquisition of the CTP insurance.

Date of effect: The amendments apply, and are taken to have applied, in relation to net amounts for tax periods starting on, or after, 1 July 2000.

Proposal announced: Not previously announced.

Financial impact: $5 million in the first year after the transition period ends.

Compliance cost impact: Reduction in compliance costs for providers of CTP insurance.