Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)General outline and financial impact
Introduction
In the 2003-2004 Federal Budget, following extensive consultation and a report (International Taxation - A Report to the Treasurer) by the Board of Taxation, the Government announced a package of reforms to international taxation. Following on from a new tax treaty with the United Kingdom and the New International Tax Arrangements Bill 2003, the measures contained in this bill are a further substantial instalment of those reforms.
Capital gains tax concession: active foreign companies
Schedule 1 to this bill amends the income tax law to ignore capital gains and losses arising from capital gains tax (CGT) events happening to shares in foreign companies which are held either by Australian companies or by controlled foreign companies in certain, specified circumstances. Broadly, the gains or losses will be disregarded to the extent that the foreign company has an underlying active business.
Date of effect: The amendments will apply to the specified CGT events relating to shares in foreign companies occurring on or after 1 April 2004.
Proposal announced: This measure was announced in Treasurer's Press Release No. 32 of 13 May 2003.
Financial impact: The financial impact of this measure is not quantifiable.
Compliance cost impact: Because of the underlying active business requirement and a business desire for the measure not to operate as an all-or-nothing exemption, additional compliance costs will be incurred when applying this measure. However, this was regarded as an acceptable cost of a better measure by business during consultation. Business can choose not to apply the rules so as not to incur these costs but then all of any relevant gain will be taxable or all of a loss will be non-deductible.
Foreign branch income, non-portfolio dividends and listed countries
Schedule 2 to this bill extends the existing exemptions for branch profits earned in, and non-portfolio dividends paid from, certain listed countries to all countries. It also changes the existing classification of countries as broad-exemption listed countries, limited-exemption listed countries or unlisted countries to either listed or unlisted countries.
Date of effect: The broadening of the exemption for non-portfolio dividends will apply to dividends paid after 30 June 2004. The broadening of the branch profits exemption and the changes to the classification of countries will apply to income years or statutory accounting periods of controlled foreign companies commencing after 30 June 2004.
Proposal announced: These measures were announced in Treasurer's Press Release No. 32 of 13 May 2003.
Financial impact: The cost to the revenue of this measure is expected to be $30 million in 2005-2006 and $55 million in 2006-2007.
Compliance cost impact: There should be considerable compliance cost savings for business from this measure. The law will be easier to understand and fewer distinctions between countries will be relevant (e.g. all dividends from foreign subsidiaries will be exempt from tax regardless of where the subsidiary is resident or where its profits have been derived).
Tainted services income
Schedule 3 to this bill amends sections 448 and 450 of the Income Tax Assessment Act 1936 to reduce the scope of tainted services income. Tainted services income will, in general, no longer include income from services provided by a company to a non-resident associate, or the overseas permanent establishment of an Australian resident. The amendments will improve the international competitiveness of Australian companies.
Date of effect: The amendments apply in relation to statutory accounting periods beginning on or after 1 July 2004.
Proposal announced: This measure was announced in Treasurer's Press Release No. 32 of 13 May 2003.
Financial impact: The amendments will have a cost to revenue of $10 million in 2005-2006 and $10 million in 2006-2007.
Compliance cost impact: The amendments are expected to reduce compliance costs for affected taxpayers.
Summary of regulation impact statement
Impact: Providing capital gains tax (CGT) relief for the disposal of non-portfolio interests in a foreign company with an active business will provide Australian companies (and controlled foreign companies) with greater flexibility in corporate restructuring decisions. It could remove Australian tax costs from consideration in making these decisions. Additional compliance costs will be incurred in obtaining those benefits.
The extension of the exemption for non-portfolio dividends and foreign branch profits and the many changes to the legislation that this has prompted will substantially reduce compliance costs for taxpayers while improving their international competitiveness.
The modifications to the tainted services income rules will allow for greater flexibility in dealing with offshore associates.
Main points:
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- The provision of CGT relief for the disposal of non-portfolio interests in a foreign company with an active business will give Australian multinationals greater flexibility in the use of their capital. While this necessarily involves additional compliance costs for taxpayers in order to receive the consequent benefits (to determine whether a business is an active business), these costs have been minimised to the extent possible within integrity concerns. The additional compliance costs were seen as an acceptable cost of obtaining the benefits of the measure by those businesses that were consulted.
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- The extension of the exemption for non-portfolio dividends and foreign branch profits will allow Australian multinationals (and their controlled foreign companies) to compete more effectively in overseas markets by removing the Australian tax liability on active business profits. This too will improve flexibility for companies in their use of capital. Compliance costs for taxpayers will be substantially reduced.
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- Reducing the scope of tainted services income will improve the competitiveness of Australian companies with offshore operations by allowing for greater flexibility in dealing with offshore associates. They will be able to use offshore service centres to provide services to other offshore group companies. The changes will also reduce taxpayer compliance costs.
Although the CGT measure requires the addition of new law, these measures in total have enabled some substantial improvements to the law in this area. It will be more easily understood.