House of Representatives

Explanatory Memorandum

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

General outline and financial impact

Consolidation: providing greater flexibility

Schedule 1 to this bill provides greater flexibility, clarifies certain aspects of the consolidation regime and ensures that the regime interacts appropriately with other aspects of the income tax law.

Date of effect: These amendments have retrospective effect to 1 July 2002, which is the date of commencement of the consolidation regime. The amendments clarify the operation of the consolidation regime and the interaction of the regime with other areas of the tax law and as such are beneficial to taxpayers and do not have the potential to act to the detriment of any persons.

Proposal announced: All these amendments were foreshadowed in the former Minister for Revenue and Assistant Treasurer's Press Release No. C116/03 of 4 December 2003.

Financial impact: The financial impact in relation to the amendment dealing with capital gains or capital losses arising from changes in the value of deferred tax liabilities is unquantifiable as it depends on the future level of activity in disposals of assets which is not possible to determine. However, this change is designed to reduce compliance costs associated with keeping track of changes in the value of deferred tax liabilities. All of the other changes are not expected to impact on revenue.

Compliance cost impact: The amendments in this bill will provide taxpayers with additional flexibility in the transition to consolidation and are not expected to impact on compliance costs.

Copyright collecting societies

Schedule 2 to this bill amends the Income Tax Assessment Act 1997, the Income Tax (Transitional Provisions) Act 1997 and the Taxation Administration Act 1953 to:

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ensure that copyright collecting societies are not taxed on any copyright income that they collect and hold on behalf of members, pending allocation to them;

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minimise compliance costs for copyright collecting societies by ensuring that they are not taxed on the non-copyright income they derive, provided that the amount of non-copyright income derived falls within certain limits; and

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ensure that any copyright and non-copyright income collected or derived by copyright collecting societies that is exempt from income tax in their hands, is included in the assessable income of members upon distribution.

Date of effect: The amendments will generally apply from 1 July 2002. However, under a transitional option, societies may elect to have the amendments apply from 1 July 2004.

Proposal announced: This measure was announced in the former Minister for Revenue and Assistant Treasurer's Press Release No. C081/02 of 1 August 2002.

Financial impact: The financial impact of the amendments is expected to be negligible.

Compliance cost impact: The measure is expected to have a minimal effect on the compliance costs of copyright collecting societies.

Simplified imputation system - consequential and other amendments

Schedule 3 to this bill:

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makes consequential amendments to the income tax laws which will:

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replace references to the former imputation provisions in Part IIIAA of the Income Tax Assessment Act 1936 (ITAA 1936) to those of the simplified imputation system (SIS) in Part 3-6 of the Income Tax Assessment Act 1997 (ITAA 1997); and

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update terminology of the former imputation system to equivalent terms of the SIS;

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makes various technical amendments in relation to the SIS and other imputation related provisions; and

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inserts into Division 207 of the ITAA 1997 anti-avoidance rules that apply in relation to certain tax exempt entities that are entitled to a refund of franking credits. These rules were previously in Division 7AA of Part IIIAA of the ITAA 1936.

Date of effect: The amendments will generally apply to events occurring on or after 1 July 2002, the commencement date of the SIS.

The amendment to section 46FB of the ITAA 1936 will generally apply to dividends paid after 30 June 2003, subject to the transitional rule allowing groups to consolidate either before 30 June 2003 or on the first day of the first income year after 30 June 2003 and before 1 July 2004.

The amendments to re-insert the definition of 'controller (for CGT purposes)' will apply to assessments for the 2002-2003 income year and later income years.

For assessments for the 2002-2003 income year, section 109ZC of the ITAA 1936 has effect as if the references in subsection 109ZC(3) to amounts that are not assessable income and are not exempt income were instead a reference to income that is not exempt.

For the period starting 1 July 2002 and ending 30 June 2004 the following apply:

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section 128TB of the ITAA 1936 has effect as if the reference to 'general company tax rate' in subsection 128TB(2) was amended to 'corporate tax rate'; and

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section 377 of the ITAA 1936 has effect as if the references in paragraph 377(1)(e) to the former imputation provisions were references to the SIS.

Proposal announced: The consequential amendments form part of the SIS, which was announced as part of the Government's business tax reform package. The proposal was announced in the Treasurer's Press Release No. 058 of 21 September 1999. On 14 May 2002, the former Minister for Revenue and Assistant Treasurer announced in Press Release No. C057/02 the Government's program for delivering the next stage of business tax reform measures including the SIS.

Financial impact: Nil.

Compliance cost impact: The SIS is designed to reduce compliance costs incurred by business by providing simpler processes and increased flexibility.

Deductible gift recipients

Schedule 4 to this bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to update the lists of specifically listed deductible gift recipients (DGRs). It also amends the ITAA 1997 to add a new category of DGRs for government special schools.

Date of effect: The new category of DGRs for government special schools applies from 1 April 2004.

Deductions for gifts to organisations listed as DGRs under Schedule 4 apply as follows:

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State and territory fire and emergency services from 23 December 2003; with the exception of the ACT Rural Fire Service and the ACT State Emergency Service which apply from 1 July 2004, reflecting that these organisations only began operating under these names from that date;

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International Social Service - Australian Branch from 18 March 2004;

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Victorian Crime Stoppers Program from 23 April 2004;

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Australian Ex-Prisoners of War Memorial Fund from 20 October 2003 to 19 October 2005;

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Albert Coates Memorial Trust from 31 January 2004 to 30 January 2006;

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Coolgardie Honour Roll Committee Fund from 2 June 2004 to 1 June 2006;

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Tamworth Waler Memorial Fund from 20 April 2004 to 19 April 2006;

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Australian Business Week Limited from 9 December 2003;

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St Patrick's Cathedral Parramatta Rebuilding Fund from 25 February 2004 to 30 June 2004;

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St Paul's Cathedral Restoration Fund from 23 April 2004 to 22 April 2006;

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CFA and Brigades Donations Fund from 1 July 2004;

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City of Onkaparinga Memorial Gardens Association Inc. from 29 April 2004 to 25 April 2005;

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Mount Macedon Memorial Cross Trust from 14 August 2004 to 15 August 2005;

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Shrine of Remembrance Foundation from 3 July 2004 to 30 June 2006;

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Shrine of Remembrance Restoration and Development Trust from 1 July 2005 to 30 June 2007;

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Finding Sydney Foundation from 27 August 2004 to 26 August 2006;

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The Clontarf Foundation from 31 August 2004;

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Lord Somers Camp and Powerhouse from 5 March 2004;

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The Lowy Institute for International Policy from 14 August 2003; and

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St George's Cathedral Restoration Fund from 28 September 2004 to 27 September 2006.

Proposal announced: The new DGR category for certain government special schools was announced in the Treasurer's Press Release No. 32 of 11 May 2004. The deductibility of gifts to rural fire and emergency services authorities was announced in the Treasurer's Press Release No. 114 of 23 December 2003.

Financial impact: The cost to revenue of creating a new category of DGR for certain government special schools is unquantifiable, but likely to be small.

The DGR listings and extensions to DGR listings have the following financial impacts:

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St Paul's Cathedral Restoration Fund: $2 million for the period of the extension;

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St Patrick's Cathedral Parramatta Rebuilding Fund: $0.1 million for the period of the extension;

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the Shrine of Remembrance Foundation and the Shrine of Remembrance Restoration and Development Trust: $0.6 million over the period of the extension;

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Finding Sydney Foundation: $1 million over the life of the project; and

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St George's Cathedral Restoration Fund: $0.9 million over the two year period.

The cost to revenue of the remaining DGR listings and extensions is unquantifiable but insignificant.

Compliance cost impact: Nil.

Debt and equity interests - at call loans

Schedule 5 to this bill amends the Income Tax Assessment Act 1997 so that the transitional period for at call loans under the debt/equity rules will extend to 30 June 2005.

Date of effect: These amendments will commence on Royal Assent. They apply to loans entered into at any time on or before 30 June 2005.

Proposal announced: This measure was announced in the former Minister for Revenue and Assistant Treasurer's Press Release No. C045/04 of 24 May 2004.

Financial impact: The financial impact of the amendments is expected to be negligible.

Compliance cost impact: The amendments will give taxpayers extra time to assess existing loans and adjust their arrangements, if need be, in light of the Government's decision to carve out certain small business at call loans from the debt/equity rules (the former Minister for Revenue and Assistant Treasurer's Press Release No. C045/04 of 24 May 2004). The amendments are expected to assist in reducing compliance costs.

Irrigation water providers

Schedule 6 to this bill amends the water facilities and landcare tax concession provisions in the Income Tax Assessment Act 1997 to provide irrigation water providers and rural land irrigation water providers access to these concessions.

Date of effect: From 1 July 2004 for expenditure incurred on, or after, that date.

Proposal announced: This measure was announced in the former Minister for Revenue and Assistant Treasurer's and the Minister for Agriculture, Fisheries and Forestry's Press Release No. C040/04 of 11 May 2004.

Financial impact: The impact of this measure is estimated to cost $15 million over the forward estimate period.

Compliance cost impact: Compliance costs could be slightly lower.

Summary of regulation impact statement

Regulation impact on business

Impact: This measure is expected to impact favourably on irrigation water providers and rural land irrigation water providers and assists in renewing water supply infrastructure in rural Australia.

Main points:

The amendments will allow irrigation water providers and rural land irrigation water providers to claim accelerated decline in value deductions for eligible capital expenditure.

These amendments will have a small positive impact on compliance costs.

This measure will have a minor negative impact on the Australian Government's revenue collections.

Fringe benefits tax - broadening the exemption for the purchase of a new dwelling as a result of relocation

Schedule 7 to this bill amends the provisions for accessing the fringe benefits tax exemption for incidental purchase costs associated with the acquisition of a dwelling as a result of relocation.

Date of effect: 1 April 2004.

Proposal announced: This measure was announced in the former Minister for Revenue and Assistant Treasurer's Press Release No. C031/04 of 11 May 2004.

Financial impact: An insignificant cost to revenue.

Compliance cost impact: Nil.

CGT event G3

Schedule 8 to this bill extends the scope of CGT event G3 so that an administrator (in addition to a liquidator) of a company can declare shares and financial instruments in the company to be worthless for capital gains tax (CGT) purposes. The declaration permits taxpayers who hold those shares or financial instruments to choose to make a capital loss.

Date of effect: These amendments apply to declarations made by liquidators or administrators after the date of Royal Assent of this bill.

Proposal announced: This measure was announced in the 2004-2005 Budget and in the former Minister for Revenue and Assistant Treasurer's Press Release No. C029/04 of 11 May 2004.

Financial impact: These amendments have an unquantifiable but insignificant cost to revenue.

Compliance cost impact: These amendments will reduce compliance costs for affected taxpayers.

Summary of regulation impact statement

Regulation impact on business

Impact: The main impact will be on individuals, superannuation funds, trusts and companies that are shareholders and holders of financial instruments in companies under external administration.

Main points:

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Taxpayers who hold worthless shares in companies that appoint an administrator (rather than a liquidator), or who hold financial instruments that have become worthless, will not have to create a trust over those shares or financial instruments to be able to claim capital losses.

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Liquidators and administrators will incur additional costs in determining whether there are reasonable grounds to declare shares and financial instruments to be worthless and in making the appropriate declarations. These costs are not expected to be significant.

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The Australian Taxation Office may incur some implementation costs. These costs are not expected to be significant.

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The measure will reduce compliance costs for affected taxpayers at little cost and therefore is supported.

GST - supplies to offshore owners of Australian real property

Schedule 9 to this bill amends the A New Tax System (Goods and Services Tax) Act 1999 to remove an anomaly that allows supplies of certain services made to owners of residential property to be GST-free if the owner is not in Australia at the time of the supply. This amendment will result in the same goods and services tax (GST) treatment applying to both non-resident and resident entities whether or not they are in Australia at the time of the supply.

Date of effect: The amendments will apply to supplies made on or after the first day of the first quarterly tax period that commences after the day on which this bill receives Royal Assent.

Proposal announced: This proposal has not previously been announced.

Financial impact: The gain to GST revenue from this measure is estimated to be as follows:

Compliance cost impact: This measure is expected to reduce compliance costs, especially for real estate agents who will not be required to apportion supplies they make on behalf of owners located overseas.

Baby Bonus (first child tax offset) and adoption

Schedule 10 to this bill amends the first child tax offset provisions affecting adoption.

Date of effect: 1 July 2001.

Proposal announced: This measure was announced in the 2003-04 Mid-Year Fiscal and Economic Outlook.

Financial impact: An insignificant cost to revenue.

Compliance cost impact: Nil.

Technical correction to the Taxation Laws Amendment Act (No. 8) 2003

Schedule 11 to this bill corrects a technical defect in the citation of an Act in the commencement provision applying to the franking deficit tax offset provisions for life insurance companies in Schedule 7 to the Taxation Laws Amendment Act (No. 8) 2003.

Date of effect: The amendment commences immediately after the Taxation Laws Amendment Act (No. 8) 2003 received Royal Assent (21 October 2003).

Proposal announced: This measure has not previously been announced.

Financial impact: Nil.

Compliance cost impact: The amendment in this bill makes a technical correction to the citation of an Act and is not expected to impact on compliance costs.

Transfer of life insurance business

Schedule 12 to this bill amends the income tax law to alleviate unintended tax consequences that arise when a life insurance company transfers some or all of its life insurance business to another life insurance company under Part 9 of the Life Insurance Act 1995 or under the Financial Sector (Transfers of Business) Act 1999.

Date of effect: These amendments apply to transfers of life insurance business that take place on or after 1 July 2000.

Proposal announced: This measure was announced in the former Minister for Financial Services and Regulation's Media Release No. FSR/069 of 12 October 2000.

Financial impact: Negligible.

Compliance cost impact: This measure is expected to have a minimal impact on compliance costs.