Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello MP)General outline and financial impact
Introduction
This Bill is a further instalment implementing the package of reforms which were announced following the Government's review of international taxation arrangements. Earlier instalments included a new treaty with the United Kingdom, the New International Tax Arrangements Act 2004, the New International Tax Arrangements (Participation Exemption and Other Measures) Act 2004 and the New International Tax Arrangements (Managed Funds and Other Measures) Bill 2004.
Dividends received by foreign-owned branches
Schedule 1 to this Bill amends the taxation treatment of certain non-residents in respect of Australian branches by taxing dividends paid to the branches on a net assessment basis and providing tax offsets in relation to franked distributions received.
Date of effect: These amendments will apply to dividends, non-share dividends, non-unit dividends and distributions paid on or after the date of Royal Assent.
Proposal announced: This measure was announced in the Treasurer's Press Release No. 32 of 13 May 2003.
Financial impact: The financial impact of this measure is unquantifiable, but expected to be insignificant.
Compliance cost impact: The compliance costs will generally be comparable to current levels, although they may be reduced in relation to some taxpayers.
Changes to the controlled foreign companies rules
Schedule 2 to this Bill amends the income tax law to:
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- prevent inappropriate taxation as a result of the definition of 'commencing day' in the controlled foreign companies rules when Australian residents gain a direct or indirect interest in a controlled foreign company, and
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- remove inappropriate taxation where an 'unlisted country' controlled foreign company becomes a 'listed country' controlled foreign company due to its country of residence being listed.
This Schedule also corrects a deficiency in the law relating to 'adjusted distributable profits' when a controlled foreign company changes residence from an unlisted country to a listed country or Australia.
Date of effect: The new definition of commencing day will, for most purposes, apply to capital gains tax events occurring on or after the 1 July that next occurs after Royal Assent.
The removal of inappropriate consequences that follow listing of a country will apply from the day after Royal Assent.
The correction of the deficiency relating to adjusted distributable profits will apply for income years and statutory accounting periods starting on or after 1 July 2004.
Proposal announced: This measure was announced in the Treasurer's Press Release No. 32 of 13 May 2003.
Financial impact: The financial impact of the new definition of commencing day is unquantifiable. The financial impact of the amendments to remove inappropriate consequences that occur from the listing of a country is insignificant and has been rounded down to nil.
Compliance cost impact: This amendment will reduce compliance costs associated with acquisitions of overseas groups and restructuring of overseas operations. It allows Australian taxpayers who have acquired an interest in a foreign company, which has never before been controlled from Australia, to assume that Australian tax will not subsequently be payable on gains which have accrued prior to the time of acquisition by the Australian taxpayer.
There will be no compliance cost impact from the removal of inappropriate attribution when an unlisted country controlled foreign company becomes a listed country controlled foreign company due to its country of residence becoming listed pending listing of a country.
Australian branches of foreign financial entities
Schedule 3 to this Bill extends the existing separate entity treatment currently provided to Australian branches of foreign banks, to include Australian branches of foreign financial institutions. Separate entity treatment entails treating a branch as a separate legal entity from a parent company, as if it is a subsidiary. Australian branches of foreign banks are treated as entities separate from the head office of the foreign bank under Part IIIB of the Income Tax Assessment Act 1936 (ITAA 1936) for thin capitalisation grouping purposes and under the transfer of loss provisions. Also extending separate entity treatment to Australian branches of foreign financial entities will improve competition within the financial services sector.
Date of effect: These amendments will generally apply to income years starting on or after the date of Royal Assent.
The amendments to the transfer of loss provisions will apply in relation to relevant losses for income years starting on or after the date of Royal Assent.
Proposal announced: This measure was announced in the Treasurer's Press Release No. 32 of 13 May 2003.
Financial impact: The financial impact of this measure is unquantifiable, but expected to be insignificant.
Compliance cost impact: There will be some additional compliance costs for taxpayers who are subject to this measure, however these costs are no more onerous then those imposed on foreign banks. These cost may be met by the systems taxpayers already have in place.
Cross-border employee shares and rights
Schedule 4 to this Bill amends the income tax law, to more closely align the taxation of shares or rights acquired under an employee share scheme with international norms developed by the Organisation for Economic Co-operation and Development. The amendments are relevant for individuals who work in more than one country or change their country of residence. They will help prevent double or nil taxation of employee shares or rights and provide greater certainty for individuals.
Additional rules clarify capital gains tax (CGT) interactions, and make other minor improvements.
Date of effect: The amendments relating to the acquisition of employee shares or rights by individuals or employee share trusts, and to individuals who first become employed in Australia holding employee shares or rights will generally apply from the date of Royal Assent.
The CGT amendments generally apply to CGT events occurring on or after Royal Assent.
Amendments to the fringe benefits tax and foreign investment fund rules apply from the relevant income year ending after Royal Assent.
Proposal announced: This measure was announced in the Treasurer's Press Release No. 32 of 13 May 2003.
Financial impact: The financial impact of this measure is unquantifiable, but expected to be insignificant.
Compliance cost impact: The clarification will provide greater certainty for taxpayers while its overall impact on compliance cost is unquantifiable.
Technical correction to application rule
Schedule 5 to this Bill amends the application rule in subitem 140(2) in Schedule 2 to the New International Tax Arrangements (Participation Exemption and Other Measures) Act 2004 to ensure all the amendments made by Parts 2 and 3 in that Schedule operate as intended.
Date of effect: The change to the application rule is to take effect immediately after the commencement of the New International Tax Arrangements (Participation Exemption and Other Measures) Act 2004. That Act commenced on 29 June 2004.
Proposal announced: This measure has not previously been announced.
Financial impact: Nil.
Compliance cost impact: Nil.
Summary of regulation impact statement
Impact: The measures in this Bill are part of a broader reform package that builds on Australia's position as an attractive place for business and investment. Two measures relate to the Australian branches of foreign entities and will provide a more neutral treatment of alternative corporate structures and improve competition in the financial services sector. The changes to the treatment of the employee shares or rights of individuals moving between countries will improve Australia's ability to attract highly skilled individuals and businesses that employ them by aligning more closely with international norms and reducing uncertainty. The changes to the controlled foreign companies rules have a number of objectives, including reducing compliance costs associated with the acquisitions of foreign companies and the restructuring of overseas operations.
Main points:
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- Extending similar tax treatment to Australian branches of foreign financial entities, as currently provided to Australian branches of foreign banks, will foster competitive neutrality between these two types of financial service providers. It will provide similar tax outcomes for foreign financial entities (as well as banks) in choosing whether to operate in Australia through either branches or subsidiaries. There will be some compliance costs for taxpayers who are subject to this measure.
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- The taxation of dividends received by Australian branches on an assessment basis will also improve tax neutrality between foreign-owned branches and subsidiaries in Australia. It removes an inconsistency between Australia's domestic income tax law and its tax treaty obligations, thereby providing compliance cost savings for certain taxpayers as well as cash-flow benefits.
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- The changes to the taxation of cross-border employee shares or rights aim to align Australia's tax rules more closely with international norms developed by the Organisation for Economic Co-operation and Development, and help prevent double or nil taxation where individuals move between countries. It will also address areas of uncertainty associated with the current law.
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- Changes to the definition of 'commencing day' in the controlled foreign companies rules will ensure that only capital gains and capital losses that relate to the period of time during which a controlled foreign company was in the controlled foreign companies net are included in Australia's capital gains tax net.
Changes to the consequences that follow from the listing of a country as a listed country for the purposes of the controlled foreign companies rules will ensure that inappropriate consequences do not apply to attributable taxpayers with controlled foreign companies in such a country.