Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello MP)Chapter 5 - Technical correction to application rule
Outline of chapter
5.1 Schedule 5 to this Bill amends subitem 140(2) of the New International Tax Arrangements (Participation Exemption and Other Measures) Act 2004 (NITA Act 2004) which deals with the application rule for Parts 2 and 3 of Schedule 2 to that Act. This chapter explains how the new application rule will affect the amendments contained in Parts 2 and 3.
5.2 Unless otherwise stated, all legislative references are to the Income Tax Assessment Act 1936.
Context of amendments
5.3 The technical amendment in this Schedule amends an application rule to ensure that the changes made by the NITA Act 2004 operate as originally intended. The original application rule resulted in ambiguity and did not clearly express the Government's policy.
Summary of new law
5.4 Schedule 5 amends the application rule in subitem 140(2) in Schedule 2 to the NITA Act 2004 to ensure all the amendments made by Parts 2 and 3 in that Schedule operate as intended.
Comparison of key features of new law and current law
| New law | Current law |
|---|---|
| The application rule ensures most amendments contained in Parts 2 and 3 of Schedule 2 to the NITA Act 2004 apply when a thing happens after 30 June 2004. A further application rule applies specifically to items 7, 58 and 59 of those Parts to ensure those amendments apply to a statutory accounting period that starts on or after 1 July 2004. | The application rule provides that all amendments contained in Parts 2 and 3 of Schedule 2 to the NITA Act 2004 apply when a dividend is paid after 30 June 2004. |
Detailed explanation of new law
5.5 Schedule 5 to this Bill clarifies the application rule contained in Part 6 of Schedule 2 to the NITA Act 2004. The application provisions in Part 6 provide rules to ensure amendments made by Parts 1 to 5 in Schedule 2 to the NITA Act 2004 operate from the intended time.
5.6 The new application rule changes the specific rule in Part 6 dealing with the application of amendments made by items 4 to 84 in Schedule 2 to the NITA Act 2004. The new rule applies so that most of the amendments made by those items will come into effect when a thing happens after 30 June 2004. The rule is drafted in a principle-based way to cover many sorts of things such as the payment of a dividend, the sale of an asset or the change of residence of a foreign company. The effect of the new rule on the amendments made by items 4 to 84 in Schedule 2 to the NITA Act 2004 is explained in paragraphs 5.7 to 5.16.
5.7 Amendments made by items 4 to 6 and 8 in Part 2 of Schedule 2 to the NITA Act 2004 will apply when a dividend is paid after 30 June 2004. The new subitem 140(2) of Schedule 2 to the NITA Act 2004 ensures the amendments take effect at the time a thing happens where it happens after 30 June 2004. A dividend paid is the relevant thing happening. [Schedule 5, item 1, subitem 140(2) in Schedule 2 to the NITA Act 2004]
5.8 Items 5 and 6 amend provisions dealing with the calculation of attributable income. Item 8 repeals provisions that were used to calculate attributable income in specific situations. The calculation of attributable income is not a 'thing that happens' for the purposes of the new subitem 140(2). The amendments made by items 5, 6 and 8 are only important in calculating attributable income where a controlled foreign company receives a dividend. This means that the changes made by those items will take effect where a dividend is paid after 30 June 2004. [Schedule 5, item 1, subitem 140(2) in Schedule 2 to the NITA Act 2004]
5.9 Item 7 in Schedule 2 to the NITA Act 2004 amends section 403. The old section 403 provided a rule that applied where an unlisted country controlled foreign company derived certain branch profits and non-portfolio dividends. The rule allowed those amounts to be treated as notional exempt income in the calculation of attributable income. The calculation of attributable income of a controlled foreign company is made at the end of a statutory accounting period.
5.10 The amended section 403 is reduced to only apply to certain branch profits of an unlisted country controlled foreign company. Those amounts are treated as notional exempt income. There is no event or thing that happens that would trigger the operation of the amendment which means the new subitem 140(2) would not be effective. Instead, the application rule in new subitem 140(2A) ensures the amendment takes effect where a statutory accounting period of a controlled foreign company starts on or after 1 July 2004 [Schedule 5, item 1, subitem 140(2A) in Schedule 2 to the NITA Act 2004]. Other rules ensure the proper treatment of non-portfolio dividends received by a controlled foreign company after 30 June 2004 but before the start of the first statutory accounting period after 1 July 2004.
5.11 Items 9 to 37 and items 39 to 57 of Part 3 in Schedule 2 to the NITA Act 2004 amend provisions that are relevant when an Australian company or a controlled foreign company receives a dividend. The amendments made by those items will take effect where a dividend is paid after 30 June 2004. The payment of a dividend is the relevant thing happening. [Schedule 5, item 1, subitem 140(2) in Schedule 2 to the NITA Act 2004]
5.12 Item 38 of Schedule 2 to the NITA Act 2004 amends section 160AFCB. This provision applies where there is a calculation of attributable income under section 457. Attributable income is calculated under section 457 where a controlled foreign company changes its residence from an unlisted country to a listed country or to Australia. The amendment made by item 38 is effective from the time a company changes its residence after 30 June 2004. A change of residence is the relevant thing happening. [Schedule 5, item 1, subitem 140(2) in Schedule 2 to the NITA Act 2004]
5.13 Items 58 and 59 in Schedule 2 to the NITA Act 2004 repeal two provisions in section 384. Section 384 provided additional assumptions for calculating the attributable income of a controlled foreign company resident in a non-broad-exemption listed country. Paragraph 384(2)(aa) and subparagraph 384(2)(d)(ia) provided rules where the controlled foreign company was resident in a limited-exemption listed country. Where a statutory accounting period starts on or after 1 July 2004, section 384 will only apply to companies resident in unlisted countries. The list of limited-exemption countries will no longer be used in calculating the attributable income of a controlled foreign company.
5.14 There is no event or thing happening that would trigger the repeal of paragraph 384(2)(aa) and subparagraph 384(2)(d)(ia), which means the new subitem 140(2) would not be effective. Instead, the application rule in new subitem 140(2A) ensures the repeals take effect where a statutory accounting period starts on or after 1 July 2004 [Schedule 5, item 1, subitem 140(2A) in Schedule 2 to the NITA Act 2004]. The repeals will take effect at the same time the list of limited-exemption countries is no longer used.
5.15 Items 60 and 71 to 73 of Schedule 2 to the NITA Act 2004 amend sections affected by the calculation of attributable income under section 457. Attributable income is calculated under section 457 where a controlled foreign company changes its residence from an unlisted country to a listed country or to Australia. The amendments made by those items are effective from the time a company changes its residence after 30 June 2004. A change of residence is the relevant thing happening. [Schedule 5, item 1, subitem 140(2) in Schedule 2 to the NITA Act 2004]
5.16 Items 61 to 70 and 74 to 84 of Schedule 2 to the NITA Act 2004 amend provisions that are relevant when an Australian company or a controlled foreign company receives a dividend. The amendments made by those items will take effect where a dividend is paid after 30 June 2004. The payment of a dividend is the relevant thing happening. [Schedule 5, item 1, subitem 140(2) in Schedule 2 to the NITA Act 2004]
Application and transitional provisions
5.17 The amendments made by Schedule 5 to this Bill commence immediately after the commencement of the NITA Act 2004. That Act commenced on 29 June 2004. These amendments are retrospective to ensure that it is clear when the amendments in the NITA Act 2004 take effect.