House of Representatives

Explanatory Memorandum

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

General outline and financial impact

Modifications to exemption for foreign earnings

Schedule 1 to this Bill modifies some aspects of the section 23AG of the Income Tax Assessment Act 1936 foreign employment income exemption. It aims to reduce compliance costs for taxpayers, and to address some specific issues that have arisen. The amendments:

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provide that a period of foreign service will not end until absences exceed one-sixth of the days of foreign service

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allow the exemption to potentially apply where a taxpayer dies during a period of foreign service before reaching the requisite 91 days

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reinstate eligibility for the exemption where a taxpayer was employed in Iraq during the suspension of Iraq's income tax system from 1 January 2003 to 30 April 2004.

Date of effect : Amendments to the treatment of absences from foreign service apply on or after Royal Assent. The amendment relating to foreign service in Iraq will apply for the 2002-03 and later years of income. The amendment relating to deaths in foreign service will apply to deaths that occurred on or after 1 July 2004.

Proposal announced : The amendments relating to the treatment of absences were announced in the 2004-05 Budget. The amendment relating to Australians employed in Iraq was announced in the Minister for Revenue and Assistant Treasurer's Press Release No. 005 of 19 January 2005. The amendment relating to death in foreign service has not previously been announced.

Financial impact : The financial impact of the amendment dealing with restoring the exemption to certain Australians employed in Iraq is $1 million for 2005-06. The financial impact of the other amendments is unquantifiable but is not expected to be significant.

Compliance cost impact : The amendments relating to treatment of absences should reduce compliance costs for taxpayers, since it reduces complexity. As the other amendments deal with specific and limited circumstances, compliance costs will be minimal.

Refundable film tax offset - extension to high budget television series

Schedule 2 to this Bill contains amendments that will include high budget television series as an eligible format for the purposes of Division 376 of the Income Tax Assessment Act 1997 (ITAA 1997). This will enable producers of certain eligible television series to apply for the Division 376 tax offset.

Date of effect : These amendments apply to eligible production expenditure incurred on and after 1 July 2004. Effectively, expenditure incurred on television series on or after 1 July 2004 may be eligible under Division 376 of the ITAA 1997.

Proposal announced : The former Minister for Revenue and Assistant Treasurer, the former Minister for Communications, Information Technology and the Arts and the Minister for the Arts and Sport together announced the proposal in joint media release No. C043/04 of 11 May 2004.

Financial impact : This measure will have a cost to revenue as follows:

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

Consolidation

Schedule 3 to this Bill amends the Income Tax Assessment Act 1997 to:

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clarify the operation of the bad debt rules for multiple entry consolidated (MEC) groups

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ensure that the modifications to the bad debt rules for consolidated groups and MEC groups also apply to determine whether consolidated groups and MEC groups can deduct swap losses.

Schedule 3 also amends the Income Tax (Transitional Provisions) Act 1997 to extend the time, until 31 December 2005, for head companies of consolidated groups and MEC groups to make or revoke certain choices in relation to setting the tax cost of assets and the utilisation of losses.

Date of effect : These amendments apply from 1 July 2002.

Proposal announced : The amendments relating to bad debts and swap losses were announced in the Minister for Revenue and Assistant Treasurer's Press Release No. 62 of 13 July 2005. The amendments to extend the time for making or revoking certain choices were announced in the Minister for Revenue and Assistant Treasurer's Press Release No. 23 of 20 December 2004.

Financial impact : Nil.

Compliance cost impact : These amendments are expected to have a minimal impact on compliance costs.

Thin capitalisation - transitional provision

Schedule 4 to this Bill amends the Income Tax (Transitional Provisions) Act 1997 to implement changes, for a limited period, to the application of the thin capitalisation regime contained in Division 820 of the Income Tax Assessment Act 1997 .

These amendments will ensure that a taxpayer's thin capitalisation position is not immediately affected by changes made to the Australian accounting standards from 1 January 2005 to align those standards with International Financial Reporting Standards.

These amendments allow taxpayers to use accounting standards as they existed prior to 1 January 2005 to undertake thin capitalisation calculations for a period of three years.

Date of effect : These amendments apply to three consecutive income years commencing on or after 1 January 2005.

Proposal announced : These amendments were announced in the Treasurer's Press Release No. 2 of 24 January 2005.

Financial impact : Nil.

Compliance cost impact : If taxpayers choose to take advantage of the amendments, they will be required to undertake thin capitalisation calculations based on old accounting standards. There will be compliance costs involved in determining the relevant figures and in maintaining appropriate records.

Forestry managed investments

Schedule 5 to this Bill extends the operation of the '12-month rule' for certain prepaid expenditure by investors in forestry managed investment schemes. The 12-month rule is currently due to expire on 30 June 2006 but will now be extended until 30 June 2008.

Date of effect : This amendment applies from the date of Royal Assent.

Proposal announced : This measure was jointly announced by the Minister for Revenue and Assistant Treasurer and the Minister for Fisheries, Forestry and Conservation in Press Release No. 035 of 10 May 2005.

Financial impact : The extension of the prepayment rule has an estimated revenue cost of $30 million in 2007-08 and $35 million in 2008-09.

Compliance cost impact : Nil.

Debt and equity interests

Schedule 6 to this Bill:

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deems related party at call loans to small companies to be debt interests under the debt/equity rules

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makes a number of minor technical amendments to ensure that the debt/equity rules work as intended.

Date of effect : The deemed debt treatment of related party at call loans to small companies applies to schemes entered into on or after 1 July 2005 and schemes entered into before 1 July 2005, in so far as they continue to exist at that date. The technical amendments apply from 1 July 2001.

Proposal announced : The Minister for Revenue and Assistant Treasurer announced the deemed debt treatment of the related party at call loans measure in Press Release No. 063 of 15 July 2005. The Minister for Revenue and Assistant Treasurer had previously announced the technical amendments in Press Release No. 002 of 5 August 2004.

Financial impact : The deemed debt treatment for related party at call loans has an estimated revenue cost of up to $11 million per annum for the 2005-06 income year, increasing to $14 million per annum in the 2009-10 income year. The financial impact of the technical amendments is unquantifiable.

Compliance cost impact : The deemed debt treatment is expected to reduce compliance costs for small business. The technical amendments are expected to have negligible compliance costs.

Summary of regulation impact statement

Regulation impact on business

Impact : The deemed debt treatment is expected to reduce compliance costs for small business.

Main points :

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The deemed debt treatment will reduce compliance costs of small companies, as such companies will not have to treat related party at call loans as equity interests for income tax purposes.

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This reduces record keeping requirements because it means that small companies do not need to keep non-share capital accounts for these loans.

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It also means that small companies will not be forced to bear costs in formalising their loans to avoid equity treatment.