House of Representatives

Explanatory Memorandum

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

General outline and financial impact

Marriage breakdown roll-over

Schedule 1 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to extend the marriage breakdown capital gains tax (CGT) roll-over to assets transferred to a spouse or former spouse because of:

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a binding financial agreement under the Family Law Act 1975 (Family Law Act) or a corresponding written agreement that is binding because of a corresponding foreign law;

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an arbitral award under the Family Law Act or a corresponding arbitral award under a corresponding state, territory or foreign law; or

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a written agreement that is binding because of a state, territory or foreign law relating to de facto marriage breakdowns and that, because of such a law, cannot be overridden by an order of a court except to avoid injustice.

These amendments ensure that a capital gain or loss that would otherwise be made by an individual, a company or a trustee is deferred until the transferee spouse or former spouse disposes of the CGT asset.

These amendments also ensure that the CGT main residence exemption interacts more appropriately with the marriage breakdown roll-over by taking into account the way in which both the transferor and transferee spouses use the dwelling when determining the transferee spouse's eligibility for the main residence exemption.

Finally, these amendments ensure that marriage breakdown settlements do not give rise to CGT liabilities.

Date of effect : The amendments that relate to the marriage breakdown roll-over and the main residence exemption apply to CGT events that are trigger events for the purposes of Subdivision 126-A of the ITAA 1997 and that happen after the date of Royal Assent of this Bill.

The amendment that relates to marriage breakdown settlements applies to CGT events that happen after the date of Royal Assent of this Bill.

Proposal announced : This measure was announced in the then Minister for Revenue and Assistant Treasurer's Press Release No. 33 of 10 May 2005.

Financial impact : Minimal.

Compliance cost impact : Minimal.

Consolidation

Schedule 2 to this Bill amends the consolidation provisions in the Income Tax (Transitional Provisions) Act 1997 to ensure that the integrity provision that requires certain roll-overs to be ignored for tax cost setting purposes does not apply to a consolidated group or multiple entry consolidated group that forms after a demerger, provided certain conditions are satisfied. These amendments also clarify the operation of the integrity provision.

Date of effect : This measure applies from 1 July 2002.

Proposal announced : This measure was announced in the then Minister for Revenue and Assistant Treasurer's Press Release No. 098 of 1 December 2005.

Financial impact : This measure will have these revenue implications:

Compliance cost impact : Negligible.

Simplified imputation system: imputation for New Zealand resident companies

Schedule 3 to this Bill amends the income tax law to ensure that franking credits are available to an Australian company which receives a franked distribution that is non-assessable non-exempt income from a New Zealand company that has elected into the Australian imputation system.

Date of effect : 1 April 2003.

Proposal announced : This measure has not previously been announced.

Financial impact : Nil.

Compliance cost impact : Negligible.

Capital gains tax and foreign residents

Schedule 4 to this Bill amends the income tax law to better target and strengthen Australia's capital gains tax (CGT) laws for foreign residents. This is achieved by narrowing the range of assets on which foreign residents will be subject to Australian CGT to Australian real property and the business assets (other than Australian real property) of a foreign resident's Australian permanent establishment. The integrity of the narrower CGT tax base is strengthened by including rules covering indirect holdings of Australian real property by foreign residents.

Date of effect : These amendments will apply to CGT events occurring on or after Royal Assent.

Proposal announced : This measure was announced in the Treasurer's Press Release No. 44 of 10 May 2005.

Financial impact : The cost to revenue of this measure is expected to be $50 million per annum in 2006-07. Thereafter, the cost is expected to be $65 million per annum.

Compliance cost impact : The CGT and foreign residents measure is unlikely to have a large impact on compliance costs overall. Although compliance costs may rise for those foreign investors with indirect holdings in Australian real property, compliance costs will likely decrease for a large number of other investors due to the narrowing of the assets on which foreign residents are subject to Australian CGT and the broadening of the non-portfolio interest requirement.

Summary of regulation impact statement

Regulation impact on business

Impact : The CGT and foreign residents measure in this Bill impacts on all foreign residents, be they individuals, companies, trusts or trustees of foreign trusts, holding interests in Australian assets or resident entities.

Narrowing the range of assets for foreign residents subject to Australian CGT, and expanding the non-portfolio (ie, 10 per cent or greater) interest requirement means that many foreign residents who may have previously been subject to the Australian CGT will now fall outside the scope of the regime.

However, some foreign residents previously outside Australia's tax net will now come within the scope of Australia's CGT regime. Foreign residents affected are those holding non-portfolio interests in certain foreign entities.

Main points :

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This measure narrows the range of assets on which a foreign resident will be liable to Australian CGT to Australian real property and the business assets (other than Australian real property) of a foreign resident's Australian permanent establishment. This will further enhance Australia's status as an attractive place for business and investment by addressing the deterrent effect for foreign investors of Australia's current broad foreign resident CGT tax base.

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To complement this change, the integrity of the CGT regime for foreign residents is strengthened by covering foreign residents' indirect holdings of Australian real property.

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Limiting the integrity measure to non-portfolio interests in entities where more than 50 per cent of the value of the assets of the entity is attributable to Australian real property will additionally carve out other foreign investors not investing in entities that are land rich.