Senate

Revised Explanatory Memorandum

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

General outline and financial impact

Tax preferred entities (asset financing)

Schedule 1 to this Bill amends the income tax law to modify the taxation treatment of leasing and similar arrangements between taxpayers and tax preferred end users (such as tax-exempt entities and non-residents) for the financing and provision of infrastructure and other assets.

Division 250 of the Income Tax Assessment Act 1997 will apply to a taxpayer if, broadly:

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a tax preferred end user directly or indirectly uses, or effectively controls the use of, an asset; and

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the taxpayer does not have the predominant economic interest in the asset.

Certain relatively short-term and lower value arrangements are specifically excluded from the scope of Division 250.

If Division 250 applies to an arrangement, capital allowance deductions will be denied and the arrangement will be treated as a deemed loan that is taxed as a financial arrangement on a compounding accruals basis.

Date of effect: These amendments apply to arrangements entered into on or after 1 July 2007. Under transitional provisions, Division 250 will apply to arrangements entered into before 1 July 2007 in certain circumstances.

Proposal announced: This measure was announced in the then Minister for Revenue and Assistant Treasurer's Press Release No. 081 of 13 September 2005.

Financial impact: The financial impact of these amendments is unquantifiable.

Compliance cost impact: This measure will reduce ongoing compliance costs for affected stakeholders, although there will be a small transitional cost.

Summary of regulation impact statement

Regulation impact on business

Impact: The tax-exempt asset financing reforms are beneficial to taxpayers as they provide a more uniform set of rules and remove harsh outcomes that can arise under the existing law. This measure is largely expected to impact a relatively small number of large corporate taxpayers, along with tax-exempt entities (including state governments) and non-resident entities that enter into certain large asset financing arrangements.

Main points:

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The reforms adopt a 'lease, use and control of use' of the asset test to determine which entity has the predominant economic interest in an asset. Stakeholders are familiar with the operation of this test. Certain relatively short term and lower value arrangements are specifically excluded from the scope of the measures.

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If this measure applies, capital allowance deductions are denied and the arrangement is treated as a deemed loan that is taxed as a financial arrangement on a compounding accruals basis. This outcome is broadly consistent with the financial accounting treatment of asset financing arrangements.

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This measure is expected to improve the current investment environment for tax-exempt asset financing arrangements through a more uniform set of rules and less administrative complexity, specific carve outs for relatively short term and lower value arrangements, and less onerous tax treatment for arrangements which meet the provisions.

Stakeholders and their advisers may incur some transitional costs in familiarising themselves with the technical detail of the new law. It is not expected that these transitional costs will be significant.

Thin capitalisation - excluded equity interests

Schedule 2 to this Bill amends the Income Tax Assessment Act 1997 to change the definition of 'excluded equity interest'. The effect of the change is to exclude from the definition those equity interests that remain on issue for a total period of 180 days or more, whether or not this was the case at a specific valuation day.

Date of effect: This amendment commences on the day this Bill receives Royal Assent and will apply to income years starting on or after 1 July 2002 (the date when the definition of 'excluded equity interest' took effect).

Proposal announced: This measure was announced as part of the 2007-08 Budget.

Financial impact: Nil.

Compliance cost impact: Nil.

Thin capitalisation - application to groups containing certain authorised deposit-taking institutions

Schedule 3 to this Bill amends the Income Tax Assessment Act 1997 to introduce a choice mechanism under which authorised deposit-taking institutions (ADIs) known as specialist credit card institutions may be treated as if they were not ADIs in certain circumstances.

Date of effect: This amendment commences on the day this Bill receives Royal Assent and will apply to income years starting on or after 1 January 2004.

Proposal announced: This measure was announced on 20 December 2006 as part of the Mid-Year Economic and Fiscal Outlook 2006-07.

Financial impact: Unquantifiable, but expected to be negligible. Compliance cost impact: Nil.

Capital gains tax marriage breakdown roll-over for small superannuation funds

Schedule 4 to this Bill amends the Income Tax Assessment Act 1997 to extend the capital gains tax (CGT) marriage breakdown roll-over to in specie transfers of personal superannuation interests from a small superannuation fund to another complying superannuation fund under specific conditions. This enables separating spouses to achieve a 'clean break' from each other in terms of their superannuation arrangements.

Date of effect: This measure applies to CGT events that happen on or after 1 July 2007.

Proposal announced: This measure was announced in the Minister for Revenue and Assistant Treasurer's Press Release No. 046 of 8 May 2007.

Financial impact: This measure will have these revenue implications:

Compliance cost impact: The compliance cost impact of this measure is expected to be minimal for both implementation costs and ongoing compliance costs.

Income tax treatment of the Prime Minister's Prize for Australian History and the Prime Minister's Prize for Science

Schedule 5 to this Bill amends the Income Tax Assessment Act 1997 to exempt from income tax the Prime Minister's Prize for Australian History and the Prime Minister's Prize for Science, to the extent that the prizes would otherwise be assessable income.

Date of effect: These amendments apply to assessments for the 2006-07 income year and later years of income.

Proposal announced: This measure was announced in the Prime Minister's Press Release of 20 June 2007.

Financial impact: Negligible.

Compliance cost impact: Negligible.

Removal of the same business test cap

Schedule 6 to this Bill amends the company loss recoupment rules in the Income Tax Assessment Act 1997 to remove the $100 million total income cap on the same business test.

Date of effect: These amendments apply to losses incurred in an income year commencing on or after 1 July 2005.

Proposal announced: These amendments were announced in the 2007-08 Budget and in the Minister for Revenue and Assistant Treasurer's Press Release No. 048 of 8 May 2007.

Financial impact: This measure will have these revenue implications:

Compliance cost impact: These amendments are expected to reduce ongoing compliance costs for companies.

Partial capital gains tax roll-over for statutory licences

Schedule 7 to this Bill amends the Income Tax Assessment Act 1997 to extend the existing statutory licence capital gains tax (CGT) roll-over under Subdivision 124-C to provide for roll-over where one or more new licences are issued in consequence of the ending of one or more licences and to provide for a partial roll-over. A partial roll-over applies where one or more statutory licences end and are replaced by one or more new licences and the licensee also received non-licence capital proceeds such as money.

Date of effect: This measure will apply to CGT events that happen in the 2006-07 income year and later years.

Proposal announced: This measure was announced in the Minister for Revenue and Assistant Treasurer's Press Release No. 069 of 8 June 2007.

Financial impact: There is a cost to revenue of $20 million in 2006-07 and $90 million in 2007-08.

The nature of this measure is such that a reliable estimate cannot be provided for the remainder of the forward estimates, however, the impact in the 2008-09, 2009-10 and 2010-11 financial years is expected to be small.

Compliance cost impact: This measure is expected to lead to small increases in implementation and ongoing compliance costs, resulting in an overall low impact.

Australian property trusts and stapled securities

Schedule 8 to this Bill amends the Income Tax Assessment Act 1997 to provide holders of ownership interests in stapled entities with a capital gains tax (CGT) roll-over when a public unit trust is interposed between those holders and the stapled entities.

This Schedule also amends the Income Tax Assessment Act 1936 to ensure that such restructures do not result in the interposed head trust being taxed as if it were a company. In addition, public unit trusts will be able to acquire controlling interests in, or control, foreign entities whose business consists primarily of investing in land outside Australia for the purpose, or primarily for the purpose, of deriving rent.

Date of effect: The CGT roll-over amendments apply to CGT events that happen on or after 1 July 2006. The other amendments will apply to the 2006-07 year of income and later years of income.

Proposal announced: These amendments were announced in the Minister for Revenue and Assistant Treasurer's Press Release No. 031 of 4 April 2007.

Financial impact: Unquantifiable.

Compliance cost impact: These amendments will result in a small increase to implementation costs and a small decrease to ongoing compliance costs.

Deductible gift recipients

Schedule 9 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to update the list of deductible gift recipients (DGRs).

Date of effect: Deductions for gifts to the following organisations that are listed as DGRs under this Schedule, apply as follows:

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The Bathurst War Memorial Carillon Public Fund Trust from 3 August 2007 until 2 August 2009;

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Kidsafe ACT (Inc.) from 3 August 2007;

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Kidsafe New South Wales (Inc.) from 3 August 2007;

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Kidsafe QLD (Inc.) from 3 August 2007;

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Kidsafe Vic (Inc.) from 3 August 2007;

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Kidsafe SA Incorporated from 3 August 2007;

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Kidsafe Western Australia (Inc) from 3 August 2007;

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Kidsafe NT (Inc.) from 3 August 2007; and

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Kidsafe Tasmania (Inc) from 3 August 2007.

In addition, this Schedule extends the DGR listing of the Shrine of Remembrance Restoration and Development Trust until 30 June 2009.

Proposal announced: The deductibility of gifts to The Bathurst War Memorial Carillon Public Fund Trust was announced in the Minister for Revenue and Assistant Treasurer's Press Release No. 094 of 7 August 2007.

The deductibility of gifts to the Kidsafe state and territory bodies was announced in the Minister for Revenue and Assistant Treasurer's Press Release No. 095 of 7 August 2007.

The extension for the deductibility of gifts to the Shrine of Remembrance Restoration and Development Trust was announced in the Minister for Revenue and Assistant Treasurer's Press Release No. 092 of 25 July 2007.

Financial impact: This measure will have these revenue implications:

Compliance cost impact: Nil.

Film production offsets

Schedule 10 to this Bill reforms the taxation arrangements for the Australian screen media industry by:

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introducing a refundable tax offset for Australian expenditure in making Australian films (the producer offset);

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enhancing the existing refundable film tax offset for Australian production expenditure (the location offset);

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introducing a refundable film tax offset for post, digital and visual effects production in Australia (the PDV offset); and

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phasing-out the existing tax incentives provided to investors in Australian films.

Date of effect: The location offset will apply to films commencing principal photography or production of the animated image on or after 8 May 2007.

The PDV offset will apply to a film that commences post, digital and visual effects production on or after 1 July 2007.

The producer offset applies to qualifying Australian production expenditure incurred:

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on or after 1 July 2007; and

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before 1 July 2007, to the extent that such expenditure is attributable to goods or services provided on or after 1 July 2007.

Proposal announced: This measure was announced in the 2007-08 Budget and in joint press releases from the Minister for Communications, Information Technology and the Arts and the Minister for the Arts and Sport, on 9 May 2007.

Financial impact: This measure will have these financial implications:

Compliance cost impact: Nil.

Premium 175 per cent research and development tax concession for Australian research and development activities on behalf of a grouped foreign company

Schedule 11 to this Bill amends the Income Tax Assessment Act 1936 to allow for an additional 75 per cent deduction for additional expenditure on foreign-owned research and development (R & D) activities. A base 100 per cent specific deduction will be allowed for all R & D expenditure contributing to the calculation of the premium 175 per cent R & D tax concession.

Date of effect: Deductions will apply to a company's eligible expenditure in its first full income year after 30 June 2007 and later income years.

Proposal announced: This measure was announced by the Prime Minister and the Minister for Industry, Tourism and Resources in the Australian Government's Industry Statement of 1 May 2007.

Financial impact: This measure will have these revenue implications:

Compliance cost impact: Medium. All claimants of the premium 175 per cent R & D tax concession will have to understand and comprehend the new law even if their entitlements are unchanged. Ongoing compliance costs are likely to be negligible compared to the compliance costs for the existing premium 175 per cent R & D tax concession.

Establishment of Innovation Australia

Schedule 12 to this Bill amends the administration and oversight arrangements for the Industry portfolio's innovation and venture capital programmes as prescribed in the Industry Research and Development Act 1986 , the Pooled Development Funds Act 1992 and the Venture Capital Act 2002 . There are also consequential amendments to the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1997 in relation to the programmes with taxation implications.

These amendments establish a new board, Innovation Australia, combining the roles, responsibilities and functions of the Industry Research and Development Board (IR & D Board) and the Venture Capital Registration Board (VCR Board).

Date of effect: These amendments will apply from a day to be fixed by Proclamation.

Proposal announced: This measure has not previously been announced.

Financial impact: This measure is expected to result in some moderate administrative costs to the Department of Industry, Tourism and Resources to enable it to establish Innovation Australia and combine the roles of the IR & D Board and the VCR Board. There will be negligible change in the ongoing costs of administering the innovation and venture capital programmes as a result of this measure.

Compliance cost impact: This change will have negligible direct impact on clients of the innovation and venture capital programmes.