Explanatory Memorandum
(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)Chapter 7 - Other amendments
Consequential amendments
What is the effect on the Controlled Foreign Company provisions?
7.1 Section 400 of Part X of the Income Tax Assessment Act 1936 (ITAA 1936) is repealed by these amendments. Subsection 400(aa) is re-written to ensure the Controlled Foreign Company (CFC) rules continue to operate as intended when calculating the attributable income of an eligible CFC. This section specifies that for an eligible CFC the cross-border test is not satisfied where the eligible CFC and the other entity (provided it is also a CFC) are residents of the same listed country (disregarding the residency test in section 383 of the ITAA 1936). [Schedule 2, item 18, section 400]
7.2 Former subsection 400(a) is not re-written because it is not required. The residency assumption under section 383 means that a CFC is treated as an Australian resident and the cross-border test satisfied in the same way for that CFC as it is for any other resident entity. It would be expected that in most cases the cross-border test would be satisfied for the CFC because it would operate through an overseas permanent establishment.
7.3 Former subsection 400(b) is not rewritten because it has no practical effect in the context of the new rules. That subsection related to consequential amendments for entities as the result of the notional application of Division 13 of the ITAA 1936 (Division 13) to a CFC in working out its attributable income. In the event that an entity is actually disadvantaged by the application of the new transfer pricing rules, they are entitled to request a consequential adjustment under those rules.
7.4 Amendments also modify the gross turnover calculation provisions in the CFC rules to reflect the change in the transfer pricing rules from operating on the basis of the Commissioner of Taxation (Commissioner) making a determination under section 136AD of the ITAA 1936, to the new rules operating on a self-assessment basis. [Schedule 2, item 19, subsection 434(3)]
What is the effect on the transferor trust rules?
7.5 Consequential amendments also repeal section 102AAZA, which modified the way Division 13 applied in the notional application of Division 13 to the trustee of a trust in calculating the net income of the trust under the transferor trust rules. [Schedule 2, item 9, section 102AAZA in Schedule 1 to the TAA 1953]
7.6 Former subsection 102AAZA(a) is not re-written because it is not required. The residency assumption for the trustee that applies in the ordinary calculation of the net income of a non-resident trust estate will mean that the trustee is treated as an Australian resident. The cross-border test is satisfied in respect of the trustee in the same way that it is for any other resident entity.
7.7 Former subsection 102AAZA(b) is not rewritten because it is not required for the provisions relating to consequential adjustments under Subdivision 815-B. That subsection related to consequential amendments for entities as the result of the notional application of Division 13 to a trustee in calculating its net income under Division 13. In the event that an entity is actually disadvantaged by the notional application of the new transfer pricing rules, it is entitled to request a consequential adjustment under those rules.
Amendment Period
7.8 Consequential amendments also repeal various provisions in Part IV of the ITAA 1936 as a result of the removal of the unlimited amendment period available to the Commissioner to give effect to any transfer pricing adjustment. [Schedule 2, items 12 to 16, subsection 170(9B), table item 4 in subsection 170(10), subsection 170(9C), definition of ' double taxation agreement' in subsection 170(14), definition of ' prescribed provision' in subsection 170(14), definition of ' relevant provision' in subsection 170(14)]
7.9 However, unlimited amendment periods continue to apply to consequential adjustments made under subsection 815-145(2). [Schedule 2, item 2, subsection 815-150(2)]
Administrative Penalties
7.10 A note is also included in provisions dealing with determining when a matter is 'reasonably arguable' which directs taxpayers to Subdivision 284-E of Schedule 1 to the Tax Administration Act 1953 (TAA 1953). This Subdivision sets out the requirements for transfer pricing documentation [Schedule 2, item 44, note at end of subsection 284-15(1) in Schedule 1 to the TAA 1953]
7.11 A further amendment updates provisions that apply administrative penalties to scheme shortfall amounts to ensure they may also be applied where a liability to an administrative penalty arises under subsection 284-145(2A) in Schedule 1 to the TAA 1953 from 1 July 2012. This amendment resolves an issue in calculating the penalty amount for adjustments under Subdivision 815-A. The change does not adversely affect taxpayers because Subdivision 815-A makes clear provision for penalties to apply in this way. [Schedule 2, item 58, subsection 284-160(b) in Schedule 1 to the TAA 1953]
Other amendments
7.12 As a result of Schedule 2 modernising the transfer pricing rules and replacing Division 13, many consequential amendments arise, where sections currently contain references to Division 13, or to terms used in that Division. [Schedule 2, items 8, 10, 30, 31, 33, 35, subsection 6(1) definition of ' international tax sharing treaty', note in subsection 160ZZW(2), paragraph 802-35(1)(c), paragraph 802-35(2)(c), subsection 815-40(2), subparagraph 842-250(1)(c)(ii)]
7.13 Further consequential amendments repeal provisions that are no longer necessary as a consequence of the repeal of Division 13. [Schedule 2, items 11, 13, 17, 24 to 29, subsection 160ZZW(5), table item 24 in subsection 170(10), subsection 389(a), notes 1 and 2 in section 70-20, notes 1 and 2 in section 355-400, note in section 420-20, note in section 420-30]
7.14 Amendments also reflect changes to references that have resulted from the inclusion of additional Subdivisions within Division 815. [Schedule 2, items 32 and 34, note in section 815-10, note in section 820-30]
7.15 Amendments also update the checklist in sections 10-5 and 12-5 to reflect the changes that resulted from the repeal of Division 13 and the inclusion of the transfer pricing rules into the Income Tax Assessment Act 1997 . [Schedule 2, items 20 to 23, table item headed ' avoidance of tax' in section 10-5, table item headed ' trading stock' in section 10-5, table item headed ' tax avoidance schemes' in section 12-5, table item headed ' transfer pricing' in section 12-5]
7.16 Amendments also insert new definitions into the dictionary for an 'area covered by an international tax sharing treaty', 'arm's length conditions', 'arm's length profits', 'international tax sharing treaty', 'PE', 'reasonably arguable threshold' and 'residence article', while the definition of 'transfer pricing benefit' has been updated to incorporate amendments resulting from the modernisation of the transfer pricing rules. [Schedule 2, items 36 to 43, subsection 995-1(1)]
7.17 In updating the IMR income provision to account for the repeal of Division 13, a further technical amendment is also made to this provision with the insertion of the words 'that is resident in a country' to ensure that the provision applies only to entities that are residents of countries that have not entered into an international agreement with Australia which contains a business profits article. [Schedule 2, item 35, subparagraph 842-250(1)(c)(ii)]
7.18 Minor technical amendments also ensure that dictionary definitions apply and that the appropriate entity is identified. [Schedule 2, items 55 to 57, subparagraph 815-35(1)(b)(ii), subparagraph 815-35(2)(b)(ii), subsection 815-35(10)]
Application provisions
7.19 The amendments made by Schedule 2 apply:
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- in respect of tax other than withholding tax - to income years starting on or after the earlier of:
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- 1 July 2013; and
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- the day this Bill receives Royal Assent.
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- in respect of withholding tax - in relation to income derived, or taken to be derived, in income years starting on or after the earlier of the above two dates.
[Schedule 2, items 50 and 54]
7.20 The amendment made by item 58 (which applies a base penalty to scheme shortfall amounts) applies to income years commencing on or after 1 July 2012. [Schedule 2, item 59]
7.21 Amendments to the Income Tax (Transitional Provisions) Act 1997 reflect changes that have resulted from the inclusion of the additional Subdivisions within Division 815. In particular, the amendments clarify that Subdivision 815-A does not apply to an income year to which Subdivisions 815-B and 815-C apply. [Schedule 2, items 51 to 53]
STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
Modernisation of the Transfer Pricing Rules
7.22 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .
Overview
7.23 Schedule 2 to this Bill inserts Subdivisions 815-B, 815-C and 815-D into the Income Tax Assessment Act 1997 and Subdivision 284-E into Schedule 1 to the Taxation Administration Act 1953 . These amendments are designed to modernise the transfer pricing rules contained in Australia's domestic rules.
7.24 The amendments provide a set of consistent rules that apply to both tax treaty and non-treaty cases, ensuring greater alignment between outcomes for international arrangements involving Australia and other jurisdictions irrespective of whether they are part of Australia's treaty network.
7.25 The amendments also contain specific rules relating to transfer pricing documentation.
7.26 This measure applies for income years commencing on or after the earlier of:
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- 1 July 2013; and
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- the day this Bill receives Royal Assent.
7.27 In respect of withholding tax, this measure applies in relation to income derived, or taken to be derived, in income years commencing on or after the earlier of the above two dates.
Human rights implications
7.28 The Schedule does not engage any of the applicable rights or freedoms.
Conclusion
7.29 This Schedule is compatible with human rights as it does not raise any human rights issues.