House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon J. B. Hockey MP)

General outline and financial impact

Thin capitalisation and Foreign dividends

Schedule 1 to this Bill:

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tightens the debt limit settings in the thin capitalisation rules to ensure that multinationals do not allocate a disproportionate amount of debt to their Australian operations;

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increases the de minimis threshold to minimise compliance costs for small businesses; and

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introduces a new worldwide gearing debt test for inbound investors.

Schedule 2 to this Bill reforms the exemption for foreign non-portfolio dividends.

Date of effect: Schedules 1 and 2 to this Bill commence on the day after Royal Assent. Schedule 1 to this Bill applies to income years commencing on or after 1 July 2014 and Schedule 2 to this Bill applies to distributions and non-share dividends made after the day the Bill receives Royal Assent.

Proposal announced: The Treasurer and Assistant Treasurer announced in a joint Media Release titled 'Restoring integrity in the Australian tax system' of 6 November 2013 that it would proceed with reforms to the thin capitalisation and foreign dividend rules to prevent erosion of the Australian tax base.

Financial impact: The changes to the thin capitalisation rules and the exemption for foreign non-portfolio dividends (Schedule 1 and 2 respectively) are expected to provide an increase in revenue of $755 million over the forward estimates period.

Human rights implications: Schedules 1 and 2 to this Bill do not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapters 1 and 2, paragraphs 1.100 to 1.103 and 2.39 to 2.42 respectively.

Compliance cost impact: Low.

Improving the integrity of the foreign residents capital gains tax regime

Schedule 3 amends the Income Tax Assessment Act 1997 (ITAA 1997) to ensure that the foreign residents capital gains tax (CGT) regime operates as intended by preventing the double counting of certain assets under the Principal Asset Test. A technical correction is also made to the meaning of 'permanent establishment' in section 855-15 of the ITAA 1997.

Date of effect: The amendments to the Principal Asset Test will apply to CGT events that occur to different entities on:

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7.30pm on 14 May 2013; and

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13 May 2014.

The technical correction to section 855-15 will apply from the commencement of Division 855 (12 December 2006).

These changes are of a technical nature and do not affect any other aspect of the definition of taxable Australian property. They do not negatively affect any taxpayer because the scope of the definition of taxable Australian property aligns with the intention of the original provisions.

Proposal announced: The Principal Asset Test amendments were announced on 14 May 2013. The technical correction was announced on 26 May 2014.

Financial impact: The amendments to the Principal Asset Test are expected to raise an additional $10 million per annum from 2014-15:

The technical correction to the meaning of 'permanent establishment' does not have a financial impact as it fixes a technical defect in the legislation in order to align with the existing policy intent of the regime.

Human rights implications: This Schedule engages the right to equality and non-discrimination but does not raise any human rights concerns. See Statement of Compatibility with Human Rights - Chapter 3, paragraphs 3.72 to 3.76.

Compliance cost impact: The amendments will have a minor regulatory cost to foreign residents disposing of interests in 'land rich' entities.

Personalised tax receipts

Schedule 4 to this Bill amends the tax law to provide greater transparency to taxpayers about how their tax money is spent, by requiring the Commissioner of Taxation to issue a tax receipt to individuals for the income tax assessed to them.

Date of effect: The amendments will apply with respect to assessments for the 2014-15 income year and future income years.

Proposal announced: The amendments give effect to a 2013 election commitment.

Financial impact: Nil. The Australian Taxation Office will absorb the costs of preparing the receipts.

Human rights implications: This Schedule engages the right to take part in the conduct of public affairs. See Statement of Compatibility with Human Rights - Chapter 4, paragraphs 4.11 to 4.15.

Compliance cost impact: Nil.

Miscellaneous amendments

Schedule 5 to this Bill makes a number of miscellaneous amendments to the taxation and superannuation laws. These amendments are part of the Government's commitment to the care and maintenance of the taxation and superannuation systems.

These amendments include style changes, the repeal of redundant provisions, and the correction of anomalous outcomes and corrections to previous amending Acts.

Date of effect: The amendments have various application dates that are explained in detail in this explanatory memorandum. While some of these amendments have retrospective application, taxpayers will not be adversely impacted.

Proposal announced: The amendments were announced in the 2014-15 Budget.

Financial impact: These amendments are expected to have a minimal or nil revenue impact. However, some of the amendments are integrity measures that protect what could be significant amounts of revenue.

.. not zero, but rounded to zero

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 5, paragraphs 5.117 to 5.120.

Compliance cost impact: Negligible.