Senate

Revised Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Josh Frydenberg MP)

General outline and financial impact

Non-concessional MIT income

Schedules 1 and 5 to this Bill amend the ITAA 1997, the ITAA 1936 and the TAA 1953 to improve the integrity of the income tax law for arrangements involving stapled structures and to limit access to tax concessions for foreign investors by increasing the MIT withholding rate on fund payments that are attributable to non-concessional MIT income to 30 per cent.

An amount of a fund payment will be non-concessional MIT income if it is attributable to income that is:

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MIT cross staple arrangement income;

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MIT trading trust income;

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MIT agricultural income; or

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MIT residential housing income.

The Income Tax (Managed Investment Trust Withholding Tax) Amendment Bill 2018 makes consequential amendments to the Income Tax (Managed Investment Trust Withholding Tax) Act 2008 to specify that the MIT withholding rate on income attributable to non-concessional MIT income is 30 per cent.

Date of effect: The amendments apply from 1 July 2019. Transitional rules apply to appropriately protect existing arrangements from the impact of the amendments.

Proposal announced: This measure was announced by the Government on 27 March 2018 and published in the 2018-19 Budget Paper No. 2 as 'Stapled structures - tightening concessions for foreign investors'.

Financial impact: As a package, the 2018-19 Budget measure 'Stapled structures - tightening concessions for foreign investors' is estimated to have the following gain to revenue over the forward estimates period:

Human rights implications: Schedules 1 and 5 to this Bill, and the Income Tax (Managed Investment Trust Withholding Tax) Amendment Bill 2018, do not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 6.

Compliance cost impact: Low.

Thin capitalisation

Schedule 2 to this Bill amends the ITAA 1997 to improve the integrity of the income tax law by modifying the thin capitalisation rules to prevent double gearing structures.

Date of effect: The amendments apply to income years starting on or after 1 July 2018.

Proposal announced: This measure was announced by the Government on 27 March 2018 and published in the 2018-19 Budget Paper No. 2 as 'Stapled structures - tightening concessions for foreign investors'.

Financial impact: As a package, the 2018-19 Budget measure 'Stapled structures - tightening concessions for foreign investors' is estimated to have the following gain to revenue over the forward estimates period:

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 6.

Compliance cost impact: Low.

Superannuation funds for foreign residents withholding tax exemption

Schedule 3 to this Bill amends the ITAA 1936 to improve the integrity of the income tax law to limit access to tax concessions for foreign investors by limiting the withholding tax exemption for superannuation funds for foreign residents.

Date of effect: The amendments apply from 1 July 2019. Transitional rules apply to appropriately protect existing arrangements from the impact of the amendments.

Proposal announced: This measure was announced by the Government on 27 March 2018 and published in the 2018-19 Budget Paper No. 2 as 'Stapled structures - tightening concessions for foreign investors'.

Financial impact: As a package, the 2018-19 Budget measure 'Stapled structures - tightening concessions for foreign investors' is estimated to have the following gain to revenue over the forward estimates period:

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 6.

Compliance cost impact: Low.

Sovereign immunity

Schedule 4 to this Bill will amend the ITAA 1936 and the ITAA 1997 to improve the integrity of the income tax law to limit access to tax concessions for foreign investors by codifying and limiting the scope of the sovereign immunity tax exemption.

The Income Tax Rates Amendment (Sovereign Entities) Bill 2018 makes consequential amendments to the Income Tax Rates Act 1986 to specify that sovereign entities are liable to income tax on taxable income at a rate of 30 per cent.

Date of effect: The amendments apply from 1 July 2019. Transitional rules apply to appropriately protect existing arrangements from the impact of the amendments.

Proposal announced: This measure was announced by the Government on 27 March 2018 and published in the 2018-19 Budget Paper No. 2 as 'Stapled structures - tightening concessions for foreign investors'.

Financial impact: As a package, the 2018-19 Budget measure 'Stapled structures - tightening concessions for foreign investors' is estimated to have the following gain to revenue over the forward estimates period:

Human rights implications: Schedule 4 to this Bill, and the Income Tax Rates Amendment (Sovereign Entities) Bill 2018, do not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 6.

Compliance cost impact: Low.

Summary of regulation impact statement

Regulation impact on business

Impact: The compliance costs of the package of measures in Schedules 1 to 5 to this Bill overall involve a low compliance cost impact, comprising a medium implementation impact and a low increase in ongoing compliance costs.

Main points:

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The package of measures in this Bill comprehensively tackles the various tax settings that are combined with stapled structures to deliver low tax rates to foreign investors and is the most effective option in providing significant revenue protection.

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Domestic investors will not be disadvantaged when competing for investment under the current tax settings.

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Some marginal projects could potentially be affected due to the higher withholding tax rate faced by foreign investors. Although tax can have a significant impact on investment decisions, tax is only one of many factors that investors consider in their investment decisions. There are a multitude of other factors that investors consider, such as the regulatory, political and social environment of their investment.

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The net benefits derived from the significant revenue protection and removal of distortions provided by the package outweigh concerns about increased complexity and compliance costs, as well as the potential impact on investment.