House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)

Exemption for Interest of Less than $50,000

Overview

This chapter explains the exemption from taxation under the FIF measures for natural persons (other than trustees) with small levels of offshore investments. Where the total of the taxpayer's interest together with the interests of associates, in foreign companies, trusts and life policies is not more than $A50,000, the FIF taxation provisions will not apply to the taxpayer's investments. [Section 515]

In addition, if the interests of the natural person (other than a trustee) and associates in foreign companies, trusts and life policies and interests in resident public unit trusts do not exceed $A50,000 the impact of the FIF taxation provisions will not apply in calculating the taxpayer's share of net income of the resident public unit trust. [Subsection 96A(2)]

Explanation

Introduction

The small investor exemption is only available to a taxpayer who is a natural person. The taxpayer may apply one or both of the tests given below at the end of the year of income to determine what interests (if any) are excluded from FIF taxation.

If, the interests exceed $A50,000 under both tests then the exemption is not available.

For the purpose of applying the tests, the value of the taxpayer's interests in a foreign company or trust that is a Foreign Investment Fund ( FIF), a foreign life assurance policy ( FLP) or a resident public unit trust is the higher of the cost incurred by the person in acquiring the interest or the market value of the interest at the end of the year of income. [Subsections 515(2) and 96A(3)]

First test

The first test measures only the direct interests of the taxpayer and associates in FIFs and FLPs. Where these are not greater than $A50,000 the FIF taxation provisions do not apply in the year of income to the taxpayer's interests in the FIFs and FLPs. [Subsection 515(1)]

Meaning of 'associate'

For the purposes of the small investor exemption an associate of a taxpayer, who is a natural person, includes the following:

spouse of the taxpayer, but not including a spouse who, although legally married to the taxpayer, has been living separately and apart from the taxpayer for at least 12 months;

child of the taxpayer whether or not the child lives with the taxpayer;

step-child who lives with the taxpayer;

partner of the taxpayer, including a spouse and child of the partner, of a partnership in which the taxpayer is a partner;

trustee of a trust, other than a public unit trust or an eligible Part IX entity, if the taxpayer or an associate benefits under the trust; and

company in which the taxpayer and associates have a majority voting interest or which is sufficiently influenced by the taxpayer and associates.

If the taxpayer is under 18 years of age the associates of the person include, in addition to the above:

parent of the taxpayer; and

brother or sister of the taxpayer. [Section 491]

Second test

The second test may operate to exclude the effect of the FIF taxation provisions in relation to the taxpayer's interest in a resident public unit trust that effectively represents an indirect offshore investment by the taxpayer. [Subsection 96A(2)]

Interest in a 'resident public unit trust'

An interest in a resident public unit trust means a unit in the trust or an entitlement to acquire such a unit. [Subsection 96A(5)]

Example

A natural person (A) has an interest in a resident public unit trust (B) which has an interest in a foreign trust FIF. A has a right to a share of the trust's income for the year.

The FIF measures will apply to B in the calculation of the net income of the trust for the year of income. A would be subject to tax on a share of the net income of B (section 97).

Where the second test is satisfied then subsection 96A(2) will modify the calculation of A's share of the net income of B to exclude the effect of the FIF taxation measures in relation to A.

The second test measures the interests of the taxpayer and associates in FIFs, FLPs and resident public unit trusts. Where these are not greater than $A50,000 the modification to the trust provisions illustrated by the above example will apply to the calculation of the taxpayer's share of the net income of the resident public unit trust. [Subsection 96A(2)]

A unit trust is a resident public unit trust where it is:

public unit trust as defined in section 102AAF for the whole year of income; and

either

he central management and control of the unit trust was in Australia; or

resident or residents held more than 50 per cent of the beneficial interests in the income of the unit trust or the beneficial interests in the property of the unit trust.[Subsection 96A(4)]

Clauses making the amendment

Clause 11: Inserts section 96A. Subsection 96A(2) will provide that the impact of the FIF measures will not apply in the calculation of a taxpayer's share of net income of a resident public unit trust where the taxpayer is a natural person with not more than $50,000 in foreign companies, trusts, life policies and resident public unit trusts.

Clause 27: Inserts Part XI which contains the exemption for interest of less than $50,000.