House of Representatives

Explanatory Memorandum

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

General outline and financial impact

Disposal of leases and leased plant

This Bill amends the income tax law to:

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include an amount in the assessable income of a taxpayer that disposes of an interest in leased plant or a lease of plant;

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trigger a balancing charge for 100% subsidiaries of wholly-owned groups by treating the subsidiary as having disposed of and reacquired its depreciable plant at market value where:

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the group transfers the majority beneficial ownership in the subsidiary to an entity outside the group that is not in the same business as the group;

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the subsidiary leases out the depreciable plant for a majority of the period it was held by the subsidiary; and

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some or all of the lease period occurred on or after 22February 1999; and

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where the balancing charge is triggered, make the subsidiary and all the companies that were members of the group immediately before the time the subsidiary was transferred jointly and severally liable if the subsidiary does not pay tax arising from the balancing charge within 6 months of the due date for payment.

Date of effect: The amendments apply to:

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disposals of interests in leased assets or leases on or after 22February 1999, if the asset was leased for most of the period it was held; and

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transfers of majority benefical ownership interests in 100% subsidiaries on or after 22 February 1999.

Proposal announced: The proposal was announced in Review of Business Taxation Press Release No. 4 of 22 February 1999, and in Treasurers Press Release No. 58 of 21September 1999 (in particular, refer to Attachment R of that Press Release).

Financial impact: The financial impact of this measure is set out in the table below:

Compliance cost impact: Taxpayers may incur some compliance costs in undertaking additional calculations or obtaining market valuation.

Value shifting through debt forgiveness

This Bill amends the income tax law, to deal with debt forgiveness arrangements entered into between commonly-owned companies. Where a debt is forgiven, the amendments will:

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require reductions to the cost base of equity interests, and in certain circumstances of debt interests, held directly or indirecly in the creditor company that are subject to CGT; and

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require compensatory increases in certain circumstances to the cost base of equity interests held directly or indirectly in the debtor company that are subject to CGT.

Date of effect: The amendments apply to debts forgiven on or after 22February 1999.

Proposal announced: The proposal was announced in Treasurers Press Release No. 58 of 21 September 1999 (in particular, refer to Attachment Q to that Press Release). It is one of the measures to prevent abuse of deficiences in the current business tax system foreshadowed in Treasurers Press Release No. 10 of 22 February 1999.

Financial impact: This measure is estimated to raise revenue of $25million in 2000-2001 and $22 million in 2001-2002. This measure is expected to cease on commencement of consolidation.

Compliance cost impact: Affected taxpayers may incur some compliance costs associated with determining the adjustments to be made to cost bases and reduced cost bases.

Excess deductions

This Bill amends the ITAA 1997 to remove deduction limitson exploration and prospecting expenditure and allowable capital expenditure on mine development.

Date of effect: The amendments apply to excess deductions available at 21 September 1999. For taxpayers whose 1998-1999 income year ends after 21 September 1999 the amendments will apply to excess deductions available on the first day of their 1999-2000 income year.

Proposal announced: The proposal was announced in Treasurers Press Release No. 58 of 21 September 1999 (in particular, refer to Attachment Q to that Press Release).

Financial impact: The financial impact of this measure is set out in the table below:

Compliance cost impact: This measure will reduce compliance costs as it will reduce the need for calculations and record keeping.

Preventing a deduction and a capital loss arising from a single economic loss

This Bill amends the ITAA 1997 to ensure that a taxpayer cannot claim a deduction and a capital loss for the same economic loss when a CGT event occurs in relation to a CGT asset.

Date of effect: The amendments apply to CGT events (such as the disposal of an asset) occurring on or after the date of introduction of this legislation.

Proposal announced: On introduction.

Financial impact: This is a revenue protection measure.

Compliance cost impact: None.

Transfer or creation of assets by companies that are members of linked groups

This Bill amends the ITAA 1997 to defer recognition of capital losses or deductions which would otherwise be realised when:

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an asset is transferred between companies in the same linked group;

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an asset is created in a company in the same linked group; or

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an asset is transferred to, or created in, an entity or an associate of that entity, and that entity is connected with a member of the linked group.

Date of effect: The amendments apply to CGT events (such as the disposal of an asset) occurring on or after the date of introduction of this legislation.

Proposal announced: The original proposal was announced in Treasurers Press Release No. 58 of 21 September 1999 (in particular, refer to Attachment Q to that Press Release).

Financial impact: The financial impact of this measure is set out in the following table:

Compliance cost impact: Affected taxpayers may incur minimal compliance costs associated with determining whether a capital loss or deduction can be recognised.

Transfer of losses within wholly-owned groups of companies

This Bill amends the income tax law to prevent the duplication of a tax loss or a net capital loss which has been transferred between wholly-owned group companies, where direct or indirect interests in the loss company are realised by:

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reducing the cost base of equity and debt interests held directly or indirectly in the loss company that are subject to CGT if certain conditions are satisfied;

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increasing the cost base of interests held directly or indirectly in the income company that are subject to CGT if certain conditions are satisfied; and

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clarifying the current law intended to prevent the duplication of net capital losses.

Date of effect: The amendments apply where losses are transferred under a written agreement made on or after 22 February 1999. In addition, for tax loss transfers the amendments only apply where CGT events happen in relation to shares or debts on or after 22 February 1999.

Proposal announced: The proposal was announced in Treasurers Press Release No. 58 of 21 September 1999 (in particular, refer to Attachment Q to that Press Release). It is one of the measures to prevent abuse of deficiences in the current business tax system foreshadowed in Treasurers Press Release No. 10 of 22 February 1999.

Financial impact: This measure is estimated to raise revenue of $35million in 2000-2001 and $20 million in 2001-2002. This measure is expected to cease on commencement of consolidation.

Compliance cost impact: Affected taxpayers may incur some compliance costs associated with determining the adjustments to be made to cost bases of CGT assets.

The continuity of ownership test

This Bill amends the ITAA 1997 to remedy defects in the continuity of ownership test, currently applying to tax losses, net capital losses and bad debts of a company, and proposed to apply to companies with unrealised net losses.

Date of effect: The amendments apply to:

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tax losses, net capital losses and bad debt deductions claimed in an income year ending after 21 September 1999; and

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unrealised net losses, in respect of which the continuity of ownership test is failed after 11.45 am AEST on 21September1999.

Proposal announced: The proposal was announced in Treasurers Press Release No. 58 of 21 September 1999 (in particular, refer to Attachment Q to that Press Release).

Financial impact: The financial impact of this measure is set out in the following table:

Compliance cost impact: The measure may increase compliance costs due to the requirement for companies to demonstrate the maintenance of continuous majority ownership. Depending on the extent to which a companys shareholder is widely-held.

Applying the same business test to unrealised losses

This Bill amends the ITAA 1997 to limit the extent of the duplication of company losses that are unrealised at the time of a substantial change in a companys ownership or control, by applying the same business test.

Date of effect: The amendments apply to losses that are incurred after 11.45 am AEST on 21 September 1999. The amendments providing for the application of the same business test apply to a company that:

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undergoes a substantial change of ownership or control after 11.45 am AEST on 21 September 1999; and

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has an unrealised net loss in respect of assets it held at the time of that change.

Proposal announced: The proposal was announced in Treasurers Press Release No. 58 of 21 September 1999 (in particular, refer to Attachment Q to that Press Release).

Financial impact: The financial impact of this measure is set out in the following table:

Compliance cost impact: The measure may increase compliance costs faced by companies, depending on the extent and nature of company asset holdings.

Deducting prepayments

This Bill amends the ITAA 1936 to:

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deny access by medium and large businesses to the 13 month rule, which allows immediate deductions of prepayments for things to be done within 13months; and

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spread deductions arising from prepayments for those businesses over the period the prepayment covers (to a maximum of 10 years).

Date of effect: The amendments generally apply to prepayments incurred after 11.45 am AEST on 21 September 1999. Special transitional provisions apply if prepayments are made in the income year that includes 21September 1999.

Proposal announced: The proposal was announced in Treasurers Press Release No. 58 of 21 September 1999 (in particular, refer to Attachment J to that Press Release).

Financial impact: The financial impact of this measure is set out in the following table:

Compliance cost impact: This measure is expected to reduce compliance costs over time as the tax treatment of prepayments would be aligned more closely to the accounting treatment.

Limiting indexation of cost bases of CGT assets

This Bill amends the ITAA 1997 to:

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freeze indexation of the cost base of an asset at 30 September 1999, if that asset was acquired at or before 11.45 am AEST on 21 September 1999 and disposed of after that date; and

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deny indexation of the cost base of assets acquired after 11.45am AEST on 21 September 1999.

Date of effect: The amendments apply to the calculation of the cost base of an asset for a CGT event (such as the disposal of the asset) occurring after 11.45 am AEST on 21 September 1999.

Proposal announced: The proposal was announced in Treasurers Press Release No. 58 of 21 September 1999 (in particular, refer to Attachment D to that Press Release).

Financial impact: The financial impact of this measure is included in the estimates reported under the measure dealing with reduced CGT rates for individuals, trusts and other entities.

Compliance cost impact: The measure will reduce compliance costs through simplifying the calculation of the amount of a capital gain to be included in assessable income.

Concessions for capital gains by individuals and some other entities

This Bill amends the ITAA 1997 so that:

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for assets acquired at or before 11.45 am AEST on 21September 1999 and held for at least 12 months:

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individuals and trusts can choose to calculate any capital gain on an asset by either using an indexed cost base with indexation frozen or reducing by one-half the capital gain without indexation of the cost base; and

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superannuation funds can choose to calculate any capital gain on an asset by either using a frozen indexed cost base or reducing by one-third the capital gain without indexation of the cost base; and

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for assets acquired after 11.45 am AEST on 21 September 1999 and held for at least 12 months:

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individuals and trusts are allowed a one-half exemption on any capital gain made in relation to the asset; and

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superannuation funds are allowed a one-third exemption on any capital gain made in relation to the asset.

Date of effect: The amendments apply to capital gains arising from CGT events occurring after 11.45 am AEST on 21 September 1999:

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Individuals, trusts and superannuation funds can choose how the capital gain is treated for assets acquired at or before 11.45am AEST on 21 September 1999.

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The exemption will apply to capital gains arising for individuals, trusts and superannuation funds from assets acquired after 11.45 am AEST on 21 September 1999.

Proposal announced: The proposal was announced in Treasurers Press Release No. 58 of 21 September 1999 (in particular, refer to Attachment D to that Press Release).

Financial impact: The financial impact of this measure is part of the estimate for the measures limiting indexation of cost bases of CGT assets in this Bill, CGT concessions for individuals, trusts and other entities, and abolishing averaging for individuals. The provisions relating to the abolishing of averaging are to be included in a later Bill.

The financial impact of these measures is set out in the following table:

Compliance cost impact: Negligible.

Summary of Regulation Impact Statement

Regulation Impact on Business

Impact: The measures contained in this Bill are part of the Governments broad-ranging reforms which will give Australia a New Business Tax System. These reforms are based on the Recommendations of the Review that the Government established to consider reforms to Australias business tax system.

The New Business Tax System will be a simpler and sounder tax system with lower compliance costs.

Main points:

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The potential compliance, administrative and economic impacts of the measures contained in this Bill have been carefully considered, both by the Review and the business sector. The business sector was involved in the substantial consultation process associated with the Review.

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Most of the measures in this Bill impact on a particular group of taxpayers (e.g. the measures dealing with artificial duplicated losses will impact on companies) or taxpayers that undertake a particular transaction (e.g. the measure dealing with disposals of leases and leased plant apply to taxpayers who undertake these disposals).

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Some of the measures have a wider impact (e.g. the measure removing CGT indexation will apply to all taxpayers with CGT assets).

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Most of the measures are expected to decrease compliance costs (e.g. the measure removing CGT indexation will significantly simplify how taxpayers work out capital gains). Where measures may increase compliance costs for some taxpayers, they also provide taxpayers with greater flexibility in managing their affairs or preserve the integrity of the tax system.

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The administrative costs of implementing the measures in this Bill are expected to be minimal.