House of Representatives

Explanatory Memorandum

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

General outline and financial impact

Intercorporate dividend rebate

This Bill amends the ITAA 1936 to:

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remove the inter-corporate dividend rebate on unfranked dividends paid between resident companies on or after 1 July 2000 (unless they are part of a wholly owned company group); and

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allow certain non-resident owned companies a tax deduction to offset the removal of the rebate to ensure that commercially viable investment in Australia is not impeded.

Date of effect : The amendments apply to dividends paid on or after 1 July 2000.

Proposal announced : The proposal was announced in Treasurers Press Release No. 58 of 21 September 1999 (see Attachment L).

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

Compliance cost impact : By removing the intercorporate dividend rebate on unfranked dividends compliance costs will decrease for companies eligible for the rebate now because they will no longer have to calculate the rebate. There will also be a reduction in compliance costs for companies that currently have to decide if they are a private or public company, to know if they are eligible for the rebate. This can be difficult, as their status for tax law purposes is not necessarily the same as it is for company law.

Refunding excess imputation credits

This Bill amends the ITAA 1997 to enable taxpayers whose tax rates are below the company tax rate, to receive a refund of excess imputation credits (franking rebates) obtained from franked dividends.

Date of effect : The amendments apply to dividends paid on or after 1 July 2000.

Proposal announced : The proposal was announced in Treasurers Press Release No. 58 of 21 September 1999 (see Attachment M).

Financial impact : Implementing this measure will have a revenue cost. The revenue impact was identified as part of the business tax measures outlined in ANTS.

Compliance cost impact : Taxpayers who currently do not lodge a tax return will need to in order to claim their imputation credit refund.

Company rate changes (franking account and infrastructure borrowings rebate consequentials)

This Bill amends the ITAA 1936 to make consequential amendments to the dividend imputation and the infrastructure borrowings rebate provisions of the Act following the reduction in the company tax rate.

Date of effect : The amendments to the dividend imputation provisions apply from 1 July 2000. The amendments reflecting the new 34% company tax rate in the infrastructure borrowings rebate provisions apply to assessments for the 2000-2001 income year. The amendments reflecting the new 30% company tax rate in the infrastructure borrowings rebate provisions apply to assessments for the 2001-2002 and later income years.

Proposal announced : The proposal was announced in Treasurers Press Release No. 58 of 21 September 1999 (see Attachment A).

Financial impact : The financial impact of this measure has been factored into the revenue estimates for the reduction in the company tax rate made by the Income Tax Rates Bill No. 1.

Compliance cost impact : Companies may incur a small one off cost in converting their franking account balances.

Venture capital franking rebates

This Bill amends the ITAA 1936 to encourage venture capital investment in Australia by allowing complying superannuation funds and like entities a special franking rebate which enables them to receive venture capital gains, free of tax through a PDF. (A separate Bill, the New Business Tax System (Venture Capital Deficit Tax) Bill 1999, complements this measure.)

Date of effect : The amendments apply to venture capital gains PDF derived after the Capital Gains Tax Bill receives Royal Assent.

Proposal announced : The proposal was announced in Treasurers Press Release No. 58 of 21 September 1999 (see Attachment H).

Financial impact : The financial impact of this measure is included in the cost to the revenue of the measures to improve incentives for venture capital investment announced by the Treasurer on 21 September 1999 (including those relating to non-resident pension funds). The measure will have no impact to the revenue until the 2004-2005 financial year when there will be a revenue loss of $5 million.

Compliance cost impact : The proposal may result in a small increase in compliance costs for PDFs that opt to provide the benefit of the special franking rebate to its eligible shareholders.

Low-value pools

This Bill amends the ITAA 1936 to:

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replace, for certain taxpayers, immediate deductibility for plant costing $300 or less with a right to pool plant costing less than $1,000 and to depreciate that pool, as a single item of plant, over an effective life of 4 years; and

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allow certain taxpayers to add plant to that pool if it was written down to less than $1,000 under the diminishing value method.

Date of effect : The amendments regarding the removal of the immediate deduction and the option to pool plant costing less than $1,000 will commence in the income year in which 1 July 2000 occurs. The amendments regarding the option to pool plant that has been depreciated to less than $1,000 will commence from the 2000-2001 income year.

Proposal announced : The proposal was announced in Treasurers Press Release No. 58 of 21 September 1999 (see Attachment B).

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

Compliance cost impact : The proposal will significantly reduce compliance costs for those taxpayers who opt to use the pooling system.

Summary of regulation impact statement

Regulation impact on business

Impact : The measures contained in these Bills are part of the Governments broad-ranging reforms that 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 Australia's business tax system.

The New Business Tax System will be a more simple and sound tax system with lower compliance costs.

Main points :

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Potential compliance, administrative and economic impacts of the measures contained in these Bills have been carefully considered, both by the Review and the business sector. Substantial consultation with the business sector was an important part of the Review.

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Most of the measures in these Bills affect a particular group of taxpayers (e.g. the measures dealing with the intercorporate dividend rebate will affect companies).

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Some of the measures have wider effects (e.g. changes to imputation to reflect the decreased company rate of tax).

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The refundability of excess imputation credits from 1 July 2000 will have some impact on administration costs. This is because additional tax returns are expected to be lodged, so that refunds can be claimed. The other measures in this Bill are not expected to impose significant ongoing administration costs.