Replacement Explanatory Memorandum
(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P)Chapter 3 Offshore Banking - Summary of proposed amendments
This Bill will amend the Income Tax Assessment Act 1936 to provide income tax concessions for profits of offshore banking activities carried out in Australia.
Income Tax Concession
The Bill will give effect to the Government's decision to provide concessional tax treatment for profits from offshore banking activity in Australia. The concession will take the form of a tax rate of 10% on those profits.
Announcement - One Nation Economic Statement
The One Nation economic statement of 26 February 1992 announced the concession. It stated that the concession would be confined to pure offshore banking transactions by an authorised OBU. The concession was to apply from 1 July 1992.
Pure Offshore Banking Transactions
The traditional concept of offshore banking is:
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- the borrowing of money in any currency from non-residents; and
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- on-lending of the funds to non-residents.
This concept, referred to as pure offshore banking, is embodied in the exemption from interest withholding tax (IWT) provided in the current law for offshore banking units. OBUs are generally exempt from IWT on the interest paid on these borrowings.
The aim of the OBU tax concessions
The tax concessions for OBUs are designed to facilitate the growth of Australia as a viable offshore banking centre.
The existing withholding tax concessions have not promoted any significant offshore banking.
After the announcement in the One Nation Economic Statement, extensive consultations were held with the banking and finance industry. An objective evaluation was made of the scope of the tax concessions needed to achieve the desired outcome.
Scope of the offshore banking activities
The studies have shown that the activities of the OBU centres in other countries in the region cover a wide range extending beyond the traditional concept of borrowing and lending. These wider activities are seen as integral to the establishment of an offshore banking centre in Australia.
The extended activities include:
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- dealing in financial or treasury instruments, like currency and interest rate swaps, hedges and futures;
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- securities and futures trading;
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- foreign exchange trading;
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- a range of fee-based activities such as funds management for non-residents and the provision of investment advice to non-residents; and
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- borrowing from and lending to offshore branches of Australian residents.
Extended coverage of the tax concessions
It has been accepted that the viability of an Australian offshore banking regime depends on Australia's ability to compete on an even footing with other offshore banking regimes of the region. These regimes provide a broad range of concessions for offshore banking having regard to the width of operations of this sector.
The wide range of activities can be classified as either:
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- financial intermediation with non-residents (including foreign branches of Australian residents); and
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- the provision of financial services to non-residents in respect of transactions and business occurring outside Australia.
Some activities outside the concept of 'pure' offshore banking will also attract concessional tax treatment. These are:
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- dealings with foreign branches of residents;
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- foreign currency dealings with residents; and
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- trading in non-Australian dollar (non-AUD) futures contracts on the Sydney Futures Exchange.
Dealings with foreign branches of Australian residents
The Australian banking industry has a network of foreign branches, operating as separate profit centres, similar to non-residents. The overseas profits of these centres are generally exempt from Australian tax when derived in listed (comparable tax) countries.
Other Australian multinationals have significant levels of foreign currency assets that can be accessed by OBUs.
The Bill will extend the tax concession to OBU's dealings with foreign branches of Australian residents. As a revenue-protection measure and to restrict domestic funding of offshore banking, the borrowing and lending transactions with branches of Australian residents are limited to non-AUD transactions.
Foreign currency dealing with residents
The concessional tax treatment will also apply to spot or forward foreign currency trading that does not involve the Australian dollar on either side of the transaction. The concession will extend to trading in options or rights in respect of currency.
Dealing with residents is to be permitted because it would not be administratively feasible to confine non-AUD foreign exchange dealings to non-resident counterparties. This will enable OBUs to access the large amounts of foreign currency assets held overseas by Australian exporters and multinationals.
Sydney Futures Exchange
The Bill also extends the tax concessions to trading by OBUs in non-AUD futures contracts and options on futures contracts (including on behalf of offshore persons) on the Sydney Futures Exchange.
The rate of tax and treatment of OBU losses
The Bill provides for the taxation of the profits of the OBU from qualifying transactions at a tax rate of 10%. Rather than providing a special tax rate for this purpose, the assessable income and allowable deductions are adjusted down by a factor of 10/39 to achieve the same results.
This factoring down also enables any loss that results after the adjustment of the income and deductions to be offset against any other income of the taxpayer since the adjustment will give the loss the same tax value as the normal rate of tax.
Amendments to the withholding tax provisions
The Bill will also align, as far as is practicable, the exemptions from interest withholding tax provided to OBUs in the current law with the transactions in relation to which income tax concessions are provided.
Separate record keeping requirements
The Bill will require an OBU to maintain separate records of its transactions as though the OBU was itself a separate bank. This extends to the new measures the current requirement for OBUs in relation to the interest withholding tax exemptions.
Where an eligible financial institution is declared by the Treasurer to be an OBU, any OB transactions undertaken by that institution have to be recorded and maintained in accounts and records separate from the accounts and records for other business activities conducted by the institution.
It will also be necessary to maintain separate bank accounts for offshore banking activities.