Senate

Supplementary Explanatory Memorandum

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

General outline and financial impact

Thin capitalisation

Schedules 1 to 4 to this bill amend the ITAA 1997 and the ITAA 1936 to implement changes to the thin capitalisation regime contained in Division 820-D of the ITAA 1997. The amendments ensure that the policy objectives of the thin capitalisation regime are achieved, promote equity between taxpayers, generally reduce compliance costs and clarify the operation of the law.

Date of effect: The amendments in Schedule 1 will apply from the start of a taxpayer's first income year commencing on or after 1 July 2001. Amendments in Schedule 2 (except Part 5) and Schedule 4 will apply for income years commencing on or after 1 July 2002, with Schedule 2 (Part 5) amendments not applying for the purposes of working out a capital gain made from a CGT event happening before 1 July 2002. Schedule 3 amendments are applicable to income years commencing on or after 1 July 2003.

Proposal announced: The amendments were announced in Minister for Revenue and Assistant Treasurer's Press Release No. C125/02 of 4 December 2002.

Financial impact: Nil.

Compliance cost impact: Overall, the amendments will involve a net reduction in compliance costs as compared with the operation of the existing thin capitalisation rules.

Fringe benefits tax - certain exemptions for public hospitals

Schedule 5 to this bill amends the FBTAA 1986 to ensure that fringe benefits provided to employees whose duties are performed in, or in connection with, a public hospital will continue to be subject to the $17,000 capped FBT exemption, whether or not the hospital is a PBI.

This measure forms part of the Government's response to the Report of the Inquiry into the Definition of Charities and Related Organisations. It will ensure that public hospitals of the Commonwealth, a State or a Territory will have access to the $17,000 capped FBT exemption, whether or not they are a PBI.

Housing fringe benefits are FBT exempt where provided in a remote area. This Schedule also amends the FBTAA 1986 so that for a public hospital, a remote area will be one that is at least 100 kilometres from a population centre of 130,000 or more, whether or not the hospital is a PBI. The amendment to the housing fringe benefit provision will ensure consistent treatment for public hospitals with that provided under the $17,000 capped FBT exemption.

Date of effect: These amendments apply from 1 April 2003.

Proposal announced: The Government's response to the Report of the Inquiry into the Definition of Charities and Related Organisations was announced in Treasurer's Press Release No. 49 of 29 August 2002.

Financial impact: The amendments are expected to have an insignificant effect on revenue.

Compliance cost impact: The amendment will not involve additional compliance costs.

Reducing tax on the excessive component of ETPs

Schedule 6 to this bill amends relevant taxation legislation to reduce the effective rate of tax on the excessive component of an ETP paid by a superannuation fund. The amendments also provide a reduction in the amount of surchargeable contributions reported by the fund paying the excessive ETP in that year, in respect of the relevant member.

The Acts that are amended are the:

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Income Tax Rates Act 1986;

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Superannuation Contributions Tax (Assessment and Collection) Act 1997; and

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Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Assessment and Collection Act 1997.

Date of effect: The amendments will apply to ETPs made on or after 1 July 2002.

Proposal announced: This measure was announced in the Government's policy statement A Better Superannuation System on 5 November 2001, and confirmed in the 2002-2003 Federal Budget.

Financial impact: The revenue cost of this measure is expected to be $5 million in each of 2003-2004, 2004-2005 and 2005-2006.

Compliance cost impact: The proposed amendments impose additional administrative and compliance costs on the ATO. However, it is expected that any additional compliance costs on superannuation funds or taxpayers will be minimal.

Summary of regulation impact statement

Regulation impact on business

Impact: This measure will impact on those taxpayers who receive an ETP with an excessive component. Such taxpayers will benefit from the tax rate and superannuation surcharge reduction for ETPs made on or after 1 July 2002.

Main points:

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Superannuation funds currently provide information to the ATO regarding the components of an ETP when one is paid to a member. As such, it is expected that superannuation funds will incur minimal additional compliance costs.

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Superannuation funds currently report surchargeable contributions for each member to the ATO each year. This information, together with information on the amount of the excessive ETP will be used by the ATO to ascertain by how much the surchargeable contributions should be reduced. As such, it is expected that superannuation funds will incur minimal additional compliance costs for this aspect of this measure.

Application of same business test

Schedule 7 to this bill amends Division 165 of the ITAA 1997 to remove an anomaly that prevents a company from accessing the SBT to determine its eligibility to deduct a tax loss incurred in a previous year, or write off a bad debt, in circumstances where the company has failed the COT but is unable to identify the precise date on which that failure occurred.

Date of effect: The amendments made by Part 1 of Schedule 8 to this bill apply to assessments for the 1997-1998 income year and later income years. The amendments made by Part 2 of Schedule 8 to this bill apply to assessments for the 1998-1999 income year and later income years.

Proposal announced: The measure was announced on 14 May 2002 as part of the 2002-2003 Federal Budget.

Financial impact: The financial impact of the amendments is expected to be negligible.

Compliance cost impact: Overall, the amendments will involve a net reduction in compliance costs.

Tax losses

Schedule 8 to this bill will amend the ITAA 1997 so that corporate tax entities will be able to choose the amount of prior year losses they want to deduct in an income year. This will ensure prior year losses are not used up against franked dividend income. Also, to ensure corporate tax entities are not required to deduct 'current year' losses against franked dividend income, the current year loss will be treated as a tax loss for the income year and carried forward for deduction in a later year of income.

Date of effect: The amendments will apply in respect of the 2002-2003 and later income years.

Proposal announced: 2002-2003 Federal Budget on 14 May 2002.

Financial impact: The measure has a cost to revenue of nil in 2002-2003, $15 million in 2003-2004, $40 million in 2004-2005 and $70 million in 2005-2006.

Compliance cost impact: Nil.

Summary of regulation impact statement

Regulation impact on business

Impact: This measure will potentially apply to all corporate tax entities who will benefit as they will no longer be required to use up losses that could be deductible in a later year of income against franked dividend (effectively tax free) income.

Main points:

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Corporate tax entities will now be allowed to choose the amount of prior year losses they wish to deduct in a later year of income, again avoiding such losses being used up against franked dividend income.

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Corporate tax entities will identify the otherwise wasted current year loss by reference to the amount of any unused franking tax offset as part of the calculation of income tax payable for a year of income.

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The excess franking tax offset will be converted back to the equivalent amount of tax loss, allowed to be carried forward as a prior year loss and considered for deduction in a later year of income.