Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)General outline and financial impact
Company Law Review
Amends the Income Tax Assessment Act 1936 and associated tax laws to ensure that the share capital tainting provisions are not triggered in inappropriate circumstances. Broadly speaking, this is achieved by ensuring that:
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- a share capital account does not become tainted by the merger of tainted share premiums with share capital unless the share capital account ceases to be more than the total of the tainted share premium account immediately before the merger;
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- all debt for equity swap arrangements which should qualify for the exception to the tainting rule do so; and
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- the delayed crediting of share capital to the share capital account does not trigger the share tainting rule.
Date of effect: The amendments will apply from 1 July 1998.
Proposal announced: Assistant Treasurer's Press Release No. 43 on 20 November 1998.
Financial impact: The amendments are designed to prevent an unintended gain to the revenue that is not capable of being quantified.
Compliance cost impact: Compliance costs will be negligible.
Summary of Regulation Impact Statement
To ensure that a company's share capital account is not tainted by the compulsory merger of tainted share premiums with the share capital account under recent company law changes.
Impact: Low.
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- There is only one option to implement the policy objective a company's share capital account will not be tainted upon its merger with a tainted share premium account under section 1446 of the Company Law Review Act 1998.
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- Companies' compliance costs will be kept to a minimum because:
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- the provisions simply require companies to record the extent to which they have a tainted share premium account, if any; and
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- the legislation implementing the measure is not complex.
Taxation relief for managed investment schemes
Amends the Income Tax (Transitional Provisions) Act 1997 to provide relief from any unintended tax consequences arising on a managed investment scheme (the scheme) restructuring to become a registered scheme in accordance with the Managed Investments Act 1998. These amendments give effect to the Assistant Treasurer's Press Releases No. 37 on 27 July 1998 and No. 10 on 12 March 1999.
Date of effect: 1 July 1998.
Proposal announced: Assistant Treasurer's Press Releases No. 37 on 27 July 1998 and No. 10 on 12 March 1999.
Financial impact: None.
Compliance cost impact: The net impact of these measures will reduce compliance costs.
Summary of Regulation Impact Statement
Impact: Low.
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- The measure will provide taxation relief to schemes operating on 1 July 1998, which restructure in accordance with the Managed Investments Act 1998 during the period 1 July 1998 to 30 June 2000.
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- Schemes described above and their members will benefit from the taxation relief.
Policy objective: To provide eligible schemes, and their members, relief from any unintended taxation consequences caused by changing the scheme's two tier manager and trustee structure to a single responsible entity structure as required under the Managed Investments Act 1998.
Chapter 1 - Company law review
Overview
1.1 Schedule 1 to the Bill will amend the Income Tax Assessment Act 1936 (ITAA 1936) and the Taxation Laws Amendment (Company Law Review) Act 1998 (the Act) to ensure that:
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- a share capital account does not become tainted by the merger of tainted share premiums with share capital unless the share capital account ceases to be more than the total of the tainted share premium account immediately before the merger;
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- all debt for equity swap arrangements which should qualify for the exception to the tainting rule do so; and
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- the delayed crediting of share capital to the share capital account does not trigger the share tainting rule.
1.2 Some clarificatory amendments are also made to the Proclamation that set the commencement date for the Act.
Summary of amendments
1.3 The purpose of the amendments is to prevent the inappropriate tainting of the share capital account.
1.4 The amendments apply from 1 July 1998. [Subclause 2(1)] - Background to the legislation
1.5 The Act, which received Royal Assent on 1 July 1998, made various consequential amendments to the tax laws as a result of changes being made to the Corporations Law by the Company Law Review Act 1998 (Review Act) which abolished the concept of par value for shares and the associated terms of share premium as well as made it easier for companies to return capital to shareholders.
1.6 The tainting rule within the Act prevents companies disguising a profit distribution as a tax-preferred capital distribution from the share capital account by first transferring profits into that account and then distributing from it. A similar rule applied to share premium accounts before their abolition on 1 July 1998: in cases where the share premium account contained amounts other than share premiums (tainted share premium accounts') the share premium account was also treated as a profit account.
1.7 Since the tainting rule's inception two unintended outcomes have emerged. First, the merger of tainted share premiums with share capital on 1 July 1998 has the effect of tainting the new share capital account for tax purposes, thereby preventing the distribution of profits in the guise of share capital. This has the inappropriate flow-on effect of producing an automatic franking debit upon merger and it removes the ability of companies to defer distribution of tainted amounts already transferred to share premium accounts.
1.8 Second, under the rules formerly applicable to share premium accounts before 1 July 1998, a share premium account did not become tainted when share premiums were credited to another account and then transferred to the share premium account, provided they could be identified in the books of the company at all times as such a premium. The law in its present form does not expressly provide for this exception.
1.9 The Act also provides an exception to the tainting rule where an amount is transferred to a share capital account under a debt for equity swap. The exception reflects the fact that no undue tax advantage can arise by companies transferring amounts which only represent a liability, as distinct from a profit, to the share capital account, and then making a distribution from that account.
1.10 To achieve this, the tainting rule adopts the existing definition of debt for equity swap in section 63E of the ITAA 1936. However, for technical reasons some debt for equity swaps fail to qualify as the definition is currently expressed.
Explanation of amendments
Merger of tainted share premiums with share capital
1.11 To prevent companies from being adversely affected by the compulsory merger of tainted share premiums with share capital, the amendments provide that a share capital account does not become tainted by the merger of tainted share premiums with share capital under section 1446 of the Review Act. [Item 7 of Schedule 1]
1.12 However, to ensure that the merger of tainted share premiums does not confer an undue tax advantage by sanctioning the transfer of profits to share capital, the share capital will be treated as if it were tainted during periods when the amount standing to the credit of the share capital account is equal to the balance of the tainted share premium account merged in it (ie. nothing remains in it other than tainted share premiums). [Subitems 7(1) and 7(2) of Schedule 1]
1.13 Where the amount standing to the credit of the share capital account becomes equal to the balance of the tainted share premium account merged in it, the amendments also provide that no immediate franking debit arises in the companies franking account. [Subitem 7(3) of Schedule 1]
1.14 For this purpose the balance of the tainted share premium account will be the amount standing to the credit of the tainted share premium account when it was merged with the share capital account on 1 July 1998, less any subsequent distributions during periods when the share capital account is treated as tainted under this rule. [Subitems 7(4) and 7(5) of Schedule 1]
1.15 This will prevent the distribution of existing tainted amounts as share capital, while allowing companies to continue to distribute untainted share capital as such.
1.16 Consistent with existing tainting rules distributions from a tainted share capital continue to be treated as unrebatable and unfrankable dividends in the hands of recipient shareholders. [Subitem 7(4) of Schedule 1]
1.17 Where a company's share capital account becomes tainted under the above circumstances, companies will continue to have the opportunity to untaint the account through the ordinary tainting rules contained in section 160ARDR of the ITAA 1936. Furthermore, the amendments do not override the potential application of the ordinary tainting rules contained in the ITAA 1936. Therefore, if a company transfers profits to a share capital account containing tainted share premiums, the ordinary rules will continue to treat the entire account as a tainted share capital account unless the company has taken the necessary steps to untaint it. [Subitem 7(2) of Schedule 1]
Example:
For example, if a company had a tainted share premium account totalling $200,000 on 1 July 1998, and paid-up share capital of $300,000, it would thereafter have a share capital account of $500,000 with a tainted share premium account balance of $200,000. As long as the total of the share capital account is more than $200,000 (and no fresh tainting amounts are transferred to it) distributions from it will be treated as distributions of share capital.
If the company made a distribution of $400,000 from the share capital account, leaving a total of $100,000, $300,000 will be treated as a distribution of share capital, and $100,000 will be treated as an unfranked, non-rebatable dividend because the distribution reduces the share capital account to less than the tainted share premium account balance of $200,000.
The new tainted share premium account balance in this example will be $100,000. If no fresh share capital is raised, all subsequent distributions from the share capital account would also be taken to be dividends because the share capital account is not greater than the tainted share premium account balance.
However, if the company raised fresh capital of $200,000, the share capital account total would be $300,000, which is greater than the new tainted share premium account balance of $100,000; and as long as subsequent distributions did not reduce the share capital account to less than the new balance (and there is no fresh tainting of the share capital account) they will be distributions of share capital.
1.18 Under the current tax laws an exception to the tainting rule applies where an amount is transferred to a share capital under a debt for equity swap. The exception reflects the fact that no undue tax advantage can arise by companies transferring amounts which only represent a liability, as distinct from profit, to the share capital account, and then making a distribution from that account.
1.19 To achieve this, the tainting rule adopts the existing definition of debt for equity swap provided in section 63E of the ITAA 1936. However, for technical reasons some debt for equity swaps fail to qualify as the definition is currently expressed.
1.20 To ensure that all arrangements that should qualify do so, the amendments provide that, for the purposes of the tainting rule, a debt for equity swap includes an arrangement where a taxpayer discharges, releases, or otherwise extinguishes the whole or part of a debt owed to the taxpayer in return for the issue by the debtor to the taxpayer of shares (other than redeemable preference shares) in the debtor. [Items 3 and 4 of Schedule 1; amends subsection 160ARDM(2) and new subsection 160ARDM(3)]
1.21 However, this exception only applies provided the amount of the debt transferred to the share capital account does not exceed the lesser of the value of the shares issued to the creditor and the amount of the debt. [Item 3 of Schedule 1; new subparagraph 160ARDM(2)(b)(ii)]
1.22 For the purposes of this exception to the tainting rule, the term arrangement' means any agreement, arrangement, understanding, promise, undertaking, or scheme, whether express or implied, and whether or not enforceable, or intended to be enforceable, by legal proceedings. [Item 4 of Schedule 1; new subsection 160ARDM(4)]
Delayed crediting of share capital
1.23 Under the current tainting rule, the delayed crediting of share capital to the share capital account results in tainting the account. This may occur in circumstances where share capital received on the issue of shares is not credited by the company to its share capital account, but to another account. For example, some accounting standards may require share capital received by a company on the issue of redeemable preference shares to be credited to a liability account.
1.24 In this way the current tainting rule is inconsistent with the rules that were formerly applicable to share premium accounts whereby a share premium account did not become tainted when share premiums were credited to another account and then transferred to the share premium account, provided they could be identified in the books of the company at all times as such a premium.
1.25 To ensure that the delayed crediting of share capital to the share capital account does not inappropriately taint the account the amendments insert a new definition of share capital account'. [Items 1 and 2 of Schedule 1; new section 6D]
1.26 The amendments provide that a share capital account is to include, in addition to the ordinary account which a company keeps of its share capital, an account (whether called a share capital account) where the first amount credited to the account was an amount of share capital. [Item 2 of Schedule 1; new subsection 6D(1)]
1.27 Where the company has more than one share capital account, the accounts are taken for the purposes of the tax laws to be a single account. (As a result the tainting of any of the share capital accounts will result in the tainting of all of the share capital accounts.) This means that where a company establishes a special account for share capital before transferring the share capital to the main account, the special account will be treated as always having been part of the share capital account. Any subsequent transfer of amounts between accounts will therefore amount to a transfer between sub-accounts of the share capital account, and will not taint share capital. [Item 2 of Schedule 1; new subsection 6D(2)]
1.28 Furthermore, the transfer to a company's share capital account of an amount of share capital which has been credited to an existing non-share capital account, for example, an account of amounts owed creditors, will not result in the share capital account becoming tainted if the amount could be identified in the books of the company as an amount of share capital at all times before it was credited to the share capital account. [Item 3 of Schedule 1; new paragraph 160ARDM(2)(a)]
1.29 The amendments also provide that an account that is tainted under the tainting rule is not a share capital account for the purposes of the Act other than for the purposes of:
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- the definition of paid-up share capital in subsection 6(1);
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- subsection 44(1B);
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- section 46H;
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- subsection 159GZZZQ(5);
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- Division 7B of Part IIIAA; and
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- subsection 160ZA(7A).
[Item 2 of Schedule 1; new subsection 6D(3)]
1.30 The Proclamation that set the commencement date for the Act contains a defect that arguably prevents three amendments commencing from the date intended (ie. 1 July 1998). To ensure that these amendments apply from the date intended certain clarificatory amendments have been made to the Act to make this commencement date explicit. [Items 5 and 6 of Schedule 1; amend subsection 2(2) and Item 3 of Schedule 1 of the Act] - Regulation Impact Statement
Specification of policy objective
1.31 To ensure that a company's share capital account is not inappropriately tainted as a result of the compulsory merger of tainted share premiums with the share capital account under recent company law changes.
Identification of implementation options
1.32 The Act which received Royal Assent on 1 July 1998, made various consequential amendments to the tax laws as a result of changes being made to the Corporations Law (by the Review Act) which will abolish the concept of par value for shares and the associated terms of share premium as well as make it easier for companies to return capital to shareholders.
1.33 The tainting rule within the Act prevents companies disguising a profit distribution as a tax-preferred capital distribution from the share capital account by first transferring profits into that account and then distributing from it. A similar rule applied to share premium accounts before their abolition on 1 July 1998 by the Review Act: in cases where the share premium account contained amounts other than share premiums (tainted share premium accounts') the share premium account was also treated as a profit account.
1.34 Under section 1446 of the Review Act, share premium accounts existing on 1 July 1998 were merged with share capital. Where the share premium account was tainted the merger has the effect of tainting the new share capital account for tax purposes, thereby preventing the distribution of profits in the guise of share capital. Two unintended effects with this element of the tainting rule is that it produces a franking debit on the merger of tainted share premiums and it removes retrospectively the ability of companies to defer distribution of tainted amounts already transferred to share premium accounts.
1.35 There is only one option to implement the policy objective, that is, the option announced by the Assistant Treasurer in his Press Release No. 43 on Nov 1998. A company's share capital account will not be tainted upon its merger with a tainted share premium account under section 1446 of the Review Act. However, to ensure that an undue tax advantage is not conferred, the share capital account will be treated as if it were tainted during periods when the amount standing to the credit of the share capital account is equal to the balance of the tainted share premium account merged in it (ie. nothing remains in it other than tainted share premiums).
Assessment of Impacts (Costs and Benefits) of the Implementation Option
1.36 The proposed provisions will only impact on those companies that had a tainted share premium account immediately before 1 July 1998 (the date of the compulsory merging of the accounts) and the shareholders of those companies.
Analysis of the costs and benefits associated with the implementation option
1.37 The advantage of the proposed approach is that the legislation implementing it will not be complex. The provisions will simply require companies to record the extent to which they have a tainted share premium account at the time of merging, if any.
1.38 The amendments are concessional to taxpayers and as such there are no disadvantages.
1.39 The nature of these amendments is such that a reliable estimate of the revenue effect of the proposed amendments cannot be made. However, these amendments are designed to clarify the law and preserve the taxation treatment of companies and their shareholders prior to changes in the Corporations Law and therefore prevent an unintended gain to the revenue.
1.40 Extensive discussions were held with the tax profession on this issue.
1.41 The Australian Taxation Office has consultative arrangements in place to obtain feedback from professional and small business associations and through other taxpayer consultation forums.
Chapter 2 - Taxation relief for Managed Investment Schemes
Overview
A new legal structure for investment funds
2.1 From 1 July 1998, the provisions of the Corporations Law changed significantly for certain investment funds. The most fundamental change was the replacement of a fund's dual structure of trustee and manager with a single responsible entity performing most of the roles previously undertaken by the trustee and manager. Restructuring the investment fund to a single responsible entity structure removes the dual structure's inherent problems of divided powers and responsibilities along with the related legal complexity and uncertainty. Investment funds that adopt a single responsible entity structure under the Corporations Law are described as registered managed investment schemes.
2.2 The amendments contained in Schedule 2 to the Bill will amend the Income Tax (Transitional Provisions) Act 1997 to provide relief from unintended tax consequences arising from a managed investment scheme (the scheme) restructuring to become a registered scheme in accordance with the Managed Investments Act 1998 (MIA). These amendments give effect to the Assistant Treasurer's Press Releases No. 37 on 27 July 1998 and No. 10 on 12 March 1999.
2.3 In addition, tax relief will also be available for certain changes to a trust deed not strictly required by the MIA if the changes improve the overall operation of the scheme.
2.4 The amendments will:
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- provide schemes with relief from unintended taxation consequences arising from complying with the requirements of the MIA;
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- provide schemes with relief from unintended taxation and administrative consequences arising from certain changes that are not strictly required by the MIA; and
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- provide members of such schemes with relief from unintended taxation consequences arising from the replacement of their interest in the scheme with an interest in the registered scheme.
2.5 The amendments will achieve the above by:
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- treating the creation of a new trust upon the registration of a scheme not to be a creation of a new trust but a continuation of the original trust;
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- treating the change in legal entity upon the registration of a scheme not to have occurred and treat the registered scheme as if it were the same legal entity as the scheme immediately before registration;
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- treating the change in ownership of the scheme's assets due to the transfer of the assets to the registered scheme not to have occurred;
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- treating the change in ownership of a member's interest in a scheme due to the transfer of the interest to the registered scheme not to have occurred; and
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- stating a capital gains tax (CGT) event does not happen to either the scheme, or its members, as a result of the scheme becoming a registered scheme.
Relief will also be provided for certain other changes made to the trust deed of the scheme that are not strictly required by the MIA. The other changes are discussed in paragraphs 2.18 and 2.23.
Summary of the amendments
2.6 The purpose of the amendments is to assist schemes to comply with the MIA by providing relief from any unintended taxation consequences which may arise when schemes become registered schemes. Relief will also extend to the members of such schemes.
2.7 The measure will be effective from 1 July 1998.
Background to the legislation
2.8 The purpose of the MIA is to overcome possible confusion over the division of responsibility between a scheme's management company and its trustee for the conduct of a scheme's operations. The MIA achieves this by requiring certain schemes to become registered and thereby replace the dual responsibility structure with a single responsible entity. Schemes may also become registered on a voluntary basis.
What is a Managed Investment Scheme?
2.9 The Explanatory Memorandum to the MIA, which amended section 9 of the Corporations Law, explains the essential features of a managed investment scheme in section 9 of that definition. The features are:
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- people contribute money in return for a right to benefit from the scheme;
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- the contributions are pooled for member's financial benefit; and
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- the members do not control the operation of the scheme; or
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- the scheme is a time-sharing scheme.
2.10 Generally, such a scheme will be administered as a unit trust.
2.11 For example, a scheme is a type of collective investment such as a public unit trust. In such a trust, a number of investors hand over money or assets to a professional manager who manages the total funds or collection of assets to produce a return that is shared by the investors. Investors, as members of the scheme, hold units in that trust that represent a proportional beneficial entitlement to the trust assets. A unit represents an interest in the scheme.
2.12 The relevant entities eligible for taxation relief are schemes which satisfy the definition of a managed investment scheme in section 9 of the Corporations Law and satisfy the requirements described in paragraph 2.17. The members of such schemes are also eligible for relief from any unintended taxation consequences arising because a scheme becomes a registered scheme.
What relief do the proposed amendments provide?
2.13 The restructure of a scheme may result in a new trust being created. The proposed amendments will provide relief from unintended taxation consequences that may arise from the creation of a new trust and the transfer of the original trust's assets to the new trust. Examples of such consequences are:
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- assets of the original trust would be disposed of and reacquired (at market value) on transfer. Assets acquired before 20 September 1985 are called pre-CGT assets. A capital gain or capital loss is disregarded in relation to a pre-CGT asset. The asset would lose its pre-CGT status on being transferred to the new trust. If an asset was a post-CGT acquisition (acquired after 19 September 1985), an immediate CGT liability may arise;
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- on creating the new trust the original trust ceases to exist, all revenue losses and capital losses belonging to the original trust would not be available to the new trust;
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- transfer of traditional securities to the new trust from the original trust would be a disposal or redemption of the traditional securities;
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- gains on currency exchange are assessable and losses are deductible to the original trust on the creation of a new trust with capital gains or capital losses being realised on the transfer of the asset to the new trust;
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- the transfer of assets to the new trust would give rise to balancing adjustments in respect of some assets subject to the capital allowance rules;
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- the benefits of undeducted losses, various categories of unrecouped capital expenditure and uncredited foreign taxes to be carried forward to reduce future tax liability may be lost in the transition to the new trust depending on the circumstances of each particular case;
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- foreign tax credits of the original trust are lost as the new trust is not the same entity that generated the credits;
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- the transfer of trading stock by the original trust to the new trust would lead to a disposal of the trading stock at market value by the original trust; and
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- franking credit trading rules may be triggered in the transfer process from the original trust to the new trust if shares were acquired cum dividend less than 45 days before the creation of the new trust.
Operation of the proposed measures
2.14 To assist schemes which were in existence on 1 July 1998 to restructure under the MIA, the Government proposes to provide relief from any unintended taxation consequences arising from the restructure.
2.15 The restructure will require variation of the trust deed and the removal of the two tier system of manager and trustee. Such changes may create a new entity giving rise to a number of taxation consequences.
2.16 In applying the Income Tax Assessment Act 1936, Income Tax Assessment Act 1997 (ITAA 1997) and Tax Administration Act 1953, the proposed amendments treat the creation of a new entity on the restructuring of the scheme to be a continuation of the original entity where the scheme's restructure meets the requirements of these amendments. The amendments will also treat any change in ownership of the scheme's assets or a member's interest in a scheme not to have occurred as a result of the scheme becoming registered. The amendments will provide relief for any unintended taxation consequences affecting both the scheme and its members due to the restructure.
Explanation of the amendments
When schemes qualify for relief?
2.17 Schemes will be eligible for relief if:
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- it is a managed investment scheme;
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- it makes changes to the scheme to become a registered scheme in accordance with the MIA requirements;
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- it existed on 1 July 1998;
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- it is administered as the same kind of entity immediately before and immediately after the changes (for example, if the scheme is a unit trust before the changes it must also be a unit trust after the changes to qualify for relief);
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- the changes are undertaken during the period 1 July 1998 to 30 June 2000; and
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- the membership of the scheme did not alter as a result of the changes.
[New paragraphs 960-105(1)(a) to (f)]
Relief for changes not strictly required by the MIA
2.18 Schemes will also be eligible for relief where changes are made to their trust deed that are not strictly required by the MIA but are done with a view to improving the overall operation of the scheme, if:
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- the requirements specified in paragraph 2.17 are satisfied; and
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- in comparing the situation immediately before and immediately after the changes:
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- the changes made to the scheme did not create shifts in value between members, or classes of members of the scheme; and
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- the market value of member's rights was not reduced.
2.19 Example of a typical scheme eligible for relief
2.20 A scheme will also be eligible for relief in the following situation. A listed property trust holds investments in the form of joint ventures, via subsidiary trusts. The MIA requires the listed trust:
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- to restructure its trust deed to become a registered scheme; and
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- to only invest in other registered schemes.
In order for the listed trust to continue to hold its investments in the subsidiary and partly owned trusts, it is necessary for those trusts to also become registered. Even though the MIA does not specifically require these trusts to restructure, relief is provided to the subsidiary and partly owned trusts if they are schemes that meet the requirements in paragraph 2.17 and become registered schemes. This relief will enable the listed trust to continue to hold investments in those trusts.
2.21 Relief is not provided where a listed property trust holds investments in an entity that is not a managed investment scheme, and that entity restructures in a manner that would bring it within the definition of a managed investment scheme after 1 July 1998 so as to enable that entity to become a registered scheme. This is because the entity was not a managed investment scheme on or before 1 July 1998 as required under the MIA.
When members of a scheme qualify for relief?
2.22 Members of a scheme will be eligible for relief if:
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- they are members of a scheme that is eligible for relief;
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- they are a member of that scheme both immediately before and immediately after the scheme makes changes to the scheme; and
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- where changes are made at different times, they are a member of that scheme both immediately before the first change and immediately after the last change.
Examples of changes to a trust deed not strictly required by the MIA
2.23 The following are examples of changes to trust deeds which are not strictly required by the MIA, but meet the above requirements:
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- implementing plain English principles, reformatting, re-numbering and removal of typographical errors; and
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- areas where deeds are likely to be updated include:
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- provisions relating to fees and expense recoveries which include the replacement of the manager and trustee fees with a single responsible entity fee, the replacement of ad valorem fees with a fee basis that remunerates on fund performance basis, allowing for or capping the level of expense reimbursement permitted to be paid to the single responsible entity, imposing a fee for service on individual members in the scheme and changing the calculation basis and the date payable for various classes of fees;
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- clarification of the members entitlements;
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- the implementation of best practice' scheme pricing in alignment with industry best practice; and
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- the updating of the list of investments that the schemes are able to invest in.
Connection with the Income Tax Assessment Act 1997
2.24 The general rule in the ITAA 1997 is that the provisions of that Act apply to assessments for the 1997-98 income year and later income years. Where there are exceptions to this rule a specific transitional provision will be inserted in the Income Tax (Transitional Provisions) Act 1997. These amendments are examples of such exceptions. The proposed new note in section 4-5 of the ITAA 1997 will provide a signpost to the proposed amendments in the Income Tax (Transitional Provisions) Act 1997. [Item 2] - REGULATION IMPACT STATEMENT
2.25 The Government announced in the Assistant Treasurer's Press Release No. 37 of 1998 of its intention to extend tax relief to schemes required to change their two tier manager and trustee structure to a single responsible entity when complying with the MIA
2.26 The measures will extend relief to other changes not strictly required by the MIA but are consistent with the policy behind the MIA. These measures will remove any unintended tax consequences for a scheme that existed on 1 July 1998 and takes action to comply with the MIA within the period beginning 1 July 1998 to 30 June 2000.
2.27 The MIA is the Government's response to recommendations made by the Australian Law Reform Commission and the Company and Securities Advisory Committee in order to promote efficiency and flexibility in schemes and to provide greater investor protection. The proposed tax relief reflects this position.
2.28 The MIA inserted Chapter 5C into the Corporations Law to set out a new regime for the regulation of schemes.
2.29 The MIA allows for a two-year transitional period from 1 July 1998, during which certain schemes in existence on that date must change to the new structure. Schemes, which commence after 1 July 1998, are required to operate under the new rules and are not eligible for relief.
2.30 In addition to the change in a scheme's structure, the MIA requires substantial amendment of a scheme's trust deed.
Identification of implementation options
2.31 There was only one option compatible with the Government's intention to facilitate a smooth, revenue neutral transition for schemes complying with the MIA. That is to amend the taxation laws by providing transitional taxation relief to those schemes.
2.32 The proposed relief will allow schemes to make the necessary structural and operational changes in order to comply with the MIA without unintended taxation consequences arising, provided that:
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- the scheme is administered as the same kind of entity immediately before and immediately after making the changes;
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- the changes are made during the transitional period between 1 July 1998 and 30 June 2000; and
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- the scheme is registered in accordance with the MIA.
2.33 Relief will also be granted in respect of changes to a trust deed not strictly required by the MIA, providing:
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- the criteria in paragraph 2.32 are met; and
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- in comparing the situation before and immediately after the changes -
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- the changes do not create shifts in value between members, or classes of members;
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- the market value of members' rights is not reduced; and
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- there has been no change in the membership of the scheme.
Assessment of impacts (costs and benefits) of the implementation option
2.34 The new measures will impact on those schemes that become registered under the MIA and their members. The measures will remove any unintended taxation consequences of the transition to the new regime.
2.35 A scheme's financial and legal advisers will be affected by the measures. One set of obligations - to meet taxation requirements of the creation of a new trust - will be replaced by another - to determine whether the changes made by a scheme are eligible for relief.
2.36 The Australian Taxation Office (ATO) will administer these measures.
2.37 The provision of relief upon transition to the MIA may impose some costs on taxpayers and their advisers. These costs would include becoming familiar with the new taxation measures and the maintenance of source documentation.
2.38 However, in the absence of any relief, transition to the MIA would generate extensive compliance costs. The proposed measure will avoid these costs.
2.39 The net impact will be a reduction in compliance costs. However, it is not possible with existing compliance cost data to quantify this reduction.
2.40 The ATO does not expect the measures to require further resources beyond those required for the transitional period.
2.41 As the nature of the relief is to avoid any unintended taxation consequences there will be no impact on Government revenue.
Consultation
2.42 Consultation for the measures was conducted between the ATO, Treasury and the Investment and Financial Services Association (IFSA). No other representative bodies made representations.
2.43 IFSA has expressed broad support for the transitional relief measures being proposed and have requested implementation of these proposals as soon as possible. Treasury strongly supports the measures.
Conclusion
2.44 The measure proposes to allow schemes access relief from any unintended tax consequences and other associated administrative requirements that may result from amending or replacing original trust deeds due to comply with the MIA.
2.45 These changes will facilitate a smooth transition for schemes to the MIA regime.