House of Representatives

Explanatory Memorandum

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

General outline and financial impact

Alienation of real property through interposed entities

This Bill amends the International Tax Agreements Act 1953 by inserting section3A to clarify the meaning of terms used in the Alienation of Property Article in Australia's tax treaties.

The amendment ensures that the Alienation of Property Article in the double tax agreements and conventions (DTAs) is read to cover alienations of shares or other interests in companies, and in other entities, whose assets consist principally of Australian real property, whether held directly or indirectly through a chain of interposed companies or other entities.

The amendment will protect Australia's taxing rights over income, profits or gains arising from effective sales of Australian real property, including mining rights. It is designed to address substantial risks to the revenue and tax planning opportunities exposed by the decision in 1997 of the Full Federal Court in Commissioner of Taxation v. Lamesa Holdings BV (1997) 77 FCR 597.

Date of effect: The new section applies to all DTAs containing the identified provision covering alienation of property where the provision came into force domestically before 27 April 1998 and affects transactions occurring after 12 noon Australian Eastern Standard Time on 27 April 1998.

Proposal announced: This measure was announced in the Treasurer's Press Release No. 39 of 27 April 1998.

Summary of Regulation Impact Statement

The Office of Regulation Review has advised that a Regulation Impact Statement is not required for these changes.

Extension of period for certain gifts

This Bill amends the income tax law to extend the period of time within which gifts to the Australian National Korean War Memorial Trust Fund, the St Patrick's Cathedral Parramatta Rebuilding Fund and the Shrine of Remembrance Restoration and Development Trust are tax deductible.

Date of effect: Applies to gifts made to:

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the Shrine of Remembrance Restoration and Development Trust before 1 July 2005;

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the St Patrick's Cathedral Parramatta Rebuilding Fund before 25 February 2002; and

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the Australian National Korean War Memorial Trust Fund before 2 September 2000.

Proposal announced: The Shrine of Remembrance Restoration and Development Trust was announced in the Assistant Treasurer's Press Release No. 54 on 16 November 1999.

The St Patrick's Cathedral Parramatta Rebuilding Fund was announced in the Assistant Treasurer's Press Release No. 58 on 24 November 1999.

The Australian National Korean War Memorial Trust Fund was announced in the Assistant Treasurer's Press Release No. 34 on 20 July 1999.

Financial impact: Negligible.

Compliance cost impact: Negligible.

Summary of Regulation Impact Statement

A Regulation Impact Statement is not required for the amendments.

Income of non-resident sports persons, clubs and associations

This Bill amends the income tax law to remove income tax exemptions, currently available to certain non-resident sportspersons and sporting clubs or associations. The amendments ensure that the income of all non-resident athletes and their related clubs or associations, earned in Australia, is taxed consistently.

Date of effect: The amendments will apply to income derived after 30 June 2000.

Proposal announced: Not previously announced.

Financial impact: It is not possible to estimate the financial impact of this amendment because these people and organisations have been exempt from income tax and have not previously interacted with the tax system.

Compliance cost impact: The compliance cost is expected to be minimal.

Summary of Regulation Impact Statement

A Regulation Impact Statement is not required for this amendment.

Technical amendments

Capital gains tax minor amendments

This Bill amends the Income Tax Assessment Act (ITAA 1997) by correcting unintended consequences made by the rewrite of provisions of the Income Tax Assessment Act (ITAA 1936) that were inserted in the ITAA 1997 by Act No. 46 of 1998. These amendments will make technical changes to these rewritten provisions to more accurately reflect the effect of the ITAA 1936. None of the amendments change the policy reflected in the ITAA 1936.

Date of effect: The amendments will apply to assessments for the 1998-1999 income year and later income years. However, an amendment to the record keeping requirements will only apply from the date of Royal Assent so that taxpayers will not be disadvantaged.

Proposal announced: The amendments augment the rewritten provisions of the ITAA 1936 that were inserted in the ITAA 1997 by Act No. 46 of 1998.

Financial impact: None.

Compliance cost impact: There are no additional compliance costs associated with the corrections.

Summary of Regulation Impact Statement

A Regulation Impact Statement is not required for the amendments.

Minor corrections

This Bill amends the ITAA 1997 by improving the readability of some provisions of the ITAA 1936 that have been rewritten as part of the Tax Law Improvement Project. The amendments correct references, insert additional signposts and make slight changes that improve the wording of the rewrite. There will also be some minor technical amendments to the Income Tax (Transitional Provisions) Act 1997, the ITAA 1997 and the ITAA 1936. None of the amendments change the meaning of the law and many merely delete inappropriate asterisks or insert them where required.

Date of effect: The amendments will apply to assessments for the 1998-1999 income year and later income years.

Proposal announced: The amendments augment the rewritten provisions of the ITAA 1936 that have been rewritten as part of the Tax Law Improvement Project.

Financial impact: None.

Compliance cost impact: There are no additional compliance costs associated with the corrections.

Summary of Regulation Impact Statement

A Regulation Impact Statement is not required for the amendments.

Chapter 1 - Alienation of real property through interposed entities

Overview

1.1 The amendment to the International Tax Agreements Act 1953 (the Agreements Act) will ensure that the taxing right afforded to Australia under the relevant provision of a double taxation agreement (DTA) over income, profits or gains arising from the alienation of Australian real property, including mining rights, is fully effective.

Summary of the Amendments

Purpose of the amendments

1.2 This amendment will insert new section 3A into the Agreements Act. [Item1]

1.3 The purpose of the amendment is to ensure that Australia is able to maintain its taxing right over alienations of Australian real property in situations where it is owned by non-residents either directly or through a chain of interposed entities and it is one of these entities which is alienated, rather than the real property being directly alienated. It will overcome the decision in 1997 of the Full Federal Court in Commissioner of Taxation v. Lamesa Holdings BV (1997)77 FCR 597.

1.4 The change to the Agreements Act will signal that the relevant provisions of the DTAs are to be interpreted in accordance with their anti-avoidance intention of maintaining Australia's taxing rights over effective alienations of real property situated in Australia.

Date of effect

1.5 Income, profits or gains from the relevant alienation of shares or interests occurring after 12 noon Australian Eastern Standard Time on 27 April 1998 will be affected by the amendment.

Background to the legislation

1.6 The Full Federal Court in Commissioner of Taxation v. Lamesa Holdings BV (1997) 77 FCR 597 held that the relevant provisions of the Alienation of Property Article in the Australia/Netherlands Double Tax Agreement did not extend to an effective alienation of Australian real property held by a non-resident through a chain of companies that was achieved by the sale of shares in one of those companies. This result is inconsistent with the anti-avoidance purpose of provisions of this type, as is evidenced by the Commentary on the comparable provision of the United Nations Model Tax Convention.

Explanation of the amendments

1.7 New subsection 3A(1) identifies the circumstances in which the section will apply. First, the treaty must make provision for income, profits or gains from the alienation or disposition of shares or comparable interests in companies or of interests in other entities, whose assets consist wholly or principally of real property. Secondly, the provision in the DTA must have been given the force of law by the Agreements Act before 27 April 1998.

1.8 The amendment will apply in relation to the following DTAs:

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United States Convention - Article 13

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New Zealand Agreement - Article 13

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Singapore Agreement - Article 10A

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Netherlands Agreement - Article 13

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French Agreement - Article 12

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Belgian Agreement - Article 13

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Philippine Agreement - Article 13

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Swiss Agreement - Article 13

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Swedish Agreement - Article 13

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Danish Agreement - Article 13

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Irish Agreement - Article 14

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Italian Agreement - Article 13

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Korean Convention - Article 13

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Norwegian Convention - Article 13

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Maltese Agreement - Article 13

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Finnish Agreement - Article 13

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Austrian Agreement - Article 13

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Chinese Agreement - Article 13

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Papua New Guinea Agreement - Article 13

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Thai Agreement - Article 13

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Sri Lankan Agreement - Article 13

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Fijian Agreement - Article 13

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Hungarian Agreement - Article 13

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Kiribati Agreement - Article 13

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Indian Agreement - Article 13

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Polish Agreement - Article 13

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Indonesian Agreement - Article 13

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Vietnamese Agreement - Article 13

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Spanish Agreement - Article 13

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Czech Agreement - Article 13

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Taipei Agreement - Article 13.

1.9 New subsection 3A(2) then explains how the relevant provision in each of those articles is to be understood. Because of the wide variety of structures available internationally, the amendment will give a broad coverage of interests and of entities in which there is an interest. Specifically the alienation or disposition of shares or comparable interests in companies, or of interests in other entities' is to be taken to cover:

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shares in companies; or

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other interests in companies; or

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interests in any other entity.

1.10 The subsection provides for a wide examination of the assets held by such entities for the purpose of determining whether their value is wholly or principally attributable to real property, without being limited by the corporate veil'. This will ensure that the holding of real property through a chain of companies (such as bodies corporate) or other entities, including mixed chains of bodies corporate and various forms of other entities, will not facilitate the avoidance of Australian taxation in relation to what is effectively an alienation of Australian real property.

1.11 New subsection 3A(3) clarifies the connection with Australia in that the real property must be physically located in Australia for section 3A to apply. This reflects the purpose of the section.

1.12 New subsection 3A(4) provides that section 3A will no longer apply in relation to an affected DTA once a new or amended relevant Article comes into force in that DTA. Thus, this amendment is designed as an interim measure, pending the renegotiation of the relevant provision in existing DTAs.

1.13 New subsection 3A(5) deals with the definition of entity' to be applied. The definition in the Income Tax Assessment Act 1997 applies but for the purposes of new section 3A an individual in his or her personal capacity is not included in the meaning of entity'.

Application

1.14 The amendment will apply in relation to relevant alienations or dispositions of shares or other interests effected after the time of the Treasurer's Press Release No. 39 of 27 April 1998. [Item 2]

Chapter 2 - Extension of period for certain gifts

Outline of Chapter

2.1 Schedule 2 to this Bill will amend the ITAA 1997 to extend the period of time within which gifts to a number of funds, outlined in paragraph 2.6, are tax deductible.

Background to the legislation

2.2 Broadly, Division 30 of the ITAA 1997 provides deductions for gifts of $2 or more to various funds, authorities or institutions. A deduction is allowable in the year of income in which the gift is made.

2.3 A fund or other body can be granted tax deductible gift status in 2 ways. First, it may qualify under one of the general categories listed in Division 30, for example, the general category of education. Second, it may be specifically listed in Division 30, either in the Register of Environmental Organisations or the Register of Cultural Organisations which are kept under Subdivisions 30-E and 30-F respectively.

2.4 In some circumstances, deductibility for a gift to a fund or organisation may only be available if the gift is made during a period specified in the law, for example, gifts to war memorials specifically listed in the Defence category are usually deductible for a period of 2years only. The amendments made by this Bill will extend the deductible period for 3funds.

Summary of new law

2.5 The amendments will extend the period for which donations to the following funds will be tax deductible:

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the St Patrick's Cathedral Parramatta Rebuilding Fund;

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the Australian National Korean War Memorial Trust Fund; and

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the Shrine of Remembrance Restoration and Development Trust.

Comparison of key features of new law and current law

2.6 The amendments will extend the period during which gifts to the following funds will be tax deductible:

Detailed explanation of new law

2.7 The Shrine of Remembrance Restoration and Development Trust was established for the sole function of providing money for the benefit of the Shrine of Remembrance located in Melbourne. An extension of time has been granted to 30 June 2005 so that the Trust can continue to raise funds. [Schedule 2, item 1]

2.8 The Australian National Korean War Memorial Trust Fund was established to raise money for the construction of a memorial on Anzac Parade, Canberra. An extension of time has been granted to 1 September 2000 so that further funds can be raised. [Schedule 2, item 2]

2.9 St Patrick's Cathedral Parramatta Rebuilding Fund was established to raise money to rebuild the St Patrick's Cathedral, Parramatta which was destroyed by fire on 19 February 1996. An extension of time has been granted to 24 February 2002 so that the rebuilding of the Cathedral can progress. [Schedule 2, item 3]

Application and transitional provisions

2.10 The amendments will apply from the date of Royal Assent of this Bill.

Chapter 3 - Income of non-resident sports persons, clubs and associations

Outline of Chapter

3.1 Schedule 3 to this Bill amends the Income Tax Assessment Act 1936 (ITAA 1936) to remove exemptions, from income tax, currently available to certain sportspersons and sporting clubs or associations. The amendments ensure that the income of all non-resident sportspersons and sporting clubs or associations, earned in Australia, is taxed consistently.

Background to legislation

3.2 An exemption, from income tax, is currently available under subparagraph 23(c)(i) to non-resident sportspersons if:

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they represent the controlling body of their out-door athletic sport or game; and

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they participate in an out-door athletic sport or game.

3.3 An exemption, from income tax, is also available under subparagraph 23(c)(ii) to non-resident sporting clubs or associations if they:

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are from a Commonwealth country;

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represent the controlling body of the sport; and

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the team representing the non-resident club or association plays cricket, football or other similar matches.

3.4 The application of subparagraph 23(c)(i) gives rise to inconsistent tax treatment (for some visiting sportspersons) because the exemption is limited to out-door athletic sport or game'. The practical effect of this provision is that an exemption from income tax is currently available to a non-resident sportsperson competing in an out-door athletic event such as a 100m sprint but not to a non-resident sportsperson competing in an in-door event such as a 100m swimming race.

3.5 Similar problems occur with the application of subparagraph 23(c)(ii). Again, inconsistencies arise because the exemption is limited to non-resident sporting clubs and associations from a Commonwealth country' and is only available where the team plays a match similar to cricket, football or other similar matches'. The practical effect of this provision is that an income tax exemption is currently available to a non-resident sporting club or association from a Commonwealth country with a team that plays, for example, a cricket match, but not to a non-resident club or association from a non-Commonwealth country even if their team plays the same match.

3.6 A further inconsistency could also arise where, for example, a Commonwealth country sends a cricket team and a cycling team to Australia. The cricket club would be exempt from income tax whereas the cycling association would not be exempt.

3.7 The amendments are designed to remove these inconsistencies and to ensure that all non-resident sportspersons and their clubs or associations are taxed on the same basis.

3.8 An exemption from income tax may still be available to any affected bodies through subparagraph 23(g)(iii) which provides an exemption from income tax for a society, association or club that is established for the encouragement or promotion of a game or sport generally. There is no limitation on the sport having to be played out-doors, or the association having to come from a Commonwealth country, or the sport being akin to cricket or football.

Explanation of amendments

3.9 The repeal of subparagraphs 23(c)(i) and (ii) removes the tax free income status currently enjoyed by certain non-resident sportspersons and sporting clubs or associations. This measure ensures that the income of all non-resident sportspersons and sporting clubs or associations, earned in Australia, is taxed consistently. [Items 1 and 2]

3.10 A consequence of the repeal is that the current income tax exemption for visiting members of the press reporting the activities of persons covered by subparagraphs 23(c)(i) and (ii) is also removed. This is because the exemption contained in subparagraph 23(c)(v) refers to subparagraphs 23(c)(i) and (ii).

Application

3.11 The amendments will apply to income derived after 30 June 2000. [Item 3]

Chapter 4 - Technical amendments

SECTION 1 - CAPITAL GAINS TAX - MINOR AMENDMENTS

Overview

4.1 Certain amendments in Schedule 4 to this Bill will make corrections to the capital gains tax (CGT) provisions in the Income Tax Assessment Act 1997 (ITAA 1997). Amendments in the Schedule will also make corrections to the Income Tax (Transitional Provisions) Act 1997 (IT (TP) Act) and the Income Tax Assessment Act 1936 (ITAA 1936).

Background

4.2 The CGT provisions in the ITAA 1936 were rewritten as part of the Tax Law Improvement Project (TLIP) and inserted into the ITAA 1997 by Tax Law Improvement Act (No. 1) 1998. Since then, some unintended consequences have been identified which resulted from the rewrite. Amendments are required to the ITAA 1997 and the IT(TP) Act. Another unintended consequence also requires an amendment to the ITAA 1936.

4.3 The amendments will merely reinstate the position of the ITAA 1936. One of the amendments will reinstate a tax benefit to taxpayers which was inadvertently removed as a result of the CGT rewrite process. Other amendments will remove a tax benefit which inappropriately resulted from the process. None of the amendments change the policy reflected in the ITAA 1936.

4.4 The amendments will also satisfy the Joint Committee of Public Accounts and Audit (JCPAA)'s Report 356: An Advisory Report on the Tax Law Improvement Bill (No. 2) 1997.

4.5 The amendments are the second instalment of refinements. The first instalment was contained in Taxation Laws Amendment Act (No. 4) 1999.

Date of effect

4.6 The amendments will apply to assessments for the 1998-99 income year and later income years [subitem 82(1)] . The date of effect reflects the view expressed by the JCPAA.

4.7 However, an amendment to the record keeping requirements contained in section 121-30 of the ITAA 1997 is to apply only from the date of Royal Assent so that taxpayers will not be disadvantaged. [Subitem82(2)]

Explanation of the amendments

4.8 The effects of the amendments are set out in the third column of the table below. The first column in the table identifies the amendment number.

SECTION 2 - Minor CORRECTIONS

Overview

4.9 Certain amendments in Schedule 4 to this Bill will make corrections to provisions in the ITAA 1997. Some amendments contained in Schedule 4 will also make minor technical corrections to the IT(TP) Act and the ITAA 1936.

Background

4.10 These amendments will improve the readability of the rewrite of the CGT and certain other provisions, correct references, insert additional signposts and make slight changes that improve the wording of the rewrite. There will also be some other minor technical amendments to the ITAA 1997, the IT(TP) Act and the ITAA 1936. However, none of these amendments change the meaning of the law and many merely delete inappropriate asterisks or insert them where required.

Date of effect

4.11 The amendments will apply to assessments for the 1998-1999 income year and later income years. [Subitem 82(1)]

Explanation of the amendments

4.12 The effects of the amendments are set out in the third column of the table below. The first column in the table identifies the amendment number.

CGT Finding Tables

4.13 This Chapter will also make 2 corrections to the finding table in the Explanatory Memorandum to Act No. 46 of 1998.

4.14 Finding Table 1 - New Law to Current Law

4.15 Finding Table 2 - Current Law to New Law

4.16 Finding Table 1 - New Law to Current Law

4.17 Finding Table 2 - Current Law to New law