Supplementary Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)General outline and financial impact
Amendments to the New Business Tax System (Taxation of Financial Arrangements) Bill (No. 1) 2003
The New Business Tax System (Taxation of Financial Arrangements) Bill (No. 1) 2003 (the bill) introduces new rules into the Income Tax Assessment Act 1997 which:
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- remove the taxing point at conversion of convertible and exchangeable notes;
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- provide for the taxation of gains and losses on foreign currency transactions; and
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- provide for the translation of amounts of foreign currency for Australian income tax purposes.
The amendments to the bill apply to elections and choices contained in Schedule 4 to the bill. This Schedule contains measures relating to the treatment of foreign currency transactions and the taxation of gains and losses from those transactions. The amendments will allow the elections and choices in the bill to be made with effect from 1 July 2003 or, in some cases, another date specified by the relevant entity. These amendments are necessary because the bill was not enacted prior to 1 July 2003.
The amendments will also include a number of technical amendments to the bill.
Date of effect: The amendments will apply to elections made under proposed Division 775 or proposed Subdivision 960-D and made between the date on which the bill receives Royal Assent and 30 days after that date. The amendments have no impact on the date of effect of the remainder of the bill.
Proposal announced: The amendments were announced by the Minister for Revenue and Assistant Treasurer.
Financial impact: The amendments are expected to result in a negligible revenue cost.
Compliance cost impact: The amendments are designed to ensure that compliance cost saving measures in the bill are available to taxpayers from the bill's commencement date as was intended when the bill was introduced. There is no additional compliance impact resulting from the amendments.
Chapter 1 - Amendments to the New Business Tax System (Taxation of Financial Arrangements) Bill (No. 1) 2003
Outline of chapter
1.1 Schedule 4 of the New Business Tax System (Taxation of Financial Arrangements) Bill (No. 1) 2003 (the bill) introduces a number of elections and choices designed to reduce compliance costs associated with the taxation of foreign currency denominated transactions. The foreign currency regime introduced by the bill will generally take effect from 1 July 2003. However, because the bill was not enacted by 1 July 2003, the validity of elections and choices sought to be made - before enactment but with effect from a date from 1 July 2003 - is called into question.
1.2 Accordingly, the amendments ensure that taxpayers are able to access the choices and elections in the bill from the date on which the provisions take effect by permitting an election or choice made within 30 days of when the bill comes into force to take effect as though it had been made earlier.
1.3 The amendments will also include a number of technical amendments to the bill.
Detailed explanation of amendments
1.4 This amendment provides most taxpayers with extra time to elect out of the short-term gains and losses rules.
1.5 The amendment is required due to the delay in the bill's enactment.
1.6 This amendment will ensure that an entity has at least 30 days after the bill's enactment to make the election.
1.7 The amendment will primarily impact on entities who started their 2003-2004 income year more than 60 days prior to Royal Assent and on or after 1 July 2003. That is, it will primarily impact on entities for whom the 90 day period usually permitted for this choice after their applicable commencement date will end less than 30 days after the bill receives Royal Assent.
1.8 The amendment will also provide extra time to entities which come into existence more than 60 days prior to the bill receiving Royal Assent so long as these entities come into existence within 90 days after the date which would have been their applicable commencement date, had they existed at that time.
1.9 An election made in the period allowed by this amendment will have effect from the start of the entity's 2003-2004 income year (normally, from 1 July 2003).
1.10 This amendment provides most entities with extra time to elect to bring transactions which they entered into prior to their applicable commencement date into the scope of the new foreign currency regime. The amendment permits this choice to be made within 30 days after the bill receives Royal Assent.
1.11 This amendment is required due to the delay in the bill's enactment.
1.12 This amendment will ensure that an entity has at least 30 days after the bill's enactment to make the election.
1.13 The amendment will only impact on entities who started their 2003-2004 income year more than 30 days prior to Royal Assent and on or after 1 July 2003. That is, it will impact on entities for whom the 60 day period usually permitted for this choice after their applicable commencement date will end less than 30 days after the bill receives Royal Assent.
1.14 A choice made pursuant to this amendment will have effect from the start of the entity's 2003-2004 income year (normally, from 1 July 2003).
1.15 These amendments permit extra time for most taxpayers to elect to use the bill's roll-over provisions for foreign currency finance facilities existing at the applicable commencement date (usually 1 July 2003). An election to roll-over gains and losses on these facilities will be permitted within 30 days of Royal Assent.
1.16 The amendments also ensure that a taxpayer has at least 30 days in which to elect to use the roll-over provisions for foreign currency finance facility under which an eligible security was first issued between 1 July 2003 and the date of Royal Assent.
1.17 These amendments are required due to the delay in the bill's enactment.
1.18 A choice under these amendments will apply from the later of the entity's applicable commencement date and the day on which the first security was issued under the facility.
1.19 This amendment permits taxpayers to make an election within 30 days of Royal Assent to disregard all gains and losses on specified low balance foreign currency bank accounts. The election will have effect as though it were made on an earlier date which the taxpayer specifies - so long as that date is between 1 July 2003 and the day on which the election is actually made.
1.20 This amendment is required due to the delay in the bill's enactment.
1.21 This amendment will permit taxpayers to gain the benefit of the limited balance bank account concession from the day on which the bill first applies for them.
1.22 This amendment will not permit taxpayers to vary or withdraw this choice with effect prior to the date on which the variation or withdrawal is made. Withdrawal and variation of backdated choices is possible following Royal Assent - but will only vary the treatment of gains and losses made after the withdrawal or variation is made.
1.23 This amendment permits taxpayers to make an election within 30 days of Royal Assent to calculate gains and losses on a foreign currency bank account using the retranslation method. The election will have effect as though it were made on an earlier date which the taxpayer specifies - so long as that date is between 1 July 2003 and the day on which the election is actually made.
1.24 This amendment is required due to the delay in the bill's enactment.
1.25 This amendment will permit taxpayers to gain the benefit of the retranslation option from the day on which the bill first applies for them.
1.26 This amendment will not permit taxpayers to withdraw this choice with effect prior to the date on which the withdrawal is made. Withdrawal of backdated choices is possible following Royal Assent - but will only change the treatment of gains and losses made after the withdrawal is made.
1.27 These amendments permit extra time for taxpayers to elect to use a functional currency to calculate all, or part, of their taxable income for the 2003-2004 financial year.
1.28 These amendments are required due to the delay in the bill's enactment.
1.29 The amendments will permit entities which are eligible to use a functional currency for all or part of their income to have a functional currency choice taken to be a backdated startup choice if it is made within 30 days of the bill receiving Royal Assent.
1.30 This results in the choice having effect from the start of the income year in which it is made, rather than the following income year. For a controlled foreign company, the choice will have effect from the start of the statutory accounting period in which it is made, rather than the following statutory accounting period.
Amendments 1, 2, 4, 5, 13, 14 and 24
1.31 These amendments are minor technical amendments designed to improve the consistency of the bill.