House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. P. J. Keating, M.P.)

GENERAL OUTLINE

TAXATION LAWS AMENDMENT (FOREIGN INCOME) BILL 1990

This Bill contains provisions to amend the Income Tax Assessment Act 1936 to give effect to the proposal, announced in the Economic Statement of 12 April 1989 and modified in press statements of 17 December 1989, 3 June 1990 and 29 June 1990, to introduce, with effect from the beginning of the 1990-91 income year, an accruals system of taxing certain foreign source income and, in particular:

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to attribute to Australian residents certain income derived by a non-resident company that is controlled by Australian residents, unless the company is subject to a tax system comparable to Australia's or is predominantly engaged in active business;

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to exempt from tax dividends received by a resident company from a company that is a resident of a country with a tax system comparable to Australia's, where the resident company has a voting interest of at least 10 percent in the non-resident company;

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to generally exempt from tax profits derived by a resident company from carrying on business at or through a permanent establishment in a country with a tax system comparable to Australia's;

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to exempt from tax profits of a foreign branch of a life assurance company that relate to the provision of life assurance for the benefit of unassociated non-resident policy holders;

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to substitute a "passive" class of income for the narrower "interest" class of income that applies for the purposes of quarantining foreign tax credits;

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to allow excess foreign tax credits to be carried forward for up to five years;

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to replace the per country/class of income basis of quarantining foreign losses under the foreign tax credit system with a worldwide/class of income basis, and to add a new class of income (broadly, passive income other than interest) to the existing classes of income;

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to attribute income of a non-resident trust to an Australian resident who has transferred value to the trust where, in broad terms, the trust is resident in a low-tax country, or has derived certain concessionally taxed income, and the transfer was made:

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in the case of a discretionary trust, at any time; or

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in the case of a non-discretionary trust, after 12 April 1989;

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to generally exempt from tax distributions made by non-resident trusts out of income that has previously been so attributed;

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to provide for the attributable income of a non-resident trust to be calculated by applying a deemed rate of return to the market value of property transferred or services provided to the trust in circumstances where the transferor is unable to calculate the net income of the trust;

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to give an incentive - in the form of a 10 per cent final tax liability on the taxable amount of a trust distribution - to wind up non-resident discretionary trusts that were in existence on 12 April 1989;

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to provide for additional tax, in the nature of an interest charge, to be imposed on trust distributions that are included in the assessable income of a resident beneficiary where the trust income had neither been subject to tax on a current basis in a listed country, nor on an attribution basis under the transferor measures;

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to impose an evidentiary sanction in respect of foreign documents or information that are not provided pursuant to a request by the Commissioner of Taxation; and

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to impose specific record keeping requirements on a person who is an attributable taxpayer in relation to a controlled foreign company or a foreign trust.

The draft Bill also contains provisions to amend:

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the Income Tax (International Agreements) Act 1953 as a consequence of the changes to the classes of income that are to apply for the purposes of the foreign tax credit system; and

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the Taxation Administration Act 1953 to ensure that a person cannot be prosecuted in respect of a statement made in a document produced to the Commissioner in response to an offshore information notice or under the active income test substantiation provisions.

TAXATION (INTEREST ON NON-RESIDENT TRUST DISTRIBUTIONS) BILL 1990

This Bill will formally impose the interest charge calculated in accordance with section 102AAM of the Income Tax Assessment Act 1936, proposed to be inserted by the Taxation Laws Amendment (Foreign Income) Bill 1990.