Explanatory Memorandum
General outline and financial impact
Foreign income
Amends the income tax law to:
- (a)
- provide that the cost base of non taxable Australian assets owned by a foreign company that becomes a controlled foreign company (CFC) after 30 June 1990 is their market value at the time the company became a CFC;
- (b)
- ensure that tax arising under the CFC measures is not avoided by liquidating the CFC;
- (c)
- ensure that a taxpayer cannot claim a credit for foreign tax where the tax is refunded to the taxpayer or to an associate of the taxpayer and;
- (d)
- allow the Commissioner of Taxation to make adjustments, reflecting arm's length values, to amounts used in determining whether a CFC has passed the active income test.
Date of effect:
- (a)
- 1 July 1995
- (b)
- CFCs that cease to exist on or after the date of introduction of the Bill where winding-up begins on or after that date.
- (c)
- Date of introduction of the Bill
- (d)
- 1 July 1995
Proposal announced: Not previously announced.
Financial impact: The revenue impact for each of the amendments is as follows:
- (a)
- Unquantifiable loss.
- (b)
- Unquantifiable but potentially significant gain
- (c)
- Unquantifiable gain
- (d)
- Unquantifiable gain
Compliance cost impact: The amendment described in paragraph (a) will reduce compliance costs because taxpayers who acquire a foreign company will no longer be required to ascertain the value of non taxable Australian assets held by the company at a time prior to the acquisition.
The amendment described in paragraph (b) will increase compliance costs. Taxpayers are not currently required to apply the CFC measures where a CFC is liquidated prior to the end of a statutory accounting period. In this regard, the changes will result in the CFC measures applying where a CFC is liquidated. Accordingly, taxpayers with an interest in a CFC which is liquidated prior to the end of a statutory accounting period will incur additional compliance costs similar to those which arise for taxpayers with an interest in a CFC at the end of a statutory accounting period.
The amendments described in paragraphs (c) and (d) will not have a significant impact on compliance costs and are only relevant where there is an arrangement to generate false foreign tax credits or where a CFC enters into a non arm's length transaction with an associate.
Rebatable and frankable dividends
Amends the income tax law so that dividends that are debited to share capital or share premium accounts or revaluation reserves of a company are disqualified from being rebatable or frankable.
Date of effect: The amendments will apply to distributions paid after 7.30 pm AEST on 9 May 1995 unless declared before that time.
Proposal announced: 1995-96 Budget, 9 May 1995
Financial impact: There is insufficient data available on which a reliable estimate of the revenue impact of this measure can be made. However, the proposed amendments are expected to prevent a significant loss to the revenue.
Compliance cost impact: The proposed amendments will not have any significant compliance cost impact. The only additional requirement is for a company to ascertain whether a dividend is debited to share capital or share premium accounts or revaluation reserves. This information will be readily available to the company.
Bankruptcy and losses
Amends the income tax law to:
- •
- ensure that subsection 79E(8) of the Income Tax Assessment Act 1936 denies deductions for losses incurred prior to bankruptcy notwithstanding that the bankruptcy is later annulled in connection with arrangements under which debts are released
- •
- prevent net capital losses incurred prior to bankruptcy or release from debts under bankruptcy law from being taken into account in ascertaining future net capital gains or losses.
Date of effect: The amendments relating to annulment of bankruptcy will apply to annulments occurring after 25 February 1995. The amendments relating to net capital losses will apply to taxpayers who become bankrupt or who have been released from debts after 25 February 1995.
Proposal announced: The Treasurer's Press Release No. 19 of 26 February 1995.
Financial impact: The revenue gain will be less than $1million per year.
Compliance cost: The compliance cost is minimal because the existing law already requires taxpayers to compute and maintain records of amounts for which tax claims will be denied under these amendments.
Reduction of PAYE early remitter threshold
Amends the income tax law to reduce the threshold at which the twice monthly remittance arrangements apply. Where group employers have an annual PAYE remittance in excess of $1 million per year (previously $5 million) they will be required to remit PAYE deductions twice monthly.
Date of effect: The amendment applies to deductions made on or after 1 December 1995.
Proposal announced: 1995-96 Budget, 9 May 1995.
Financial impact: $275 million will be brought forward into the 1995-96 year of income.
Compliance cost impact: Additional up front compliance cost will be incurred by those employers who are required to adjust their operations to take into account that they are now early remitters. Employers will also face a funding cost to replace the money that is remitted earlier.
Depreciation on trading ships
Extends the date on which the prime cost concessional depreciation rate is available under section 57AM from 1 July 1997 to 30 June 2002.
Date of effect: Royal Assent
Proposal announced: 1995-96 Budget,9 May 1995
Financial impact: This proposal will cost the revenue $11 million in 1997-98 and $16 million in 1998-99.
Compliance cost impact: The cost of compliance with this provision will not change.
Infrastructure borrowings
Amends the income tax law to increase the infrastructure borrowings tax rebate from 33 per cent to 36 per cent in line with the increase in the company tax rate.
Date of effect: Applies in respect of assessable income for the 1995-96 and subsequent income years.
Proposal announced: 1995-96 Budget, 9 May 1995.
Financial impact: The estimated cost to the revenue of the increase in the infrastructure borrowings rebate is $2 million in 1995-96, $8 million in 1996-97 and $10 million in 1997-98. However, under subsection 93Y(1) of the Development Allowance Authority Act 1992 the maximum total cost to the Commonwealth of the infrastructure borrowings tax concessions is capped as follows:
- •
- 1995-96 - $100 million
- •
- 1996-97 - $150 million
- •
- 1997-98 - $200 million
Compliance cost impact: None.
Group Certificates and other PAYE provisions
Amends the income tax law to:
- •
- require that original group certificates are returned to the Australian Taxation Office by employers to facilitate electronic data capture of employment income information. This also necessitates a change in the basis of allowing tax instalment credits to a basis consistent with other collection mechanisms;
- •
- remove the tax stamp provisions and replace them with a tax voucher system;
- •
- provide that employers who remit less than $10,000 per annum of tax instalment deductions are only required to remit tax instalment deductions quarterly;
- •
- offset excess PAYE credits against other liabilities owing to the Commissioner;
- •
- remove the requirement on employers to return unused group certificates; and
- •
- remove redundant provisions relating to the Commissioner's former priority to recover unremitted PAYE deductions over all other debts in cases of insolvency.
Date of effect: The group certificate and tax stamp amendments will apply from 28 days after Royal Assent. The requirement for employers who remit less than $10,000 per annum of tax instalment deductions will apply to quarters beginning after Royal Assent. The repeal of the redundant Commissioner's priority provisions of the Act does not apply to amounts that became payable under those provisions prior to Royal Assent.
Proposal announced: Not previously announced.
Financial impact: Unquantifiable revenue savings through increased integrity of the income matching system. Possible public debt interest savings from the new tax voucher system. Expected reduction in other debts owed to the Commissioner from the proposed altered credit offset provisions.
Compliance cost impact: Any employer now required to register as a group employer will be subject to the attendant group employer obligations and resultant compliance costs. These costs are not expected to be significantly different to the existing costs of those employers in meeting their tax obligations in respect of their employees. Other measures are not expected to have any compliance cost.
Superannuation guarantee charge - notional earnings base
Amends the Superannuation Guarantee (Administration) Act 1992 to extend the use of pre 21 August 1991 employee earnings bases if employers restructure their superannuation funds. Currently employers can only use such bases if they continue to contribute:
- •
- to the same fund; and
- •
- under the same law, award, arrangement or scheme;
as for an employee for whom they were contributing immediately before 21 August 1991.
The Bill allows pre 21 August 1991 earnings bases to be kept by an employer if the employer contributes under the same law, award, arrangement or scheme to:
- •
- a new fund under the same earnings base as the original fund if employees transfer between the funds and receive equal or improved rights to benefits;
- •
- an existing fund in relation to an employee of a former employer who transfers to the fund from a former employer's fund because of a business acquisition, if the base was used in the former employer's fund; or
- •
- a former employer's fund for employees who transfer to the new employer because of a business acquisition.
Date of effect: The amendments will affect the calculation of the superannuation guarantee charge on and from 1 July 1995 for qualifying changes of employers and/or funds that occur after 3.55pm Canberra legal time on 28 June 1994 (the time the Treasurer announced the measure in Parliament). The measure only affects an employer's contributions from 1 July 1995 so that contributions made by employers for the 1994-95 year do not need to be reduced.
Proposal announced: Treasurer's Statement on Superannuation Policy of 28 June 1994.
Financial impact: None.
Compliance cost impact: The amendments will affect some employers contributing to superannuation funds that enter into reorganisations. The amendments allow these employers to keep existing notional earnings bases if they meet the conditions in the Bill. They must keep records which show they have met these conditions.
Employers may incur costs in getting advice on this measure. However, the measure will provide for desirable restructuring of superannuation funds resulting in lower administrative costs to employers, without a forced change from an existing earnings base.
Superannuation guarantee charge - excess benefits
Amends the Superannuation Guarantee (Administration) Act 1992 to exempt employers from the superannuation guarantee charge (SGC) in respect of employees who make an election because their accumulated superannuation entitlements exceed the pension reasonable benefits limit (RBL). Employees who make an election to exempt an employer from the SGC will not be able to claim deductions for personal superannuation contributions.
Date of effect: Royal Assent.
Proposal announced: Treasurer's Statement on Superannuation Policy of 28 June 1994.
Financial impact: There will be minimal financial impact.
Compliance cost impact: There are two elements to compliance cost impacts for this measure:
- •
- for employers, there are potential compliance cost savings because they will not have to provide superannuation support for employees who make an election and, consequently, will not have to calculate, or keep records of, superannuation contributions for those employees.
- •
- superannuation funds, approved deposit funds and other organisations may incur some costs in providing the information to employees who need to demonstrate that they have exceeded the pension RBL. However, it is expected that most employees will use the periodic statements issued by the funds in the normal course of events.
Minor amendment
The Bill also makes a minor technical amendment to the tax law.