Senate

Explanatory Memorandum

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

General outline and financial impact

Amendments related to net capital losses

Amends Part IIIA of the Income Tax Assessment Act 1936 to ensure that:

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net capital losses will attach to the year of income in which they are incurred and are recouped or transferred within a company group in the order in which they are incurred; and

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where a net capital loss is transferred within a company group, the transferee company is required to satisfy the same recoupment tests (for example, the continuity of ownership test or the same business test) that apply to the transferor company.

Date of effect: The amendments relating to the transfer of net capital losses will affect transfer agreements resulting in net capital losses being recouped by transferee companies in the 1996-97 year of income or a subsequent year. The other amendments will apply in respect of the 1996-97 year of income and subsequent years.

Proposal announced: 1996-97 Budget, 20 August 1996

Financial impact: Increased revenue of $20 million in 1996-97, $80 million in 1997-98 and $55 million in 1998-99 and 1999-2000 is expected.

Compliance cost impact: It will be particularly necessary for corporate taxpayers who incur net capital losses to maintain detailed records showing the years in which losses were incurred. This is to ensure that those losses are recouped or transferred in the appropriate order.

In addition, companies may be required to keep records evidencing beneficial ownership of shares and the nature of their business over a longer period of time than was previously required. This is to ensure that relevant recoupment tests are satisfied when the net capital losses are recouped or transferred. However, these requirements should not result in additional compliance costs because such records are already required to be kept under the existing law relating to the recoupment and transfer of revenue losses.

To the extent that the measures clarify the operation of the law, there will be a reduction in compliance costs.

Withholding tax avoidance

Amends the withholding tax provisions and Part IVA of the income tax law to:

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extend the general anti-avoidance provisions of the Act - Part IVA -so that they apply to non-resident interest, dividend and royalty withholding tax;

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address arrangements which attempt to convert an interest income stream into another income form which it is argued is not 'interest' or 'in the nature of interest';

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impose withholding tax where royalties are derived by a resident in similar circumstances to those by which interest is subjected to withholding tax under subsection 128B(2A) of the Act;

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ensure that withholding tax is payable where tax exempt bodies are interposed between an Australian resident payer and a non-resident recipient; and

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remove any doubt that the withholding tax provisions apply to dividends paid out of capital reserves.

Date of effect: The measures will apply to interest, dividend and royalty payments made after 7.30 pm Eastern Standard Time on 20 August 1996.

Proposal announced: 1996-97 Budget, 20 August 1996.

Financial impact: The impact of these measures is a gain to the revenue of $85 million in 1996-97 and then $100 million per annum from 1997-98.

Compliance cost impact: Entities who previously avoided the payment of withholding tax will now have to bear the costs associated with complying with the withholding tax collection provisions.

This involves accounting costs and the cost of deducting and remitting withholding tax to the Australian Taxation Office.

Dual resident companies

Amends the provisions of the Income Tax Assessment Act 1936 (the Act) in respect to certain dual resident companies (and non-individual entities that are treated as companies) to deny specified benefits that are available in respect to resident companies and ensure the application of specified anti avoidance measures that are targeted at non-resident companies.

Date of effect: Applies on or after 1 July 1997.

Proposal announced: 1996-97 Budget, 20 August 1996.

Financial impact: Estimated revenue savings of $50-100 million per year from the 1997-98 income year.

Compliance cost impact: Nil.

Removal of standard superannuation contribution limit

This measure removes the right of employers to elect to use a standard contribution limit to calculate the upper limit of deductions allowable in relation to superannuation contributions they make for the benefit of their employees. To calculate the upper limit all employers will be required to use their employees' age based limits.

Date of effect : 7.30pm Eastern Standard Time on 20 August 1996.

Proposal announced: 1996-97 Budget, 20 August 1996.

Financial impact: This measure will result in savings of $35 million in 1997-98, $40 million in 1998-99 and $40 million in 1999-2000.

Compliance cost impact: This measure will result in a slight increase in compliance costs for affected taxpayers. Affected taxpayers will need to calculate their deduction limit on the basis of each of their employees' age based limits. Therefore, employers will need to know how many employees fit into the three age based limits: under 35 years of age, between 35 and 49, and over 50. This, however, would usually be information the employer has readily available.

Interest withholding tax and related provisions

Amends the interest withholding tax provisions of the Income Tax Assessment Act 1936 (the Act) to:

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extend the section 128F exemption to wholesale borrowings by Australian companies by replacing the existing wide distribution test with a public offer test;

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repeal the use of funds in an Australian business requirement in the existing section 128F;

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restrict the section 128F non-resident borrowing subsidiary exemption to subsidiaries resident in countries listed in the Income Tax Regulations;

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provide that the section 128F exemption will not be available if the company pays interest to an associate where the company issuing the debentures is aware or should have been aware that the interest was paid to an associate; and

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introduce self assessment procedures for claiming the section 128F exemption.

Amends the income tax collection provisions of the Act to prevent an income tax deduction being claimed in respect of interest which is subject to interest withholding tax where the tax has not been deducted from the interest payment.

Amends the bearer debenture tax provisions of the Act to:

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provide an exemption for bearer debentures issued by an Offshore Banking Unit; and

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subject interest in relation to bearer debentures which are issued overseas by an Australian company and where interest is paid overseas, to taxation under the interest withholding tax provisions.

Amends the foreign bank branch provisions (Part 111B) of the Act to define the term 'interest' as having the same meaning as in the interest withholding tax provisions.

Amends the Income Tax (Bearer Debentures) Act 1971 to restrict the rate of tax to the top marginal rate.

Amends the Financial Corporations (Transfer of Assets and Liabilities) Act 1993 to ensure that it will deal with the transitional period in relation to the section 128F interest withholding tax exemption.

Date of effect: As foreshadowed by the Treasurer in his Press Release, No 36 of 25 June 1996 titled 'Interest Withholding Tax Measures':

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the amendments to bearer debenture provisions will be effective from the date the amending legislation receives Royal Assent;

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the amendments to the interest withholding tax provisions will take effect from 1 January 1996.

The amendments to the foreign branch bank provisions (Part IIIB) will apply from Royal Assent.

Proposal announced: The interest withholding and bearer debenture proposals were announced by the Treasurer in his Press Release No 36 of 25 June 1996 titled 'Interest Withholding Tax Measures' and Press Release No 129 of 16 December 1996 titled 'Implementation of Certain International Tax Measures'.

The amendments to Part IIIB have not been previously announced.

Financial impact: There will be a negligible cost to the revenue.

Compliance cost impact:

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In relation to the section 128F exemption, compliance costs should be reduced because of the self assessment system for claiming the exemption.

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In relation to the bearer debenture tax provisions the compliance costs should not vary because the procedure for determining tax liability will remain unchanged.

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The compliance cost of the foreign bank branch amendments will be minimal as this will involve taxpayers converting amounts in the nature of interest into an interest rate.

Leases of luxury cars

Inserts a new Schedule into the income tax law that provides a legislative framework for the taxation treatment of leases of luxury cars. The lessor is treated as having loaned the lessee the money to acquire the car. The lessor is taxed on the finance charge component of the lease payments, but not the lease payments themselves. The lessee is able to deduct the finance charge component of the lease payments, but not the lease payments. The lessee is also treated as the owner of the car entitled to relevant depreciation deductions.

Date of effect: Applies to leases entered into after 7.30 pm by legal time in the Australian Capital Territory on 20 August 1996.

Proposal announced: 1996-97 Budget, 20 August 1996.

Financial impact: This measure will increase revenue by approximately $2 million in 1996-97, $30 million in 1997-98, $45 million in 1998-99 and $60 million in 1999 -2000.

Compliance cost impact: The tax accounting methodology contained in the new Division broadly reflects existing financial accounting standards for finance leases. Leasing companies should have little additional compliance difficulty. Individual lessees may not be familiar with the relevant lease accounting standards, but in most instances their tax position will simply be the reverse of the lessor's. Leasing companies ought to be in a position to inform lessee clients of the proportion of each year's lease payments that represents a deductible finance charge, as well as the cost of luxury cars for depreciation purposes.