House of Representatives

Explanatory Memorandum

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

General outline and financial impact

CFCs and capital gains tax

This Bill contains provisions to amend the controlled foreign company (CFC) measures in the Income Tax Assessment Act 1936 to correct anomalies in the interaction of the CFC measures and the capital gains tax (CGT) provisions of the income tax law.

Date of effect: The amendments will apply in determining the attributable income of a CFC if a tainted asset is deemed to be disposed of because the CFC ceased to be a member of a group (and had previously benefited from CGT roll-over relief) after 7.30pm, by legal time in the Australian Capital Territory, on 13 May 1997.

Proposal announced: The proposal was announced in the Treasurers Press Release No. 51 on 13 May 1997 as part of the 1997-98 Budget Statement.

Financial impact: The measure will protect the revenue base used for the forward estimates by removing opportunities for significant future expansion of tax minimisation practices. In the absence of the measure, to the extent that the revenue base would not be protected, there would be a significant revenue loss compared to the forward estimates.

Compliance cost impact: The initial and recurrent compliance costs of the measure are not expected to be significant (that is, less than $1 million per annum).

Summary of Regulation Impact Statement

Impact: Low.

Main points:

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the taxpayers affected by this measure will be those Australian residents that have an attributable interest in a CFC that has obtained roll-over relief in relation to a tainted asset and is subsequently deemed to have disposed of the asset;

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the proposed amendments are unlikely to significantly affect taxpayers unless a company group has been intending to make use of the identified anomalies to avoid the payment of Australian tax;

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it is envisaged that the majority of the increase in compliance costs will arise for those Australian taxpayers that undertake complex arrangements to dilute their interest in a CFC that holds a tainted asset that has received roll-over relief;

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the compliance costs will mainly result from record keeping and anticipated increased adviser fees but are not expected to be significant; and

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the compliance costs will not increase for all CFCs only those that have received roll-over relief and mainly where the CFC ceases to be a member of a wholly-owned company group.

Policy objective: To remove anomalies preventing the intended Australian taxation of capital gains arising on tainted assets deemed to be disposed of because the CFC ceased to be a member of a group (and had previously benefited from CGT roll-over relief).

Amendments to exempt certain post-judgment interest

This Bill amends the Income Tax Assessment Act 1997 and the Income Tax Assessment Act 1936 to exempt from income tax post-judgment interest in personal injury compensation cases. The amendments ensure that post-judgment interest payable in personal injury cases that accrues between the time of the original award of damages by a court and the time at which the original judgment is finalised either when any right to appeal has expired or when the matter is finally determined on appeal or otherwise settled between the parties will be exempt from income tax.

Date of effect: The amendments will apply to the 1992-1993 and later years of income.

Proposal announced: Assistant Treasurers Press Release No. 13 of 24March 1999.

Financial impact: It is estimated that the cost to the revenue will be $14million in the 1999-2000 year of income and $2 million in each later year of income.

Compliance cost impact: Affected taxpayers are expected to incur only minimal compliance costs in determining the extent of their entitlement to exemption from income tax for post-judgment interest they receive.

Summary of Regulation Impact Statement

The Office of Regulation Review has been consulted and a Regulation Impact Statement is not required.

Franking of dividends

This Bill amends the Income Tax Assessment Act 1936 to make a number of changes to the franking credit trading and dividend streaming rules in Part IIIAA. These changes make corrections to these rules to ensure that they operate as intended.

Date of effect: These changes will apply from the commencement of the relevant measures.

Proposal announced: These changes have not been previously announced.

Financial impact: Extending the scope of a transitional concession for the general anti-avoidance rule and the specific anti-streaming rule will result in a loss to revenue that cannot be quantified but may be exceed $31million from one known case. The other changes will result in a negligible loss to revenue or have no revenue impact.

Compliance cost impact: These changes will have a negligible impact on compliance costs.

Summary of Regulation Impact Statement

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

Non-deductibility of bribes

This Bill amends the Income Tax Assessment Act 1997 to disallow deductions for bribes to foreign public officials.

Date of effect: The amendments will apply to the 1999-2000 and later years of income.

Proposal announced: Joint statement by the Deputy Prime Minister and Minister for Trade, Treasurer and Attorney-General dated 16 May 1997.

Financial impact: Insignificant.

Compliance cost impact: The amendments will impose minimal compliance costs. Details of the compliance cost impact are incorporated into the Regulation Impact Statement in Chapter 4 of this Explanatory Memorandum.

Summary of Regulation Impact Statement

Impact: Low.

Main points: The measure will marginally increase compliance costs of some taxpayers involved in international trade. Only those taxpayers who incur expenditure for bribes or facilitation payments to foreign public officials will be affected.

Policy objective: The policy objective is to give effect to a recommendation by the Organisation for Economic Co-operation and Development Council that member countries deny tax deductibility for bribes to foreign public officials.

Philanthropy

Schedule 5 of Taxation Laws Amendment Bill (No. 8) 1999 (this Bill) amends the Income Tax Assessment Act 1997 and the Income Tax Assessment Act 1936 to implement the Governments response to the report on philanthropy in Australia by the Business and Community Partnerships Working Group on Taxation Reform by:

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allowing an income tax deduction for a gift of property to certain funds, authorities and institutions and to political parties worth more than $5,000, regardless of when or how the property was acquired;

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providing a capital gains tax (CGT) exemption for testamentary gifts of property to certain funds, authorities and institutions and to political parties unless the property is reacquired for less than market value by the estate, a beneficiary of the estate or an associate;

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providing a CGT exemption for gifts of property under the Cultural Gifts Program unless the property is reacquired for less than market value by the donor or an associate;

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allowing concessional taxation treatment for specified private funds which will not be required to seek donations from the public but will be subject to the other requirements applying to public funds; and

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allowing the apportionment of deductions for gifts made under the Cultural Gifts Program over a period of up to 5 years.

Date of effect: The amendments will apply from 1 July 1999:

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Deductions will be allowable for gifts of property to certain funds, authorities and institutions and to political parties made on or after 1 July 1999 where the value of the property exceeds $5,000, regardless of when or how the property was acquired.

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Deductions will be allowable for gifts to specified private funds made on or after 1 July 1999.

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CGT exemption will apply to property donated under the Cultural Gifts Program on or after 1 July 1999.

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CGT exemption will apply to testamentary gifts of property donated on or after 1 July 1999.

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Deductions for donations to the Cultural Gifts Program made on or after 1 July 1999 may be apportioned over a period of up to 5 income years.

Proposal announced: The proposal was announced on 26 March 1999 by the Prime Minister, the Treasurer, the Minister for Family and Community Services, the Minister for Communications, Information Technology and the Arts, and the Minister for the Arts and the Centenary of Federation.

Financial impact: This measure is expected to cost the revenue $5.5million in the 1999-2000 income year, $51 million in the 2000-2001 income year, $56 million in the 2001-2002 income year and $71 million in the 2002-2003 income year.

Compliance cost impact: There will be a minimal increase in compliance costs for taxpayers as a result of the need to make an election to apportion deductions in certain circumstances.

Summary of Regulation Impact Statement

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

Rate of tax for friendly societies etc.

Amends the Taxation (Deficit Reduction) Act (No. 2) 1993 so that the rate of tax imposed on the eligible insurance business of friendly societies and other registered organisations will be retained at 33% for the 1999-2000 income year. The trustee rate will increase to 39% for the 2000-2001 and subsequent income years unless other relevant amendments to the taxation treatment of friendly societies are made prior to that time.

Date of effect: 1999-2000 income year.

Proposal announced: Tax Reform: not a new tax, a new tax system: The Howard Governments Plan for a New Tax System on 13August1998.

Financial impact: The estimated cost to the revenue is $20million in 1999-2000 income year.

Compliance cost impact: The proposed amendments are not expected to impose any additional compliance costs because they ensure that the existing tax arrangements remain unchanged until the 2000-2001 income year.

Summary of Regulation Impact Statement

A Regulation Impact Statement is not required for these changes.

Company Law Review Amendments

Amends the Income Tax Assessment Act 1936 (ITAA 1936) and associated tax laws to:

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provide for the necessary machinery provisions to collect untainting tax;

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ensure that distributions from share premium accounts are within the ambit of the capital streaming and dividend substitution rules;

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make some minor technical changes to rectify certain incorrect references; and

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ensure that bonus shares deemed to be a dividend under section 45C have a cost base of the dividend amount where the shares are held on revenue account.

Date of effect: The amendment to include distributions of share premium within the ambit of the capital streaming and dividend substitution rules will apply from the date of introduction of the Bill. The other amendments will apply from 1 July 1998, the date of commencement of the Taxation Laws Amendment (Company Law Review) Act 1998 .

Financial impact: The amendments, other than the amendment to include distributions of share premium in the anti-avoidance rules, have no revenue impact. The revenue cost of the amendment to the anti-avoidance rules is unquantifiable but there is the potential for significant revenue loss if the amendment is not made.

Compliance cost impact: There are no compliance costs.

Summary of Regulation Impact Statement

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

Technical amendments

This Bill makes minor technical amendments to the Income Tax Assessment Act 1997 that improve signposting to provisions in the Act dealing with excess tax offsets.

Date of effect: Royal Assent.

Proposal announced: Not previously announced.

Financial impact : Nil.

Compliance cost impact: Nil.

Summary of Regulation Impact Statement

A Regulation Impact Statement is not required for these changes.

Concessional tracing rules for company loss etc. provisions

The company loss and bad debt and debt/equity swap deduction provisions of the income tax law will be amended to extend to companies 2 concessional tracing rules available to trusts under the trust loss measures which are contained in Schedule 2F to the Income Tax Assessment Act 1936 . The amendments are as follows:

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A family trust concession will apply where the relevant interests in a company are held, directly or indirectly, by a family trust. The trustee of the family trust will be treated as an individual holding the interests for its own benefit.

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An alternative condition will apply for the purpose of testing continuity of majority beneficial ownership of a company. If the company is held by non-fixed trusts such that it is not able to pass the continuity of ownership test, the company will still be able to deduct its losses or debts if certain conditions are satisfied.

The legislation was first introduced into Parliament in October 1997 in the Taxation Laws Amendment Bill (No. 6) 1997 and lapsed when Parliament was prorogued for the election. To ensure taxpayers are not disadvantaged by the delay in implementation, the legislation will continue to apply to losses and debts first incurred in the 1996-97 year of income.

Date of effect: The amendments will apply to losses and debts incurred in the 1996-97 year of income or later years of income.

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

Financial impact: Details on the financial impact of the amendments are included in the Regulation Impact Statement (see paragraph 9.121).

Compliance cost impact: The Compliance Cost Impact Statement is incorporated into the Regulation Impact Statement at the end of Chapter 9 of this Explanatory Memorandum.

Summary of Regulation Impact Statement

Impact: Low

Main points

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The only viable option for this measure involves amending the company loss and bad debt and debt/equity swap deduction provisions in the tax law to make the special tracing rules that are available to trusts under the trust loss measures available to companies.

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The rules will create certainty in the application of the law to companies in respect of tracing interests through non-fixed trusts. Companies that will be affected are those which have deductions including prior year losses.

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The family trust concession will result in some initial compliance costs as trusts will need to make a family trust election. For the alternative condition , there will be some costs for companies in monitoring whether non-fixed trusts which hold interests in a company will pass the tests that apply to non-fixed trusts under the trust loss measures.

Policy objective: To extend to companies 2 concessional tracing rules (the family trust concession and the alternative condition ) that are available to trusts under the trust loss measures.

Extension of transitional family trust and interposed entity election provisions

Amends Schedule 1 to the Taxation Laws Amendment (Trust Loss and Other Deductions) Act 1998 (the Trust Loss Act) to extend the deadline for making family trust and interposed entity elections for the purpose of the family trust concessional tracing rule that applies to companies and the franking credit trading provisions in Division 1A of Part IIIAA of the Income Tax Assessment Act 1936 .

Date of effect: These amendments will apply from the day this Bill receives Royal Assent.

Proposal announced: These changes have not been previously announced.

Financial impact: These changes will result in a negligible loss to revenue.

Compliance cost impact: These changes will have a negligible impact on compliance costs.

Summary of Regulation Impact Statement

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