Second Reading Speech
Mr SLIPPER (Parliamentary Secretary to the Minister for Finance and Administration)I move:
That this bill be now read a second time.
This bill reflects a continuation of the Government's initiatives to the reform of business taxation by amending the income tax law and other laws to give effect to the following measures.
The basic foundations of the consolidation regime were contained in the initial measures introduced on May 16, 2002.
The measures contained in this bill will deal with outstanding matters necessary for the further implementation of the consolidation regime from 1 July 2002. Further legislation is scheduled to be introduced later this year.
This bill introduces the cost setting rules for the formation of a consolidated group. These rules modify the basic case rules of a single entity joining an existing consolidated group.
The bill also contains transitional measures aimed primarily at reducing the compliance costs associated with forming a consolidated group. The key transitional measure provides that in certain circumstances, and where a consolidated group is formed before 1 July 2004, the head company may choose that assets of subsidiary members retain their existing tax cost. This transitional option removes the need for consolidated groups to re-value assets as required under the ongoing tax cost setting rules.
Further, this bill includes certain measures that deal with international aspects of consolidation. The measures in the bill ensure that the foreign tax credit provisions work appropriately for a consolidated group, including allowing the head company to use excess foreign tax credits available to a subsidiary member at the time of joining a group. The removal of the existing foreign tax credit grouping rules has also resulted in the rewriting of the provisions applying to all taxpayers that allow excess foreign tax credits to be carried forward for 5 years.
The bill also deals with balances that are maintained to avoid double Australian taxation of the income of a controlled foreign company or foreign investment fund. The measures in the bill transfer those balances to the head company of a group when a subsidiary company becomes a member of a consolidated group. Balances are transferred from the head company to a subsidiary company that leaves the group with some or all of the controlled foreign company or foreign investment fund interests held by the group.
These measures are considered to be the most important in terms of the immediate application of international tax provisions to consolidated groups but they will be
followed by further legislation and may be subject to fine tuning for more complex arrangements.
This bill also contains additional rules and amendments of a minor or technical nature. These consist of modifications to various consolidation rules in the income tax legislation in relation to membership rules, utilisation of losses, cost setting, imputation and removal of grouping.
This bill makes consequential amendments to the provisions currently referred to in the tax laws as the `exempting and former exempting company provisions'. These provisions are concerned with limiting the source of franking credits available for franking credit trading. The simplified imputation system measures introduced into Parliament on 30 May 2002 contained core rules for the new simplified imputation system. As a result of the introduction of those measures, certain consequential amendments are now required to other areas of the imputation system not covered by those rules including the exempting and former exempting company provisions.
The consequential amendments include moving the existing provisions from the Income Tax Assessment Act 1936 to the Income Tax Assessment Act 1997. The simplified imputation system, including these consequential amendments, applies from 1 July 2002.
Value shifting and loss integrity
The bill will also introduce a general value shifting regime applying mainly to interests in controlled companies and trusts that are not consolidated. The regime is expected to achieve similar value shifting integrity to that achieved within consolidation. The new regime, which will generally apply to value shifts from 1 July 2002, will also strengthen the integrity of the existing capital gains tax rules.
The bill will also make amendments to the current loss integrity provisions to allow assets to be valued globally in calculating unrealised losses. This will reduce the compliance costs of these measures.
Finally, the bill will introduce provisions to provide tax relief for a demerger. A demerger involves restructuring a corporate or trust group by splitting it into two or more entities or groups, with the underlying owners of the head entity holding the demerged entities or groups directly.
The tax relief for demergers will increase efficiency by allowing greater flexibility in restructuring a business and ensuring that tax considerations are not an impediment to such restructuring. The proposed demerger amendments will apply to demergers happening on or after 1 July 2002.
Full details of the measures in this bill are contained in the explanatory memorandum.
I commend this bill and present the explanatory memorandum.