Explanatory Statement

Issued by authority of the Minister for Revenue and Assistant Treasurer

EXPLANATORY STATEMENT

Income Tax Assessment Act 1936

Income Tax Amendment Regulations 2003 (No. 2)

Section 266 of the Income Tax Assessment Act 1936 (the Act) provides that the Governor-General may make regulations, not inconsistent with the Act or the Income Tax Assessment Act 1997 (the 1997 Act), prescribing matters required or permitted by the Act or the 1997 Act to be prescribed, or necessary or convenient to be prescribed for carrying out or giving effect to the Act or the 1997 Act.

Schedule 12 of the Income Tax Regulations 1936 lists approved stock exchanges for the purposes of the Foreign Investment Fund (FIF) regime (Part XI of the Act).

The FIF regime applies to an Australian resident taxpayer who has had an interest in a foreign company or trust (a FIF), at the end of a year of income, that would not otherwise be subject to other Australian foreign source income rules. The rules also apply to a taxpayer who had held a foreign life policy at any time during a year of income.

Broadly, the FIF rules operate by attributing the undistributed profits of the FIF (called FIF income) to the Australian resident taxpayer in proportion to their interest in the FIF, unless the interest or taxpayer qualifies for a particular exemption.

The list of approved stock exchanges serves two purposes under the FIF regime. For those whose FIF interests are taxed under the regime, it enables investors in foreign companies listed on a designated exchange to use the market value method for determining the value of FIF attributable income. This involves calculating any movement in the market value of the FIF interest quoted on an approved stock exchange, generally between two annual reporting dates. It also allows those who seek the active business exemption an easy method of demonstrating their investment's active nature, by using the approved stock exchanges' sectoral classifications of the investment's activities.

These Regulations were required to add the Stock Exchange of Newcastle Limited (NSX) in Australia as an approved stock exchange.

The inclusion of the NSX as an approved stock exchange expands on an extensive list of approved exchanges for FIF purposes and will assist the NSX to compete equally with other listed exchanges in attracting foreign company listings.

The change to the list is effective from 1 July 2002. The retrospective commencement of these Regulations benefits taxpayers by reducing their compliance costs.