Explanatory Statement

Issued by authority of the Assistant Treasurer

Income Tax Amendment Regulations 2011 (No. 2)

Income Tax Assessment Amendment Regulations 2011 (No. 1)

Subject - Income Tax Assessment Act 1936 and Income Tax Assessment Act 1997

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 (ITAA 1997) prescribing all matters by which the Act or the ITAA 1997 are required or permitted to be prescribed, or are necessary or convenient to be prescribed for giving effect to the Act or the ITAA 1997.

The purpose of the amendments to the Income Tax Regulations 1936 (ITR 1936) and to the Income Tax Assessment Regulations 1997 (ITAR 1997) is to give effect to consequential amendments that are necessary to ensure that the taxation law operates as intended following the repeal of the foreign investment fund (FIF) and deemed present entitlement rules.

The Government announced in the 2009-10 Budget on 12 May 2009 that it would reform the foreign source income attribution rules. The repeal of the FIF and deemed present entitlement rules represents the first part of this reform. The remaining reforms (include the modernisation of the controlled foreign company rules, improving the effectiveness of the transferor trust rules, and the inclusion of an anti-roll-up rule) are scheduled to be introduced into the Parliament in the first half of this year.

The FIF rules applied to Australian residents with non-controlling shareholdings in foreign companies or with interests in foreign trusts. The rules applied to approximate a resident taxpayer's share of the undistributed profits of a FIF and to assess the taxpayer on those profits. The FIF rules also applied to Australian residents with an interest in a foreign life assurance policy.

The Tax Laws Amendment (Foreign Source Income Deferral) Act (No. 1) 2010, which repeals the FIF and deemed present entitlement rules, received Royal Assent on 14 July 2010.

The amendments will repeal or amend provisions in the ITR 1936 and the ITAR 1997 which relate to the FIF rules.

The amendments also insert the definition of an approved stock exchange and updates the list of approved stock exchanges in the ITAR 1997 for the purposes of the definition of approved stock exchange in subsection 995-1(1) of the ITAA 1997 as a consequence of the repeal of the FIF regulations in the ITR 1936.

The amendments also modify the references to "Australian Stock Exchange Limited" and "Bendigo Stock Exchange Limited" to read "ASX Limited" and SIM Venture Securities Exchange Ltd" respectively for the purposes of the definition of approved stock exchange in subsection 995-1(1) of the ITAA 1997 (in order to reflect the change in names of those institutions) and adds "Asia Pacific Stock Exchange Limited" to the list of approved stock exchanges.

A further technical amendment is made to omit definitions that no longer apply.

These minor consequential amendments arise from the repeal of the FIF rules in the tax laws. A comprehensive Regulation Impact Statement was prepared and accompanied the repeal of these rules in the primary legislation.

Targeted confidential consultation occurred as the Regulations were minor or machinery in nature.

The Regulations commenced on the day after they were registered on the Federal Register of Legislative Instruments.