Senate

Revised Explanatory Memorandum

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

Chapter 13 - Regulation Impact Statement

Policy objective

The objectives of the New Business Tax System

13.1 The measures in this Bill are part of the Government's broad ranging reforms which will give Australia a New Business Tax System. The reforms are based on the Recommendations of the Review, instituted by the Government to consider reform of Australia's business tax system. ^[F32]

13.2 The Government instituted the Review to consult on its plan to comprehensively reform the business income tax system (as outlined in ANTS). The Review made 280 recommendations to the Government, designed to achieve a more simple, stable and durable business tax system.

13.3 The New Business Tax System is designed to provide Australia with an internationally competitive business tax system that will create the environment for achieving higher economic growth, more jobs and improved savings, as well as providing a sustainable revenue base so the Government can continue to deliver services to the community.

13.4 The New Business Tax System also seeks to provide a basis for more robust investment decisions. This is achieved by:

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improving simplicity and transparency;

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reducing the cost of compliance; and

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providing fairer, more equitable outcomes.

13.5 This Bill is part of the legislative program implementing the New Business Tax System. Other Bills have been introduced and passed already.

The objectives of measures in this Bill

13.6 Broadly, the New Business Tax System will enhance Australia's competitiveness through lower company and capital gains tax rates, and reduced compliance costs.

13.7 More specifically, the measures contained in this Bill have these objectives:

Implementation options

13.8 The major measures in this Bill arise directly from recommendations of the Review. Those Recommendations were the subject of extensive consultation. The implementation options for these measures can be found in A Platform for Consultation (APFC) and A Tax System Redesigned (ATSR). Table 13.3 shows where the measures (or the principles underlying them) are discussed in those publications.

13.9 The remaining measures are of a more technical nature, and were not directly discussed in A Platform for Consultation and A Tax System Redesigned . Where appropriate, implementation options for these measures are outlined in Table 13.4.

Assessment of impacts

13.10 The potential compliance, administrative and economic impacts of the measures in this Bill have been carefully considered, both by the Review and by the business sector. The Review focussed on the economy as a whole in assessing the impacts of its recommendations and concluded that there would be net gains to business, government and the community generally from business tax reform.

Impact group identification

13.11 The measures in this Bill specifically impact on those taxpayers identified in Table 13.5.

Analysis of costs / benefits

Compliance costs

13.12 As is standard with new measures, groups affected by them will need to incur a small up-front cost in either familiarising themselves with the new law or having advisers familiarise themselves with the new law.

13.13 However, overall, the measures in this Bill are expected to reduce compliance costs as part of providing a more consistent and easily understood business tax system.

13.14 The General Outline to this Explanatory Memorandum discusses the impact each measure in this Bill has on compliance costs. Below are some specific examples of how the measures in this Bill will impact on compliance costs. The examples have been listed according to how significant an impact the particular group of measures has on compliance costs.

Life insurers measures

13.15 Broadening the tax base for life insurers should reduce compliance costs by increasing the certainty and integrity of the tax base. For example, the taxable income of life insurance companies will only be split into 2 components rather than 4, reducing the need to undertake apportionment calculations. However, there are implementation and transitional costs that are expected to arise:

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For example, segregating assets for the purposes of taxing the superannuation business of life insurers at a 15% rate rather than the company tax rate will require the creation of additional records.

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The measures also apply from 1 July 2000 rather than on an income year basis. This will cause approximately 35 life insurers with substituted accounting periods to effectively work out their taxable income twice for the income year containing 1 July 2000. However, during consultation the life insurance industry strongly supported having these measures commence from a set date, as a means of ensuring competitive neutrality. Those life insurers that are early balancers will also have additional time to prepare for all of the changes.

13.16 Compliance costs should decrease for superannuation funds that only carry on pension business as a result of the measure affecting superannuation funds with a pension business. Currently, these funds require an actuarial certificate every 3 years to qualify for an exemption from tax. This will no longer be required.

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Other changes affecting the pension business of superannuation funds may increase compliance costs in the implementation phase, for example where self-managed funds have members in both the accrual and pension phase. These funds will now have to separately identify assets to be entitled to an exemption from tax. Currently the exemption is worked out using figures provided by an actuary. Identifying these assets will require the creation of additional records.

Imputation measures

13.17 Requiring life insurers to accrue franking credits and debits for the payment of tax on income actually allocated to shareholders will require more calculations. However, using accepted and already used accounting practices to identify income allocated to shareholders will limit any additional complexity.

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The current method for accruing franking credits and debits involves applying a set proportion to tax paid, reflecting prudential requirements. While this is simple, it is an arbitrary rule that does not reflect the true underlying circumstances.

13.18 Increasing the threshold for the exemption from the franking credit trading rules reduces compliance costs for individual taxpayers entitled to a franking rebate between $2,000 and $5,000. These taxpayers no longer have to consider the application of the 45-day rule.

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The increase in the threshold will also eliminate the complexity involved with the current tapering of the exemption between $2,000 and $2,500. This tapering involves difficult calculations.

13.19 The amendments to the conversion of franking account provisions will cause a small, one-off cost for companies affected by the measure arising from implementing changes to their systems.

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However, the method adopted in the conversion of franking account provisions minimises ongoing compliance costs (particularly record-keeping costs associated with companies maintaining multiple franking accounts).

Losses measures

13.20 Making adjustments to capital losses and deductions to prevent multiple recognition of losses under the inter-entity measure may increase compliance costs, for example, through requirements for companies to provide information to entity shareholders.

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However, special relief has been incorporated with this measure to ensure any increase in compliance costs is minimised.

13.21 Linking the continuity of ownership test to the new inter-entity measure will streamline the rules that apply to entities and provide greater integrity. The measures are expected to increase the requirement to maintain records regarding the direct and indirect ownership in a loss company.

13.22 Changes to the unrealised loss measures (originally introduced in the Integrity and Other Measures Act) will reduce compliance costs associated with valuation by:

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excluding small business taxpayers (i.e. taxpayers with net asset values of $5 million or less) and low cost assets (i.e. assets that are acquired for less than $10,000);

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allowing tax written-down value to be used as a proxy for market value, for depreciable plant; and

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enabling the Commissioner to provide guidance about valuation methods.

13.23 Measures not discussed in paragraphs 13.15 to 13.22 will have no impact, or only a negligible impact, on compliance costs.

13.24 Further details on how the measures in this Bill impact on affected taxpayers can be found in the specific Chapters in this Explanatory Memorandum explaining each measure.

Administration costs

13.25 The implementation of the measures in this Bill are not expected to give rise to any significant increase in administration costs.

Government revenue

13.26 The revenue impact of each measure is noted in the General Outline for this Explanatory Memorandum.

Economic benefits

13.27 The New Business Tax System will provide Australia with an internationally competitive business tax system that will create the environment for achieving higher economic growth, more jobs and improved savings. The economic benefits of these measures are explained in more detail in the publications of the Review, particularly A Platform for Consultation and A Tax System Redesigned.

Other issues - consultation

13.28 The consultation process began with the release of ANTS in August 1998. The Government established the Review in that month. Since then, the Review has published 4 documents about business tax reform; in particular A Platform for Consultation and A Tax System Redesigned in which it canvassed options, discussed issues and sought public input.

13.29 Throughout that period, the Review held numerous public seminars and focus group meetings with key stakeholders in the tax system. It received and analysed 376 submissions from the public about reform options. Further details are contained in paragraphs 11 to 16 of the Overview of A Tax System Redesigned .

13.30 In analysing options, the Review was guided by, and frequently referred to views expressed during the consultation process.

13.31 The measures in this Bill dealing with PAYG instalments were not directly considered by the Review. The PAYG system was subject to extensive consultation prior to its implementation.

13.32 Many of the measures in this Bill have also been subject to extensive consultation between when the Review reported to Government and when this Bill was introduced.

Conclusion and recommended option

13.33 The measures contained in this Bill should be adopted to support a more efficient, innovative and internationally competitive Australian business sector, to reduce compliance costs and to establish a simpler and more structurally sound business tax system.