House of Representatives

Explanatory Memorandum

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

General outline and financial impact

Internal roll-overs

Schedule 1 to this bill will amend the ITAA 1936 to ensure that roll-over transactions which occur wholly within the one superannuation fund or annuity provider (internal roll-overs) are treated in the same way for RBL purposes as roll-overs which occur between funds or providers (external roll-overs). This will address a problem in the current law which leads to the double counting of benefits for RBL purposes in situations involving internal roll-overs.

Date of effect: 1 July 2001.

Proposal announced: This measure was announced in Minister for Revenue and Assistant Treasurer's Press Release No. C74/02 of 1 July 2002.

Financial impact: The revenue impact of the measure is not readily quantifiable.

Compliance cost impact: Negligible. The reporting of internal roll-overs is not expected to result in additional compliance costs for superannuation funds or annuity providers.

Summary of regulation impact statement

Regulation impact on business

Impact: This measure will potentially have implications for all providers and recipients of pensions and annuities.

Pension and annuity recipients will benefit through avoiding the double counting of benefits problem currently associated with internal roll-over transactions.

The current ETP regime requires funds to report roll-over transactions to the ATO for RBL assessment purposes. Within this existing framework, the reporting of internal roll-overs is not expected to result in additional compliance costs for superannuation funds or annuity providers.

Main points:

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The current law results in the double counting of superannuation benefits for purposes of the RBLs when a superannuation pension or annuity is commuted (stopped) and the resulting amount is rolled over within a fund.

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The changes in this bill expand the definition of 'eligible termination payment' to cover internal roll-over transactions and make related changes. This will allow internal roll-overs to come within the scope of the relevant RBL provisions of the income tax law. This means that when an internal roll-over occurs it will be reportable to the Commissioner and the RBL value of the pension or annuity will be reduced by the rolled over amount so as to avoid double counting of the benefit.

Uniform capital allowance system

Schedule 2 to this bill makes a number of technical corrections and amendments to the ITAA 1997 and IT(TP) Act 1997 to ensure the law operates as intended. The amendments all relate, directly or indirectly, to the uniform capital allowances system.

Date of effect: These amendments will apply from 1 July 2001, the commencement date of the uniform capital allowance system.

Proposal announced: These amendments have not been previously announced.

Financial impact: There is no revenue impact as a result of these amendments as the amendments ensure that the uniform capital allowance system operates as intended and as originally costed.

Compliance cost impact: These amendments will not involve additional compliance costs.

Non-assessable non-exempt income

Schedule 3 to this bill will improve the income tax law by clarifying, standardising and rationalising the recognition and treatment of non-assessable non-exempt income amounts. Specifically, it involves:

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establishing an explicit framework in the income tax law dealing with non-assessable non-exempt income;

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standardising related concepts by converting amounts of excluded exempt income and exempt income subject to withholding tax into non-assessable non-exempt income; and

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making a number of technical amendments to the law, including the correction of potential anomalies relating to non-assessable non-exempt income.

Date of effect: The amendments will generally apply to assessments for the 2003-2004 and later income years. Some amendments correcting technical errors or implementing other minor policy decisions will apply from earlier years.

Proposal announced: Not previously announced.

Financial impact: Nil.

Compliance cost impact: Small compliance cost saving to taxpayers through clarification of the law and removal of anomalies.

Refundable tax offset rules

Schedule 4 to this bill makes amendments to the tax offset carry forward rules in Division 65 and the refundable tax offset rules in Division 67 of the ITAA 1997.

Amendments to tax offset carry forward rules

The tax offset carry forward rules in the ITAA 1997 will be amended to ensure that taxpayers always receive the maximum benefit from refundable tax offsets.

Date of effect: The amendment will apply from 1 July 2000, when the tax offset for franked dividends became refundable.

Proposal announced: Not previously announced.

Financial impact: Nil.

Compliance cost impact: Nil.

Amendments to reflect of the simplified imputation system rules

Consequential amendments will be made to the refundable tax offset rules in the ITAA 1997 to reflect the SIS rules.

Date of effect: The amendments will apply from 1 July 2002, when the SIS rules came into effect.

Proposal announced: These amendments are part of the SIS, which was announced as part of the Government's business tax reform package. The SIS was announced in Treasurer's Press Release No. 58 of 21 September 1999 as a component of the unified entity regime.

Financial impact: Nil.

Compliance cost impact: Nil.

Preventing double refunds of the private health insurance tax offset to trustees and beneficiaries

A correction to the refundable tax offset rules in the ITAA 1997 will be made so that double claiming of the private health insurance tax offset in respect of the same private health insurance premiums by both a trustee and beneficiary will not be possible.

Date of effect: The amendments will apply from 1 July 2002.

Proposal announced: Not previously announced.

Financial impact: Nil. There would be a cost to revenue if these amendments were not made.

Compliance cost impact: Nil.

Foreign resident withholding

Schedule 5 to this bill explains amendments to the TAA 1953 that introduce new obligations to withhold from payments to foreign residents. There will also be obligations to withhold from payments received for foreign residents (i.e. by intermediaries of foreign residents). The payments to be included will be prescribed by regulations, and will be supported by the existing PAYG withholding system. The measure will improve the compliance of foreign residents with their Australian tax obligations. The measure is intended to minimise the compliance burden on Australian businesses by requiring withholding only for specified payments.

Date of effect: The new withholding arrangements will apply to payments made on or after 1 July 2003.

Proposal announced: Minister for Revenue and Assistant Treasurer's Press Release C57/02 of 14 May 2002.

Financial impact: The legislation will have no financial impact as it establishes the framework for payments to be prescribed in the regulations. As regulations are made specifying payments, these will result in an increase to revenue.

Compliance cost impact: The obligation to withhold will generally only apply to entities carrying on enterprises that are already participating in the PAYG withholding system. This measure is expected to have a minimal compliance cost impact on those entities. For those entities not already using the PAYG withholding system, there will be a requirement to register for withholding, remit amounts, and provide payment summaries and annual reports if they make payments prescribed in the regulations to foreign residents.

Summary of regulation impact statement

Regulation impact on business

Impact: The measure is expected to have a minimal compliance cost impact on entities making payments to foreign residents. Most of these payers will already be participating in the PAYG withholding system as payers through their business activities. For those entities not already using the PAYG withholding system, there will be a requirement to register for withholding, remit amounts, and provide payment summaries and annual reports if they make payments prescribed in the regulations to foreign residents.

Main points:

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The measure is expected to have a minimal compliance cost impact on entities making payments to foreign residents. Most of these payers will already be participating in the PAYG withholding system as payers through their business activities.

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Foreign residents who receive payments of a kind specified by regulation will be affected by the measure. These foreign residents will only receive the net amount of the payment, rather than the gross amount.

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Some foreign residents may find contracts in Australia less attractive under the new arrangements. This potential economic cost would be offset by the improved competitiveness of resident individuals and entities participating in the industries for which payments are prescribed.

The ATO will administer the new withholding arrangements using existing resources and administrative systems.

PAYG withholding where no ABN is quoted

Schedule 6 to this bill amends the ITAA 1997and the TAA 1953 to ensure that the no ABN withholding event will apply to enterprise-to-enterprise transactions in Australia. This Schedule also amends the no ABN withholding rules to have the same geographical application as the ABN Act. This will ensure that the no ABN withholding provisions are consistent with the ABN Act, and that the original objectives of the no ABN withholding provisions are fully implemented.

Date of effect: The amendments will commence on Royal Assent.

Proposal announced: The measure has not been announced.

Financial impact: The financial impact of the proposal is unquantifiable but is not expected to be significant.

Compliance cost impact: Nil.

Worker entitlement funds

Schedule 7 to this bill amends the FBTAA 1986 to provide an FBT exemption for certain payments to approved worker entitlement funds.

This Schedule also amends the ITAA 1997 to provide a CGT roll-over to a fund that amends or replaces its trust deed in order to be approved as an approved worker entitlement fund.

Date of effect: The FBT exemption applies to benefits provided on or after 1 April 2003 and the CGT roll-over applies to CGT events that happen on or after 1 April 2003.

Proposal announced: The FBT exemption was announced in Treasurer's Press Release No. 61 of 11 October 2002. The CGT roll-over has not been previously announced.

Financial impact: The FBT exemption has a cost to revenue of $1 million in 2003-2004, $6 million in 2004-2005, $10 million in 2005-2006 and $15 million in 2006-2007. The CGT roll-over has no cost to revenue.

Summary of regulation impact statement

Regulation impact on business

Impact: Some worker entitlement funds will have to apply to the Commissioner in order to determine whether they meet certain criteria. These funds must meet certain criteria before being able to be prescribed by regulation as approved worker entitlement funds.

Main points:

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Worker entitlement funds may be required to provide the Commissioner with information such as how the funds operate, the documentation that governs their operation and documentation relevant to their establishment.

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Prescribing the funds by regulation provides certainty to the funds, employers and workers. It is also likely to limit the compliance costs on employers as they would not have to inquire whether or not a fund has self-assessed itself as meeting the relevant criteria.

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Prescribing worker entitlement funds by regulation also minimises tax planning opportunities.