House of Representatives

Explanatory Memorandum

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

General outline and financial impact

Second World War payments

Schedule 1 to this bill amends the income tax law to provide income tax and CGT exemptions for payments relating to persecution suffered and loss of, or damage to, property during the Second World War.

Date of effect: The amendments apply to assessments for the 2001-2002 income year and later years.

Proposal announced: The amendments were announced in the 2003-2004 Federal Budget and in Minister for Revenue and Assistant Treasurer's Press Release No. C37/03 of 13 May 2003.

Financial impact: The revenue cost of this measure is unable to be quantified but is expected to be insignificant.

Compliance cost impact: Nil.

Gifts and covenants

Schedule 2 to this bill amends the ITAA 1997 to update the lists of specifically-listed DGRs.

Schedule 3 to this bill amends the ITAA 1997 from 1 July 2003:

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to simplify the listing in the tax law of specifically-listed DGRs; and

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to allow deductions for cash donations to DGRs to be spread over a period of up to 5 years.

Date of effect

Deductions for gifts to specifically-listed DGRs under Schedule 2

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the Australian Literacy and Numeracy Foundation Limited from 11 October 2002;

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Crime Stoppers Western Australia Limited from 31 October 2002;

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New South Wales Crime Stoppers Limited from 31 October 2002;

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Crime Stoppers Tasmania from 28 November 2002;

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Crime Stoppers Queensland Limited from 23 January 2003;

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the Australian-American Educational Foundation from 30 April 2003;

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Crime Stoppers Australia Limited from 4 June 2003; and

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the Alcohol Education and Rehabilitation Foundation Limited from 5 June 2003.

Schedule 2 also limits deductions for gifts to the Stolen Children's Support Fund to gifts made before 4 February 2003 (when the dissolution of the fund was confirmed).

The amendments under Schedule 3 apply to gifts made and covenants entered into on or after 1 July 2003.

Proposal announced: The new specifically-listed DGRs contained in Schedule 2 were announced by the Minister for Revenue and Assistant Treasurer in press releases during 2002 and 2003. The measure in Schedule 3 to simplify the listing in the tax law of specifically-listed DGRs was announced in Treasurer's Press Release No. 49 of 29 August 2002. The measure in Schedule 3 to allow deductions for cash donations to DGRs to be spread over a period of up to 5 years was announced in Prime Minister's Press Release of 11 December 2002.

Financial impact: The amendments in Schedule 2 have an unquantifiable, but insubstantial, cost to revenue. The measure in Schedule 3 to simplify the listing in the tax law of specifically-listed DGRs involves no cost to revenue. The measure in Schedule 3 to allow deductions for cash donations to DGRs to be spread over a period of up to 5 years involves a cost to revenue of $1 million in 2005-2006.

Compliance cost impact: Nil.

Amendment of the Crimes (Taxation Offences) Act 1980

Schedule 4 to this bill amends the Crimes (Taxation Offences) Act 1980 to correct a technical deficiency with the deeming mechanism in the Act, and to include Criminal Code harmonisation amendments to clarify the interpretation of offences under the Criminal Code.

Date of effect: These amendments will apply from the day following Royal Assent.

Proposal announced: These amendments have not previously been announced.

Financial impact: Nil.

Compliance cost impact: Nil.

Consolidation: transitional foreign loss makers

Schedule 5 to this bill makes amendments to the IT(TP) Act 1997 to allow certain entities with foreign losses to be excluded from a consolidated group for a transitional period.

Date of effect: 1 July 2002.

Proposal announced: This measure was announced on 27 November 2002 in the Mid-Year Economic and Fiscal Outlook 2002-2003.

Financial impact: This measure essentially allows entities with foreign losses to maintain their existing tax treatment for a transitional period. The revenue impact is therefore not expected to be significant.

Compliance cost impact: This measure is not expected to impact significantly on compliance costs as it essentially allows entities with foreign losses to maintain their existing tax treatment for a transitional period.

Goods and services tax: interaction with consolidation regime

Schedule 6 to this bill amends the GST Act to ensure that certain supplies made as a result of the consolidation regime, specifically those made as a result of:

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the statutory operation of the consolidation provisions;

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entering into a tax sharing agreement;

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leaving a consolidated group clear of group liability; or

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entering into a tax funding agreement,

will not be taxable supplies.

Date of effect: The amendments apply, and are taken to have applied, in relation to net amounts for tax periods starting or that started on or after 1 July 2002.

Proposal announced: Not previously announced.

Financial impact: Nil.

Compliance cost impact: These amendments are expected to reduce compliance costs.

Imputation for life insurance companies

Schedule 7 to this bill amends the ITAA 1997 to include imputation rules for life insurance companies. The rules generally replicate the former imputation rules that applied to life insurance companies in Part IIIAA of the ITAA 1936. Broadly, the provisions set out the circumstances when franking credits and debits arise in franking accounts of life insurance companies, complementing the core SIS rules already introduced into the ITAA 1997.

Date of effect: 1 July 2002.

Proposal announced: The proposal was announced in Treasurer's Press Release No. 58 of 21 September 1999 as a component of the unified entity regime. On 14 May 2002, the Minister for Revenue and Assistant Treasurer announced in Press Release No. C57/02, the Government's program for delivering the next stage of business tax reform measures. In that press release, the Minister confirmed that the simplified imputation system will commence on 1 July 2002.

Financial impact: The financial impact of the amendments is expected to be negligible.

Compliance cost impact: The new amendments are designed to reduce compliance costs incurred by business by providing for simpler processes and increased flexibility.

Overseas forces tax offsets

Schedule 8 to this bill amends the overseas forces tax offset provisions of the ITAA 1936 to exclude periods of service for which an income tax exemption for foreign employment income is available.

Date of effect: The amendments will apply from 1 July 2001.

Proposal announced: The measures were announced on 22 May 2001 in the 2001-2002 Federal Budget and in former Assistant Treasurer's Press Release No. 28 of 28 June 2001.

Financial impact: Negligible.

Compliance cost impact: Nil.

Roll-over for financial services reform transitions

Schedule 9 to this bill amends the ITAA 1997 to provide an automatic CGT roll-over for financial service providers on transition to the FSR regime when, during the FSR transitional period:

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an existing statutory licence, registration or authority is replaced with an Australian financial services licence;

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a qualified Australian financial services licence is replaced with an Australian financial services licence; and

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an intangible CGT asset is replaced with another intangible CGT asset.

The CGT roll-over will ensure that the capital gain or capital loss that would otherwise be made when the original asset comes to an end is deferred until a CGT event happens to the replacement asset.

Date of effect: The CGT roll-over will apply to CGT events that happen during the FSR transitional period (i.e. from 11 March 2002 to 10 March 2004 inclusive).

Proposal announced: The measure was announced in Minister for Revenue and Assistant Treasurer's Press Release No. C10/03 of 21 February 2003.

Financial impact: The measure is expected to result in a small revenue deferral.

Compliance cost impact: The measure is being introduced to assist the transition to the FSR regime and will result in minimal additional compliance costs.

Foreign hybrid

Schedule 10 to this bill amends the ITAA 1936 and the ITAA 1997 to treat foreign hybrids as partnerships for all purposes of the income tax law. Foreign hybrid is defined to include limited partnerships, limited liability companies in the USA and other similar entities that are taxed on a partnership basis in their country of formation. However, limited partners will only be able to claim losses of the foreign hybrid to the extent of their exposure to economic loss through the foreign hybrid.

Certain foreign hybrids will be excluded from this treatment where they:

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are residents of Australia; or

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in general, where they would otherwise be dealt with under the FIF regime and not the CFC regime.

Other amendments will be made to allow deductions or tax credits to be claimed for Australian or foreign taxes paid by the investors on income that is attributed to them under the CFC or FIF provisions, for a limited number of years. Amendments will also be made to provide greater certainty as to the foreign hybrid's country of residence for CFC purposes for those same years.

Date of effect: This measure will apply from the start of the 2003-2004 income year, with taxpayers having an option to apply the amendments from the start of the 2002-2003 income year. The amendments providing double tax relief will apply, in general, to income years for which amended assessments can still be made.

Proposal announced: This measure was announced in Minister for Revenue and Assistant Treasurer's Press Release No. C26/03 of 8 April 2003.

Financial impact: There are minimal costs associated with these amendments because they do not alter the income that would have otherwise been attributed under the CFC rules.

Compliance cost impact: Compliance costs will be reduced in certain areas (e.g. application of the CFC rules), but be increased in others. The CGT rules as they apply to partnerships will impose greater compliance costs than current treatment under the CGT rules.

Summary of regulation impact statement

Regulation impact on business

Impact: These measures will have a minimal net impact, mainly on large businesses which invest in these foreign hybrids, but have been introduced to improve global competitiveness, provide certainty to taxpayers and consistency in compliance. There is no evidence to suggest that the measure will have a noticeable impact on small business.

Main points:

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The amendments will apply to taxpayers with interests in non-resident limited partnerships (and other foreign hybrids such as US LLCs). Taxpayers will be treated as having a partnership interest where they have an interest in a foreign hybrid.

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These amendments:

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address business concerns avoiding the unintended consequences;

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provide clear rules increasing certainty about the operation of the law;

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meet the policy intent of the anti-deferral measures (CFC and FIF measures); and

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promote a consistent method of compliance.

Technical amendments

Schedule 11 to this bill makes a number of technical amendments to the ITAA 1936, the ITAA 1997 and other tax-related legislation.

Date of effect: The amendments have various dates of effect. The amendments are of a minor or machinery of government nature and do not substantially alter existing arrangements. They do not affect the rights or liabilities of taxpayers.

Proposal announced: Not previously announced.

Financial impact: Nil.

Compliance cost impact: Nil.