House of Representatives

Explanatory Memorandum

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

General outline and financial impact

Franking of non-share dividends

Schedule 1 to this bill amends the imputation rules contained in the income tax law that deal with the franking of non-share dividends. The changes will rectify an anomaly that prevents the franking of non-share dividends as was intended.

Date of effect: These amendments apply to non-share dividends paid on or after 1 July 2001, the date when the debt/equity rules first applied.

Proposal announced: These amendments were announced in Minister for Revenue and Assistant Treasurer's Press Release No. C134/02 of 20 December 2002.

Financial impact: Nil.

Compliance cost impact: Nil.

Consolidation: franking deficit tax offsets, MEC groups and enhancements to the cost setting rules

Schedule 2 to this bill enhances the consolidation regime by:

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making minor adjustments to clarify the cost setting rules;

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ensuring that MEC groups are given the same treatment as consolidated groups; and

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enabling the transfer of unapplied excess FDT offsets in a consolidated environment.

Date of effect: The amendments have retrospective effect to 1 July 2002, which is the date of commencement of the consolidation regime. The amendments are either beneficial to taxpayers or correct unintended outcomes. All of the amendments to address unintended outcomes are consistent with the original policy intent for the consolidation regime and therefore have the same commencement date as the consolidation regime.

Proposal announced: A number of these measures were foreshadowed in Minister for Revenue and Assistant Treasurer's Press Release No. C67/03 of 30 June 2003. There are two measures that were not foreshadowed in this press release. The first is in relation to the introduction of CGT event L8. This measure has been foreshadowed in the law itself. The second is in relation to the introduction of the FDT offset provisions and is a corollary of the incorporation of the FDT offset provisions into the SIS (which are also included in this bill).

Financial impact: Nil.

Compliance cost impact: These measures are not expected to impact compliance costs because they relate to specific issues that will not affect all taxpayers.

Conservation covenants

Schedule 4 to this bill amends the ITAA 1997 to provide an income tax deduction for taxpayers entering into certain types of conservation covenants on or after 1 July 2002 with the Commonwealth, a State, a Territory or a local governing body, or an authority of the Commonwealth, a State or a Territory.

Date of effect: The amendments apply to conservation covenants entered into on or after 1 July 2002. The retrospective application is advantageous to taxpayers.

Proposal announced: The measure was announced on 20 February 2003 in a joint press release by the Minister for Revenue and Assistant Treasurer and the Minister for the Environment and Heritage.

Financial impact: The measure will have an insignificant cost to revenue.

Compliance cost impact: Compliance costs will be negligible.

Fringe benefits tax - deemed depreciation rate for cars

Schedule 5 to this bill amends the Fringe Benefits Tax Assessment Act 1986 to ensure that alignment between the FBT deemed depreciation rate used under the operating cost method for valuing a car fringe benefit and the Commissioner's determination for the effective life of the car is maintained.

Date of effect: The amendment applies in respect of cars acquired after 30 June 2002.

Proposal announced: This measure was announced in Minister for Revenue and Assistant Treasurer's Press Release No. C21/03 of 31 March 2003.

Financial impact: The estimated cost to revenue is $8 million in 2003-2004, $9 million in 2004-2005, $10 million in 2005-2006 and $10 million in 2006-2007.

Compliance cost impact: The amendment will not impose any additional compliance costs.

Endorsement of perpetual bodies as deductible gift recipients

Schedule 6 to this bill amends the ITAA 1997 to remove the requirement to have a winding up clause as part of the endorsement provisions for statutory bodies established by the Commonwealth Parliament in perpetuity.

Date of effect: The reduced requirements for endorsement as a deductible gift recipient apply from the 2003-2004 year of income and later years of income.

Proposal announced: The measure was announced in Treasurer's Press Release No. 49 of 29 August 2002.

Financial impact: The measure will have an insignificant cost to the revenue.

Compliance cost impact: Compliance costs will be negligible.

Eligibility rules for farm management deposits scheme

Schedule 7 to this bill will clarify the eligibility rules for the FMD scheme in Schedule 2G to the ITAA 1936.

First, the amendments will clarify the definition of the term 'financial institution' for the purposes of the FMD scheme. This will make it easier for primary producers to determine if the institution they are dealing with is able to issue FMD.

Second, the amendments will deem certain entities to be financial institutions in relation to pre-1 July 2003 deposits or transfers. This will protect primary producers who have made deposits with non-complying entities offering products described as FMD. Eligible deposits with non-complying entities will be included in the definition of FMD, and will retain that tax treatment into future years provided they are transferred to an authorised deposit-taking institution or institution with a State or Territory guarantee within a specified transfer period.

Date of effect: Clarification of the term 'financial institution' will take effect from 1 July 2003.

Primary producers that made deposits with, or transferred a deposit to, a non-complying entity before 1 July 2003 will have the tax status of their deposits protected.

Proposal announced: The amendments were announced in Minister for Revenue and Assistant Treasurer's Press Release No. C56/03 of 17 June 2002.

Financial impact: Nil.

Compliance cost impact: There will be no additional compliance costs for persons.

Simplified imputation system - offsetting franking deficit tax

Schedule 8 to this bill will amend Part 3-6 of the ITAA 1997 to insert rules in the SIS for offsetting of FDT against company tax. Rules are provided for both ordinary companies and life insurance companies and are based on the former provisions in Part IIIAA of the ITAA 1936.

The rules will reflect that franking additional tax penalty provisions have been replaced with a simplified penalty for an excessive franking deficit.

Date of effect: The amendments to insert rules into the SIS for offsetting of FDT apply to events arising on or after 1 July 2002, when the SIS rules commenced.

The rules which apply to reduce the company's FDT offset against future company tax liabilities by 30% where there is an excessive franking deficit will generally apply to FDT liabilities arising at the end of 2002-2003 and later income years.

Proposal announced: These rules are part of the SIS, which was announced as part of the Government's business tax reform package. 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.

The amendment to replace the former franking additional tax penalty with a simplified penalty for an excessive franking deficit was announced in Minister for Revenue and Assistant Treasurer's Media Release No. 134 of 20 December 2002.

Financial impact: Unquantifiable but expected to be insignificant.

Compliance cost impact: These amendments are part of the SIS which will reduce compliance costs incurred by business by providing simpler processes and increased flexibility.