House of Representatives

Explanatory Memorandum

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

General outline and financial impact

Foreign income exemption for temporary residents

Schedule 1 to this bill amends the ITAA 1936 and the ITAA 1997 to provide certain exemptions from Australian tax for individuals who are temporary residents of Australia for tax purposes. This measure will:

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define who is considered to be a temporary resident;

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exempt foreign source income of temporary residents for 4 years;

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ensure that no capital gain or loss would arise on the disposal of foreign assets by temporary residents for 4 years;

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remove interest withholding tax obligations of temporary residents for 4 years; and

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extend the existing 4 year exemption from the FIF rules for temporary residents.

Date of effect: The amendments will apply from 1 July 2002 except for the interest withholding tax exemption which will apply from date of Royal Assent.

Proposal announced: This proposal was originally announced in the Treasurer's Press Release No. 74 of 11 November 1999 (in particular, refer to Attachment G). Changes to the proposal were announced in Treasurer's Press Release No. 82 of 15 October 2001.

Financial impact: The revenue cost of this measure is estimated to be between $40 to $50 million per annum.

Compliance cost impact: Overall, the amendments will involve a net reduction in compliance costs.

Summary of regulation impact statement

Policy objective

Impact: This measure providing a foreign income exemption for temporary residents is part of the Government's broad ranging reforms that will give Australia a New Business Tax System. These reforms are based on the recommendations of the Review of Business Taxation that the Government established to consider reforms to Australia's business tax system.

For businesses and intermediaries for example tax agents, affected by this measure there may be initially a small cost associated with the training of staff and the modification of internal systems that deal with remuneration. However, given that this is a sought after measure this is not seen as significant. Also, once any necessary training or changes have been implemented this measure will also lead to reduced compliance costs for these businesses and intermediaries.

Main points:

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The foreign income exemption for temporary residents is designed to achieve 2 related objectives. The measure seeks to attract internationally skilled mobile labour to Australia. It also seeks to assist in the promotion of Australia as a business location, by reducing the costs to Australian business of bringing skilled expatriates to work in Australia.

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The New Business Tax System will provide Australia with internationally competitive business tax system that will create the environment for achieving higher economic growth, more jobs and improved savings. This measure will contribute to this by reducing the tax burden on people who are considered to be temporary residents of Australia for taxation purposes.

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Potential compliance, administrative and economic impacts of this measure were considered by the Review of Business Taxation and the business sector. Specific compliance issues raised in relation to the taxation of temporary residents subsequent to the release of A Tax System Redesigned have been considered in implementing this measure.

Exempting compensation for loss of defence remuneration

Schedule 2 to this bill amends the ITAA 1997 to exempt from income tax the payment of compensation to:

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ADF members for loss of a deployment allowance owing to injury sustained while on eligible duty outside Australia; and

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members of the Reserve Defence Forces, who leave as a result of injuries sustained while performing duties for the Reserve Forces, for the loss of pay and allowances which would have been paid if they had remained members of the Reserve Forces.

Date of effect: The amendments will apply to assessments for the 1996-1997 and later years of income.

Proposal announced: The amendments were announced in former Assistant Treasurer's Press Release No. 34 of 1 August 2001.

Financial impact: The measure will cost the revenue less than $1 million in 2002-2003, 2003-2004, 2004-2005 and 2005-2006.

Compliance cost impact: Compliance costs will be negligible.

Amounts repaid are not assessable income

Schedule 3 to this bill amends the ITAA 1997 to treat previously assessable income as not assessable income nor exempt income where the taxpayer must repay an amount in a later year of income. It will also amend the ITAA 1936 to permit amendments of income tax assessments for the year in which the amount was originally treated as assessable income despite the time limit for amendments to assessments being exceeded.

Date of effect: The amendments will apply to assessments for the 1996-1997 and later years of income.

Proposal announced: The amendments were announced in former Assistant Treasurer's Press Release No. 34 of 1 August 2001.

Financial impact: The measure will cost the revenue less than $1 million in 2002-2003, 2003-2004, 2004-2005 and 2005-2006.

Compliance cost impact: Compliance costs will be negligible.

Amendments relating to tax offset for medical expenses

Schedule 4 to this bill amends the ITAA 1936 to increase the level of expenses above which the medical expenses tax offset applies from $1,250 per annum to $1,500 per annum.

Date of effect: Applies from the 2002-2003 year of income.

Proposal announced: The measure was announced on 14 May 2002 as part of the 2002-2003 Federal Budget.

Financial impact: This amendment is expected to provide a gain to revenue of $17 million in 2003-2004, $18 million in 2004-2005 and $19 million in 2005-2006.

Compliance cost impact: Nil.

Income tax exemption of the Commonwealth Games Federation

Schedule 5 to this bill amends the ITAA 1997 to provide an income tax exemption to the Commonwealth Games Federation. The exemption will apply from 1 January 2000 to 30 June 2007. This will allow for income received by the Federation in the course of staging the Melbourne Commonwealth Games 2006 to be exempt from income tax. The Schedule also makes a minor technical amendment to the withholding tax provisions.

Date of effect: 1 January 2000

Proposal announced: Not previously announced

Financial impact: The cost to revenue is estimated to be less than $1 million over the period of the exemption.

Compliance cost impact: Nil