House of Representatives

Explanatory Memorandum

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

General outline and financial impact

Life insurance companies

Schedule 1 to this bill modifies the operation of the income tax law affecting life insurance companies to:

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overcome a range of technical difficulties that the life insurance industry has raised about the practical operation of the income tax law affecting them;

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clarify how the two classes of taxable income or tax losses of life insurance companies are calculated;

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ensure that the provisions in the Income Tax Assessment Act 1936 (ITAA 1936) relating to reinsurance with non-residents apply only to their accident and disability business;

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ensure that certain aspects of the ITAA 1936 are effectively replicated in the Income Tax Assessment Act 1997; and

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ensure that the interactions with other provisions in the income tax law work as intended.

Date of effect: The amendments generally apply from 1 July 2000. Some of the amendments will potentially have an adverse impact on taxpayers and therefore apply from the date that this bill receives Royal Assent.

Proposal announced: Most of the measures were announced in Minister for Revenue and Assistant Treasurer's Press Release No. C96/02 of 11 September 2002. Other measures have not previously been announced.

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

Compliance cost impact: The measures are expected to have a minimal impact on compliance costs.

Consolidation: providing greater flexibility

Schedule 2 to this bill provides greater flexibility, clarifies certain aspects of the consolidation regime and ensures that the regime interacts appropriately with other aspects of the income tax law.

Date of effect: The amendments generally have retrospective effect to 1 July 2002, which is the date of commencement of the consolidation regime. Full details concerning the date of effect of amendments are contained in the application and transitional provisions at the end of Chapter 2. The amendments are either beneficial to taxpayers or to 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: All these measures were foreshadowed in three press releases announced by Minister for Revenue and the Assistant Treasurer. They were Press Release's No. C116/03 of 4 December 2003, No. C067/03 of 30 June 2003 and No. C019/03 of 27 March 2003.

Financial impact: The majority of changes are not expected to impact on revenue. The revenue cost concerning membership rules for corporate unit trusts and public trading trusts are expected to be less than $2 million per annum from 1 July 2002.

Compliance cost impact: The measures in this bill will provide taxpayers with additional flexibility in the transition to consolidation and are not expected to impact significantly on compliance costs.

Venture capital partnerships

Schedule 3 to this bill amends the Income Tax Assessment Act 1997 and the Income Tax Assessment Act 1936 to ensure that a limited partnership formed with a legal personality separate from its partners that is taxed as an ordinary partnership under the venture capital regime is a 'partnership' for income tax purposes. A transitional rule operates to backdate the registration or conditional registration of a limited partnership that would have been registered or conditionally registered between 2 December 2003 and the day this bill receives Royal Assent.

Date of effect: 2 December 2003.

Proposal announced: This measure was announced in Minister for Revenue and Assistant Treasurer's Press Release No. C112/03 of 2 December 2003.

Financial impact: Nil.

Compliance cost impact: Nil.

Fringe benefits tax housing benefits

Schedule 4 to this bill amends the Fringe Benefits Tax Assessment Act 1986 to allow for continuity of fringe benefits tax (FBT) treatment for non-remote housing benefits where administration and payment of FBT is devolved by State or Territory governments to a departmental level.

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

Proposal announced: This measure was announced in the 2002-03 Mid-Year Economic and Fiscal Outlook.

Financial impact: Nil.

Compliance cost impact: Nil.

Capital gains tax event K6 and demergers

Schedule 5 to this bill amends the Income Tax Assessment Act 1997 to ensure that capital gains tax event K6 is not inadvertently triggered by the disposal of new interests in demerged entities.

Date of effect: The amendments apply to shares or units acquired under a demerger on or after 1 July 2002.

Proposal announced: This measure was announced in Minister for Revenue and Assistant Treasurer's Press Release No. C097/03 of 16 October 2003.

Financial impact: Nil.

Compliance cost impact: The measure will decrease compliance costs for some taxpayers.

Deductions for United Medical Protection Limited support payments

Schedule 6 to this bill amends the Income Tax Assessment Act 1997 to ensure that all individuals who make United Medical Protection Limited (UMP) support payments will be entitled to an income tax deduction for the amount of their contributions in that income year.

Date of effect: The amendment applies to UMP support payments made on or after 1 July 2003.

Proposal announced: This measure was announced by the Australian Government on 17 December 2003.

Financial impact: The measure has an estimated cost to revenue of $0.8 million in 2004-2005, $1.6 million in 2005-2006 and $1.5 million in 2006-2007.

Compliance cost impact: Nil.

Goods and services tax amendments relating to compulsory third party schemes

Schedule 7 to this bill amends the A New Tax System (Goods and Services Tax) Act 1999 to ensure that the goods and services insurance provisions apply as intended to transactions undertaken by operators of compulsory third party schemes.

Date of effect: 1 July 2000.

Proposal announced: These measures have not previously been announced.

Financial impact: Nil.

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

Public ambulance services

Schedule 8 to this bill amends the Fringe Benefits Tax Assessment Act 1986 to provide public ambulance services with the same fringe benefits tax (FBT) treatment as is provided to public hospitals. Public ambulance services will be able to access an FBT exemption of up to $17,000 of grossed-up taxable value per employee, and will also be able to access the remote area housing FBT exemption under the same criteria as applies to public hospitals. In addition, the Income Tax Assessment Act 1997 will be amended to allow public ambulance services to be endorsed to receive tax deductible gifts.

Date of effect: The amendments will apply from 1 April 2004.

Proposal announced: This measure was announced in Treasurer's Press Release No. 2 of 20 January 2004.

Financial impact: The revenue cost of the measure is expected to be $1 million in 2003-2004, $3.5 million in 2004-2005 and $5 million in each of 2005-2006, 2006-2007 and 2007-2008.

Compliance cost impact: Nil.

Taxation of overseas superannuation payments

Schedule 9 to this bill amends the Income Tax Assessment Act 1936 to alter the taxation treatment that applies when payments are made from overseas superannuation funds. The amendments give effect to the Government's response to the report by the Senate Select Committee on Superannuation on Taxation of Transfers from Overseas Superannuation Funds.

The key change will enable a taxpayer who is having their overseas superannuation paid directly to an Australian complying superannuation fund to elect to have part of the payment treated as a taxable contribution in the Australian fund. By doing so the fund, rather than the individual, will pay relevant tax arising on the payment and tax will be paid at the concessional superannuation fund rate rather than at the individual's marginal rate.

A number of related amendments are also made to improve the operation and clarity of the provisions dealing with payments of overseas superannuation.

Date of effect: The amendments will apply to payments made on or after 1 July 2004.

Proposal announced: This measure was announced in Minister for Revenue and Assistant Treasurer's Press Release No. C092/03 of 30 September 2003.

Financial impact: The amendments are expected to provide a first year revenue gain of $1.1 million and have a negligible long term impact.

Compliance cost impact: Superannuation funds may incur some costs in processing the payments and deducting the appropriate tax.

Summary of regulation impact statement

Regulation impact on business

Impact: The main impact will be on those individuals who have benefits from their overseas superannuation fund paid directly to a complying superannuation fund in Australia. Such individuals will benefit from not having to personally finance their tax liability from sources other than superannuation as well as from a reduced tax rate applying to the assessable amount of the payment.

Superannuation funds may incur some costs in processing the payments and deducting the appropriate tax.

Main points:

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Individuals who have their overseas superannuation paid directly into an Australian complying superannuation fund will be able to elect to have part of the payment treated as a taxable contribution by the fund.

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The Australian fund will have to give effect to the election and ensure the payment is appropriately taxed. This may involve some additional administration costs for the funds. However, as the election process will provide a mechanism by which the amount to be treated as a taxable contribution is identified, and as this amount of the payment is taxed in the same way as other taxable contributions to the fund, the impacts on fund processes are expected to be minimal.

Simplified imputation system - franked distributions received through certain partnerships and trusts

Schedule 10 to this bill amends, as part of the implementation of the simplified imputation system (SIS), Division 207 of the Income Tax Assessment Act 1997 which deals with the tax effect of receiving a franked distribution. The amendments will include adjustment rules to provide the calculation to adjust an entity's assessable income where a franked distribution flows indirectly to the entity through a trust or partnership and the entity has no entitlement to a tax offset.

This bill will also amend the rules in the trans-Tasman imputation measures that adjust the assessable income of an Australian shareholder in receipt of a supplementary dividend paid by a New Zealand (NZ) company. The amendments will implement a minor policy change and ensure that the trans-Tasman adjustment rules are consistent with the adjustment rules in Division 207, introduced in Schedule 10 to this bill.

This bill also makes technical amendments and other consequential amendments to Division 207 and other parts of the SIS including an amendment to the exempting entity rules to ensure that the rules operate as intended in respect of certain tax exempt institutions that are entitled to a refund of imputation credits.

Date of effect: The amendments to the SIS will generally apply to events arising on or after 1 July 2002, the commencement date of the SIS rules.

The amendments to the trans-Tasman imputation measures will apply from 1 April 2003, the commencement of those measures.

The amendments relating to the concept of non-assessable non-exempt income will apply to assessments for the 2003-2004 income year and later income years, consistent with the introduction of the non-assessable non-exempt concept in the income tax law.

The consequential amendment to the exempting entity rules will apply from 1 July 2000, the commencement date of the provisions allowing a refund of imputation credits for certain charities and gift-deductible organisations.

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. 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 including the SIS.

The trans-Tasman imputation measures were announced jointly by the Treasurer and the NZ Minister for Finance on 19 February 2003. (Treasurer's Press Release No. 7 of 19 February 2003.)

Financial impact: The amendments to Division 207 and consequential amendments to other parts of the SIS (except the amendment to the exempting company rules) will have no impact on revenue.

A reliable estimate of the revenue cost of the amendment to the exempting entity rules cannot be made.

The amendments to the trans-Tasman imputation measures are expected to have a small, positive but unquantifiable impact on revenue.

Compliance cost impact: The SIS is designed to reduce compliance costs incurred by business by providing simpler processes and increased flexibility.

Technical corrections to foreign tax credit provisions

Schedule 11 to this bill changes the provisions dealing with the carry-forward of excess foreign tax credits to ensure those provisions refer to the correct paragraphs in the general foreign tax credit provisions.

Date of effect: The amendments have retrospective effect to correct a technical problem with the current application of the relevant provisions.

Proposal announced: This measure has not been previously announced.

Financial impact: Nil.

Compliance cost impact: The measures in this bill make a technical correction to the law to ensure the correct paragraph references are inserted in the excess foreign tax credit carry-forward provisions.

Amendments to the alienation of personal services income provisions

Schedule 12 to this bill amends the alienation of personal services income (PSI) provisions contained in Part 2-42 of the ITAA 1997 to clarify when the Commissioner can make a personal services business (PSB) determination as is consistent with the policy intent.

Date of effect: The amendments in Part 1 of Schedule 12 will apply to assessments for the 2000-2001 income year and each subsequent year.

The amendments in Part 2 of Schedule 12 will apply to assessments for the income year after the income year in which this bill receives Royal Assent and each subsequent income year.

Proposal announced: The measure has not been announced.

Financial impact: The revenue impact of the measure is unquantifiable however, it is expected to be insignificant.

Compliance cost impact: Nil.