House of Representatives

Explanatory Memorandum

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

Outline and financial impact

Foreign income exemption for temporary residents

Schedule 1 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to provide exemptions from Australian tax on non-Australian-source income 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;

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tax only net capital gains made by temporary residents on which a foreign resident would be taxed;

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disregard net capital gains on employee shares and rights held by temporary residents to the extent that the relevant employment is not in Australia;

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remove interest withholding tax obligations of temporary residents; and

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exempt temporary residents from some record-keeping requirements associated with their interests in foreign companies and trusts.

Date of effect: The amendments will apply for income years that begin on or after the 1 July next following the date of Royal Assent, except for the interest withholding tax exemption which will apply from the date of Royal Assent.

Proposal announced: The reintroduction of this measure was announced in the 2005-06 Budget (Treasurer's Press Release No. 44 of 10 May 2005). This measure had previously been defeated twice in the Senate.

Financial impact: This measure will have revenue implications estimated to be a cost of $75 million over the forward estimates period.

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

Summary of regulation impact statement

Regulation impact on business

Impact: This measure provides an exemption for the foreign income of temporary residents. It is part of the Government's New Business Tax System reforms. It is based on the recommendations of the Review of Business Taxation that the Government established to consider reforms to Australia's business tax system.

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For businesses and intermediaries (eg, tax agents) affected by this measure there will be initially a small cost associated with the training of staff and the modification of internal systems that deal with remuneration to remove the need for normalisation payments (payments made to employees to compensate them for additional costs associated with working in Australia). Once any necessary training or changes have been implemented no ongoing compliance costs would be expected for these businesses.

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The intermediaries would have the usual requirement to keep up to date with a new area of the law and its interpretation. However, the new law would mean new business for them.

Main points:

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The foreign income exemption for temporary residents is designed to achieve two related objectives. The measure seeks to attract internationally mobile skilled 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 provides Australia with an internationally competitive business tax system that will create more jobs and improve savings. This measure will contribute to an environment for achieving higher economic growth by reducing the tax burden on people who are considered to be temporary residents of Australia for taxation purposes. It will also have the effect of reducing business costs (fewer or no normalisation payments) where foreigners are employed temporarily in Australia. Australia should then benefit from the dynamic effects of having business located here, as well as from the expenditure, profits and local employment that such businesses may generate. In addition, the bringing to Australia of foreign executives and skilled employees will facilitate the transfer of new management techniques and information and skills to the Australian economy.

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Potential compliance, administrative and economic impacts of this measure were considered as part of the Review of Business Taxation. Specific compliance issues raised subsequent to the release of A Tax System Redesigned have been considered in implementing this measure.

Business-related costs

Schedule 2 to this Bill amends the Income Tax Assessment Act 1997 to allow deductions for certain business capital expenses that are not otherwise recognised and are not denied a deduction elsewhere in the income tax law.

This Schedule also amends the cost base for capital gains tax (CGT) assets and cost rules for uniform capital allowances (UCA) assets.

This Schedule also allows deductions for certain lease and licence-related payments.

Date of effect: These amendments will apply to expenditures incurred on or after 1 July 2005. The amended CGT provisions will apply to CGT events that happen on or after 1 July 2005. The amendments to the UCA cost rules will also apply to expenditures incurred on or after 1 July 2005.

Proposal announced: This measure was announced in the Treasurer's Press Release No. 045 of 10 May 2005 and the 2005-06 Mid-Year Economic and Fiscal Outlook .

Financial impact: This measure will have these revenue implications:

Compliance cost impact: Expected to be low. The compliance cost impact is outlined in the regulation impact statement.

Summary of regulation impact statement

Regulation impact on business

Impact: The main impact of the measure will be on businesses and individuals that incur business capital expenditure.

Main points:

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These amendments will have an overall positive impact by providing a systematic treatment for business blackhole expenditures.

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There will be familiarisation costs for taxpayers.

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There will be implications for the Australian Taxation Office in terms of ensuring taxpayer compliance.

Deterring the promotion of tax exploitation schemes

Schedule 3 to this Bill amends the Taxation Administration Act 1953 (TAA 1953) and Income Tax Assessment Act 1997 (ITAA 1997) to introduce a new civil penalty regime to apply to an entity who:

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is a promoter of a tax exploitation scheme; or

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implements a scheme that has been promoted on the basis of a taxation product ruling, in a materially different way to that described in the product ruling.

Schedule 3 also amends the TAA 1953 and the ITAA 1997 to provide that:

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the Commissioner of Taxation (Commissioner) will be able to enforce a voluntary undertaking given by a promoter, or the person who implements a scheme covered by a product ruling; and

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the Commissioner will be able to apply to the courts for an injunction to stop the promotion of a tax avoidance or tax evasion scheme.

Date of effect: This measure will apply to conduct engaged in, on or after the date of Royal Assent.

Proposal announced: The proposal was announced by the then Minister for Revenue and Assistant Treasurer, Senator the Hon Helen Coonan, in Press Release No. C117/03 of 5 December 2003.

Financial impact: Low. This measure will have these revenue implications:

Compliance cost impact: Low. The compliance cost impact is outlined in the regulation impact statement.

Summary of regulation impact statement

Regulation impact on business

Impact: Low.

Main points:

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The regime will not apply to businesses involved with legitimate tax effective schemes.

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Businesses involved in the marketing or implementation of high risk schemes can avoid the regime by seeking tax rulings from the Commissioner, involving minor costs for the preparation and lodgment of applications.

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The remedies of voluntary undertakings and injunctions provide timely low cost alternatives to civil penalty proceedings.

Goods and services tax and vouchers - prepaid phone products

Schedule 4 to this Bill amends Division 100 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to ensure that certain prepaid phone products are treated as 'eligible vouchers' for the purposes of the GST Act. Amendments will also be made to clarify that the goods and services tax (GST) is required to be remitted on the stated monetary value of a Division 100 voucher. A further amendment will also be made to Division 100 to include a rule which simplifies accounting for GST on commissions and similar payments on a supply of a voucher through a distribution chain.

The GST attribution rules will also be amended to provide another circumstance where the Commissioner of Taxation can determine that GST, input tax credits and adjustments can be attributed to a particular tax period.

Date of effect: The amendments to the definition of 'voucher' will operate from 1 July 2000, the commencement date for GST. The amendment which clarifies that GST be remitted on the stated monetary value of a voucher will operate from 11 May 2005. The rule to simplify accounting for GST on vouchers provided through a distribution chain and the change to the attribution rules will take effect from the date of Royal Assent.

Proposal announced: The amendments to the definition of 'voucher' and that GST be remitted on the stated monetary value of a voucher were announced as part of the 2005-06 Budget. The rule providing for a simplified accounting for GST on Division 100 vouchers provided through a distribution chain and the change to the attribution rules have not previously been announced.

Financial impact: These amendments are expected to lead to a gain in GST revenue of approximately $10 million per annum from 2005-06.

Compliance cost impact: When the GST was introduced, it was intended that prepaid phone products would be treated as vouchers under Division 100. However, some prepaid phone vouchers do not qualify as Division 100 vouchers. The amendments which are retrospective will reduce compliance costs and ensure consistency of treatment of prepaid phone cards.

The amendments to simplify accounting for GST on commissions and similar payments paid by suppliers of Division 100 vouchers to their distributors/retailers will reduce the cost of compliance where vouchers are provided through a distribution chain.