House of Representatives

Explanatory Memorandum

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

General outline and financial impact

New foreign income tax offset rules

Schedule 1 to this Bill amends the income tax law to abolish foreign loss and foreign tax credit quarantining and to streamline the remaining foreign tax credit rules. This is achieved by repealing the existing foreign loss and foreign tax credit quarantining rules and replacing them with new simplified foreign income tax offset rules. These rules allow taxpayers to claim relief for foreign income taxes paid on an amount included in their assessable income. These amendments also include transitional rules for the treatment of existing quarantined foreign losses and credits.

These amendments provide a systemic mechanism to allow the Commissioner of Taxation to give effect to Australia's tax treaty obligations to provide relief from economic double taxation arising from transfer pricing adjustments.

Further, certain taxpayers operating within the foreign investment fund rules will be given the option to calculate attributable income using the controlled foreign company rules. The current treatment of a foreign company, as an Australian financial institution subsidiary, will be extended to subsidiaries of Australian financial institutions that choose to calculate foreign investment fund income using the controlled foreign company rules.

Date of effect: These changes will apply to income years beginning on or after the 1 July following Royal Assent.

Proposal announced: This measure was announced in the Treasurer's Press Release No. 044 of 10 May 2005.

Financial impact: The cost to revenue of this measure is expected to be $40 million per annum over the forward estimates period.

Compliance cost impact: These amendments will reduce ongoing compliance costs for taxpayers that conduct foreign business or earn foreign income. There will be some transitional costs, however, it is expected these will be quickly exceeded by the ongoing benefits.

Capital gains tax roll-over for medical defence organisations

Schedule 2 to this Bill amends the Income Tax Assessment Act 1997 to provide a capital gains tax (CGT) roll-over for membership interests in medical defence organisations (MDOs). The roll-over will generally be available when a membership interest in an MDO is replaced with a similar membership interest in another MDO and both MDOs are companies limited by guarantee.

Date of effect: These amendments apply to CGT events that happen on or after 14 February 2007.

Proposal announced: These amendments were announced in the Minister for Revenue and Assistant Treasurer's Press Release No. 011 of 14 February 2007.

Financial impact: Nil.

Compliance cost impact: These amendments are expected to have a low impact for both implementation and ongoing compliance costs.

Investment in instalment warrants by superannuation funds

Schedule 3 to this Bill amends the borrowing restriction contained in the Superannuation Industry (Supervision) Act 1993 to allow superannuation funds to invest in instalment warrants of a limited recourse nature over any asset a fund would be permitted to invest in directly.

The in-house asset rules contained in the Superannuation Industry (Supervision) Act 1993 are also amended to provide that an investment in a related trust forming part of an eligible instalment warrant arrangement will only be an in-house asset where the underlying asset would itself be an in-house asset of the fund if it were held directly.

Date of effect: These amendments will apply from the day this Bill receives Royal Assent.

Proposal announced: This measure was announced in the Minister for Revenue and Assistant Treasurer's Press Releases No. 078 of 3 November 2006 and No. 066 of 22 May 2007.

Financial impact: This measure will have these revenue implications:

Compliance cost impact: Minimal.

Trustee beneficiary reporting rules

Schedule 4 to this Bill amends the Income Tax Assessment Act 1936 (ITAA 1936) so that trustees of closely held trusts are not required to report to the Commissioner of Taxation (Commissioner) the details of the ultimate beneficiaries of trust income. Instead, trustees of closely held trusts may be required to report the details of trustee beneficiaries that are presently entitled to certain income of the trust and tax-preferred amounts.

Trusts that are covered by a family trust election, or an interposed entity election, or wholly-owned by a family trust are not covered by these trustee beneficiary reporting requirements. These trusts are restricted in the range of beneficiaries they can distribute to without penalty tax. Any distributions outside the family group are subject to penalty tax at a rate of 46.5 per cent via the family trust distribution tax. Therefore, it is not necessary to include family trusts (or their related trusts) in these reporting rules. The Commissioner already has an avenue for obtaining information about these trusts and their beneficiaries. In addition, any distributions by these trusts to non-resident trustee beneficiaries will be subject to taxation at 45 per cent under subsection 98(4) of the ITAA 1936.

The trustee of a closely held trust must report to the Commissioner the tax file number and name of resident trustee beneficiaries that are presently entitled to a share of the income or a tax-preferred amount, together with details of the share within a specified period after the end of the year of income. For non-resident trustee beneficiaries the trustee of a closely held trust will have to disclose the name and address of the trustee beneficiary and details of the share of net income or tax-preferred amount, except for net income that is subject to taxation under subsection 98(4) of the ITAA 1936 or Subdivision 12-H in Schedule 1 to the Taxation Administration Act 1953 (TAA 1953).

The Commissioner may make a determination that a specified class of trustees is not required to make a correct trustee beneficiary statement annually in certain circumstances.

Where the trustee of the closely held trust fails to correctly identify the trustee beneficiaries within the specified period, the trustee is liable for trustee beneficiary non-disclosure tax at the rate of 46.5 per cent (in respect of the share of net income). For tax-preferred amounts such a failure may produce offences under the TAA 1953.

Date of effect: These amendments will apply to the first income year starting on or after the day on which this Bill receives Royal Assent and later income years.

Proposal announced: This measure was announced in the Treasurer's Press Release No. 039 of 9 May 2006.

Financial impact: The overall cost to revenue of these amendments is unquantifiable but expected to be minimal against the forward estimates.

Compliance cost impact: These amendments will reduce ongoing compliance costs for trustees of closely held trusts that are required to report, although there will be a small transitional cost.

Summary of regulation impact statement

Regulation impact on business

Impact: The trustee beneficiary rules will reduce compliance costs for trustees of closely held trusts by removing the requirement to trace amounts through a chain of trusts to the ultimate beneficiary.

Main points:

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Trustees of closely held trusts are generally required to report the details of trustee beneficiaries that are entitled to certain income of the trust and tax-preferred amounts, therefore reducing costs in having to trace amounts to the ultimate beneficiary.

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Where a trustee of the closely held trust fails to disclose the details of a trustee beneficiary, the trustee will be liable to trustee beneficiary non-disclosure tax. The integrity of the tax system will therefore be maintained.

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This measure will reduce ongoing compliance costs for trustees and beneficiaries when compared with the costs imposed under the existing ultimate beneficiary rules. This should lead to a reduction in recordkeeping, information collection and planning effort.

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This measure is expected to have benefits for the Australian Taxation Office in terms of administration as it should reduce the volume of paperwork required to be collected.

Superannuation amendments

Schedule 5 to this Bill amends various Acts to assist in the smooth transition to the Simplified Superannuation regime. This Schedule limits strategies which could circumvent the minimum drawdown requirements for account-based pensions, facilitates the provision of tax file numbers (TFNs) to superannuation and retirement savings account (RSA) providers, and revises the application provision for small business capital gains tax relief under the regime. The readability of provisions rewritten as part of the reforms is also further improved to ensure the policy intent underpinning the provisions is clear.

Date of effect: Simplified Superannuation commences on 1 July 2007. However, an individual's TFN is taken to have been quoted by the individual, for notices given to superannuation and RSA providers by the Commissioner of Taxation, from 1 June 2007.

Proposal announced: These amendments have not previously been announced.

Financial impact: The amendments to prevent individuals circumventing the minimum drawdown requirements for account-based pensions will result in a revenue gain of $20 million over the forward estimates.

The other amendments have no financial impact.

Compliance cost impact: These amendments are expected to have a small impact on compliance costs.

Deductible gift recipients

Schedule 6 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to update the list of deductible gift recipients (DGRs).

Date of effect: Deductions for gifts to the following organisations that are listed as DGRs under this Schedule, apply as follows:

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Australian Peacekeeping Memorial Project Incorporated from 30 April 2007 until 31 December 2008; and

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Social Ventures Australia Limited from 4 May 2007.

In addition, this Schedule reflects a name change of one organisation (listed as a DGR under section 30-55 of the ITAA 1997) to Mawson's Huts Foundation Limited.

Proposal announced: The deductibility of gifts to the Australian Peacekeeping Memorial Project Incorporated was announced in the Minister for Revenue and Assistant Treasurer's Press Release No. 040 of 30 April 2007.

The deductibility of gifts to Social Ventures Australia Limited was announced in the Minister for Revenue and Assistant Treasurer's Press Release No. 043 of 4 May 2007.

Financial impact: This measure will have these revenue implications:

Compliance cost impact: Nil.

Minor amendments

Schedule 7 to this Bill makes technical corrections and other minor amendments to the taxation laws. These amendments are part of the Government's ongoing commitment to improve the quality of the taxation laws.

Date of effect: These corrections, amendments and improvements generally commence from Royal Assent to this Bill but some apply prospectively or retrospectively.

Proposal announced: These amendments have not previously been announced.

Financial impact: The change in the definition of 'tertiary course' in the A New Tax System (Goods and Services Tax) Act 1999 results in a small reduction in income tax collections because it allows a deduction for gifts to funds for scholarships for masters or doctoral courses. This change results in no change in goods and services tax revenue.

The change in the car depreciation rate in the Fringe Benefits Tax Assessment Act 1986 is expected to result in a gain to revenue as follows:

The change in the capital gains tax treatment of 'not-for-profit' mutuals in the Income Tax Assessment Act 1997 is a revenue protection measure. As such, the revenue impact is zero but there would be a potential revenue loss if the amendment were not made.

The other amendments have no financial impact.

Compliance cost impact: Nil to small.

Increasing flexibility for family trusts

Schedule 8 to this Bill amends the trust loss regime in Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) to allow family trust elections and interposed entity elections to be revoked or varied in certain limited circumstances.

These amendments also broaden the definition of 'family' in section 272-95 in Schedule 2F to the ITAA 1936 to include lineal descendants of family members. In addition, spouses, former widows/widowers and former step-children are exempted from the family trust distribution tax by including them in the definition of 'family group' in section 272-90 in Schedule 2F to the ITAA 1936.

Date of effect: The changes take effect from the start of the income year in which this Bill receives Royal Assent.

Proposal announced: This measure was announced in the 2006-07 Budget and the Treasurer's Press Release No. 039 of 9 May 2006.

Financial impact: This measure will have these revenue implications:

Compliance cost impact: These amendments will result in minimal impact for both implementation and ongoing compliance costs.