House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon. J. B. Hockey MP)

General outline and financial impact

Removing tax impediments to certain business restructures

Schedule 1 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to extend the existing business restructure roll-overs available where a member of a company or unitholder in a unit trust can defer the income tax consequences of transactions that occur in the course of a business restructure.

In particular, the amendments permit taxpayers to apply the roll-overs in circumstances where they held the relevant shares or units as revenue assets or trading stock. The amendments also consolidate the separate but effectively identical business restructure roll-overs for shares and units in a unit trust into a single set of provisions.

The amendments also make a number of technical changes to provisions of the ITAA 1997 to:

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allow roll-overs for trusts transferring all their assets to a trust or company to apply where the new trust or company holds rights needed to facilitate the transfer;

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address a technical defect in the operation of the business restructure roll-overs in relation to revenue assets; and

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clarify that the business restructure roll-overs only apply where the new asset has the same character (as a revenue asset or trading stock) as the original asset.

Date of effect: The amendments extending the business restructure roll-overs in relation to revenue assets and trading stock have effect from:

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7.30 pm on 8 May 2012 (by legal time in the Australian Capital Territory) for shares; and

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7.30 pm on 10 May 2011 for unitholders in a unit trust who exchange their units for shares in a company.

The amendments relating to roll-overs where trusts transfer assets apply to transfers:

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after 1 November 2008 for transfers between trusts; and

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from 7.30 pm on 10 May 2011 for transfers from trusts to companies.

The technical amendment to the provisions in the business restructure roll-over for revenue assets applies from 7.30 pm on 8 May 2012.

Finally, the amendments introducing the same character rules for assets acquired in a business restructure apply from 7.30 pm on 8 May 2012.

Proposal announced: The technical amendments to the revenue asset roll-overs and to certain capital gains tax trust restructure roll-overs were announced on 10 May 2011 as part of the 2011-12 Budget.

The amendments providing revenue asset and trading stock roll-overs where interest holders exchange their units in a unit trust for shares in a company were announced in the 2011-12 Mid-Year Economic and Fiscal Outlook on 29 November 2011.

The amendments broadening the existing revenue asset and trading stock roll-overs that apply where interest holders exchange their shares in a company for shares in another company and introducing the same character rule were announced on 8 May 2012 as part of the 2012-13 Budget.

On 14 December 2013, in a media release titled Integrity restored to Australia's tax system, the Assistant Treasurer announced the Government intended to proceed with all of the components of this measure.

Financial impact: These amendments have a small unquantifiable cost to revenue over the forward estimates.

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 1, paragraphs 1.96 to 1.99.

Compliance cost impact: Low overall, with a low implementation impact and no change in ongoing compliance costs for affected entities.

Managed investment trust withholding regime for foreign pension funds

Schedule 2 to this Bill ensures that foreign pension funds can access the managed investment trust (MIT) withholding tax regime and the associated lower rate of withholding tax on income from certain Australian investments.

Date of effect: This measure applies to income years commencing on or after 1 July 2008 ratifying current industry practice.

Proposal announced: This measure was announced in the joint Press Release of the Treasurer and the Assistant Treasurer No. 017 of 6 November 2013.

Financial impact: The amendments in Schedule 2 to this Bill are not expected to have a revenue impact against the forward estimates.

Human rights implications: Schedule 2 to this Bill does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 2, paragraphs 2.18 to 2.21.

Compliance cost impact: Low.

US Force Posture Initiatives

Schedule 3 to this Bill provides an exemption from Australian tax on income derived by certain entities engaged by the Government of the United States of America (US) in connection with Force Posture Initiatives in Australia.

Date of effect: The exemption will apply in relation to the 2014-15 income year and later income years.

Proposal announced: On 16 November 2011, the Australian and US governments announced two new Force Posture Initiatives to significantly enhance defence cooperation between Australia and the US.

Financial impact: The amendments in Schedule 3 to this Bill are not expected to have a revenue impact against the forward estimates.

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 3, paragraphs 3.30 to 3.33.

Compliance cost impact: Low.

Fuel tax credits and grants

Schedules 4 and 5 to this Bill amend the Fuel Tax Act 2006 and the Energy Grants (Cleaner Fuels) Scheme Regulations 2004. Schedules 4 and 5 ensure that changes to the amount of excise and excise-equivalent customs duty payable by taxpayers as a result of any tariff proposals tabled in the House of Representatives are taken into account in calculating fuel tax credits and the cleaner fuels grant for biodiesel and renewable diesel. Therefore upon Royal Assent to this Bill, fuel tax credit and grant claimants are able to claim the higher rate of fuel tax credits and grant amounts as a result of the Excise Tariff Proposal (No. 1) 2014 and the Customs Tariff Proposal (No. 1) 2014 tabled in the House of Representatives.

These amendments also make consequential changes to the fuel tax credit attribution rules consistent with the introduction of fuel indexation under the Excise Tariff Proposal (No. 1) 2014 and the Customs Tariff Proposal (No. 1) 2014.

Date of effect: This measure applies generally from 10 November 2014. However the consequential change to the fuel tax credit attribution rules applies from 1 July 2014.

Proposal announced: The amendments to take into account the effect of tariff proposals in determining fuel tax credits and grants have not previously been announced. The changes to the fuel tax credit attribution rules were included in the Fuel Indexation (Road Funding) Bill 2014 that was introduced to Parliament on 19 June 2014.

Financial impact: This measure is estimated to have no cost to revenue over the forward estimates period.

Human rights implications: This measure does not raise any human rights issues. See Statement of Compatibility with Human Rights, paragraphs 4.28 to 4.37.

Compliance cost impact: This measure imposes minor ongoing compliance costs as affected claimants of fuel tax credits and cleaner fuel grants will need to become familiar with the changes and claim the revised rate of credits and grants as changes to the rate of duty occur.

The regulation impact statement (paragraphs 4.38 to 4.91) is included in this explanatory memorandum in the form in which it was approved and consulted on. Therefore, it does not reflect the impact of subsequent policy or technical changes that are contained in this measure. These changes result from the delay in the expected enactment of the fuel indexation measure from when the regulation impact statement was prepared in the context of the Excise Tariff Amendment (Fuel Indexation) Bill 2014, Customs Tariff Amendment (Fuel Indexation) Bill 2014, Fuel Indexation (Road Funding) Special Account Bill 2014 and Fuel Indexation (Road Funding) Bill 2014, that were introduced to the House of Representatives on 19 June 2014. In addition, the changes reflect that fuel duty rates are adjusted from 10 November 2014 under Excise Tariff Proposal (No. 1) 2014 and Customs Tariff Proposal (No. 1) 2014.

Summary of regulation impact statement

Regulation impact on business

Impact: Moderate.

Main point:

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The majority of the change in the compliance costs for businesses with entitlements to fuel tax credits is borne by entities who submit their Business Activity Statements on a monthly, quarterly or annual basis. These entities will be required to organise purchases of fuels between purchases before and after the indexation date, in order to properly account for their fuel tax credit entitlement.