House of Representatives

Replacement Explanatory Memorandum

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

General outline and financial impact

Tax relief for certain mining arrangements

Schedule 1 to this Bill provides tax relief to taxpayers entering into certain arrangements in relation to mining, quarrying and prospecting rights and information. Relief will apply to farm-in farm-out arrangements, interest realignment arrangements and expenditure relating to the improvement of mining, quarrying and prospecting information.

Date of effect: The amendments generally apply from 7:30 pm on 14 May 2013, the date of the original Budget announcement.

Proposal announced: The proposals were first announced in the 2013-14 Budget. A further announcement was made in the 2014-15 Budget.

Financial impact: Part 1 of Schedule 1 will have a small but unquantifiable cost to revenue. The financial impacts for Part 2 of Schedule 1 were accounted for with the passage of the Tax and Superannuation Laws Amendment (2014 Measures No. 3) Act 2014. Part 3 of Schedule 1 will have a zero financial impact.

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 1, paragraphs 1.108 to 1.111.

Compliance cost impact: Low.

Increasing the statutory effective life of in-house software

Schedule 2 to this Bill amends Income Tax Assessment Act 1997 to better align the statutory effective life of in-house software with the typical useful life of in-house software for businesses by extending the statutory effective life of in-house software from four to five years.

Date of effect: The amendments will generally apply to assets that are first used or first installed ready for use on or after 1 July 2015. The amendments to the timing of deductions for software development pools apply to expenditure incurred in income years commencing on or after 1 July 2015.

Proposal announced: This measure was announced in the 2014-15 Mid-Year Economic and Fiscal Outlook.

Financial impact: The measure has the following revenue implications over the forward estimates:

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 2, paragraphs 2.21 to 2.24.

Compliance cost impact: This measure will result in a minor increase in compliance costs for taxpayers, estimated to be around $0.16 million each year over the forward estimates on an annualised basis.

Income tax look-through treatment for instalment warrants and similar arrangements

Schedule 3 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to provide income tax look-through treatment for instalment warrants, instalment receipts, and other similar arrangements, and for certain limited recourse borrowing arrangements entered into by regulated superannuation funds. This look-through treatment ensures that most income tax consequences associated with the underlying asset of the trust flows through to the investor, and not the trustee.

Date of effect: These amendments apply to assets that are acquired by the trustee of an instalment trust in the 2007-08 or later income years. These changes, which are beneficial to taxpayers and implement industry practice, are retrospective to broadly align with the application date of the provisions which allow regulated superannuation funds to enter into certain limited recourse borrowing arrangements. A consequential amendment relating to the insertion of a definition in the ITAA 1997 dictionary applies from the day of royal assent.

Proposal announced: The former Assistant Treasurer announced the Government would proceed with this measure in a Media Release titled Integrity restored to Australia's taxation system of 14 December 2013.

This measure was first announced by the previous Government in the 2010-11 Budget. As part of the 2011-12 Budget, the measure was extended following industry consultation to cover a larger range of arrangements.

Financial impact: This measure is estimated to have a negligible cost to revenue over the forward estimates period.

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 3, paragraphs 3.79 to 3.83.

Compliance cost impact: These amendments have a low compliance cost impact, comprised of a low implementation impact and no change in ongoing compliance costs for the affected group.

Company losses

Schedule 4 to this Bill amends the company loss recoupment rules in the Income Tax Assessment Act 1997 by:

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modifying the continuity of ownership test for companies whose shares have unequal rights to dividends, capital distributions or voting power;

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ensuring that, for the purposes of applying the continuity of ownership test, the ownership of companies does not have to be traced through a complying superannuation fund, a superannuation fund that is established in a foreign country and is regulated under a foreign law, a complying approved deposit fund, a special company, a managed investment scheme or a first home savers account trust; and

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clarifying that the entry history rule does not operate in relation to an entity that becomes a subsidiary member of a consolidated group or multiple entry consolidated group for the purposes of applying the same business test.

Date of effect: The measures to modify the continuity of ownership test for companies whose shares have unequal rights and to clarify the operation of the same business test for consolidated groups apply from 1 July 2002.

The measure to modify the continuity of ownership test so that ownership does not have to be traced through a complying superannuation fund and certain other entities applies from the 2011-12 income year.

Proposal announced: The measures to modify the continuity of ownership test for companies whose shares have unequal rights and to clarify the operation of the same business test for consolidated groups were announced by the former government in the 2007-08 Budget on 8 May 2007.

The measure to modify the continuity of ownership test so that ownership does not have to be traced through complying superannuation funds and certain other entities was announced by the former government in the 2011-12 Budget on 10 May 2011.

The former Assistant Treasurer announced that the Commonwealth Government would proceed with these measures in the Assistant Treasurer's Media Release of 14 December 2013.

Financial impact: These measures will have an unquantifiable but minimal cost to revenue.

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 4, paragraphs 4.130 to 4.133.

Compliance cost impact: Nil.