Senate

Explanatory Memorandum

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

General outline and financial impact

Thin capitalisation

Amends the thin capitalisation rules of the income tax law to:

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reduce the allowable foreign debt to foreign equity gearing ratio for taxpayers who are not financial institutions from 3:1 to 2:1;

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broaden the definition of 'foreign debt' in relation to companies who are not financial institutions to generally treat certain guaranteed debt from unrelated overseas lenders as foreign debt for thin capitalisation purposes;

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amend the definition of 'foreign equity' for partnerships and fixed trusts;

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limit asset revaluations for partnerships and trusts to market value changes;

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deny discretionary trusts a gearing ratio to the extent their foreign equity cannot be effectively measured because of the existence of the trustee's discretion;

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amend the definition of 'foreign investor' so that foreign partners, beneficiaries and trustees of Australian partnerships and trusts will be subject to the thin capitalisation debt to equity ratio requirement; and

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repeal the specific anti-avoidance provisions dealing with back to back avoidance arrangements and instead apply the general avoidance provisions to counter such arrangements.

Date of effect: 1997-98 year of income.

Proposal announced: 20 August 1996.

Financial impact: Nil in 1997-98 and increased revenue of $70 million in 1998-99, $75 million in 1999-2000 and $75 million in 2000-2001.

Compliance cost impact: The proposed amendments will result in a minor increase in compliance costs.

Finance shares

Amends various provisions relating to eligible finance shares (EFS) and widely distributed finance shares (WDFS) to ensure the EFS dividends and WDFS dividends are denied non-portfolio status and an underlying foreign tax credit paid by the foreign issuer.

Date of effect: The changes will apply to dividends paid on EFS or WDFS on or after 3 February 1997.

Proposal announced: The measures were announced by the Treasurer in Press Release (No. 4) dated 3 February 1997.

Financial impact: Estimated revenue savings of $130 million per annum.

Compliance cost impact: A slight increase in the cost of compliance for affected taxpayers. They may be required to calculate a foreign tax credit associated with dividends from EFS and WDFS.

Group certificates for employees ceasing employment

Removes the general requirement that employers must provide an employee with a group certificate within seven days of that employee's termination of employment.

Date of effect: 28th day after Royal Assent.

Proposal announced: The proposal was announced by the Prime Minister in his statement of 24 March 1997, 'More Time for Business'.

Financial impact: Nil.

Compliance cost impact: Employers' compliance costs in issuing group certificates will be reduced to the extent that employees leaving employment during a financial year wait for their group certificates, generally until 14 July after the end of the relevant year of income by which date group certificates for continuing employees must be issued.

Tax exempt entities that become taxable

Ensures that where a tax exempt entity has become taxable:

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a deduction is allowed for the amount of any surplus in the entity's defined benefit superannuation scheme at transition time;

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a deduction is allowed for contributions in arrears made after transition where the defined benefit superannuation scheme was in surplus at transition time; and

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the amount of bad debt deductions to be disallowed is reduced where a debt in existence immediately before the transition time is sold after the transition time.

Date of effect: Applies to entities that become taxable on or after 3 July 1995.

Proposal announced: Not previously announced.

Financial impact: Difficult to quantify due to the generic nature of the legislation. Any revenue impact would need to be determined on a case by case basis.

Compliance cost impact: The amendments are not expected to impose any additional compliance costs on taxpayers as taxpayers will not be required to keep additional records.

Measures to address tax avoidance through tax exempt entities distributing funds offshore

Amends the exemption provisions of the income tax law to:

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remove the exemption provided by subparagraph 23(j)(ii) for funds established by will or instrument of trust for public charitable purposes ('charitable trusts') that are located offshore;

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restrict the exemption provided to charitable trusts established in Australia by will or instrument of trust for public charitable purposes;

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remove various exemptions from income tax provided by section 23 for certain organisations which are located offshore;

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remove various exemptions from income tax provided by section 23 for certain organisations who do not incur their expenditure and pursue their objectives principally in Australia; and

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remove the exemption from non-resident interest, dividend and royalty withholding tax provided by paragraph 128B(3)(a) for certain organisations located offshore.

Date of effect: In the case of charitable trusts, the measures will take effect after the commencement of the charitable trusts' 1996-97 year of income (generally 1 July 1996). The other measures will apply from 7.30 pm, Eastern Standard Time, 20 August 1996.

Proposal announced: 1996-97 Budget, 20 August 1996.

Financial impact: The estimated impact of these measures is a gain to the revenue of $25 million in 1996-97 and then $30 million per annum from 1997-98.

Compliance cost impact: The measures are being enacted primarily to prevent tax avoidance. However, the requirements are consistent with existing accounting practices and standards and with those of other areas of taxation.

Quasi-ownership of fixtures

Amends the Income Tax Assessment Act 1997 (the 1997 Act) and the Income Tax Assessment Act 1936 (the 1936 Act) as a consequence of the Tax Law Improvement Project rewrite. Inserts new provisions into Division 42 of the 1997 Act concerning depreciation of a lessor's plant that has become a fixture on another person's land. Similar rules are being inserted into the 1936 Act by Taxation Laws Amendment Bill (No. 3) 1997.

The rules treat lessors of depreciable plant under a chattel lease as retaining ownership notwithstanding that the leased equipment may be a fixture on another person's land. To be treated as an owner - or quasi-owner for purposes of the 1997 Act - the lessor must retain an effective right to recover the leased property.

Date of effect: Applies generally to 1997-98 and later income years. Two minor corrections to the 1936 Act apply from 1 July 1996.

Proposal announced: Treasurer's Press Release No 25 of 1996, dated 11June 1996.

Financial impact: Nil.

Compliance cost impact: Nil.

Electronic lodgment and electronic funds transfer

Amends the Income Tax Assessment Act 1936 (the Act), the Fringe Benefits Tax Assessment Act 1986 (the FBTAA) and the Taxation Administration Act 1953 (the TAA) to:

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provide a legal basis for the electronic lodgment of returns, applications for amendment and other notices; and

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allow the Commissioner to pay, by electronic transfer, any refunds to an account (which may be a third-party account) nominated by the taxpayer.

Date of effect: The amendments to facilitate the electronic lodgment service (ELS) and electronic funds transfer (EFT) for income tax will commence on 1 July 1998. The amendments to facilitate ELS and EFT for fringe benefits tax will commence on 1 April 1998.

Proposal announced: Not previously announced

Financial impact: There is no revenue impact. It is expected that there will be administrative savings from the increased use of EFT.

Compliance cost impact: The compliance costs imposed on taxpayers will be minimal. Taxpayers will be required to keep a copy of the declaration made to a tax agent authorising the electronic transmission and/or consenting to an EFT of a refund to a third-party account.

A tax agent will no longer be required to keep income tax or fringe benefits tax returns as is currently the situation under the contract for participation in the interim paperless ELS. However, where a taxpayer uses the tax agent's address as the address for service of notices the tax agent will be required to give the taxpayer the notice of assessment, or a copy therof.

Rate of tax for friendly societies

Amends the Taxation (Deficit Reduction) Act (No 2) 1993 so that the rate of tax imposed on the eligible insurance business of friendly societies and other registered organisations will be retained at 33% for the 1997-98 and 1998-99 income years. Similarly, the rebate available to policyholders who receive assessable bonuses on life insurance policies issued by friendly societies and other registered organisations will be retained at 33% for the 1997-98, 1998-99 and 1999-2000 income years. The trustee rate will be increased to 39% from 1999-2000 and the rebate rate will be increased to 39% from 2000-01.

Date of effect: 1July1997.

Proposal announced: 1997-98 Budget, Treasurer's Press Release No 40 of 13May1997.

Financial impact: The estimated cost to the revenue is $6 million in 1997-98, $29 million in 1998-99 and $4 million in 1999-2000. A revenue gain of $2million is expected in 2000-01.

Compliance cost impact: Nil.

Leases of luxury cars

Amends the Income Tax Assessment Act 1997 and the Income Tax Assessment Act 1936 as a consequence of the Tax Law Improvement Project rewrite to ensure that the legislative rules for the taxation treatment of leases of luxury cars in Schedule 2E of the Income Tax Assessment Act 1936 continue to apply to the 1997-98 and later income years.

Date of effect: 1997-98 and later income years.

Proposal announced: 1996-97 Budget, 20 August 1996 and Treasurer's Press Release No 83 of 20 August 1996.

Financial impact: Nil

Compliance cost impact: Nil