Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 12 - Regulation Impact Statement
Policy objective
12.1 The measures contained in this Bill are part of the Governments broad-ranging reforms which will give Australia a New Business Tax System. These reforms are based on the Recommendations of the Review that the Government established to consider reforms to Australias business tax system.
12.2 The Government established the Review to consult on its plan to comprehensively reform the business income tax system (as outlined in ANTS). The Review made 280 recommendations to Government towards achieving a more simple, stable and durable business tax system (as set out in the Recommendations).
12.3 The New Business Tax System is designed to provide Australia with an internationally competitive business tax system that will create the environment for achieving higher economic growth, more jobs, and improved savings as well as providing a sustainable revenue base so the Government can continue to deliver services for the community. An important feature of the New Business Tax System is the CGT reforms which aim to encourage greater investment by Australians and to improve the international competitiveness of Australian business.
12.4 The New Business Tax System promotes that end by providing a basis for more robust investment decisions. This is achieved by:
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- using consistent and clearly articulated principles, for example;
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- taxing business entities and investments on the basis of their economic substance or equivalence rather than their legal form; and
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- aligning the tax value of business investments more closely with their commercial value, using accounting principles where appropriate;
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- improving simplicity and transparency;
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- reducing the costs of compliance through principled tax laws that are easier to understand and comply with; and
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- providing fairer, more equitable outcomes, and less scope for tax avoidance.
12.5 Each of the measures in this Bill is consistent with the objectives and approaches discussed above. For example:
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- tightening the prepayment rule is consistent with moving the tax value of prepayments closer to their commercial value and aligning them with accounting principles;
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- the integrity measures (i.e. lease assignments, and creation and use of losses) are consistent with providing fairer and more equitable outcomes, and less scope for tax avoidance; and
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- the CGT reforms are consistent with a simpler and more transparent system; how capital gains are worked out becomes easier to understand and apply (i.e. a discount).
12. 6 The Reviews recommendations, including those on which the measures of this Bill are based, have been the subject of extensive consultation. Discussion of each measure, including the options for implementation, are to be found in the Reviews A Platform for Consultation (APFC) and A Tax System Redesigned (ATSR). Table 12.1 shows where each of the measures in this Bill (or the principles underlying the measure) is discussed.
Table 12.1: Options for implementing the measures in this Bill
| Measure | APFC | ATSR |
|---|---|---|
| Removing indexation. | Chapter 12, pp. 303-307. | Recommendation 18, pp. 595-607. |
| Giving individuals and superannuation funds the choice of working out their CGT gains by either:
|
Chapter 11, pp. 283-294. | Recommendation 18, pp. 595-607. |
| Taxing lease assignments. | Chapter 8, pp. 221-222 and chapter 9, pp. 250-1 . | Recommendation 10.13, pp. 400-403. |
| Preventing multiple losses arising from the transfer of losses between wholly-owned group members. (This measure will apply until the commencement of the consistent entity regime on 1July 2001.) | Chapter 28, pp. 592-609. | Recommendation 6.18, pp. 268-270. |
| Preventing artificial losses arising from the forgiveness of debts between wholly-owned group members. (This measure will apply until the commencement of the consistent entity regime on 1 July 2001.) | Chapter 29, pp. 612-629. | Recommendation 6.19, pp. 270-272. |
| Preventing artificial losses arising from the transfer of loss assets within linked groups. | Recommendation 6.11(b), pp. 256-258. | |
| Removing defects in the continuity of ownership test that applies to company tax losses. | Chapter 28, pp. 592-609. | Recommendation 6.9(a), pp. 256-258. |
| Preventing a deduction and a capital loss arising from a single economic loss. | Consistent with Chapter 28 (towards single recognition of losses and gains). | Consistent with recommendation 6.9 (towards single recognition of losses and gains). |
| Applying the same business test to companies and their unrealised losses if there is a change in the majority ownership. | Chapter 28, pp. 592-609. | Recommendation 6.10, pp. 258-260. |
| Repealing the excess mining deduction rules. | Chapter 1, pp. 95 and 112-113 | Recommendation 8.17, pp. 328. |
| Tightening the 13 month prepayment rule for taxpayers that are not small business taxpayers. (This measure includes a 5 year transitional provision). | Overview, pp. 37-47. | Recommendation 4.6, pp. 171-173. |
12.7 The Review has considered the impacts of the recommended New Business Tax System in A Tax System Redesigned (refer to pages 28-34). There the focus was on the economy as a whole, business, small business and investors. The Review concluded that there would be net gains to business, Government and the community generally.
12.8 Most of the measures in this Bill specifically impact on a taxpayer that conducts a type of transaction or event as shown in Table12.2.
Table 12.2: Taxpayers affected by the measures in this Bill
| Measures | Affected taxpayer(s) |
|---|---|
| Removing indexation. | Taxpayers with CGT assets. |
| Giving individuals and superannuation funds the choice of working out their CGT gains by either:
|
Investors (i.e.individuals and superannuation funds). |
| Taxing lease assignments. | Taxpayers that assign, or effectively assign, leases over plant and equipment. |
| Preventing multiple losses arising from the transfer of losses between wholly-owned group members. (This measure will apply until the commencement of the consistent entity regime on 1July 2001.) | Companies. |
| Preventing artificial losses arising from the forgiveness of debts between wholly-owned group members. (This measure will apply until the commencement of the consistent entity regime on 1 July 2001.) | Companies. |
| Preventing artificial losses arising from the transfer of loss assets within linked groups. | Companies. |
| Removing defects in the continuity of ownership test that applies to company tax losses. | Companies. |
| Preventing a deduction and a capital loss arising from a single economic loss. | Companies. |
| Applying the same business test to companies and their unrealised losses if there is a change in the majority ownership. | Companies. |
| Repealing the excess mining deduction rules. | Mining businesses. |
| Tightening the 13 month prepayment rule for taxpayers that are not small business taxpayers. (This measure includes a 5 year transitional provision). | Non small business taxpayers. |
Analysis of costs and benefits
12.9 The New Business Tax System will reduce compliance costs as it will provide a more consistent and easily understood business tax system.
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- Tightening the prepayment rule means that properly prepared accounts will now contain the information necessary for income tax purposes.
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- The integrity measures that clarify how the law operates on the use and recognition of losses for tax purposes will harmonise disparate regimes making all of the regimes easier to comply with.
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- Taxpayers will no longer need to work out an assets indexed cost base for assets acquired after 21 September 1999; a calculation which can be quite complex and time consuming.
12. 10 Where measures may increase compliance costs for some taxpayers, they also provide taxpayers with greater flexibility in managing their affairs or preserve the integrity of the tax system.
12. 11 The costs of implementing the measures in this Bill are not expected to give rise to any significant increase in administration costs.
12. 12 The revenue impact of each measure is dealt with in the general outline for this Explanatory Memorandum.
12. 13 The New Business Tax System will provide Australia with an internationally competitive business tax system that will create the environment for achieving higher economic growth, more jobs and improved savings.
12.14 The consultation process commenced with the release of the ANTS in August 1998. The Government established the Review in August 1998 and since that time the Review has published 4 documents on business tax reform, in particular A Platform for Consultation and A Tax System Redesigned in which the Review canvassed options and issues and sought public comment.
12.15 Also during this period, the Review has held numerous public seminars and focus group meetings with stakeholders in the taxation system. It received and analysed 376 submissions from the public on reform options. Further details are contained in paragraphs 12 to 16 of the Overview of A Tax System Redesigned .
12.16 In analysing options, the published documents frequently referred to, and often were guided by, views expressed during the consultation process.
Conclusion and recommended option
12. 17 The measures contained in this Bill should be adopted to support a more efficient, innovative and internationally competitive Australian business sector, ensure a sound revenue base, reduce compliance costs and establish a simpler and sounder tax system.
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