Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
General outline and financial impact
In the 2003 Federal Budget, following extensive consultation and a report by the Board of Taxation, the Government announced a package of reforms to international taxation. The measures contained in this bill, along with legislation enacting a new tax treaty with the United Kingdom, are part of the first instalment of these reforms.
Schedule 1 to this bill will:
- exempt from the FIF rules qualifying superannuation entities and fixed trusts where all of the beneficiaries are complying superannuation entities;
- increase the FIF balanced portfolio exemption threshold from 5% to 10%; and
- remove management of funds from the FIF 'blacklist' of non-eligible business activities.
Date of effect: The superannuation exemption and the increase in the balanced portfolio exemption will apply to income years beginning on or after 1 July 2003. The removal of 'management of funds' will apply to notional accounting periods of FIFs beginning on or after 1 July 2003.
Proposal announced: These proposals were announced in Treasurer's Press Release No. 32 of 13 May 2003.
Financial impact: The FIF exemption and the increase in the balanced portfolio exemption have a total cost to revenue of $15 million for 2004-2005, $20 million for 2005-2006 and $20 million for 2006-2007. The removal of management of funds will have a negligible impact on revenue over these years.
Compliance cost impact: These measures are expected to substantially lower compliance costs for affected taxpayers.
Schedule 2 to this bill will:
- remove the need for certain unit trusts to withhold tax on interest payments to non-residents in relation to widely offered debentures; and
- extend this exemption to foreign eligible unit trusts carrying on business in Australia where the interest would otherwise be subject to IWT.
Date of effect: The exemption from IWT will apply to all qualifying debentures issued on or after the day of Royal Assent.
Proposal announced: This proposal was announced in Treasurer's Press Release No. 32 of 13 May 2003.
Financial impact: The financial impact of this measure is estimated to be up to $3 million per annum over the forward estimates period.
Compliance cost impact: The amendments are expected to decrease compliance costs by reducing the need for eligible unit trusts to withhold a portion of interest payments made to foreigners. Furthermore, special purpose companies will not need to be created to enable eligible unit trusts to receive the exemption.
Schedule 3 to this bill amends Part X of the ITAA 1936 to better target certain amounts that are included in the notional assessable income of a CFC resident in a broad-exemption listed country. Certain foreign source amounts will no longer be included in a CFC's notional assessable income, unless the amounts are also of a kind specified in regulations.
Date of effect: The amendments apply in relation to the statutory accounting periods of CFCs beginning on or after 1 July 2004.
Proposal announced: This is part of a proposal announced in Treasurer's Press Release No. 32 of 13 May 2003, as one component of several reforms to the CFC rules.
Financial impact: The financial impact of the amendments is expected to be negligible.
Compliance cost impact: The compliance cost of applying the CFC rules will be reduced.
Schedule 4 to this bill amends the ITAA 1936 to ensure that double taxation does not occur where deductions for royalty payments have been denied as a result of the operation of the transfer pricing provisions.
The amendment enables the Commissioner to determine that royalty withholding tax is not payable by a taxpayer to the extent that the transfer pricing rules have been used to disallow a deduction to the payer of the royalty.
Date of effect: The amendment made by this Schedule applies to applications of section 136AD of the ITAA 1936 that occur on or after the day of Royal Assent.
Proposal announced: Federal Budget Measures 2003-2004, Budget Paper No. 2.
Financial impact: The revenue impact of this amendment is $1 million per annum.
Compliance cost impact: Nil.
Impact: Changes to the FIF rules are designed to better target the FIF rules and reduce compliance costs for affected taxpayers (principally the superannuation and managed fund sectors).
The IWT change will reduce the cost of obtaining offshore finance for certain unit trusts operating in Australia. The change will have greatest impact on the managed funds sector, which typically operates through unit trust structures. This change will ensure the same tax treatment is given to debentures issued by these trusts as is currently given to companies.
The change to the CFC rules is designed to reduce the cost of complying with these rules.
Note, this bill also contains an amendment that was not part of the review of international taxation arrangements. This amendment ensures royalty payments are not subject to double taxation to the extent that the transfer pricing rules have disallowed a deduction to the payer of the royalty. Due to its minor nature no regulation impact statement is required for this amendment.
- Complying superannuation entities are unlikely to bias investments toward the kind of offshore investments that the FIF rules target. A new FIF exemption for qualifying superannuation entities and certain fixed trusts will mean that these taxpayers will no longer be subject to the FIF rules with associated savings in compliance costs. For example, these taxpayers will no longer classify their investments as 'exempt' or 'non-exempt', determine accrual income or maintain attribution accounts.
- The increase in the balanced portfolio exemption will lower compliance costs for fund managers and other taxpayers by reducing the practice of 'selling down' non-exempt FIF assets at the end of the income year in order to meet the balanced portfolio exemption threshold.
- The removal of 'management of funds' from the FIF 'blacklist' will reduce the compliance costs of the FIF rules for those taxpayers that hold investments in offshore funds management companies.
- The IWT measure will make it easier and less expensive for certain unit trusts, typically in the managed funds industry, to borrow offshore. It will remove a distortion in favour of companies over trusts in relation to offshore borrowing.
- The CFC measure will reduce the compliance costs for taxpayers with relevant interests in CFCs resident in broad-exemption listed countries. Taxpayers will not be required to obtain information from a CFC as to whether it derives certain foreign source amounts, except those, if any, identified in the regulations.