Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello MP)General outline and financial impact
Introduction
In the 2003-2004 Budget, following extensive consultation and a report (International Taxation - A Report to the Treasurer) by the Board of Taxation, the Government announced a package of reforms to international taxation. Following on from a new tax treaty with the United Kingdom, the New International Tax Arrangements Bill 2003, and the New International Tax Arrangements (Participation Exemption and Other Measures) Bill 2004, the measures contained in this bill are a further instalment of those reforms.
Capital gains tax and foreign residents
Schedule 1 to this bill makes changes to the tax treatment of foreign residents who make a capital gain or loss in respect of an interest in an Australian fixed trust. These amendments address the current situation where non-residents investing in Australian assets through an Australian managed fund are taxed more heavily than if they invested directly in those assets or through a non-resident fund. The measures amend the law to provide comparable tax outcomes for foreign residents in Australian managed funds. This will improve the international competitiveness of Australian managed funds, increasing their attractiveness to foreign investors investing in Australia and the region. This gives effect to Board of Taxation Recommendations 4.6(1), 4.7 and 4.8.
Date of effect: These amendments will apply to capital gains and losses on or after the date of Royal Assent.
Proposal announced: This measure was announced in the Treasurer's Press Release No. 32 of 13 May 2003.
Financial impact: The revenue impact of this measure is unquantifiable but is expected to be insignificant.
Compliance cost impact: Additional compliance costs may be incurred by fund managers and trustees in applying these amendments. Fund managers and trustees may need to keep additional records, undertake calculations and modify distribution statements in order to ensure that non-residents are able to take full advantage of the amendments. However this is not likely to be a complex or costly exercise for most fund managers.
Treaty source rules
Schedule 2 to this bill includes amendments to the International Tax Agreements Act 1953. The amendments ensure that generally the source of income derived by widely held unit trusts from funds management activities to which a non-resident beneficiary is presently entitled will be determined in the same manner as it would be determined for the purposes of the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1997. The amendments will align the tax treatment of foreign residents investing through managed funds that derive some or all of their income from sources outside Australia with the tax treatment that would apply if those foreign residents made such investments directly. In removing Australian tax in these cases the amendments will improve Australia's international competitiveness in providing funds management services to foreign investors. This gives effect to Board of Taxation Recommendation 4.6(2).
Date of effect: These amendments will apply from the year of income of the taxpayer in which Royal Assent is obtained.
Proposal announced: This measure was announced in the Treasurer's Press Release No. 32 of 13 May 2003.
Financial impact: The revenue impact of this measure is unquantifiable but is expected to be insignificant.
Compliance cost impact: This measure will reduce compliance costs for foreign resident investors in Australian managed funds as they will no longer be subject to Australian tax in respect of the foreign source income of managed funds. This measure will also reduce compliance costs for trustees (and fund managers) as they will no longer be required to withhold tax in respect of the foreign source income.
Interest withholding tax
Schedule 3 to this bill implements three distinct amendments that relate to the imposition of interest withholding tax (IWT). They seek to ensure that the IWT provisions operate as intended and are consistent with recent developments in the tax law. The first amendment broadens the range of financial instruments eligible for IWT exemption by adding 'debt interests' as debt for tax purposes. The second amendment treats payments of a non-capital nature made on certain Upper Tier 2 hybrid capital instruments as interest for IWT purposes. The final amendment allows assets and debts to be transferred from Australian subsidiaries of foreign banks to their Australian branches without losing IWT exemptions.
Date of effect: These amendments will take effect from the date of Royal Assent.
Proposal announced: This measure was announced in the Minister for Revenue and Assistant Treasurer's Press Release No. C011/04 of 1 March 2004.
Financial impact: The amendments will have a cost to revenue of $5 million per year.
Compliance cost impact: The amendments are expected to reduce compliance costs for affected taxpayers.
Summary of regulation impact statement
Impact: Exempting from Australian tax foreign source income derived by Australian fixed trusts to which foreign resident beneficiaries are presently entitled, will remove tax barriers to foreign residents investing in assets through Australian fixed trusts, such as managed funds. In turn, this should improve the international competitiveness of Australia's managed funds industry, enabling the industry to attract more offshore funds for investment in Australian and foreign assets.
Ensuring that foreign source income derived by Australian managed funds to which foreign resident beneficiaries are presently entitled is no longer subject to Australian tax will reduce compliance costs for resident investors in Australian managed funds, and for trustees and fund managers who will no longer be required to withhold tax in respect of foreign source income.
The additional compliance costs for trustees and fund managers required to track a fund's underlying assets are expected to be minimal.
Main points:
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- More closely aligning the tax treatment of foreign residents that indirectly invest in assets via Australian fixed trusts with the treatment of foreign residents that invest directly in the assets will remove tax impediments to foreign residents investing in Australian fixed trusts as they will no longer be subject to Australian tax in respect of their foreign source income.
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- Removing tax impediments that discourage foreign residents from investing in Australian trusts, including managed funds, will improve the international competitiveness of Australia's managed funds industry, enhancing the ability of Australian funds to attract foreign investment. This in turn should encourage the development of Australia as a global financial services centre.
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- Providing an exception to CGT event E4 for distributions of foreign source income to foreign resident beneficiaries of Australian trusts will remove an onerous administrative impediment to investment in Australian trusts and is expected to make Australia's managed funds industry more internationally attractive, enhancing the ability of Australian funds to compete internationally.