Explanatory Memorandum(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)
Chapter 1 Taxation incentives for the shipping industry
Outline of chapter
1.1 This chapter outlines:
- the background to shipping reform; and
- the key taxation elements of the reform.
Background to shipping reform
1.2 On 9 September 2011, the Minister for Infrastructure and Transport announced the Government's shipping policy reform, Stronger Shipping for a Stronger Economy (Media Release No. AA169/2011).
1.3 The reform package aims to make the Australian shipping industry more internationally competitive and facilitate Australian competition on international routes. It is also designed to reform and revitalise coastal shipping in Australia to create a competitive environment attractive to investors.
1.4 Stronger Shipping for a Stronger Economy delivers a tax and regulatory reform package to help remove barriers to investment in Australian shipping and to foster the global competitiveness of the shipping industry. The package consists of:
- the Coastal Trading Bill 2012 - which replaces Part VI of the Navigation Act 1912 and establishes a new regulatory framework and licensing system for vessels engaged in coastal trading in Australian waters;
- the Shipping Reform (Tax Incentives) Bill 2012 (SR(TI) Bill) - which provides for the issue of certificates for vessels as a first step in meeting the eligibility criteria for access to the tax exemption and other tax concessions;
- the tax measures contained in this Bill (and described in this explanatory memorandum) - cognate legislation amending the Income Tax Assessment Act 1997 (ITAA 1997), the Income Tax Assessment Act 1936 and the Taxation Administration Act 1953 to give effect to the income tax concessions; and
- the Coastal Trading (Consequential Amendments and Transitional Provisions) Bill 2012 and the Australian International Shipping Register (Consequential Amendments and Transitional Provisions) Bill 2012 - which make consequential amendments to relevant existing legislation to ensure consistency with the new regime, and provide for transitional arrangements.
Shipping and the Australian industry
1.5 Shipping plays a central role in the global economy as it is responsible for the carriage of approximately 90 per cent of the volume of world trade. It is, by nature, a global industry. As such it is highly competitive, with relatively few barriers to entry, which leads to strong downward pressure on prices in most market sectors. While these competitive pressures benefit shipping customers through lower freight rates, they also encourage ship owners and operators to seek to minimise costs wherever possible. Investors therefore generally seek to operate and register their vessels in low cost regimes and to source crew from low cost countries.
1.6 The Australian shipping industry has been operating at a significant disadvantage compared to international operators who have access to beneficial regulatory, tax and employment arrangements. Despite the role of shipping internationally, Australia's shipping fleet has been declining, Australian companies' participation in international maritime trades is low, and there is a growing maritime skills shortage. The Australian shipping industry has been in decline for decades: in 1995 there were 55 Australian operated ships, but this has now dropped to 22.
The need for reform
1.7 The Minister for Infrastructure and Transport's announcement of the Stronger Shipping for a Stronger Economy package of reforms represents the culmination of several years of significant consideration of the state of the shipping industry.
1.8 Given the competitive nature of the global industry and the difficulty Australian shipping companies have competing on the international stage, the Australian shipping industry needs a reform package to ensure its viability and long-term growth, and to position it to take advantage of opportunities presented by the burgeoning export market and increased domestic transport task. It is also anticipated that an effective regime for the taxation of shipping in Australia will deliver significant economic advantages. An effective reform package would allow Australian industry to compete in an industry distorted by international subsidies.
1.9 With this imperative, in 2008, the House of Representatives Standing Committee for Infrastructure, Transport, Regional Development and Local Government conducted a Parliamentary Inquiry into coastal shipping policy and regulation to advise on ways of revitalising Australia's shipping industry to make it more competitive and sustainable. The Committee released its report, Rebuilding Australia's Coastal Shipping Industry , in October 2008.
1.10 The Inquiry identified numerous issues with the industry, including:
- a significant cost disadvantage for Australian registered vessels and an absence of fiscal incentives to invest in Australian registered ships;
- a declining and ageing coastal fleet;
- a high level of transport industry competition; and
- an ageing workforce combined with insufficient recruitment and inadequate training, resulting in potential limits to Australia's capacity to service international and domestic trade efficiently.
1.11 The report confirmed the serious situation of the Australian shipping industry and highlighted the need to act quickly. In February 2009, the Minister for Infrastructure and Transport formed an advisory group of industry leaders to assist in implementing the recommendations contained in the report.
1.12 The Government committed to implementing reforms during the Federal election campaign in August 2010, and released a discussion paper for public consultation on 1 December 2010, outlining a framework for the proposed reforms. This framework was based around the objectives of:
- ensuring Australia has a viable shipping industry, which is able to provide adequate coastal shipping services at a reasonable price for customers/consumers, and which reinvests in its ships when they reach the end of their economic lives;
- ensuring Australian shipping maintains and potentially grows its share of the national transport system in order to meet the growing transport task efficiently, effectively, safely and with minimal environmental impact;
- providing opportunities to increase Australia's participation in international shipping, reflecting the significance of shipping to our trade base and the linkages between strong domestic and international sectors;
- creating employment and skills opportunities for Australian seafarers; and
- securing the maritime skills base necessary to provide regulatory and land-based maritime services as well as the sea-based services.
1.13 Three industry reference groups - a Taxation Reference Group, a Workforce Skills and Training Reference Group and a Regulation Reference Group - were established to undertake a more detailed review of the implementation arrangements that might apply to the proposed reforms.
1.14 The Taxation Reference Group was chaired by a senior Treasury official and membership comprised of senior industry representatives with an interest in the structure of the proposed tax regime. Officers from the Treasury and the Australian Taxation Office provided technical support and officers from the Department of Infrastructure and Transport provided the secretariat.
1.15 The Taxation Reference Group met four times, and a number of papers were commissioned to further develop the Group's discussions. Underlying the Group's deliberations was the policy intent of creating a strong and viable Australian shipping industry and the aim of the Group was to deliver tax reforms which assist with that goal.
1.16 The Taxation Reference Group reported to the Government in mid-2011. The Minister for Infrastructure and Transport announced the Government's shipping policy reform, Stronger Shipping for a Stronger Economy , on 9 September 2011.
Interactions with the Shipping Reform (Tax Incentives) Bill 2012
1.17 The taxation measures contained in this Bill will interact with the SR(TI) Bill, which will be administered by the relevant Department.
1.18 In particular, the SR(TI) Bill establishes a mechanism for the relevant Minister to certify compliance with certain qualifying conditions which must be met to obtain a certificate under that Bill. The qualifying conditions relate to matters such as, the company's management arrangements and training plans, and the nature of the business or commercial activities undertaken using the vessel. Receipt of a certificate under the SR(TI) Bill is the first step in meeting the eligibility requirements for the taxation elements of the Stronger Shipping for a Stronger Economy package.
1.19 The SR(TI) Bill also provides for an annual reporting mechanism, which will enable the relevant Department to collect data on the extent to which the tax concessions are being used.
Operation of existing law
1.20 Shipping companies are currently taxed in line with companies in other industries and are not afforded concessional tax treatment. As such:
- a shipping company pays tax at the company tax rate (currently 30 per cent);
- shipping vessels are depreciated based on an average effective life of 20 years;
- a balancing adjustment arising from the disposal of a shipping vessel is assessed in full in the income year in which a profit from disposal is made; and
- a company can claim salary, wages and allowances paid to seafarers as a tax deduction, but do not have access to refundable tax offset provisions.
1.21 The key taxation elements of the shipping reform package are outlined below.
Income tax exemption
1.22 A new category of exempt income is created for ship operators under certain circumstances. The income tax exemption applies to all qualifying shipping income for eligible shipping 'vessels' as defined in the SR(TI) Bill.
1.23 A 'vessel' is an eligible shipping vessel if the ship operator has applied for and obtained a certificate in respect of the vessel from the relevant Minister which certifies that the company satisfies the qualifying conditions set out in the SR(TI) Bill.
1.24 Only income derived in respect of an eligible vessel from certain shipping activities, will qualify for the income tax exemption. A generous approach is taken to defining the activities that generate income eligible for the income tax exemption, ensuring that a substantial part of shipping activities are included.
1.25 The effective life of an eligible vessel is capped at 10 years for companies that have been issued with a certificate under the SR(TI) Bill in respect of the vessel. The decline in value of the depreciating asset (the vessel) will therefore be calculated over a shorter period of time, providing companies with a greater deduction in the early income years than is currently the case.
1.26 A balancing adjustment amount is included in the second income year after the income year in which an existing vessel is disposed of. If another vessel is held on the second anniversary on the disposal of the original vessel, then an amount is rolled over.
Seafarer tax offset
1.27 A company is eligible for a refundable tax offset (a seafarer tax offset) for salary, wages and allowances paid to Australian resident seafarers who are employed to undertake overseas voyages on qualifying Vvessels, if the company employs the seafarer on such voyages for at least 91 days in the income year.
Royalty withholding tax exemption
1.28 Payments made for the lease of shipping vessels are exempt from royalty withholding tax. This exemption applies to payments made by Australian resident companies for the lease, on a bareboat basis, of qualifying vessels that are used commercially to ship cargo or passengers for consideration. This aims to reduce the costs for Australian shipping operators of securing vessels that may be crewed by Australian workers.
1.29 Part 3-90 of the ITAA 1997 allows certain groups of entities to be treated as single entities for income tax purposes. Following a choice to consolidate, subsidiary members are treated as part of the head company of the group rather than as separate income tax identities.
1.30 The income tax treatment of a consolidated group flows from the single entity rule in section 701-1. Under the single entity rule an entity is treated as part of the head company for certain purposes while it is a subsidiary member of a consolidated group. Broadly, the taxable income or tax loss is worked out for a consolidated group as if it were a single entity.
1.31 As a result, the single entity rule allows the proposed shipping reform tax concessions to apply to a consolidated group. For example:
- if a subsidiary of a head company is issued a certificate in accordance with the SR(TI) Bill for a vessel, that certificate is treated as having been issued to the head company for that vessel in applying the proposed tax concessions to the consolidated group;
- if a subsidiary is locked out of qualifying for income tax exemption with respect of a vessel, then any associate and the head company is similarly locked out;
- if a subsidiary joins a consolidated group mid-way through a lockout period, the head company is also taken to be locked out for the remainder of the period;
- if before the end of the lockout period the subsidiary entity operating the vessel leaves the consolidated group, the remainder of the lockout period applies to the subsidiary entity; or
- if a subsidiary of a consolidated group ceases to hold a vessel and replaces that vessel while in the consolidated group the head company is taken to have ceased to hold the vessel and to have commenced to hold the new vessel for the purposes of the head company seeking eligibility for the balancing adjustment roll-over.