Explanatory Memorandum(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)
Chapter 2 Income tax exemption
Outline of chapter
2.1 Schedule 1 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to create a new category of exempt income for ship operators under certain circumstances. The income tax exemption will apply to all qualifying shipping income for eligible shipping 'vessels' as defined in the Shipping Reform (Tax Incentives) Bill 2012 (SR(TI) Bill).
2.2 A modified loss wastage rule will replace the existing treatment of the application of losses against net exempt income.
2.3 Schedule 5 to this Bill outlines the amendments to the Taxation Administration Act 1953 (TAA 1953), enabling the Australian Taxation Office (ATO) to give tax information to the Department of Infrastructure and Transport for the purpose of administering the SR(TI) Bill.
Context of amendments
Operation of existing law
2.4 Shipping companies are subject to the standard corporate tax arrangements. As such, a shipping company pays tax at the company tax rate (30 per cent).
2.5 A taxpayer with qualifying exempt shipping income may also have income tax losses from prior years. A specific loss wastage rule for taxpayers that earn exempt income is provided in the current law. This requires taxpayers with tax losses to first reduce these losses by the value of their net exempt income before they can apply any remaining losses to assessable income.
2.6 The taxation law secrecy provisions in Division 355 of Schedule 1 to the TAA 1953 apply to protected information. Protected information is defined as information disclosed or obtained under or for the purposes of a taxation law (other than the Tax Agent Services Act 2009 ), which relates to the affairs of an entity (including but not limited to the entity's tax affairs), and which identifies, or is reasonably capable of being used to identify, that entity.
2.7 Division 355 permits a tax officer to disclose protected information for government purposes, as set out in Tables 1 to 7 in section 355-65 of the TAA 1953.
Rationale for changes
2.8 Over recent years, Australia has observed a flight from its national shipping register to other jurisdictions, particularly to registers such as the United Kingdom, Singapore, Hong Kong and Canada that offer favourable tax regimes, such as a tonnage tax or very low rates of income tax for shipping businesses.
2.9 A tonnage tax sets up a new tax regime with a zero rate of tax that may be varied at some point in time. A tonnage tax was initially considered in the early stages of the Shipping policy reform, however an exemption was considered to be more favourable as it would be easier to understand and comply with, and provide greater taxpayer certainty.
2.10 An exemption from income tax for all qualifying shipping income would produce the same benefits as a tonnage tax but without the administration and compliance costs associated with introducing a new tax regime in a new and separate tax Act.
2.11 A key goal of the income tax exemption is to attract existing vessels and newer vessels to be registered in Australia.
Summary of new law
2.12 Schedule 1 to this Bill creates a new category of exempt income for ship operators under certain circumstances.
2.13 The income tax exemption applies to all qualifying shipping income for eligible shipping 'vessels' as defined in the SR(TI) Bill.
2.14 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 under the SR(TI) Bill, certifying that the company satisfies the qualifying conditions set out in that Bill.
2.15 Only certain shipping activities qualify for the income tax exemption. A generous approach to defining qualifying activities is adopted, ensuring that a substantial part of shipping activities are included.
2.16 The current loss wastage rule that applies to net exempt income is modified to reduce a ship operator's tax losses at a slower rate than would otherwise occur under the current loss wastage rule in respect of net exempt income from qualifying shipping activities.
2.17 Schedule 5 to this Bill permits the ATO to disclose protected information to the relevant Secretary for the purposes of administering the SR(TI) Bill.
Comparison of key features of new law and current law
|New law||Current law|
|Ordinary and statutory income from qualifying shipping activities using an eligible vessel is exempt from income tax.||Ordinary and statutory income from shipping activities is subject to income tax.|
|A qualifying shipping company can disregard 90 per cent of so much of their net exempt income that directly relates to that exempt income for the purpose of the loss wastage rule.||Before a qualifying shipping company can deduct tax losses, they must first reduce them by all of their net exempt income.|
|A taxation officer may disclose protected information to the relevant Secretary for the purpose of administering the SR(TI) Bill.||There is no provision allowing a taxation officer to disclose protected information to the Secretary of the Department of Infrastructure and Transport for the purpose of administering the shipping reform.|
Detailed explanation of new law
2.18 Currently, Australian shipping operating companies pay tax at the company tax rate. This measure will enable shipping operating companies who meet certain criteria to be entitled to an income tax exemption on income obtained from the use of eligible 'vessels' as defined in the SR(TI) Bill.
2.19 The SR(TI) Bill outlines the qualifying conditions for companies to obtain a shipping exempt income certificate from the relevant Minister. This is the first step towards meeting the eligibility criteria for the income tax exemption.
2.20 Only income from certain shipping activities will qualify for the income tax exemption. A generous approach to defining qualifying activities is applied, ensuring that a substantial part of shipping activities are included in the income tax exemption to make Australia competitive with the United Kingdom and other jurisdictions. The list of activities is described in paragraphs 2.25 to 2.46 in this chapter.
Shipping exempt income certificate
2.21 One of the criteria for access to the income tax exemption is receipt of a shipping exempt income certificate in relation to a particular vessel. [ Schedule 1, item 4, paragraph 51-100(1 )( a )]
2.22 A shipping exempt income certificate is a certificate issued by the relevant Minister under section 8 of the SR(TI) Bill. The certificate certifies that the company has met the relevant qualifying conditions under the SR(TI) Bill.
2.23 The shipping exempt certificate will include a statement of the days on which a company has satisfied the qualifying conditions.
Example 2.1 On the 1 July 2013, the Horizon Express applies to the Minister for Infrastructure and Transport for a shipping exempt certificate. The Minister for Infrastructure and Transport grants the certificate with effect from 1 May 2013 to 30 June 2013, as in this period the Horizon Express satisfied the qualifying conditions. When the Horizon Express lodges its tax return for the 2012-2013 financial year, it will claim an exemption on its shipping related income for May and June in that income year.
2.24 A definition of 'shipping exempt income certificate' as having the same meaning as in the SR(TI) Bill is added to the Dictionary in subsection 995-1(1). [ Schedule 1, item 9, definition of ' shipping exempt income certificate' in subsection 995-1(1 )]
2.25 This Bill makes a key distinction between core and incidental shipping activities. [ Schedule 1, item 4, section 51-105 ]
2.26 The way in which a particular activity is categorised impacts upon eligibility for exemption from income tax on income from that activity. The following sections discuss the criteria for activities to qualify for the exemption under either core or incidental activities.
2.27 A definition of 'shipping activities' is added to subsection 995-1(1), as the meaning of the term given by section 51-105. [ Schedule 1, item 7, definition of ' shipping activities' in subsection 995-1(1 )]
Core shipping activities
2.28 A company's 'core shipping activities' are activities directly involved in operating a qualifying vessel to carry shipping cargo or shipping passengers such as:
- demurrage; or
- cleaning charges.
[ Schedule 1, item 4, subsection 51-100(1 )]
2.29 'Shipping cargo' and 'shipping passengers' are defined terms in the SR(TI) Bill. [ Schedule 1, items 8 and 10, definitions of ' shipping cargo' and ' shipping passenger' in subsection 995-1(1 )]
2.30 'Core shipping activities' carried on by a company in respect of a qualifying vessel that it operates may include:
- carrying the shipping cargo or shipping passengers on the vessel;
- crewing the vessel;
- carrying goods on board for the operation of the vessel (including for the enjoyment of shipping passengers);
- providing the containers that carry shipping cargo on the vessel; and
- loading shipping cargo onto, and unloading it from, the vessel.
[ Schedule 1, item 4, subsection 51-110(2 )]
2.31 The list is an inclusive list, with a regulation-making power to specifically include other core activities. [ Schedule 1, item 4, paragraph 51-110(2 )( r )]
The FedExpress is a medium sized 95,000 net tonne bulk carrier, flagged Australian, owned and operated by Luxenburgs Ltd, an Australian company. The FedExpress carries bauxite from Gladstone to China. The FedExpress also provides the ship containers to carry the bauxite and operates a wide range of cargo handling equipment including a portainer crane, mobile cranes, and several forklifts for the purposes of loading and unloading the cargo. The income generated from carrying the bauxite to its destination is exempt from income tax. The income from the provision of containers and handling equipment facilitates the carriage of the bauxite and will also be exempt from income tax.After several years, Luxenburgs Ltd decides that it no longer wishes to operate the FedExpress. Origins Ltd makes arrangements to contract to charter out its bulk carrier for a defined period to carry a quantity of bauxite between two countries at a daily rate. Luxenburgs Ltd believes that the daily rate may rise due to fluctuations in exchange rates and enters into an agreement with Rolls-Royce Marine to hedge against a possible increase in this daily rate during the charter period, assuming the same cargo, tonnage and destination.Income from the hedging contract may be included as relevant shipping income and is exempt from income tax. This is on the understanding (Schedule 1, item 4, paragraph 51-110 (2)(q)):
Taxable income = assessable income - deductions
$50m = $200m - $150m
Taxable income = assessable income - deductions
($200m - $20m) - ($150m - $15m)
$45m = $180m - $135m
2.32 There is also a regulation-making power to exclude certain activities from the definition of 'core shipping activities'. [ Schedule 1, item 4, subsection 51-110(3 )]
2.33 The SR(TI) Bill outlines a list of excluded vessels in subsection10(4). Regardless of the activities in which a vessel of an excluded kind is engaged, income from such ships cannot qualify for the income tax exemption. Tugs and offshore activities are two specific examples of maritime activities that are excluded.
2.34 A definition of 'core shipping activities' is added to subsection 995-1(1), as the meaning of the term given by section 51-110. [ Schedule 1, item 5, definition of ' core shipping activities' in subsection 995-1(1 )]
Incidental shipping activities
2.35 'Incidental shipping activities' are activities that are incidental to core shipping activities. [ Schedule 1, item 4, section 51-115 ]
2.36 A definition of 'incidental shipping activities' is added to subsection 995-1(1), stating that the meaning of the term is given by section 51-115. [ Schedule 1, item 6, definition of ' incidental Xshipping activities' in subsection 995-1(1 )]
Example 2.4 John and Sue are booked onto the luxury cruise liner, the Summer Princess, for a Tahitian getaway. The Australian operator, Wilkinson Pty Ltd, of the Summer Princess holds a shipping exempt income certificate for that ship. Wilkinson Pty Ltd supply accommodation for John and Sue on the night before the Summer Princess departs and charge a fee for the one night of accommodation. As the fee is not considered a part of the company's core shipping activity but is incidental to, and the fee is not more than 0.25 per cent of the total core shipping income, the fee is exempt from income tax.
Incidental shipping activities exceed 0.25 per cent
2.37 The income from such incidental activities may come within the exemption if the 'total incidental shipping income' does not exceed 0.25 per cent of the 'total core shipping income' in any one income year. [ Schedule 1, item 4, subsection 51-100(2 )]
2.38 'Total core shipping income' includes an entity's ordinary income derived from core shipping activities relating to the vessel on a certified day. [ Schedule 1, item 4, subsection 51-100(2 )]
2.39 It also includes any statutory income from those shipping activities. [ Schedule 1, item 4, subsection 51-100(2 )]
2.40 'Ordinary income' and 'statutory income' are defined terms in sections 6-5 and 6-10.
2.41 The 'total core shipping income' must relate to the certified days . A shipping exempt income certificate issued under section 8 of the SR(TI) Bill will specify the days from which the certificate will apply. [ Schedule 1, item 4, paragraph 51-100(1 )( b ) and associated note ]
2.42 Total incidental shipping income is an entity's ordinary income derived from incidental shipping activities relating to the vessel on a certified day and the statutory income from those activities on those days. [ Schedule 1, item 4, subsection 51-100(2 )]
2.43 It also includes any statutory income from those shipping activities. [ Schedule 1, item 4, subsection 51-100(2 )]
2.44 If the income from the incidental activities does exceed the 0.25 per cent level, then no part of the income from those activities qualifies for the income tax exemption.
2.45 The phrase 'relating to the vessel' is to be interpreted broadly, consistent with the stated objective of relieving administrative burdens. However, the activities that generate the income must relate to core shipping income. [ Schedule 1, item 4, subsection 51-100(2 )]
2.46 Example 2.5 illustrates an application of how the income from incidental shipping income does not exceed the 0.25 per cent level, and how that income qualifies for the income tax exemption.
Example 2.5 : Incidental activities do not exceed 0.25 per cent
StarAlliance, an Australian company, owns and operates the Australian flagged Diamond Lucy. StarAlliance generates income from core and incidental shipping activities from the Diamond Lucy. Assume the income generated from the Diamond Lucy consists of:
Core shipping activities: $5 million
Incidental shipping activities: $10,000,
Total core shipping income x 0.25%
$5m x 0.25% = $12,500
Loss wastage rule
2.47 This measure inserts a modified loss wastage rule into the ITAA 1997 to reduce an entity's tax losses by net exempt income made from shipping activities, at a slower rate than what would occur under the existing provisions.
2.48 Under the current law, if a shipping company has net exempt income in any year, it must reduce its tax losses by all of the company's net exempt income from all sources.
2.49 However, the modified loss wastage rule will disregard 90 per cent of a shipping company's net exempt income when calculating an entity's tax losses. [ Schedule 1, item 2, subsection 36-10(5 )]
2.50 Similarly, the modified loss wastage rule will disregard 90 per cent of a shipping company's net exempt income when deducting a tax loss in a later income year. [ Schedule 1, item 3, subsection 36-17(4A )]
2.51 Example 2.6 illustrates how, for the purposes of sections 36-10 and 36-17, a company's net exempt income as it relates to shipping income is reduced by 90 per cent.
In Year 1, the Sea Merchant, an Australian company, has:
$100m - $250m = $-150m
$150m - ($25m x 10%) = $147.5m
- assessable income of $100 million;
- deductions of $48 million;
- shipping net exempt income of $30 million; and
- prior year losses of $1,047.5 million.
($30m x 10%) - $1,047.5m = $1,044.5m
($100m - $48m) - $1,044.5m = $992.5m
2.52 A consequential amendment is made to the income tax exemption list of ordinary or statutory income which is exempt from tax only if it is made by certain entities with income from shipping activities with a signpost to section 51-100. [ Schedule 1, item 1, section 11-15 ( after the item in the table headed ' resale royalty 54collecting societies' )]
Disclosing protected information under section 355-65 of the TAA 1953
2.53 Information may need to be exchanged from the ATO and the relevant Secretary in certain circumstances.
2.54 This measure will ensure that the ATO can pass on taxpayer information collected under the taxation laws to the relevant Department for purposes consistent with the SR(TI) Bill, so the relevant Minister can effectively administer the law. [ Schedule 5, item 1, item 6A in the table in subsection 355-65(4 ) in Schedule 1 to the TAA 1953 ]
2.55 The relevant Minister may require taxpayer information for making an informed decision about granting or revoking a certificate.
Application of the income tax exemption
2.56 The income tax exemption is available in respect of shipping activities that take place on a qualifying day that occurs on or after 1 July 2012. [ Schedule 1, note to the Schedule ]