Senate

Treasury Laws Amendment (Tax Integrity and Other Measures No. 2) Bill 2018

Revised Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Scott Morrison MP)
This memorandum takes account of amendments made by the House of Representatives to the bill as introduced.

Chapter - General outline and financial impact

OECD hybrid mismatch rules

Part 1 of Schedule 1 to this Bill amends the ITAA 1997 to implement part of the OECD hybrid mismatch rules by preventing entities that are liable to income tax in Australia from being able to avoid income taxation, or obtain a double non-taxation benefit, by exploiting differences between the tax treatment of entities and instruments across different countries.

Date of effect: The OECD hybrid mismatch rules will apply to income years starting on or after 1 January 2019. However, other than where an importing payment is made under a structured arrangement, the imported mismatch rule will apply to income years starting on or after 1 January 2020.

Proposal announced: Part 1 of Schedule 1 to this Bill:

·
partially implements the measure Tax Integrity Package - implementing the OECD hybrid mismatch arrangement rules from the 2016-17 Budget;
·
partially implements the measure Tax Integrity Package - application of the OECD hybrid mismatch arrangement rules to regulatory capital from the 2017-18 Budget; and
·
partially implements the measure Tax integrity - extension of the OECD hybrid mismatch rules from the 2017-18 MYEFO.

Financial impact: The package of OECD hybrid mismatch reforms is expected to have an unquantifiable gain to revenue over the forward estimates period.

Human rights implications: Part 1 of Schedule 1 does not raise any human rights issue. See Statement of Compatibility with Human Rights -Chapter 7, paragraphs 7.1 to 7.6.

Compliance cost impact: This measure will impose compliance obligations as taxpayers will be required to obtain sufficient information to identify and assess the expected tax treatment of instruments or entities in a foreign counterparty jurisdiction. However, the measure is limited to arrangements involving related parties, members of the same control group and structured arrangements. Therefore, as noted by the OECD and the Board of Taxation, it is expected that in most cases parties to a cross border arrangement would be aware of, or able to be obtain information about, the counterparty tax treatment.

OECD hybrid mismatch rules: Branch mismatch arrangements

Part 2 of Schedule 1 to this Bill amends the ITAA 1936 to implement part of the OECD hybrid mismatch rules by limiting the scope of the exemption for foreign branch income and preventing a deduction from arising for payments made by an Australian branch of a foreign bank to its head office in some circumstances.

Date of effect: These amendments will apply to income years starting on or after 1 January 2019.

Proposal announced: Part 2 of Schedule 1 to this Bill partially implements the measure Tax integrity - extension of the OECD hybrid mismatch rules from the 2017-18 MYEFO.

Financial impact: The package of OECD hybrid mismatch reforms is expected to have an unquantifiable gain to revenue over the forward estimates period.

Human rights implications: Part 2 of Schedule 1 does not raise any human rights issue. See Statement of Compatibility with Human Rights -Chapter 7, paragraphs 7.1 to 7.6.

Compliance cost impact: Minimal.

OECD hybrid mismatch rules: Other effects of foreign income tax deductions

Schedule 2 to this Bill amends the ITAA 1997 to implement part of the OECD hybrid mismatch rules by:

·
denying imputation benefits on franked distributions made by an Australian corporate tax entity if all or part of the distribution gives rise to a foreign income tax deduction; and
·
preventing certain foreign equity distributions received, directly or indirectly, by an Australian corporate tax entity from being non assessable non-exempt income if all or part of the distribution gives rise to a foreign income tax deduction.

Date of effect: Subject to transitional rules for regulatory capital of ADI's, general insurance companies and life insurance companies, the amendments to deny imputation benefits apply in relation to distributions made on or after 1 January 2019.

The amendments to make foreign equity distributions assessable apply to foreign equity distributions made on or after 1 January 2019.

Proposal announced: Schedule 2 to this Bill:

·
partially implements the measure Tax Integrity Package - implementing the OECD hybrid mismatch arrangement rules from the 2016-17 Budget; and
·
partially implements the measure Tax Integrity Package - application of the OECD hybrid mismatch arrangement rules to regulatory capital from the 2017-18 Budget.

Financial impact: The package of OECD hybrid mismatch reforms is expected to have an unquantifiable gain to revenue over the forward estimates period.

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights -Chapter 7, paragraphs 7.1 to 7.6.

Compliance cost impact: Minimal.

Strengthening integrity of the film producer offset

Schedule 3 to this Bill amends the ITAA 1997 to ensure that the producer offset is better targeted at supporting the Australian film industry when an offshore location is used for principal photography.

Date of effect: The amendment applies to expenditure incurred in relation to films that commenced principal photography on or after 1 July 2018.

Proposal announced: This Schedule implements part of the measure - 'Broadcasting and Content Reform Package - funding for Australian film and television content and SBS' which was announced in the Communications and the Arts portfolio in the 2017-18 Budget. Schedule 3 to this Bill was amended in the House of Representatives to apply from 1 July 2018 rather than 1 July 2017.

Financial impact: The 2017-18 Budget measure with a revised start date of 1 July 2018 is estimated to provide a reduction in expenditure of $6 million over three years comprising:

2018-19 2019-20 2020-21 2021-22
- -$2m -$2m -$2m

- Nil

Human rights implications: This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights -Chapter 7, paragraphs 7.7 to 7.10.

Compliance cost impact: Low.

Income tax and withholding exemptions for the ICC World Twenty20

Schedule 4 to this Bill amends the ITAA 1997 and the ITAA 1936 to provide an income tax exemption for the IBC and to exempt from withholding tax payments of interest, dividend and royalties made to the IBC. This provides support to the International Cricket Council staging the ICC World Twenty20 in Australia in 2020.

Date of effect: The measure applies to assessable income derived on and from 1 July 2018 and to interest, dividend and royalty withholding tax liabilities arising on and from 1 July 2018.

Proposal announced: This measure was announced by the Treasurer on 8 May 2018 as part of the 2018-19 Budget as 'Income tax - exemption for the International Cricket Council for the ICC World Twenty20 in 2020'.

Financial impact: This measure is estimated to have the following revenue impact over the forward estimates period:

2017-18 2018-19 2019-20 2020-21 2021-22
- * * * *

- nil

* unquantifiable

Human rights implications: This Bill does not raise any human rights issues. See Statement of Compatibility with Human Rights -Chapter 7, paragraphs 7.11 to 7.14.

Compliance cost impact: Nil.

Deductible Gift Recipients

Schedule 5 to this Bill amends the ITAA 1997 to list Melbourne Korean War Memorial Committee Incorporated as a DGR under the income tax law.

Date of effect: The amendment applies to gifts made to Melbourne Korean War Memorial Committee Incorporated between 1 January 2018 and 31 December 2019 inclusive.

Proposal announced: This Schedule implements one of the DGR listing contained in the measure - 'Philanthropy - updates to the list of specifically listed deductible gift recipients' which was announced in the 2017-18 MYEFO.

Financial impact: The amendment forms part of a measure contained in the 2017-18 MYEFO to list a number of DGRs. The cost to revenue of that measure as recorded in the 2017-18 MYEFO was estimated to be $1.1m over the forward estimates period to 2020-21 comprising ($m):

2016-17 2017-18 2018-19 2019-20 2020-21
- - -0.4 -0.5 -0.2

- Nil

The 2017-18 MYEFO measure, 'Philanthropy - updates to the list of specifically listed deductible gift recipients', included listing Australian Philanthropic Services Limited, Centre of Entrepreneurial Research and Innovation Limited, Foundation 1901 Limited, Melbourne Korean War Memorial Committee Incorporated and Sydney Chevra Kadisha as DGRs. The listing of Centre of Entrepreneurial Research and Innovation Limited as a DGR was separately enacted in the Treasury Laws Amendment (2017 Measures No. 6) Act 2017. The listing of Australian Philanthropic Services Limited, Foundation 1901 Limited and Sydney Chevra Kadisha as DGRs is intended to be enacted in the Treasury Laws Amendment (2018 Measures No. 4) Bill 2018. In particular, the specific listing of the Melbourne Korean War Memorial Committee Incorporated is likely to have a negligible financial impact.

Human rights implications: This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights -Chapter 7, paragraphs 7.15 to 7.18.

Compliance cost impact: Nil.


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