Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
Chapter 4 - Regulation Impact Statement
The objectives of the New Business Tax System
4.1 The measures in this Bill are part of the Government's broad ranging reforms which will give Australia a New Business Tax System. These reforms are based on the Recommendations of the Review that the Government established to consider reforms to Australia's business tax system.
4.2 The Government established the Review to consult on its plan to comprehensively reform the business income tax system (as outlined in ANTS). The Review made 280 recommendations to Government designed to achieve a more simple, stable and durable business tax system.
4.3 The New Business Tax System is designed to provide Australia with an internationally competitive business tax system that will create the environment for achieving higher economic growth, more jobs and improved savings, as well as providing a sustainable revenue base so the Government can continue to deliver services for the community.
4.4 The New Business Tax System also seeks to provide a basis for more robust investment decisions. This is achieved by:
- improving simplicity and transparency;
- reducing the costs of compliance; and
- providing fairer, more equitable outcomes.
4.5 This Bill represents the second phase of legislation to implement the New Business Tax System. The first phase involved the following Bills, which were introduced to the House of Representatives on 21October 1999:
- the New Business Tax System (Integrity and Other Measures) Bill 1999;
- the New Business Tax System (Capital Allowances) Bill 1999;
- the New Business Tax System (Income Tax Rates) Bill (No.1)1999; and
- the New Business Tax System (Former Subsidiary Tax Imposition) Bill 1999.
The objectives of measures in this Bill
4.6 The New Business Tax System will promote investment through a fundamental reform of Australia's CGT regime.
4.7 The following CGT reforms are contained in this Bill:
- streamlining of existing CGT concessions for small businesses, with a further concession being provided where an active asset of the business, held for at least 15 years, is disposed of because the taxpayer intends to either retire on account of being at least 55 years old, or is incapacitated;
- ensuring any capital gain is deferred by allowing a 'CGT roll-over' where shareholders in a company, unitholders in a unit trust or beneficiaries of a fixed trust, exchange membership interests for comparable interests in an acquiring entity as part of a takeover; and
- providing certain non-resident tax exempt superannuation funds with an exemption on gains made on the disposal of eligible Australian venture capital investments.
4.8 Other important CGT reforms include:
- the CGT discount for individuals and superannuation funds and the phasing out of indexation on CGT asset cost bases, which are contained in the Integrity and Other Measures Bill; and
- the removal of CGT averaging for individuals, which is contained in the New Business Tax System (Income Tax Rates) Bill (No. 2) 1999, to be introduced contemporaneously with this Bill.
4.9 Together, the Government's CGT reforms will remove impediments to efficient asset management, improve capital mobility, reduce complexity and compliance costs and make Australia's CGT regime internationally competitive.
4.10 In particular, the measures in this Bill providing concessions to non-resident superannuation funds on venture capital investments are designed to remove tax impediments to invest in Australia's venture capital market. As a consequence, start-up firms participating in innovative ventures are more likely to remain and grow in Australia.
4.11 The measures contained in this Bill are also consistent with the overall objectives of the New Business Tax System. For example:
- the streamlining of CGT concessions for small businesses will reduce compliance costs for small business taxpayers; and
- the CGT scrip for scrip roll-over measure will defer a CGT liability arising where an equity holder of a target entity in a takeover exchanges shares and like interests. In the absence of this measure, some taxpayers may have cash flow difficulties in meeting their CGT liabilities.
4.12 All of the measures in this Bill arise from the Review's recommendations. Those recommendations have been the subject of extensive consultation. The implementation options for those measures are to be found in the Review's A Platform for Consultation (APFC) and ATax System Redesigned (ATSR). Table 4.1 shows where the measures (or the principles underlying them) are discussed in those publications.
|Small business relief (referred to as 'Streamlining capital gains provisions for small business' in ATSR)||Chapter 11, pp. 300-301||Recommendations 17.5 and 17.6, pp.586-589|
|Scrip for scrip roll-over relief||Chapter 11, pp. 294-298||Recommendations 19.3 and 19.5, pp. 615-618; 619-620|
|Venture capital exemption for non-resident tax exempt superannuation funds||Chapter 11, pp. 298-299||Recommendations 19.1 and 19.2, pp.611-615|
Evaluation of some measures
4.13 Consistent with the Recommendations of the Review, the effectiveness of the following measures will be evaluated 5 years after their commencement:
- scrip for scrip roll-over relief; and
- venture capital exemption for non-resident tax exempt superannuation funds.
4.14 The potential compliance, administrative and economic impacts of the measures in this Bill have been carefully considered, by both the Review and the business sector. The Review focused on the economy as a whole in assessing the impacts of the Recommendations (including those relating to the measures in this Bill) and concluded that there would be net gains to business, Government and the community generally from business tax reform.
Impact group identification
4.15 The measures in this Bill specifically impact on taxpayers conducting a type of transaction or event as shown in Table4.2.
|Small business relief (referred to as 'Streamlining capital gains provisions for small business' in ATSR)||Small business taxpayers disposing of certain CGT assets.|
|Scrip for scrip roll-over relief||Shareholders, unitholders and beneficiaries who exchange their interests in a takeover.|
|Venture capital exemption for non-resident tax exempt superannuation funds||Specific non-resident tax exempt superannuation funds investing in Australian venture capital.|
Analysis of costs and benefits
4.16 The measures in this Bill will reduce compliance costs as part of providing a more consistent and easily understood business tax system.
- Streamlining the CGT small business concessions will reduce complexity and provide small business taxpayers with greater flexibility in accessing the benefits.
- Scrip for scrip roll-over relief will mean that shareholders, unitholders and beneficiaries will not need to deal with a CGT event when they exchange their interests as part of a takeover.
- The venture capital measure will take certain foreign investors out of the Australian tax net in relation to particular investments, thereby reducing their compliance costs. There will be some registration and reporting requirements (to the PDF Board) in order to be eligible for the exemption. However, the information required is collected in the ordinary course of business and will be important in assessing the overall effectiveness of the measure (as discussed in paragraph4.13).
4.17 Further details on how the measures in this Bill impact on affected taxpayers can be found in the specific Chapters in this Explanatory Memorandum explaining each measure.
4.18 The implementation of the measures in this Bill are not expected to give rise to any significant increase in administration costs.
4.19 The revenue impact of each measure is dealt with in the General Outline for this Explanatory Memorandum.
4.20 The New Business Tax System will provide Australia with an internationally competitive business tax system that will create the environment for achieving higher economic growth, more jobs and improved savings. The venture capital measures in particular will place Australia's CGT treatment of venture capital investment in line with other overseas jurisdictions (such as the United States). These measures are also expected to stimulate growth in innovative industries, and therefore create more jobs.
4.21 The consultation process commenced with the release of ANTS in August 1998. The Government established the Review in August 1998 and since that time the Review has published 4 documents on business tax reform, in particular A Platform For Consulation and A Tax System Redesigned , in which the Review canvassed options and issues, and sought public comment.
4.22 Also during this period, the Review held numerous public seminars and focus group meetings with stakeholders in the taxation system. It received and analysed 376 submissions from the public on reform options. Further details are contained in paragraphs 12 to 16 of the Overview of A Tax System Redesigned .
4.23 In analysing options, the published documents frequently referred to, and often were guided by, views expressed during consultation.
4.24 The measures in this Bill have therefore been subject to extensive consultation, given all the measures arose directly from the Recommendations.
4.25 The measures contained in this Bill should be adopted to:
- support a more efficient, innovative and internationally competitive Australian business sector;
- reduce compliance costs; and
- establish a simpler tax system.