Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
Chapter 6 - Regulation impact statement
6.1 The measures in these Bills are a part of the Governments broad ranging reforms which will give Australia a New Business Tax System. Those reforms are based on the Recommendations of the Review, established by the Government to consider reform of Australia's business tax system.
6.2 The Government established the Review in August 1998 to consult on its plan to comprehensively reform the business tax system (outlined in ANTS). The Review made 280 recommendations to the Government that were designed to achieve a more simple, stable and durable business tax system.
6.3 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 a sustainable revenue base so that the Government can continue to deliver services to the community.
6.4 The New Business Tax System also seeks to provide a basis for more robust investment decisions by:
- improving simplicity and transparency;
- reducing the cost of compliance; and
- providing fairer, more equitable outcomes.
6.5 The Bills dealt with in this Explanatory Memorandum are the third phase of legislation to implement the New Business Tax System. The earlier phases involved the following Bills, passed by the Senate on 29 November 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;
- the New Business Tax System (Former Subsidiary Tax Imposition) Bill 1999;
- the New Business Tax System (Capital Gains Tax) Bill 1999; and
- the New Business Tax System (Income Tax Rates) Bill (No.2) 1999.
6.6 The New Business Tax System will enhance Australia's competitiveness through lower company and capital gains tax rates, and reduced compliance costs.
6.7 The measures contained in the New Business Tax System (Miscellaneous) Bill 1999 have these objectives:
- Ensuring that company profits paid as dividends to resident shareholders will always be taxed at the shareholders marginal tax rate. This will be fairer to self-funded retirees and other low income earners and will remove investment distortions for super funds;
- Responding to avoidance arrangements that exploit the availability of the rebate on unfranked intercorporate dividends. Ensuring a consistent treatment of all resident companies receiving unfranked dividends. Reducing the need for complex anti-avoidance provisions;
- Simplifying depreciation calculations and record keeping for taxpayers with depreciable plant;
- Changing the calculation of imputation credits, converting franking account balances and changing the infrastructure borrowings rebate to reflect the reduction in the company tax rate provided for by the Income Tax Rates Bill No.1;
- Promoting venture capital investments by further encouraging Australian super funds and similar entities to invest in PDFs. The Review argued that venture capital funding, both from domestic and non-resident sources, should be stimulated [F1] . The Government accepted the Reviews recommendation to grant an exemption for venture capital investments by non-resident tax-exempt pension funds. The Government also decided that there was also a need to encourage venture capital investment by domestic super funds and similar entities. This will boost funding for emerging enterprises, facilitate growth in knowledge-based jobs and contribute to the retirement income of all Australians.
6.8 This Explanatory Memorandum also explains the New Business Tax System (Venture Capital Deficit Tax) Bill 1999 which is part of the legislative scheme to effect the objective of promoting venture capital investments.
6.9 Most of the measures in these Bills arise from recommendations of the Review. Those Recommendations were the subject of extensive consultation. The implementation options for those measures can be found in A Platform for Consultation (APFC) and A Tax System Redesigned (ATSR). Table 6.1 shows where the measures (or the principles underlying them) are discussed in those publications.
|Making imputation credits (franking rebates), that are attached to dividends paid to Australian resident individuals or complying super funds and similar entities after 30 June 2000, refundable to the extent that they exceed tax payable||Chapter 15, pp.348-349; 360-366.||Recommendation 11.7, pp.421-424.|
|Removing the intercorporate dividend rebate on unfranked dividends paid after 30 June 2000, except within company groups, while allowing a deduction to an Australian resident company that is paid such a dividend (except portfolio dividends) after 30 June 2000 and on-pays it to a non-resident parent.||Chapter 15, pp.349-355, 356; Chapter 17, pp.389-399.||Recommendations 11.1 and 11.2, pp.411-414.|
|Replacing immediate deductibility for plant costing $300 or less with a right to pool plant costing less than $1,000 and to depreciate that pool, as a single item of plant, over an effective life of 4 years.||Chapter 1, pp.95-96.||Recommendation 8.10, pp.316-318.|
|Allow taxpayers to add plant to that pool if it was written down to less than $1,000 under the diminishing value method.|
|Effectively making capital gains on venture capital investments by pooled development funds exempt from tax, if they are distributed to a super fund or similar entity, by allowing an imputation credit for the distributions, even though those distributions are exempt from tax.||Not discussed in APFC.||Not discussed in ATSR.|
6.10 The changes to the imputation system and the infrastructure borrowings rebate are consequential amendments because of the reduction in the company tax rate.
6.11 The potential compliance, administrative and economic impacts of the measures in these Bills have been carefully considered, both by the Review and by the business sector. The Review focused on the economy as a whole in assessing the impacts of its recommendations and concluded that there would be net gains to business, government and the community generally from business tax reform.
6.12 The measures in these Bills specifically impact on those taxpayers identified in Table 6.2.
|Making excess imputation credits refundable.||Shareholders who are individuals, superannuation funds, approved deposit funds, life insurance companies, registered organisations, pooled superannuation trusts and certain other trustees, provided they have imputation credits in excess of their income tax liability.|
|Removing the intercorporate dividend rebate on unfranked dividends.||Public companies receiving unfranked dividends.|
|Allowing a deduction when they are on-paid to non-resident parent entities.||Companies that on-pay the dividend to foreign parents.|
|Replacing the immediate deduction for $300 plant with a pooling scheme for plant costing less than $1,000.||Taxpayers (except small business taxpayers) who acquire plant.|
|Allow plant written down to less than $1,000 under the diminishing value method to come within that pooling scheme.||Taxpayers (except small business taxpayers) who have plant written-down under the diminishing value method to less than $1,000.|
|Consequential changes to the infrastructure borrowings rebate and the imputation system because of the company tax rate reduction.||Investors in the infrastructure borrowings scheme and shareholders.|
|Allowing pooled development funds to effectively provide super funds and similar entities with tax-free venture capital gains.||Complying super funds and similar entities who invest in pooled development funds.|
6.13 The compliance cost effects of these Bills are:
- refunding excess imputation credits will not have a compliance cost for most taxpayers because data which is already provided will be used to calculate the refund. Taxpayers who currently do not lodge a tax return [F2] will need to in order to claim their imputation credit refund;
- removing the intercorporate dividend rebate on unfranked dividends will decrease compliance costs for companies eligible for the rebate now because they will no longer have to calculate the rebate. There will also be a reduction in compliance costs for companies that currently have to decide if they are a private or public company, to know if they are eligible for the rebate. This can be difficult as their status for tax law purposes is not necessarily the same as it is for company law;
- providing a deduction when an Australian company on-pays unfranked non-portfolio dividends to an overseas parent may result in a small increase in compliance costs from having to track the receipt of the unfranked dividend into the dividend paid to the parent;
- pooling low-cost plant (i.e. costing under $1,000) and low-value plant (i.e. plant depreciated below $1,000 under the diminishing value method) into a notional single item of plant will significantly reduce compliance costs for those taxpayers who opt to use that system. In particular, the record keeping involved in tracking separate items of low-cost, or low-value, plant will be greatly reduced;
- changing the calculation of imputation credits, and converting the balance in companies franking accounts, to reflect the reduced company tax rate will cause a small, one-off compliance cost for most companies arising from implementing changes to their systems;
- changing the rate of the infrastructure borrowings rebate will have no effect on compliance costs because the measure requires only changing a 36% rebate to a 34% rebate and then to a 30% rebate;
- where a PDF provides superannuation funds and similar entities with tax-free capital gains on venture capital investments, there may be some increase in compliance costs; and
- there will be no specific compliance costs involved with the New Business Tax System (Venture Capital Deficit Tax) Bill 1999.
6.14 The refundability of excess imputation credits from 1 July 2000 will have some impact on administration costs. This is because additional tax returns are expected to be lodged, so that refunds can be claimed. The other measures in this Bill are not expected to impose significant ongoing administration costs.
6.15 The revenue impact of each measure is noted in the General Outline for this Explanatory Memorandum.
6.16 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 economic benefits of these measures are explained in more detail in the publications of the Review, particularly A Platform for Consultation and A Tax System Redesigned .
6.17 The consultation process began with the release of ANTS in August 1998. The Government established the Review in that month. Since then, the Review has published 4 documents about business tax reform; in particular A Platform for Consultation and A Tax System Redesigned in which it canvassed options, discussed issues and sought public input.
6.18 Throughout that period, the Review held numerous public seminars and focus group meetings with key stakeholders in the tax system. It received and analysed 376 submissions from the public about reform options. Further details are contained in paragraphs 11 to 16 of the Overview to A Tax System Redesigned .
6.19 In analysing options, the published documents frequently referred to, and were guided by, views expressed during the consultation process.
6.20 The measures in these Bills should be adopted to support a more efficient, innovative and internationally competitive Australian business sector, to reduce compliance costs and to establish a simpler and more structurally sound business tax system.