House of Representatives

New Business Tax System (Consolidation and Other Measures) Bill (No. 1) 2002

Second Reading Speech

Mr SLIPPER (Fisher-Parliamentary Secretary to the Minister for Finance and Administration)

I move:

That this bill be now read a second time.

This bill reflects the ongoing implementation of the government's initiatives to the reform of business taxation by amending the income tax law and other laws to give effect to the following measures.

Consolidation Regime

The consolidation measure is an important business tax reform initiative that allows wholly-owned corporate groups to be treated as single entities for income tax purposes. The consolidation regime will promote business efficiency, improve the integrity of the Australian tax system and reduce ongoing income tax compliance costs for those wholly-owned groups that choose to consolidate.

The majority of the rules for the consolidation regime were contained in two earlier tranches of legislation. The first, contained in the New Business Tax System (Consolidation) Act (No. 1) 2002, received royal assent on 22 August 2002. The second, contained in the New Business Tax System (Consolidation, Value Shifting, Demergers and Other Measures) Bill 2002 was introduced on 27 June 2002. For the reasons of convenience, I will refer to these as the May act and the June bill, respectively.

The measures contained in this bill deal with outstanding matters necessary for the implementation of the consolidation regime, which applies from 1 July 2002. For most corporate groups the measures contained in this bill will complete the legislative package required for them to enter the consolidation regime. Further legislation scheduled to be introduced later this year relates to remaining discrete and specialist areas of the consolidation regime such as the special rules for the life insurance industry.

The consolidation cost-setting rules align the cost of membership interests in an entity joining a consolidated group with the cost of the net assets of that entity. This then allows assets to be transferred within the consolidated group without income tax consequences, and for the group to be treated as a single entity for income tax purposes.

This bill adds to the cost-setting rules contained in the May act and the June bill by introducing the cost-setting rules for the further scenarios where one consolidated group joins another consolidated group and where multiple related entities simultaneously join an existing consolidated group.

The bill also contains modifications to the cost-setting rules that remove unintended tax benefits to groups during transition to consolidation as foreshadowed by the government on introduction of the June bill. It also contains measures that ensure the cost-setting rules in the May act and June bill apply appropriately to trusts within consolidated groups and multiple entry consolidated (MEC) groups.

MEC groups are consolidated groups that, instead of being headed by a single resident head company, are headed by a non-resident company. Although the consolidation regime will apply to MEC groups in the same way as other consolidated groups, this bill contains a number of measures that recognise the special structure of an MEC group.

The bill provides that, in certain circumstances, the head company of a consolidated or MEC group may be replaced without the group's overall tax position being affected. This amendment supports the regime's underlying policy rationale that an election to consolidate is irrevocable.

The consolidation regime, by ignoring intragroup transactions, structurally removes the need for grouping rules in the current income tax law. The bill contains amendments to remove the grouping rules for foreign tax credits, thin capitalisation, the intercorporate dividend rebate and capital gains and losses. Foreign bank branches will be able to continue to group with related companies as they are not able to become members of a consolidated group. The bill also contains additional rules and amendments of a consequential or technical nature.

Other measures

Simplified imputation system: this bill will also make a number of amendments to the new simplified imputation system that commenced on 1 July 2002. As such, the amendments will generally apply to dividends paid on or after 1 July this year.

The bill will amend the Income Tax Assessment Act 1997 to extend exemptions from the benchmark rule for publicly listed companies. The benchmark rule requires that all dividends paid by a company in the same period be franked to the same extent. These changes will recognise additional situations where dividend streaming is not possible.

This bill amends the Income Tax Assessment Act 1997 to replicate provisions in the former part IIIAA of the Income Tax Assessment Act 1936 relating to distributions on non-share equity interests that are still relevant to the new regime. The bill will also amend the Income Tax Assessment Act 1936 to remove the intercorporate dividend rebate for franked dividends paid after 30 June 2002. The rebate has been replaced by the imputation tax offset.

Finally, the bill amends the Income Tax (Transitional Provisions) Act 1997 to provide transitional rules for the new simplified imputation system in relation to early and late balancing companies.

I commend this bill to the House and present the explanatory memorandum to the New Business Tax System (Consolidation and Other Measures) Bill (No. 1) 2002 and also to the New Business Tax System (Franking Deficit Tax) Amendment Bill 2002.