House of Representatives

New Business Tax System (Miscellaneous) Bill (No. 2) 2000

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 13 - Regulation Impact Statement

Policy objective

The objectives of the New Business Tax System

13.1 The measures in this Bill are part of the Government's broad ranging reforms which will give Australia a New Business Tax System. The reforms are based on the Recommendations of the Review, instituted by the Government to consider reform of Australia's business tax system. [F32]

13.2 The Government instituted 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 the Government, designed to achieve a more simple, stable and durable business tax system.

13.3 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 to the community.

13.4 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 cost of compliance; and
providing fairer, more equitable outcomes.

13.5 This Bill is part of the legislative program implementing the New Business Tax System. Other Bills have been introduced and passed already.

Table 13.1: Earlier business tax legislation
Legislation Status
New Business Tax System (Integrity and Other Measures) Act 1999

New Business Tax System (Capital Allowances) Act 1999

New Business Tax System (Income Tax Rates) Act (No.1) 1999

New Business Tax System (Former Subsidiary Tax Imposition) Act 1999

Introduced into the Parliament on 21 October 1999.

Received Royal Assent on 10 December 1999.

New Business Tax System (Capital Gains Tax) Act 1999

New Business Tax System (Income Tax Rates) Act (No.2) 1999

Introduced into the Parliament on 25 November 1999.

Received Royal Assent on 10 December 1999.

New Business Tax System (Miscellaneous) Bill 1999

New Business Tax System (Venture Capital Deficit Tax) Bill 1999

Introduced into the Parliament on 9 December 1999.

Introduced into the Senate on 6 March 2000.

The objectives of measures in this Bill

13.6 Broadly, the New Business Tax System will enhance Australia's competitiveness through lower company and capital gains tax rates, and reduced compliance costs.

13.7 More specifically, the measures contained in this Bill have these objectives:

Table 13.2: Objectives of the measures in this Bill
Measure Objective
Losses measures
The 'inter-entity loss measures', which affect the tax treatment of realised and unrealised losses of a company where:

there has been a change of ownership or control in the company; or
a liquidator has declared the company's shares to be worthless.

Preventing the multiple recognition of losses for tax purposes by reducing capital losses and deductions of an entity in respect of interests ('inter-entity interests') it holds in a loss company in which it has a controlling stake.
To take account of the inter-entity loss measures:

amend the continuity of ownership test applying to company losses; and
align the application date of the unrealised loss measures (contained in the Integrity and Other Measures Act) with that of the inter-entity loss measures.

Ensuring that the inter-entity loss measures and other measures dealing with losses interact appropriately.
Technical amendments to loss and pre-payment measures contained in the Integrity and Other Measures Act. This covers a number of amendments with varying objectives. These include:

ensuring that the measures operate in the way that they were intended; and
reducing compliance costs.

Life insurers measures
Broaden the tax base for life insurers, as well as changing the basis of taxing the current pension business of superannuation funds. Ensuring greater competitive neutrality and consistency with other entities by broadly:

taxing the various businesses of life insurers on a comparable basis to those types of businesses generally; and
taxing the current pension business of superannuation funds consistently with life insurers.

Imputation measures
Amend the imputation system as it applies to life insurers so that:

franking credits and debits arise for tax paid on income actually allocated to shareholders applying generally accepted accounting standards; and
the imputation system applies to virtual PSTs of life insurance companies.

The objectives of these respective measures are:

ensuring that franking credits and debits arise based on tax paid on income actually allocated to shareholders rather than on income available to shareholders in accordance with prudential requirements; and
ensuring that the treatment of virtual PSTs of life insurance companies under the imputation system is equivalent to complying superannuation funds.

Amend the imputation system as it applies to life insurers so that:

life insurers allocate franking credits and debits to shareholders applying generally accepted accounting standards; and
the imputation system applies to virtual PSTs of life insurance companies.

The objectives of these respective measures are:

ensuring that franking credits will be allocated to shareholders on an equitable basis; and
ensuring that the treatment of virtual PSTs of life insurance companies under the imputation system is equivalent to complying superannuation funds.

Amend the imputation system to take account of PAYG instalments. Ensuring that the imputation system applies appropriately to the new collection mechanisms introduced under ANTS.
Technical amendments to the provisions converting franking accounts to reflect the 34% company tax rate. Taking into account changes to the taxation of life insurers (also in this Bill), as well as ensuring that the provisions operate in the way intended.
Increase in the threshold for the exemption of small shareholders from the franking credit trading rules. Reducing compliance costs for small individual shareholders by ensuring that more of these taxpayers are not adversely affected by the rules.
CGT measures
Amend the CGT cost base adjustment provisions applying to capital payments made to a beneficiary for an interest in the trust, to give effect to CGT small business concessions introduced in the Capital Gains Tax Act. Broadening the scope of the provisions to ensure that general and small business CGT concessions introduced as part of a New Business Tax System operate effectively in the case of capital payments for trust interests.
Technical amendments to the scrip for scrip roll-over provisions. Clarifying the scope, and correcting some technical aspects, of the provisions.
Integrity measures
Amend the object of the PAYG instalments regime and introduce integrity rules designed to penalise taxpayers who obtain a tax benefit from a scheme the effect of which is to avoid, defer or reduce PAYG instalments. Clarifying the object and purposes of the PAYG instalments regime and protecting the integrity of that system.

Implementation options

13.8 The major measures in this Bill arise directly from recommendations of the Review. Those Recommendations were the subject of extensive consultation. The implementation options for these measures can be found in A Platform for Consultation (APFC) and A Tax System Redesigned (ATSR). Table 13.3 shows where the measures (or the principles underlying them) are discussed in those publications.

Table 13.3: Options for implementing measures in this Bill arising directly from the Recommendations
Measure APFC ATSR
The 'inter-entity loss measures'. Chapter 28, pp. 591-609. Recommendation 6.9(b), pp. 256-258.
Changes to take account of the inter-entity loss measures. Chapter 28, pp. 591-609. Recommendations 6.9(a) and (b), pp. 256-258.
Broaden the tax base for life insurers, as well as changing the basis of taxing the current pension business of superannuation funds. Chapters 34 and 35, pp. 713-733; 735-756. Recommendations 14.1 to 14.10, pp. 489-507.
Amend the imputation system as it applies to life insurers. Chapter 34, pp. 728-733. Recommendation 14.5, pp. 495-497.
Increase in the threshold for the exemption of small shareholders from the franking credit trading rules. Not discussed. Recommendation 6.7, pp. 247-250.

13.9 The remaining measures are of a more technical nature, and were not directly discussed in A Platform for Consultation and A Tax System Redesigned . Where appropriate, implementation options for these measures are outlined in Table 13.4.

Table 13.4: Implementation options for measures not explicitly addressed in the Review
Measure Implementation options
Technical amendments to loss and pre-payment measures contained in the Integrity and Other Measures Act. These amendments operate within the framework of the original measure that was legislated.

Implementation options for the original measure were discussed in the regulation impact statement for the Integrity and Other Measures Act.

Amend the imputation system to take account of PAYG instalments. This measure introduces specific provisions providing for franking credits and debits for:

the payment and refund of income tax under the PAYG instalments regime; and
PAYG rate variation credits.

This specific treatment is consistent with the treatment of previous company tax instalment regimes under the imputation system. It is also necessary to explicitly take into account features of the new collection mechanisms put in place under ANTS.

Technical amendments to the provisions converting franking accounts to reflect the 34% company tax rate. These amendments operate within the framework of the original measure that has been introduced.

Implementation options for the original measure were discussed in the regulation impact statement for the NBTS Miscellaneous Bill 1999.

Amend the CGT cost base adjustment provisions applying to capital payments made to a beneficiary for an interest in the trust to give effect to CGT small business concessions introduced under the New Business Tax System. These amendments operate within the framework of the CGT concessions that have been legislated.

Implementation options for the CGT concessions were discussed in the regulation impact statement for the Integrity and Other Measures Act and the Capital Gains Tax Act .

Technical amendments to the scrip for scrip roll-over provisions. These amendments clarify the coverage of the scrip for scrip roll-over provisions but otherwise operate within the framework of the original measure that was legislated.

Implementation options for the original measure were discussed in the regulation impact statement for the Capital Gains Tax Act .

Amend the object of the PAYG instalments regime and introduce integrity rules to penalise entities who obtain a tax benefit from a scheme the effect of which is to avoid, defer or reduce PAYG instalments. This measure adopts a general approach in dealing with schemes to avoid, defer or reduce PAYG instalments. Part IVA of the ITAA 1936 does not apply to the PAYG instalments regime, the company and superannuation fund instalment system or the provisional tax system. Without these rules, the instalment base would be undermined and there would be the potential for significant deferral of instalments. Similar integrity rules are a feature of the existing company and superannuation fund instalment system and the provisional tax system. The integrity rules in this Bill are consistent with the framework of a GAAR.

Assessment of impacts

13.10 The potential compliance, administrative and economic impacts of the measures in this Bill have been carefully considered, both by the Review and by the business sector. The Review focussed 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.

Impact group identification

13.11 The measures in this Bill specifically impact on those taxpayers identified in Table 13.5.

Table 13.5: Taxpayers affected by the measures in these Bills
Measure Affected taxpayers
Losses measures
The 'inter-entity loss measures'. Entities with interests in a company that experiences a substantial change in ownership or control.
Changes to take account of the inter-entity loss measures. As above.
Technical amendments to loss and pre-payment measures contained in the Integrity and Other Measures Act . Companies that either:

experience a substantial change in ownership or control; or
transfer losses or loss assets within a majority-owned company.

Life insurers measures
Broadening the tax base for life insurers, as well as changing the basis of taxing the current pension business of superannuation funds. Life insurance companies and friendly societies, of which there are approximately 80, are affected by the broadening of the tax base for life insurers.

Superannuation funds with pension business are affected by the changing basis of taxing the current pension business of superannuation funds. The precise number of funds affected is not known because many of them either do not lodge a tax return or are investing through a PST or a life insurance company.

Imputation measures
Amend the imputation system as it applies to life insurers. Life insurance companies, of which there are approximately 45.
Increase in the threshold for the exemption of small shareholders from the franking credit trading rules. Individual taxpayers entitled to franking rebates of between $2,000 and $5,000 who would not otherwise satisfy the 45-day rule in the franking credit trading rules.

Up to 115,000 individuals will benefit from this measure, although only a small proportion of this group would currently be denied franking rebates under the 45-day rule.

Amend the imputation system to take account of PAYG instalments. Approximately 240,000 entities, that make PAYG instalments and have franking credits and debits arise under the imputation regime.
Technical amendments to the provisions converting franking accounts to reflect the 34% company tax rate. The following taxpayers are affected by various aspects of this measure:

approximately 7,000 early balancing companies;
approximately 45 life insurance companies; and
a small number of companies applying for estimated debit determinations.

CGT measures
Technical amendments to the CGT cost base adjustment provisions applying to capital payments made to a beneficiary for an interest in the trust. Trustees and beneficiaries.
Technical amendments to the scrip for scrip roll-over provisions. The following taxpayers are affected by this measure:

companies involved in takeovers undertaken by way of a scheme of arrangement;
entities that acquire equity in the original entity; and
original and acquiring non-resident companies.

Integrity measures
Amend the object of the PAYG instalments regime and introduce integrity rules to penalise entities who obtain a tax benefit from a scheme the effect of which is to avoid, defer or reduce PAYG instalments. Entities involved in tax avoidance activities to avoid, defer or reduce PAYG instalments.

Analysis of costs / benefits

Compliance costs

13.12 As is standard with new measures, groups affected by them will need to incur a small up-front cost in either familiarising themselves with the new law or having advisers familiarise themselves with the new law.

13.13 However, overall, the measures in this Bill are expected to reduce compliance costs as part of providing a more consistent and easily understood business tax system.

13.14 The General Outline to this Explanatory Memorandum discusses the impact each measure in this Bill has on compliance costs. Below are some specific examples of how the measures in this Bill will impact on compliance costs. The examples have been listed according to how significant an impact the particular group of measures has on compliance costs.

Life insurers measures

13.15 Broadening the tax base for life insurers should reduce compliance costs by increasing the certainty and integrity of the tax base. For example, the taxable income of life insurance companies will only be split into 2 components rather than 4, reducing the need to undertake apportionment calculations. However, there are implementation and transitional costs that are expected to arise:

For example, segregating assets for the purposes of taxing the superannuation business of life insurers at a 15% rate rather than the company tax rate will require the creation of additional records.
The measures also apply from 1 July 2000 rather than on an income year basis. This will cause approximately 35 life insurers with substituted accounting periods to effectively work out their taxable income twice for the income year containing 1 July 2000. However, during consultation the life insurance industry strongly supported having these measures commence from a set date, as a means of ensuring competitive neutrality. Those life insurers that are early balancers will also have additional time to prepare for all of the changes.

13.16 Compliance costs should decrease for superannuation funds that only carry on pension business as a result of the measure affecting superannuation funds with a pension business. Currently, these funds require an actuarial certificate every 3 years to qualify for an exemption from tax. This will no longer be required.

Other changes affecting the pension business of superannuation funds may increase compliance costs in the implementation phase, for example where self-managed funds have members in both the accrual and pension phase. These funds will now have to separately identify assets to be entitled to an exemption from tax. Currently the exemption is worked out using figures provided by an actuary. Identifying these assets will require the creation of additional records.

Imputation measures

13.17 Requiring life insurers to accrue franking credits and debits for the payment of tax on income actually allocated to shareholders will require more calculations. However, using accepted and already used accounting practices to identify income allocated to shareholders will limit any additional complexity.

The current method for accruing franking credits and debits involves applying a set proportion to tax paid, reflecting prudential requirements. While this is simple, it is an arbitrary rule that does not reflect the true underlying circumstances.

13.18 Increasing the threshold for the exemption from the franking credit trading rules reduces compliance costs for individual taxpayers entitled to a franking rebate between $2,000 and $5,000. These taxpayers no longer have to consider the application of the 45-day rule.

The increase in the threshold will also eliminate the complexity involved with the current tapering of the exemption between $2,000 and $2,500. This tapering involves difficult calculations.

13.19 The amendments to the conversion of franking account provisions will cause a small, one-off cost for companies affected by the measure arising from implementing changes to their systems.

However, the method adopted in the conversion of franking account provisions minimises ongoing compliance costs (particularly record-keeping costs associated with companies maintaining multiple franking accounts).

Losses measures

13.20 Making adjustments to capital losses and deductions to prevent multiple recognition of losses under the inter-entity measure may increase compliance costs, for example, through requirements for companies to provide information to entity shareholders.

However, special relief has been incorporated with this measure to ensure any increase in compliance costs is minimised.

13.21 Linking the continuity of ownership test to the new inter-entity measure will streamline the rules that apply to entities and provide greater integrity. The measures are expected to increase the requirement to maintain records regarding the direct and indirect ownership in a loss company.

13.22 Changes to the unrealised loss measures (originally introduced in the Integrity and Other Measures Act) will reduce compliance costs associated with valuation by:

excluding small business taxpayers (i.e. taxpayers with net asset values of $5 million or less) and low cost assets (i.e. assets that are acquired for less than $10,000);
allowing tax written-down value to be used as a proxy for market value, for depreciable plant; and
enabling the Commissioner to provide guidance about valuation methods.

13.23 Measures not discussed in paragraphs 13.14 to 13.22 will have no impact, or only a negligible impact, on compliance costs.

13.24 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.

Administration costs

13.25 The implementation of the measures in this Bill are not expected to give rise to any significant increase in administration costs.

Government revenue

13.26 The revenue impact of each measure is noted in the General Outline for this Explanatory Memorandum.

Economic benefits

13.27 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.

Other issues consultation

13.28 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.

13.29 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 of A Tax System Redesigned .

13.30 In analysing options, the Review was guided by, and frequently referred to views expressed during the consultation process.

13.31 The measures in this Bill dealing with PAYG instalments were not directly considered by the Review. The PAYG system was subject to extensive consultation prior to its implementation.

13.32 Many of the measures in this Bill have also been subject to extensive consultation between when the Review reported to Government and when this Bill was introduced.

Conclusion and recommended option

13.33 The measures contained in this Bill 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.


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