Senate

Revised Explanatory Memorandum

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

General outline and financial impact

Petroleum resource rent tax - sales gas

Part 1 of Schedule 1 to this bill amends the PRRTA Act to reduce the uncertainty surrounding the determination of a price for gas produced in integrated GTL projects.

Broadly, the amendments will provide for a new methodology to determine the price of gas where there is no comparable uncontrolled price and:

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there is not a sale at the PRRT taxing point; or

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there is a sale at the PRRT taxing point but the sale is non-arms length.

The new methodology will be incorporated in regulations to the PRRTA Act.

Date of effect: A day to be fixed by proclamation.

Proposal announced: The proposal was announced jointly by the Minister for Industry, Science and Resources and the Treasurer in Media Release No. 058 of 23 December 1998.

Financial impact: The revenue impact is unquantifiable.

Compliance cost impact: Industry will incur additional compliance costs in applying the proposed methodology to determine the GTP. These costs will be detailed in an explanatory statement to the proposed regulations.

Summary of regulation impact statement

Regulation impact on business

Impact: The measurereduces uncertainty surrounding the application of the PRRTA Act to GTL projects by providing a methodology to determine a GTP for feedstock gas that is subject to PRRT.

Main points:

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Industry have been concerned that the application of the existing law in relation to PRRT liability on integrated GTL projects is unclear and could impede future developments.

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The preferred option is to provide a methodology which is to be included in regulations to the PRRTA Act.

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Industry will benefit from greater certainty in relation to GTL projects which will assist them in assessing the viability of proposed projects. Other industries who use large volumes of natural gas will benefit from the development of liquid to natural gas projects.

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The methodology clarifies the administration of the PRRTA Act for the ATO and significantly reduces the potential for protracted negotiation with industry.

Petroleum resource rent tax - 5 year rule

Part 2 of Schedule 1 to this bill amends the PRRTA Act to modify the operation of the 5 year rule. Broadly, the 5 year rule applies to classify expenditures for the purpose of calculating PRRT liability. The amendments change the date used for classifying these expenditures from the day the production licence is issued to the day the Government has received sufficient information to determine the successful production licence application.

Date of effect: The amendments takes effect in relation to production licence applications for which an application has been made after 23 December 1998.

Proposal announced: The proposal was announced jointly by the Minister for Industry, Science and Resources and the Treasurer in Media Release No. 058 of 23 December 1998.

Financial impact: The measure will result in a small but unquantifiable cost to revenue.

Compliance cost impact: Nil.

Summary of regulation impact statement

Regulation impact on business

Impact: The change to the 5 year rule ensures that the petroleum industry is not financially disadvantaged by delays in production licence approvals.

Main points:

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The option of resolving this problem by removing the delays in granting a production licence was not considered viable.

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The favoured option is to make the reference date for the 5 year rule the time at which a taxpayer has provided sufficient information to successfully determine the application for production licence.

Income tax exemption for local government businesses

Schedule 2 to this bill amends the ITAA 1936 to extend income tax exemption to businesses that are owned or controlled at the local government level.

Schedule 2 also makes a minor technical amendment to correct a legislative reference.

Date of effect: The amendments apply to income derived after 30 June 2000.

Proposal announced: This measure was announced in Treasurers Press Release No. 52 of 19 June 2000.

Financial impact: The exemption is unlikely to involve any loss of Commonwealth revenue because municipal corporations and local governing bodies are currently exempt under section 50-25 of the ITAA 1997. The amendment will simply allow these bodies to restructure their operations to improve business efficiency.

Compliance cost impact: As the amendment does not impose any additional requirements on local government bodies, it will not involve additional compliance costs. The amendment is designed to assist local government bodies who seek to restructure their activities in order to improve their business efficiency.

Superannuation fund residence requirements

Schedule 3 to this bill amends the ITAA 1936 by amending the definition of resident superannuation fund in subsection 6E(1) and also by replacing the definition of active member in subsection 6E(5) with new definitions of active member and non-active member in subsection 6E(4A) and subsection 6E(4B) respectively.

The amendments will allow a fund, in particular a self-managed superannuation fund, to retain its residency status while the trustees and/or members of the fund are temporarily overseas so long as certain conditions are met.

Date of effect: The amendments will apply from the date of Royal Assent.

Proposal announced: This measure was announced in Assistant Treasurers Press Release No. 49 of 4 October 2000.

Financial impact: Nil.

Compliance cost impact: Nil.

Tax relief for shareholders in listed investment companies

Schedule 4 to this bill amends the ITAA 1997 to provide shareholders in listed investment companies with the benefit of the CGT discount on the eligible gain component of a dividend paid to shareholders.

Date of effect: 1 July 2001.

Proposal announced: The measure was announced in the 2001-2002 Federal Budget. Broad details of the concession were provided in Treasurers Press Release No. 33 of 22 May 2001.

Financial impact: The measure will result in a cost to revenue as set out in the following table.

Compliance cost impact: There will be additional costs for listed investment companies from implementing changes to their systems, accounting for eligible gains and advising shareholders of their entitlement to the concession.

Summary of regulation impact statement

Regulation impact on business

Impact: The measure contained in this bill provides taxpayers with greater access to the benefits of the CGT discount.

Main points:

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The measure has the support of industry who have been consulted during ongoing development and finalisation of the measure.

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Compliance costs for investors will be minimal. There will be some additional compliance costs for industry associated with the change.

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The net benefit of this change is the diversification of investment available for Australians choosing to invest.

HIH rescue package

Schedule 5 to this bill amends the ITAA 1997 to:

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ensure that the income tax consequences of payments under the HIH rescue package are the same as if those payments had been made directly by HIH; and

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exempt the HIH Trust from income tax.

Schedule 5 also amends the GST Act to ensure that:

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the GST consequences of payments made under the HIH rescue package are the same as if those payments had been made directly by HIH; and

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where an insurance portfolio transfer has occurred, the GST consequences of transactions made by the transferee insurer are the same as if those transactions had been undertaken by the original insurer.

Date of effect: The amendments to the ITAA 1997 apply with effect from on or after 15 May 2001. The amendments to the GST Act relating to payments made under an HIH rescue package apply, and are taken to have applied:

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in relation to GST returns and net amounts for tax periods starting, or that started, on or after 15 March 2001; and

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in relation to payments and supplies, of a kind referred to in section 78-120 of the GST Act, that are, or have been, made on or after 15 March 2001 to an entity that is neither registered nor required to be registered.

The amendments relating to insurance portfolio transfers apply, and are taken to have applied to GST returns and net amounts for tax periods starting, or that started, on or after 1 January 2001.

Proposal announced: Minister for Financial Services and Regulations Press Release No. 50 of 26 June 2001.

Financial impact: Nil impact on forward estimates.

Compliance cost impact: Nil.

Personal services income

Schedule 6 to this bill amends Part 2-42 of the ITAA 1997 which deals with personal services income, as well as the ITAA 1936 and the TAA 1953. The amendments are intended to reduce compliance costs for taxpayers, and allow certain agents to be excluded from the personal services income rules.

The personal services income measure applies from the 2000-2001 income year and was introduced in order to improve the integrity of the tax system. The measure addresses the capacity of individuals, and interposed entities providing the personal services of an individual, to deduct greater amounts than employees providing the same or similar services. The measure also addresses the alienation of personal services income through interposed entities. The measure does not apply if the individual or entity is conducting a personal services business.

Broadly, the current amendments will:

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allow certain agents (who satisfy specific criteria) to be treated as having received their personal services income directly from the customers of their principal as a result of providing services directly to those customers;

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allow all taxpayers earning personal services income (even those earning 80% or more from one source) to self-assess against the results test for conducting a personal services business, (which is currently further grounds for the Commissioner to give a personal services business determination). This will ensure that genuine independent contractors are not affected by the measure;

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allow all taxpayers earning personal services income (even those earning less than 80% from each source) to apply to the Commissioner for a personal services business determination (based on the available grounds for a determination); and

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make technical amendments to ensure that the personal services income rules work as intended.

These amendments are designed to ease compliance costs for taxpayers under the measure.

Date of effect: The amendments will, like the original provisions, generally apply to the 2000-2001 income year and later years. As these measures are favourable to taxpayers it is appropriate that they start from the same date. The amendments do not place any compliance obligations on taxpayers.

Some technical amendments apply prospectively - items 4A to 4C (clarification of the 80% test) and 16M (preventing a double benefit for promptly paid salary or wages) apply to the 2002-2003 income year and later income years. Items 16C to 16K (consequential amendments to the penalties for directors of non-remitting companies) apply from the date of Royal Assent.

Proposal announced: The majority of the amendments were announced in Treasurers Press Release No. 47 of 29 June 2001 and No. 51 of 9 July 2001. The other amendments are technical in nature and were not announced before being introduced to the House of Representatives.

Financial impact: The amendment relating to certain agents is expected to result in a revenue loss of $35 million for the 2000-2001 financial year and for each following year.

Clarifying that a taxpayer will satisfy the results test if 75% of their personal services income satisfies all the conditions in the test is expected to result in a revenue loss of $1 million for the 2000-2001 financial year and for each following year.

The other amendments will have no effect on revenue.

Compliance cost impact: The amendments will significantly reduce compliance costs for many taxpayers earning personal services income, especially those able to satisfy the results test.

Summary of regulation impact statement

Regulation impact on business

Impact: Low.

Main points:

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The amendments were announced by the Government following concerns expressed by industry associations and commentators about the impact of the legislation on independent contractors.

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The amendments are intended to reduce compliance costs for taxpayers and provide access to personal services business determinations for all taxpayers.