House of Representatives

Explanatory Memorandum

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

General outline and financial impact

Loss recoupment rules for companies

Schedule 1 to this Bill reforms the loss recoupment rules for companies by:

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introducing a new modified continuity of ownership test (COT) to replace the existing modified COT in Division 166 of the Income Tax Assessment Act 1997 ;

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removing the same business test (SBT) for companies whose total income is more than $100 million in the year of recoupment; and

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removing certain anomalies and clarifying some aspects of the existing law.

Companies that are widely held are eligible for the new modified COT, which:

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requires testing for continuity of ownership at the end of each income year, following a takeover bid or similar transaction and after a substantial capital raising; and

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contains tracing rules that simplify the tracing of ownership interests.

Date of effect: The new modified COT applies to losses incurred in income years commencing on or after 1 July 2002. It also applies to certain eligible pre-1 July 2002 losses.

The SBT amendments apply to losses incurred in income years commencing on or after 1 July 2005.

The other amendments to the loss recoupment rules have a variety of application dates.

Proposal announced: This measure was announced in the former Minister for Revenue and Assistant Treasurer's Press Release No. C021/04 of 7 April 2004 and the Minister for Revenue and Assistant Treasurer's Press Release No. 011 of 11 February 2005.

Financial impact: The financial impact of this measure is unquantifiable. There is expected to be an unquantifiable cost to revenue over the forward estimates period because the new modified COT takes effect from an earlier date than the removal of the SBT for large companies.

Compliance cost impact: This measure is expected to reduce compliance costs. It will be easier for companies that are eligible to apply the new modified COT to test for continuity of ownership. Large companies will no longer be able to apply the SBT if they fail the COT.

Summary of regulation impact statement

Regulation impact on business

Impact: The main impact will be on widely held companies whose total income is more than $100 million.

The changes to the COT will impact on widely held companies and companies owned by widely held companies.

The changes to the SBT will impact on large companies.

The companies that are affected by the removal of the SBT are those most likely to benefit from the simplified COT.

Main points:

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Uncertainty and compliance costs associated with applying the company loss recoupment rules to widely held companies and companies owned by widely held companies will be reduced.

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Administrative costs for the Australian Taxation Office will be reduced as it is expected that there will be fewer requests by taxpayers for rulings and company audits will be simplified.

Conduit foreign income

Schedule 2 to this Bill provides tax relief for conduit foreign income. Conduit foreign income is generally foreign income received by a foreign resident via an Australian corporate tax entity. This measure ensures those amounts are not taxed in Australia when distributed by the Australian corporate tax entity to its foreign owners. Generally, the measure only applies to foreign income that is ordinarily sheltered from Australian tax when it is received by the Australian corporate tax entity.

Chapter 5:

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describes how a corporate tax entity will calculate an amount of conduit foreign income; and

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explains how conduit foreign income can pass through a series of Australian corporate tax entities to ultimate foreign owners free of Australian tax.

Date of effect: The amendments made by this measure will allow an entity to calculate the amount of its conduit foreign income from the beginning of its first income year that starts on or after 1 July 2005.

Transitional rules will affect the first year of this calculation for all existing entities. They also ensure that an entity can only declare an amount to be conduit foreign income where that declaration is made on or after the date of Royal Assent.

Proposal announced: This measure was announced in the Treasurer's Press Release No. 32 of 13 May 2003.

Financial impact: The cost to revenue of this measure is expected to be $5 million in 2005-06, $20 million for each of the following 2 years and $25 million per annum thereafter.

Compliance cost impact: There may be an increase in compliance costs for Australian corporate tax entities that choose to access the benefits of this measure.

Where corporate tax entities choose to pass on conduit foreign income amounts to their members, the benefits conferred by the conduit foreign income rules would outweigh the additional compliance costs incurred.

Summary of regulation impact statement

Regulation impact on business

Impact: This measure impacts on Australian corporate tax entities making distributions to non-resident owners out of foreign profits declared to be conduit foreign income.

Corporate tax entities that distribute amounts declared to be conduit foreign income to other Australian entities are also affected. These entities are affected as they will be required to determine the amount of their conduit foreign income.

Main points:

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Providing tax relief for a broader range of foreign income than the current foreign dividend account rules further enhances the ability of Australian entities with foreign investments to compete for foreign capital. This should encourage those entities to remain Australian residents if their foreign shareholding becomes significant. This measure also improves the attractiveness of Australia as a location for regional holding companies.

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There may be additional compliance costs for entities in determining and distributing their conduit foreign income. These costs have been minimised to the extent possible while still having regard to integrity and effectiveness concerns.

Denial of deductions for illegal activities

Schedule 3 to this Bill amends the Income Tax Assessment Act 1997 to deny deductions for losses and outgoings to the extent that they are incurred in the furtherance of, or directly in relation to, activities in respect of which the taxpayer has been convicted of an indictable offence. Similarly, the capital gains tax provisions will be amended so that losses and outgoings incurred in relation to illegal activities in respect of which the taxpayer was convicted of an indictable offence do not form part of the cost base or reduced cost base for capital gains purposes. This will ensure that no capital loss or reduced capital gain can arise from such expenditure.

Date of effect: This measure applies to losses and outgoings incurred after 29 April 2005.

Proposal announced: This measure was announced in the Treasurer's Press Release No. 038 of 29 April 2005.

Financial impact: Unquantifiable, but expected to be minor.

Compliance cost impact: Insignificant.

Copyright in film to be included in effective life depreciation

Schedule 4 to this Bill amends the Income Tax Assessment Act 1997 to include copyright in a film in the general effective life depreciation of the uniform capital allowances provisions in the income tax law.

This measure will allow taxpayers to choose either the Commissioner of Taxation's (Commissioner) 'safe harbour' effective life determination or, self assess the effective life of their copyright in a film.

When depreciating their copyright in a film using effective life, taxpayers will have the choice of using the prime cost method or the diminishing value method.

Date of effect: This amendment applies to copyright in a film acquired on or after 1 July 2004.

Proposal announced: This measure was announced by the Government as part of the 2005-06 Budget on 10 May 2005.

Financial impact: This measure is estimated to cost the revenue as follows:

Compliance cost impact: This measure is expected to decrease compliance costs by providing a shorter write-off period under the general effective life depreciation than the current 25-year period.

Summary of regulation impact statement

Regulation impact on business

Impact: This measure will have favourable implications for film producers and investors of films that do not qualify as Australian films.

Main points:

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Taxpayers may write-off their copyright expenses in a film over a period based on its effective life rather than the current statutory 25-year period for copyrights.

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Taxpayers may choose the Commissioner's safe harbour effective life or, self assess the effective life of their copyright in a film.

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This measure will increase slightly the administrative costs for the Australian Taxation Office as the Commissioner has to determine a safe harbour effective life as soon as possible after the passage of this legislation.

Relief for employee share scheme participants in the event of a corporate restructure

Schedule 5 to this Bill amends the Income Tax Assessment Act 1936 (ITAA 1936) to allow employee share scheme (ESS) participants - who acquire shares in a scheme for the acquisition of shares by employees who are assessed under section 26AAC of the ITAA 1936 - to treat the new shares or rights they are issued because of a corporate restructure as a continuation of their old shares or rights.

These amendments also allow ESS participants - who have made an election under Division 13A of the ITAA 1936 to be taxed upfront - to treat the new shares or rights they are issued because of a corporate restructure as a continuation of their old shares or rights.

Amendments are also made to the Taxation Laws Amendment Act (No. 3) 2003 , the Income Tax Assessment Act 1997 and the Income Tax (Transitional Provisions) Act 1997 to ensure the capital gains tax provisions in those Acts reflect the amendments to the ESS provisions.

Date of effect: This amendment will apply to corporate restructures which occur on or after Royal Assent.

Proposal announced: This measure has not previously been announced.

Financial impact: The cost to the revenue is unquantifiable but expected to be small.

Compliance cost impact: This amendment is expected to have a minimal impact on compliance costs.

Allow the offsetting of a late payment of contributions against an employer's superannuation guarantee charge

Schedule 6 to this Bill amends the Superannuation Guarantee (Administration) Act 1992 to allow the offsetting of a late payment of contributions against an employer's superannuation guarantee charge.

Date of effect: This measure applies to late payments of contributions made on or after 1 January 2006.

Proposal announced: This proposal was announced in the 2005 Budget on 10 May 2005.

Financial impact: This measure will have a cost to revenue as follows:

Compliance cost impact: An employer may experience some cost in providing evidence required by the Commissioner of Taxation to prove the relevant superannuation contributions had been paid to the superannuation fund or retirement savings account within the specified offset period.

Applying superannuation guarantee to back payments of wages

Schedule 7 to this Bill amends the Superannuation Guarantee (Administration) Act 1992 to clarify that mandatory employer contributions under the superannuation guarantee arrangements are payable on wages or salary paid in a quarter following the termination of an employment relationship.

Date of effect: This measure applies to payments made on the first day of the first full quarter after Royal Assent.

Proposal announced: This proposal was announced in the 2005-06 Budget on 10 May 2005.

Financial impact: This measure will have a cost to revenue as follows:

Compliance cost impact: Nil.