Second Reading SpeechMr Ross Cameron (Parliamentary Secretary to the Treasurer)
That this bill be now read a second time.
Mr Speaker, in this year's budget the Treasurer announced the outcome of the review of international tax arrangements. The government initiated this review because we understand that the future of the Australian economy is fundamentally linked to global prosperity and to Australians being a part of that prosperity. We want our tax system to help that and not hinder it. So, in the budget over 30 initiatives designed to modernise the international tax system were foreshadowed. These initiatives will help Australian companies compete abroad and boost Australia's status as an attractive place for investment.
These reforms are not just about how we tax current international business transactions. The reforms are also about business that is not going on because some of our current international tax laws impede genuine business decisions, making it more difficult for our businesses to expand into global markets and to access foreign capital. And it is not just about the big end of town-our small and medium businesses are more and more globally orientated. These reforms will free up new and emerging businesses so they can engage internationally and create more jobs for Australians.
The government delivered on the first of these reforms with the signature of a new tax treaty with the United Kingdom which was enacted by the parliament last week. That treaty reflects the policy position announced following the review.
The bill that I am introducing today covers the first of the foreshadowed legislative reforms. These measures will reduce unnecessary tax compliance burdens for the superannuation and managed funds industries. The government intends to bring forward more of the announced reforms in the new year.
This bill modifies the foreign investment fund rules, which are designed to prevent the deferral of Australian tax by accumulating passive income offshore. However, these rules as they currently stand impose significant compliance costs-resulting in higher costs and lower returns for investors. These compliance costs also disadvantaged internationally focused Australian funds seeking foreign investment, compared to foreign funds. These rules are to be changed to provide a better balance between their integrity objectives and the compliance cost burden for taxpayers.
Compliance costs will also be reduced by increasing the threshold for the 'balanced portfolio' foreign investment fund exemption from 1 July 2003. The increase from five per cent to 10 per cent will allow Australian managed funds and investors to diversify their offshore investment portfolios without taking on excessive compliance costs associated with the foreign investment fund rules.
Superannuation entities and certain other concessionally taxed entities will be exempted from the foreign investment fund rules from 1 July 2003. As these entities currently have a low tax rate, their investment decisions are unlikely to be biased towards investment in the kinds of offshore investment vehicles that the foreign investment fund rules are designed to target. It is therefore not necessary to subject this industry to the compliance costs associated with the foreign investment fund rules.
Companies carrying on business in Australia are currently able to receive an exemption from withholding tax on interest payments made to non-residents on debentures and other securities that satisfy a 'public offer test'. However, other borrowers, including managed funds organised as unit trusts, are not similarly exempted from withholding tax. This bill removes this distortion and reduces compliance costs by extending the withholding tax exemption to public unit trusts and certain other unit trusts.
This bill also amends the controlled foreign company rules, which are designed to prevent deferral of Australian tax on certain income earned by foreign subsidiaries of Australian taxpayers. The amendments will remove the need for taxpayers to consider whether certain foreign source income derived by a controlled foreign company in a country with a broadly comparable tax system is to be included in their assessable income. As a future safeguard, if specific types of foreign source income raise integrity concerns, this bill permits regulations to be made attributing such income under the controlled foreign company rules.
This controlled foreign company change is part of a wider measure arising from the review of international tax arrangements that will pare back the attributable income of controlled foreign companies in broad exemption listed countries. This will principally be achieved by changes, in the first half of 2004, to the current income tax regulations.
I commend this bill and present the explanatory memorandum.
Debate (on motion by Ms Roxon) adjourned.
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