Bills Digest No. 179 2001-02
Taxation Laws Amendment Bill (No. 4) 2002
WARNING:
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Bill.
CONTENTS
Passage History
Purpose
Background
Main Provisions
Endnotes
Contact Officer & Copyright Details
Passage History
Taxation Laws Amendment Bill (No. 4)
2002
Date Introduced:
30 May 2002
House: House of Representatives
Portfolio: Treasury
Commencement:
The majority of the
Bill commences on Royal Assent, however the various measures have
differing application dates which are detailed below.
Purpose
To:
- make largely technical amendments to the thin capitalisation
regime
-
- introduce a statutory maximum life for certain assets for
depreciation purposes
-
- provide tax exemptions for temporary residents for certain
earnings not related to their Australian employment, and
-
- provide roll-over relief from capital gains tax for certain
transfers from fixed trusts to companies.
Background
As there is no central theme to the Bill the
background to the various measures will be described below.
Thin capitalisation refers to the rules relating
to the allowance of interest deductions on borrowings and acts to
disallow deductions to the extent that borrowings exceed the
allowable ratio to capital. The rules aim not only to discourage
excessive borrowings but also to prevent artificial arrangements
where principally foreign corporations arrange their affairs so
that their Australian operations have high debt levels to take
advantage of the available deductions.
From 1 July 2001 a new thin capitalisation
regime was introduced which extended the regime to domestic
Australian companies and extended the definition of which debt is
covered by the rules. The basic rule for general (other than
financial companies) is that they may claim a deduction only for
the interest on borrowings which is less, or equal to, a 3:1 ratio
of debt to capital.(1)
The measures contained in the Schedule
1 of the Bill are of a technical nature and reflect the
first years experience of the operation of the new regime and do
not implement new policy. In particular, Schedule
1 inserts definitions of controlled foreign entity debt
and equity which are to be used when calculating the overall
position of the entity claiming the deduction. According to the
explanatory memorandum to the Bill the measures will prevent
revenue loss of $50 million in 2002-03 and $30 million annually
from 2003-04 onwards.(2)
The explanatory memorandum to the Bill provides
a description of the technical amendments contained in
Schedule 1 of the Bill.
Owners of capital plant and equipment are able
to claim a deduction for the cost of the item based on the value of
the item and its effective life. There are also special provisions
which allow for accelerated depreciation allowing a greater
deduction than would otherwise be available.
The effective life of an asset is based on
either the taxpayer s claim or the Commissioner s ruling as to the
effective life of an asset. In either case the determination is to
be based on the period for which the asset could be used having
regard to wear and tear, assuming normal maintenance. The Income
Tax (Effective Life of Depreciating Assets) Amendment Determination
2002 (No. 2) proposes to increase the effective life for a number
of assets acquired after 1 July 2002. The assets include cars;
aeroplanes and helicopters; gas distribution and transmission; gas,
oil, condensate, LNG, LPG manufacturing; and assets used in gas and
oil production. The determination substantially increases the
effective life of such assets, reducing the amount of depreciation
which may be claimed each year.
On 14 May 2002 the Minister for Revenue and
Assistant Treasurer announced that statutory caps would be placed
on the effective life of the assets mentioned above to ensure
depreciation deductions .remain appropriate following reviews of
the effective life of these assets by the Commissioner of Taxation.
(3) It was also stated:
The new statutory life caps will provide
certainty for the industries concerned, and provide an appropriate
balance between meeting the needs of those industries as well as
maintaining the integrity of the effective life depreciation
system.(4)
The statutory caps range from substantial
increases compared to the current effective life for some goods, eg
aeroplanes, marginal increases for others and others which are the
same as the current life. According to the explanatory memorandum
to the Bill the statutory life amendments will increase revenue by
approximately $825 million between 2002 and 2012 compared to
current effective lives but result in a cost to revenue of
approximately $2.2 billion over the same period when compared to
the ATO proposals.(5)
Division 40 of the Income Tax Assessment Act
1997 (ITAA97) deals with capital allowances and provides for
an entity to choose to depreciate an asset either by the life
determined by the Commissioner or that determined by the taxpayer
(section 40-95). Part 1 of Schedule
4 of the Bill will amend section 40-95 and related
sections to provide that:
-
- where an asset has been depreciated by an owner according to
the Commissioner s effective life determinations
-
- the ownership changes after 1 July 2002, and
-
- the depreciation would, but for these measures, become subject
to the new ATO ruling
the new owner is required to use the new
effective life calculations contained in proposed section
40-102.
Application: From 1 July 2002 (item
15).
A recommendation of the Review of Business
Taxation A Tax System Redesigned (Ralph Report) was that
certain income of people who are working in Australia on temporary
entry visas, of 4 years or less, be exempt from tax. The major
recommendation was that income from foreign sourced assets owned
prior to their residence in Australia be exempt.
The recommendation was designed to enhance the
position of previous non-residents who had come to work in
Australia, such as high level executives, and so improve the
chances of such people taking up employment in Australia. The Ralph
Report stated:
On taking up residence in Australia executives
and other key personnel are likely to own overseas assets and
housing that will produce income that will be taxable in Australia
even if the executives are here for less than four years. Taxing
the income from these pre-resident investments at Australia s top
rate of personal tax could increase the overall tax burden and
deter executives from taking up opportunities in
Australia.(6)
A contrary argument is that if the overseas
executive is to provide a benefit to an entity, principally
companies, it is the responsibility of that entity to provide
sufficient conditions to attract the desired person to match the
benefit they would provide. Whether it should be the Commonwealth
revenue which effectively pays to make the Australian position more
attractive to the non-resident is open to debate.
After initially endorsing the recommendations
contained in the Ralph Report, the Treasurer announced on 15
October 2001 that the exemption from tax would be extended to cover
foreign sourced income of eligible temporary residents from assets
regardless of when they were acquired (ie. the exemption would
apply to income from foreign assets acquired while the person was
working in Australia). The Treasurer also announced a number of
related measures, including that no capital gain or loss would
arise from the disposal of assets which did not have a sufficient
connection to Australia. The measures were seen as assisting to
attract skilled foreign workers and assisting in retaining and
attracting corporate headquarters to Australia.(7)
The explanatory memorandum to the Bill estimates
that the measures will cost between $40 and $50 million per
year.(8)
Item 9 of Schedule 3 will
insert a new section 51-52 into the ITAA97 to
exempt the foreign sourced income of temporary residents from
income tax. The exemption will not apply to foreign income earned
as a result of employment undertaken or services provided while a
temporary resident.
Item 11 will insert a
new section 118-575 into the ITAA97 to exempt
capital gains and losses for temporary residents derived from a
source outside Australia. As well, the gain or loss must not have a
necessary connection with Australia . This term is defined in
section 136-25 of the ITAA97 and, in addition to things with a
physical attachment to Australia, includes shares in resident
public companies and units in resident unit trusts where the shares
or units represent at least 10% of the value of the company or
trust.
Application: From 1 July 2002 (item
14).
Roll-over relief involves relief from capital
gains tax (CGT) when assets are transferred from one ownership
structure to another without there being a change in the underlying
interests in the ownership of the assets or the income from the
assets subject to the roll-over. The concept is not new and, for
example, currently applies for the transfer of interests from an
individual, trustee or partnership to a company where the company
is wholly-owned by those who had interests in the former body and
there is no change in the ratio of those interests (Division 122 of
the ITAA97). The result of the roll-over relief is that a capital
gains tax event does not arise on the disposal of the entity which
transfers assets to a company and the cost base and indexed cost
base are transferred to the new company to determine any future
capital gains tax liability.
As part of the government s response to the
Ralph Report s recommendation for the introduction of an entity
taxation regime (the introduction of which appears to have been
postponed indefinitely), it was announced that roll-over relief
would be made available where assets are transferred from a fixed
trust to a company, provided that all assets were transferred and
the trust ceased to exist after the transfer was
completed.(9)
The explanatory memorandum to the Bill estimates
that the measure will have a small but unquantifiable impact on
revenue.(10)
Schedule 2 of the Bill will
insert a new Subdivision 124-N into the ITAA97
dealing with roll-overs from fixed trusts to companies. To be
eligible for roll-over relief:
-
- the company to which the assets are transferred must not be tax
exempt, must never have carried on commercial activities, have no
CGT assets of its own other than small amounts of cash or debt and
have no losses
-
- after the assets have been transferred, each entity which owned
an interest in the trust must have an interest in the same
proportion in the company and the market value of the interests
held must be substantially similar, and
-
- the company must be an Australian resident (proposed
section 124-860).
Both the trust and company must chose to have
the roll-over relief apply (proposed section
124-865).
If roll-over relief is elected, capital gains
and losses are to be ignored, the cost base of an asset transferred
and pre-CGT assets will retain their CGT exemption
(proposed section 124-875).
Application: The amendments will apply from 11
November 1999, the date of the original response to the Ralph
Report (item 17).
-
- For further information on the previous and current
thin-capitalisation regimes, refer to the Bills
Digest for the New Business Tax System (Thin
Capitalisation) Bill 2001, No. 16, 2001 02.
- Explanatory memorandum to the Bill, p. 3.
- Minister for Revenue and Assistant Treasurer, Press
Release, 14 May 2002.
- ibid.
- Explanatory memorandum, p. 7.
- Review of Business Taxation A Tax System Redesigned,
p. 675.
- Treasurer, Press Release, 15 October 2001.
- Explanatory memorandum, p. 5.
- Treasurer, Press Release, 11 November 1999.
- Explanatory memorandum, p. 4.
Chris Field
26 June 2002
Bills Digest Service
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ISSN 1328-8091
© Commonwealth of Australia 2002
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