Bills Digest No. 122 2002-03
New Business Tax System (Consolidation and Other
Measures) Bill (No. 2) 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
New Business Tax System
(Consolidation and Other Measures) Bill (No. 2)
2002
Date Introduced:
12 December 2002
House: House of Representatives
Portfolio: Treasury
Commencement:
The amendments
contained in the Bill have numerous commencement dates depending on
the time of commencement of previous Acts dealing with the
consolidation regime. However, the measures will effectively apply
from 1 July 2002, the date of the commencement of the consolidation
regime.
Purpose
The Bill will make a number of technical
amendments to the consolidation and demerger regimes, principally
associated with the value to be assigned to assets of entities
entering or leaving a consolidated group.
The Bill will also extend the simplified
imputation regime to payments made by venture capital entities to
superannuation providers.
Background
This Bill is the fourth part of a package of
Bills dealing with the consolidation of company groups. The
consolidation regime involves some very technical and complex
rules, particularly regarding the valuation of assets in a
consolidated company group. The consolidation measures have applied
since 1 July 2002 and this Bill will, as noted above, generally
apply from that date.
There has been a substantial degree of
consultation with industry on the measures being introduced.
Industry support is based on the reduced costs in complying with
taxation requirements by being able to treat group companies as a
single consolidated entity rather than each company member of the
group having to submit individual tax information.
The Parliament s response to the consolidation
regime can perhaps be best summarised in the Senate s Economic
Legislation Committee s report on an earlier consolidation Bill.
(New Business Tax System (Consolidation, Value Shifting, Demergers
and Other Measures) Bill 2002.) In it s report on that Bill the
Senate Committee noted that there was strong industry support for
the measures to be enacted and it s commencement from 1 July 2002,
but also found that there were concerns about some of the details
contained in that legislation. The Committee noted the technicality
of the legislation and that while The Committee is reluctant to
endorse legislation that it knows needs rectification
(1) it recommended that the Bill be passed but that:
.the Government give a clear undertaking that it
will continue to monitor and review the operation of this
legislation and, in particular, in consultation with the business
sector address the problems that have been documented in this
report.(2)
Given the very technical nature of the
consolidation legislation and the willingness of the Parliament to
pass previous consolidation legislation while noting that it would
need later rectification, some of which is contained in this Bill,
this Digest will only provide a broad overview of the measures
contained in the Bill. It may also be noted that the 30 Schedules
to the Bill contain no major changes to the consolidation or
demerger rules, and that the changes being made to the simplified
imputation system (see below) also do not introduce new policy.
For a general background on the consolidation
regime refer to the Bills Digests for the New Business Tax System
(Consolidation) Bill 2002 (No.
173, of 2001 02) and the New Business Tax System
(Consolidation, Value Shifting, Demergers and Other Measures) Bill
2002 (No. 56,
of 2002 03).
Where an initial consolidation occurs or an
entity joins an existing consolidated group, it is necessary to set
a tax value (known as the tax cost) on the assets transferred to
the consolidated group principally for capital gains tax purposes
(largely to be able to set a cost base for the calculation of a
capital gain or loss on subsequent disposal). The rules for setting
the tax cost are contained in Division 705 of the Income Tax
Assessment Act 1997 (ITAA97) which contains a number of
complex formulas dealing with the various methods in which assets
may be transferred into a consolidated group. Schedule
1 will amend various provisions of Division 705 to ensure
consistency in the valuation calculations and correct some
technical anomalies.
Schedule 4 inserts a new
subdivision 705-E into the ITAA97, which deals with cases where an
error has been made in calculating the tax cost of an asset. If it
would be unreasonable for the tax cost to be recalculated for the
reasons contained in proposed section 705-315 (eg
the miscalculation is relatively small and it would be difficult to
make the recalculation) and the error was not due to evasion or
fraud, then:
-
- a capital gains tax (CGT) event will be taken to have occurred
and
-
- if the amount has been overstated a capital gains will be taken
to have occurred and
-
- if the amount has been understated a capital loss will be taken
to have occurred (proposed section 104-525).
The adjustments will compensate for any under or
over payment of CGT which would subsequently occur on disposal of
the asset.
The provisions will reduce the costs involved in
adjusting for relatively minor over or under estimation of the tax
cost of an asset.
The ITAA97 contains special rules for life
insurance companies, with differing categories of income taxed at
different rates and some income being exempt. Under the
consolidation rules as they currently stand, if a life insurance
company became a subsidiary member of a consolidated group the head
company of the group would lose the benefits available to the life
insurance company unless it was also a life insurance company. This
effectively greatly restricts the ability of life insurance
companies to join consolidated groups. Schedule 6
provides that the head company is to be treated as a life insurance
company if one or more life insurance companies are subsidiary
members of the group. The Schedule also provides that an entity
cannot be in the same consolidated group as a life insurance
company if the life insurance company has an interest in the entity
and some of those interests fall within a category which would be
exempt income for the life insurance company. The latter measure is
designed to prevent the earlier change from being exploited.
Schedule 7 of the Bill deals
with the interaction of the consolidation regime and other tax
laws. The main feature of the Schedule is determining how the
general value shifting (GVS) rules apply to the consolidation
regime in order to minimise the opportunity for tax effective
arrangements as part of a consolidation. The Schedule deals with a
number of situations where the calculation of the tax cost,
transferred losses and other issues could be used to produce a more
favourable tax result for the consolidating, or consolidated,
group. More specifically:
-
- the situations where losses are transferred and the same
business test has not been met (where, depending on the
circumstances, adjustments can be made to the tax cost of
transferred assets), and
-
- the value of assets when an entity leaves a consolidated
group.
The provisions are very technical and largely
address the CGT implications of the GVS rules in the above
circumstances. They also contain de minimus rules so that they do
not apply until a threshold value is reached to minimise compliance
costs.
The consolidation regime is based on the concept
that the head entity bears the taxation consequences for the
consolidated group. Schedule 9 will strengthen
this regime by providing that only the head company can hold a
foreign dividend account and that foreign dividend account credits
and debits held by subsidiary companies are to be transferred to
the head company, which will maintain the single account for the
group. The head company will also be responsible for any
withholding tax implications involved with foreign dividend
accounts.
Other measures relating to consolidation are of
a more specialised and technical nature and include provisions
relating to:
-
- Modification of the loss provisions for the treatment of MEC
(multiple entry consolidated) groups (groups of resident companies
all of which are wholly-owned by a foreign company and which have
consolidated) Schedule 13.
-
- Who may claim franking credits or debits when a subsidiary
leaves a group Schedule 14.
-
- Modification of transitional rules Schedules 16 to
18, and
-
- Modification of the pay as you go rules applicable to head
companies of consolidated groups and MEC groups Schedule
24.
For a general background of the activities of
venture capital entities and their taxation treatment, refer to the
Bills Digest for the Taxation Laws Amendment (Venture Capital) Bill
2002 (No. 78,
of 2002 03).
Franking credits form part of the dividend
imputation system and, to the extent of the franking credits
available, allows companies to pass dividends to investors which
then have their taxation reduced by the amount of the franking.
Pooled development funds (PDF) are the vehicles used for investing
in venture capital opportunities. Under the existing imputation
rules, superannuation providers receive franking credits directly
from the relevant PDF while other investors receive concessional
tax treatment on returns from their investments. As superannuation
providers are already subject to concessional tax treatment on
their income, without the franking credits they would have no
incentive to invest in the riskier venture capital operations.
The simplified imputation regime (SIR) was
introduced for most entities from 1 July 2002, but the new rules
for venture capital entities were delayed and are contained in this
Bill. However, they will also apply from 1 July 2002. The SIR does
not introduce new policy or substantial changes to the operation of
the imputation system but simplifies its administration.
Schedule 28 introduces the SIR
for venture capital PDFs. As the rules do not introduce new policy
and extend the implementation of the existing SIR, the provisions
will not be discussed in this Digest.
-
- Senate Legislation Committee, New Business Taxation System
(Consolidation, Value Shifting, Demergers and Other Measures) Bill
2002, October 2002.
- Ibid.
Chris Field
5 March 2003
Bills Digest Service
Information and Research Services
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ISSN 1328-8091
© Commonwealth of Australia 2003
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