Bills Digest No. 32 2003-04
Taxation Laws
Amendment Bill (No. 7) 2003
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
Concluding Comments
Endnotes
Contact Officer & Copyright Details
Passage History
Taxation Laws
Amendment Bill (No. 7)
2003
Date Introduced:
26 June 2003
House: House of Representatives
Portfolio: Treasury
Commencement:
The Bill contains
numerous commencement dates, many of which differ from the date the
measure will apply from. The application dates are dealt with
below.
To:
-
enable entities which are eligible to receive tax exempt gifts
to be listed by regulation
-
allow a company with foreign losses and which forms part of a
consolidated group to retain the losses itself for a transitional
period
-
alter the definition of supply for goods and services tax (GST)
purposes so that certain activities performed in the formation of a
consolidated group, or for a member leaving the group, will not
attract GST implications
-
allow capital gains tax (CGT) roll-over relief during the
transfer to the new financial services reform (FSR) regime, and
-
alter the treatment of certain overseas company structures so
that they are taxed in a similar basis in Australia as they are in
the country where they were formed.
Background
As there is no central theme to the Bill the
background to the various measures will be discussed below.
For a gift or donation to be deductible a
number of conditions must be met, most of which relate to status
and purpose of the entity to which the donation is made. The
Income Tax Assessment Act 1997 (ITAA97) contains both
general categories of entities which are eligible for deductible
donations (such as public or not for profit hospitals and public
benevolent institutions) but donations to such entities will only
be allowable if the entity is authorised by the Australian Taxation
Office (ATO) to receive deductible donations (such entities are
referred to as an endorsed entity). In addition, ITAA97 lists other
bodies by name and donations to these bodies are also deductible.
The listing of such bodies in the ITAA97 means that the Act must be
amended when bodies are added to, or deleted from, the list.
Additions to or deletions from the list are generally
non-controversial, other than when politically related bodies, such
as certain research institutions and foundations, are involved.
As part of the Government s response to the
Report of the Inquiry into the Definition of Charities and Related
Organisations the Treasurer announced that the Government proposed
to change the listing arrangements for those bodies specifically
listed in the ITAA97, so that from 1 July 2003 these bodies would
be listed in Regulations rather than the Act itself. The reasons
given for the change are reduced administrative costs and the more
timely listing of bodies, while Parliamentary scrutiny is still
provided for by the power of either House of Parliament to disallow
the regulations.(1)
Amendments contained in Schedule
3 of the Bill provide for the continuation of the dual
system of endorsed entities and specifically listed bodies, but
provides for the latter entities to be listed in the Regulations
rather than in the Act itself. The Bill also provides for
conditions to be set for a donation to a listed body to be
deductible, a power which is currently applicable to bodies listed
in the ITAA97 (existing conditions principally relate to the timing
of donations to be eligible for a deduction) (items 3 to
56)).
Proposed subdivision 30FA
contains special provisions relating to regulations made for the
purpose of listing charities, including:
-
providing for the disallowance of regulations (the procedures
and timing are essentially the same as those applying to
regulations generally) (proposed section 30-312),
and
-
except for the first set of regulations, which are to commence
on 1 July 2003, regulations will commence the day after the end of
the period during which they could be disallowed (proposed
subsection 30-312(4)).(2) However, a regulation
which terminates or limits the deductibility of donations to a body
may only have effect up to 60 days before the relevant regulation
is made if there has been a public announcement by the relevant
Minister to that effect before the termination/limitation comes
into force (proposed section 30-314). (Regulations
may have effect from a date before they commence under
proposed paragraph 30-105(2)(b).)
Currently, the ITAA97 allows deductions for
gifts of property valued at more than $5000 to be spread over 5
years. This can be important where tax liability is low as
deductions for gifts to charities cannot be used to create a
refundable tax loss. If the ability to spread deductions over 5
years did not exist the value of the deduction could be lost,
possibly leading to fewer donations. Proposed subdivision
30-DB will extend the ability to spread deductions to
gifts of money, while maintaining existing conditions (which relate
to notification) in relation to some categories of donations
(item 57).
Application: From 1 July 2003
(clause 2).
The recently introduced consolidation regime
allows companies with common ownership to act as a single entity
for tax purposes, including having the head company submit tax
documents for and on behalf of all of the companies in the
consolidated entity. The consolidation regime was introduced from 1
July 2002 and while extensive consultation occurred prior to the
introduction of legislation for the regime, it was acknowledged
during the passage of the various Bills dealing with the new regime
that there would be a need for early amendments as the regime
settled in.(3)
Schedule 5 of the Bill will
insert a new Division 701D into the Income Tax
(Transitional Provisions) Act 1997 dealing with the
transitional period for foreign loss makers. Proposed
section 701D-10 provides that if a number of conditions
are met, a foreign loss maker which would otherwise be a full
member of a consolidated regime may elect to have their foreign
losses treated under existing law for a transitional period of a
maximum of 3 years. The conditions to be met include:
-
the consolidated group came into existence prior to 1 July
2004
-
apart from an election under this proposed section the foreign
loss company would be a full member of the group
-
the head company makes a choice for the proposed section to
apply, and
-
the foreign loss company has been a wholly owned subsidiary of
the head company from 1 July 2002 until the election is made.
The Bill was referred to the Senate Economics
Legislation Committee (the Committee) pursuant to a motion of the
Senate of 13 August 2003 following a recommendation of the
Selection of Bills Committee. One of the main reasons for the
referral was the possible negative revenue implications of the
changes to the consolidation regime in regard to foreign losses
(see below). In evidence given to the Committee on 22 August 2003 a
representative of the Corporate Tax Association of Australia
Incorporated and their advisor outlined the potential problems if
the amendments were not passed (basically that deductions relating
to foreign losses currently allowed would be greatly reduced due to
the pooling of accounts in the head company) and expressed the
views that:
-
in allowing
only a three year transitional measure the proposed amendment was
restrictive and a five year period should be allowed to enable
existing losses to be fully used, and
-
the measure was likely to be revenue neutral or
positive.(4)
The Explanatory Memorandum generally supports
the view that there will be little revenue loss stating:
This measure essentially allows entities with
foreign losses to maintain their existing tax treatment for a
transitional period. The revenue impact is therefore not expected
to be significant.(5)
Some Committee members were not in favour of
the extension of the transitional period to 5 years.(6)
The Committee reported on 10 September 2003. The change to a 5 year
period was rejected and, while indicating that some submissions
wanted minor changes, noted that all submissions were in favour of
the Bill and the Committee recommended that it should be
passed.(7)
Commencement: 24 October 2002
(the same time as relevant provisions of the New Business Tax
System (Consolidation and Other Measures) Act 2003 commenced)
(clause 2).
The concept of a taxable supply is given a
wide definition in the GST regime and includes entering into
various financial agreements and releasing entities from certain
obligations. The consolidation legislation requires that certain
taxable actions be undertaken in the formation of the consolidated
entity while ordinary business activity will require additional
taxable supplies to be made between the entities forming the
consolidated group. Without the amendments contained in
Schedule 6 GST would be payable on arrangements
between the various members forming the consolidated group. Similar
liability would arise when a member quits a consolidated group.
There would also be input tax credits arising within the
consolidated entity to reflect the payment of GST.
The measures contained in the Bill were not
announced prior to the introduction of the Bill and are estimated
in the Explanatory Memorandum to have nil financial
impact.(8)
Item 1 of Schedule 6 will
insert new sections 110-15 to 110-30 into the
A New Tax System (Goods and Services Tax) Act 1999. The new
provisions will exempt from the definition of supply a number of
transactions associated with creating a consolidated group or an
entity leaving the group. The exempt transactions will be:
-
supplies required under the consolidation regime
(proposed section 110-15)
-
entering into a tax sharing agreement on the formation of a
consolidated group (proposed section 110-20)
-
the release of
an entity from an obligation to contribute to the tax liability of
a consolidated group where the entity is leaving the consolidated
group and leaves clear of any liability for the group s tax
(proposed section 110-25), and
-
the entering into of an agreement that distributes tax liability
and economic benefits between the head company and members of the
consolidated group (proposed section 110-30).
Application: To tax periods
starting on or after 1 July 2002 (item 11).
Prior to the introduction of the Financial
Services Reform (FSR) program, the providers of various financial
services were governed under different regimes depending on the
nature of the product dealt with. As a result, institutions which
dealt in more than one type of product found themselves having to
satisfy a number of differing regulatory regimes which increased
compliance costs for the institutions involved. As well, the
differing disclosure rules made it very difficult for consumers to
compare the costs of various products even though the products may
be considered to be alternatives in the market.
The FSR program, which has been implemented
since 2001, replaced the existing regimes with a single regulatory
regime for those who deal with, provide advice on or market
financial products.
Without roll-over relief there would be a
number of capital gains tax (CGT) implications for entities
changing to the new regime, principally related to the value of the
licence/s to conduct financial services. For example, the existing
licences will cease to have value when FSR licences are issued and
this would not only result in a capital loss being incurred but
could also result in pre-September 1985 licences losing their CGT
exempt status as they cease to have effect and the new FSR licence
takes effect. The cost bases for the new FSR licence would also
reflect their recent acquisition rather than the historic cost
bases of the old systems licences.
On 21 February 2003 the Assistant Treasurer
and Minister for Revenue announced that during the transitional
period between the old regime and the FSR regime (11 March 2002 to
11 March 2004) CGT roll-over relief would be available in respect
of intangible assets (principally licences) replaced by another
intangible asset (the new licence). The aim of the amendments is to
remove any impediments to movement to the new FSR
regime.(9)
CGT roll-over relief is a relatively common
occurrence when new taxation rules or asset restructuring occurs
and is designed to prevent consequences where an asset maintains
its same underlining ownership but ownership is transferred to a
new structure either directly as a result of general policy
implementation (as in this case) or through changes in the taxation
treatment of various corporate structures (eg changes in business
taxation).(10) The basic rule with a roll-over is that
any capital gain or loss occurring at the roll-over time is ignored
and the existing cost bases flow through to the new asset. Any
capital gain or loss arising from the future disposal of the
replacement asset is calculated according to the cost bases carried
forward from the old asset and any changes since the new asset came
into being.
The Explanatory Memorandum to the Bill
estimates that the measures will result in a small revenue deferral
.(11)
Schedule 9 deals with
roll-overs during transition to the new FSR regime. The amendments
have the same basic result if an application for relief is made
during the transitional period, ie that any capital gain or loss is
ignored, although the costs of the transition and whether these
cost are added to the cost bases may differ, and that any existing
pre-CGT status will apply to the new asset. In brief the categories
of roll-over relief are:
-
a licence or right to conduct a financial service under the old
regime is replaced by a licence under the FSR regime which relates
to the performance of some or all of the functions covered by the
original licence and the licences are held by the same owner. In
such cases, the costs of acquiring the new assets will be included
in their cost bases (proposed sections 124-880 -
124-895), and
-
a new owner has acquired an existing licence/right and has
applied for, and been granted, a FSR licence. Their CGT status will
be as described above, with any amount paid to acquire the new
assets being spread amongst the assets acquired (proposed sections
124-900 124-920).
The transition period may be extended by the
Australian Securities and Investments Commission (ASIC) beyond the
10 march 2004 ending date. Proposed sections 124-925 and
124-930 provide that if the date is extended by ASIC then
the transitional period for the purposes of roll-over relief will
also continue until the end of the period specified by ASIC.
Application: To CGT events
occurring on or after 11 March 2002 (item 17).
The amendments regarding foreign hybrids were
announced by the Assistant Treasurer and Minister for Revenue in a
Press Release dated 8 April 2003 and deal with the situation where
certain business structures used overseas are taxed on a different
basis in the country they are formulated in and Australia. The
rules are highly technical and also deal with the treatment of
foreign hybrids by Australian foreign taxation rules, principally
those dealing with controlled foreign companies (CFC) and foreign
investment funds (FIF). Due to the technical nature of the
amendments only a general view of their application will be
provided in this Digest. For a more technical examination of the
rules readers are referred to the Explanatory Memorandum to the
Bill and the Treasury explanation of the proposed
rules.(12)
Under other countries tax rules, structures
which are treated as corporations in Australia for tax purposes,
with the tax imposed on the separate corporate entity, can be
treated as partnerships with the taxation consequences being on the
individual in a similar manner as partnerships are taxed in
Australia. Examples given of such entities are limited liability
partnerships in the US and UK and, perhaps more importantly,
limited liability companies in the US which are treated as
partnerships for the purposes of US tax law (such entities are the
foreign hybrids ).
The difficulties with the different
classification between Australia and other countries arises with
the application of the CFC and, to a lesser degree, FIF rules where
attributable income and taxation paid in other countries depends on
the classification of the foreign entity earning the income or
paying the tax. While the purpose of the CFC and FIF rules is to
prevent tax avoidance by residents diverting income to low taxed
foreign tax regimes (principally by levying additional tax on
tainted income which was subject to lesser tax rates), it is
possible for an entity to be classified as having a certain
structure in one tax jurisdiction (eg as a limited liability
company) but for this classification not to be recognised in
Australia. In such cases it is possible that the tax paid in the
original jurisdiction will not be recognised in Australia, leading
to the double taxation of profits if they are returned to
Australia. It has been reported that the likelihood of double
taxation has operated to prohibit a number of Australian companies,
such as CSR, Lend Lease and Westfield, from repatriating
profits.(13)
Changes to the treatment of foreign hybrids
were detailed by the Assistant Treasurer and Minister for Revenue
on 8 April 2003. It was announced that such entities would be
treated as partnerships, rather than companies, for Australian
taxation purposes so long as they are also subject to the CFC or
FIF rules. This will allow their prior tax treatment to be taken
into account in determining any Australian tax payable and should
remove the possibility of double taxation of profits.
While interests in foreign hybrid CFCs will
automatically fall within the new rules, holders of investments in
foreign hybrid FIFs must elect to have the new rules apply. The
difference is based on the expected amount of knowledge of the
operations of the foreign hybrid involved. The argument is that a
small investor in a FIF will generally not have the information to
act as a partner for tax purposes so that they will automatically
be excluded from being considered a partner, but will have the
option of being treated as a partner if they so elect.
Item 15 of Schedule 10 will
insert a new Division 830 into the ITAA97. A
foreign hybrid may be either a:
-
foreign hybrid limited partnership basically an entity formed in
a foreign country that is taxed as a partnership in that country,
is not an Australian resident during the tax year and is a CFC or
an election has been made to be treated under these rules
(proposed section 830-10), or
-
foreign hybrid company a company that is formed in the USA and
treated as a partnership under their tax laws which at no time
during the year under consideration was a resident of Australia,
and was a CFC during the year (proposed section
830-15).
Where a company is to be treated as a
partnership, the interests in the partnership will be in the same
proportions as the interests in the company (proposed
subdivision 830-B). As the company is still limited in
liability for general purposes (the company is only treated as a
partnership for tax purposes) there will also be a limit placed on
the capital and revenue losses which may be claimed by the deemed
partnership. Such items may only be claimed up to the extent of the
partner s loss exposure amount . In brief, this will be equal to
the long term (over 180 days) contributions made to the entity less
repayable loans and the relevant proportion of losses made by the
entity (proposed section 830-60).
When an entity becomes, or ceases to be, a
foreign hybrid, it is necessary to value the interests of the
various members of the partnership/company. For a hybrid company,
this will be based on their respective tax costs which are to be
calculated in accordance with proposed subdivision
830-D. Basically this will reflect the taxpayer s
percentage interest in the entity that would be available if the
entity was wound-up. If the hybrid is a partnership, the tax cost
will be based on the proportional interest held in the various
assets.
The ability to elect that an interest in a FIF
be treated as an interest in a foreign hybrid is dealt with in
proposed section 485AA of the ITAA36. The taxpayer
may, at the end of a tax year, elect that such an interest be
treated under the new rules. If such an election is not made,
current FIF treatment will apply.
Application: Generally to the
2003-04 and later years. However, taxpayers will have the option of
electing that the rules also apply to the 2002-03 year and may also
amend assessments for earlier years during the general period
allowed to amend assessments (usually 4 years) (Part 3 of
Schedule 10).
Second World War
payments Schedule 1 of the Bill
will make it clear that no tax, including CGT, applies to payments
from a foreign country where the payment relates to loss or damage
during the Second World War. It will include payments from enemy
regimes and enemy-associated regimes. Application:
For the 2001-02 and later income years (item
4).
Imputation for life
insurance companies Schedule 7
will retain the current access for life insurance companies to the
imputation system. The Bill will insert a new Division 219 into the
ITAA97 which reflects the current treatment and may be considered a
re-writing of the existing provisions.
Application: For events occurring on or after 1
July 2002 (item 8).
Overseas
Forces The ITAA36 currently contains a number of
provisions providing concessional treatment for pay for service
overseas. The actual concession available largely depends on who
the service is provided for, eg UN or a foreign government.
Schedule 8 will make it clear that only one
concession can apply to such income. Application:
For service provided on or after 1 July 2001 (item
3).
-
Treasurer, Press Release, 29 August 2002.
-
Regulations normally have effect from the time they are Gazetted
unless the regulation specifies another time or date (Acts
Interpretation Act 1901, s. 48).
-
See, for example, the Press Release of the Assistant Treasurer
and Minister for Revenue, 30 June 2003, where examples of
future finetuning of the consolidation regime are mentioned:
http://assistant.treasurer.gov.au/atr/content/pressreleases/2003/067.asp.
-
Senate, Economics Legislation Committee, 22 August 2003, pp. E1
E3.
-
Explanatory Memorandum, p. 5.
-
ibid., p. E4.
-
http://www.aph.gov.au/senate/committee/economics_ctte/tlab7_03/report/report.pdf
-
Explanatory Memorandum, p. 6.
-
Assistant Treasurer and Minister for Revenue, Press
Release, 21 February 2003.
-
Examples of existing roll-over relief include the roll-over of
assets owned by individuals, trusts or partnerships into wholly
owned companies, the replacement of assets following involuntary
disposal and script for script company restructures.
-
Explanatory Memorandum, p. 8.
-
http://www.treasury.gov.au/contentitem.asp?pageId=&ContentID=588
-
The Australian, 15 April 2003, p. 18.
Chris Field
19 September 2003
Bills Digest Service
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ISSN 1328-8091
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