Bills Digest No. 79 2003-04
New International Tax Arrangements Bill
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
New
International Tax Arrangements Bill 2003
Date Introduced:
4 December 2003
House: House of Representatives
Portfolio: Treasury
Commencement:
Royal
Assent
The purpose of the Bill is to continue the
program of modernisation of Australia's international tax system by
reducing unnecessary tax compliance burdens for the superannuation
and managed funds industries.
Background
Australian taxation law contains foreign
investment fund rules (FIF) which prevent tax avoidance that may
occur through the deferral of Australian tax by those who
accumulate 'passive income' (such as dividends and interest) and
the conversion of such income to capital gains. FIF is designed to
address the situation where such funds are accumulated by
Australian taxpayers in low tax or tax-free countries. These rules
are necessary but they can impose high compliance costs, especially
for some Australian managed funds. There is scope for more
flexibility in these rules to enable Australian managed funds and
the superannuation industry to improve their competitiveness.
Businesses in Australia that seek finance from
abroad are usually required to withhold a proportion of their
interest payments and remit that amount to the Australian Taxation
Office a form of interest withholding tax (IWT). In some
circumstances, companies as distinct from unit trusts can receive
an exemption from IWT on certain loans. The managed funds industry
tends to operate through unit trust structures and does not enjoy
this exemption unless a unit trust arranges to interpose a company
which will undertake the borrowing of overseas loans and the
payment of interest. There is scope for introducing uniform
treatment in this area.
Australian companies with offshore operations
can operate through foreign corporate entities that they control.
This has taxation implications in terms of the income or royalty
derived by the controlled foreign company (CFC). Australian
taxation law contains CFC rules that impose informational and
compliance costs on Australian companies with operations offshore.
The various categories of income and the taxation tests that can be
subject to CFC rules have made compliance a burden for business in
some cases. There is scope for some reform.
Australian taxation law has rules that deal
with transfer pricing. Companies with overseas operations may sell
property or services to each other. In doing so there is scope to
artificially structure the pricing in such a way as to either lower
assessable income or, alternatively, increase allowable deductions.
The transfer pricing rules are necessary to counter tax avoidance
and the rules authorise the adjustment of profits between related
parties to reflect 'arm's length' dealings for taxation assessment.
In certain circumstances, disallowance of certain claims imposes a
withholding tax which in turn can result in double taxation. The
issue of double taxation can be relieved, at present, for interest
payments but not for royalty payments. There is scope to provide
uniformity in the area of royalty payments.
At the request of the Government, the Board of
Taxation reviewed Australia's international taxation arrangements
and the Board reported to the Treasurer on its findings on 28
February 2003.(1)
Budget 2003-2004, which was delivered on 13
May 2003, contained the following announcement about reforming
Australia's international tax system:
The
Co Commonwealth Budget Overview
2003-04
Following the Review of Australia's International
Taxation Arrangements, the Government is announcing a package of
reforms that continues the Government's commitment to improve the
international competitiveness of Australian business.
Improving offshore
competitiveness
To maintain Australia's status as an attractive
place for business and investment, the tax system needs to
continually adapt to the increasingly integrated global business
environment. With these issues in mind the Government undertook a
Review of Australia's International Taxation Arrangements.
After an extensive consultation process conducted
by the Board of Taxation, the Government is announcing its response
to the review.
This package of reforms will help Australian
business integrate further into the international economy by
improving the competitiveness of Australian companies with offshore
operations. It will also encourage the establishment in Australia
of regional headquarters for foreign groups.
The reforms will
-
reduce the compliance costs associated with the controlled
foreign company rules
-
reduce tax on certain forms of foreign business income and
gains
-
modernise Australia's tax treaty network
-
better target the foreign investment fund
rules.(2)
The Hon Ross Cameron MP, Parliamentary
Secretary to the Treasurer, introduced this Bill on 4 December 2003
and announced that it follows the recent enactment of legislation
to authorise a new comprehensive tax treaty with the United
Kingdom.(3)
On the broader issue of the reform of
Australia's international tax laws, Allesandro Fabro writing in the
Australian Financial Review on 9 May 2003, noted that
business looked to the reforms as a step that would 'lower the cost
of capital for Australian multinationals and reduce the incentives
for them to move offshore'.(4) Fabro also commented:
A number of surveys in recent years has decried
Australia's international tax regime as onerous and discouraging to
offshore investment.(5)
Part XI of the Act deals with taxation
liability on any share of income from certain foreign investment
funds and foreign life assurance policies. Within Part XI is
section 470 which provides relevant definitions. Items
2 to 7 provide additional definitions
that enable complying superannuation entities, certain assets of
life insurance and certain fixed trusts to be exempted from the FIF
rules in Part XI. A technical explanation of the new definitions is
found at paragraphs 1.5 to 1.8 of the Explanatory
Memorandum to the Bill. Item 1 is a
consequential amendment only.
Item 8 inserts a new
Division 11A into Part XI of the Act. This new Division
contains proposed new sections 519A and
519B which provide the exemption mechanisms for
certain foreign investment fund income, specifically, 'virtual PST
pooled superannuation trust assets' (i.e. assets that support the
complying superannuation business of life insurance companies),
segregated exempt assets (i.e. assets that support annuity and
pension business of life insurance companies) and interests held by
complying superannuation entities. Cases study examples are
provided in the Explanatory Memorandum at pages 10 11.
Division 14 of Part XI currently provides an
exemption from the FIF rules where the taxpayer's otherwise
non-exempt investment is no more than 5% of all the taxpayer's FIF
interests. Non-exempt interests involve compliance costs. The
threshold of 5% is lifted to 10% by Items 9 to
13. The aim of this proposed reform is to allow
Australian investors greater flexibility in offshore portfolio
diversification. The exemption is referred to as the 'balanced
portfolio exemption'.
Schedule 2 provides a proposed exemption from
IWT for interest paid to certain eligible unit trusts. An exemption
is already available for companies. As noted above, the managed
funds industry tends to operate through unit trust structures and
does not enjoy this exemption. Item 5 inserts a
new section 128FA in Division 11A of Part III of
the Act to enable unit trusts to be treated the same as companies.
Division 11A deals with the liability to pay tax on dividends,
interest and royalties paid to non residents. Items
1 to 4 and Item 6 (day
of application) are consequential amendments only.
Item 1 in Schedule 3 will
enable regulations to define more precisely the type of income
categories that can be attributed to CFCs. As noted above, the
current more open-ended system can impose unnecessary informational
and compliance burdens. The aim of the reform is to provide
identification in the regulations of the type of income that is
subject to compliance requirements.
Item 1 in Schedule 4 enables
the Commissioner of Taxation to alleviate any likely double
taxation under the transfer pricing rules in relation to royalty
payments. As noted above, a current mechanism already exists to
relieve certain interest payments covered by the transfer pricing
rules from the potential for double taxation.
-
A summary of the recommendations of the Board of Taxation's
report on reforming Australia's international taxation arrangements
and the Government's response can be found in the Media Release
'Review of International Taxation Arrangements' (No. 032), issued
by the Treasurer, the Hon Peter Costello MP, and located on
ParlInfo at:
http://parlinfoweb.parl.net/parlinfo/Repository1/Media/pressrel/NFC960.pdf
.
-
The Commonwealth Budget Overview 2003-04 can be found
at the following web site: http://www.budget.gov.au/2003-04/overview/html/overview-18.htm
.
-
The Hon Ross Cameron MP, Parliamentary Secretary to the
Treasurer, Second Reading speech, New International Tax
Arrangements Bill 2003, House of Representatives, Debates,
4 December 2003, p. 23767. The Bills Digest prepared by Brendan
Bailey for the International Tax Agreements Amendment Bill 2003,
which covers the new tax treaty with the United Kingdom, is at:
http://www.aph.gov.au/library/pubs/bd/2003-04/04bd041.htm
on ParlInfo. A more detailed summary of the recommendations of the
Board of Taxation review's report on reforming Australia's
international taxation arrangements can be found on ParlInfo at:
http://parlinfoweb.parl.net/parlinfo/Repository1/Media/pressrel/NFC960.pdf
.
-
Allesandro Fabro, 'Big business wins budget tax breaks',
Australian Financial Review, 9 May 2003, p. 1.
-
ibid.
Brendan Bailey
5 February 2004
Bills Digest Service
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ISSN 1328-8091
© Commonwealth of Australia 2004
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Published by the Department of the Parliamentary Library,
2004.
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