|
|||
|
|||
|
|
| 2008-09 |
2009-10 |
2010-11 |
2011-12 |
| -$60m |
-$125m |
-$210m |
-$235m |
The Explanatory Memorandum states that the financial impact of the exemption from income tax of the Prime Minister’s Literary Award will be nil.[22]
Part 1 of Schedule 1 repeals existing Subdivision 12-H of Schedule 1 of the Taxation Administration Act 1953 (TAA 1953) and inserts proposed Subdivision 12-H to provide for the withholding obligations of payers, including custodians and other entities, of certain income derived by foreign residents from MITs.
Proposed section 12-375 outlines how the withholding provisions in proposed subdivision 12-H will operate as follows.
A managed investment trust may be required to withhold an amount from a payment of its Australian sourced net income (other than dividends, interest and royalties) if the payment is made to an entity whose address, or place for payment, is outside Australia. If the payment is made to another entity, the managed investment trust is required to make information available to the recipient outlining certain details in relation to the payment.
If a custodian receives a payment that is covered by that information, it is required to withhold an amount from any related later payment to an entity whose address, or place for payment, is outside Australia. If the later payment is made to another entity, the custodian is required to make information available in relation to that later payment.
If an entity that is not a custodian receives a payment that is covered by that information, it is required to withhold an amount from that payment if a foreign resident becomes entitled to that payment. If a resident becomes entitled to the payment, the entity must make information available in relation to that payment.
Proposed Subdivision 12-H includes key definitions of ‘managed investment trust’ and ‘fund payment’ and ‘custodian’ considered below.
The rate at which tax is to be withheld by MITs, custodians and other entities is set out in proposed subsections 12-385(3), 12-390(3) and 12-390(6) respectively as follows.
The rate is:
(a) if the address or place for payment of the recipient is in an information exchange country:
(i) 22.5% for *fund payments in relation to the first income year starting on or after the first 1 July after the day on which the Tax Laws Amendment (Election Commitments No. 1) Act 2008 receives the Royal Assent; or
(ii) 15% for fund payments in relation to the following income year; or
(iii) 7.5% for fund payments in relation to later income years; or
(b) otherwise—30%.
Proposed subsection 12-385 provides that an ‘information exchange country’ is a foreign country specified in the regulations for the purposes of this section.
Proposed section 12-400 of new Subdivision 12-H, sets out the meaning of managed investment trust (MIT).
A trust is an MIT in relation to an income year if:
(a) the trustee of the trust makes the first fund payment in relation to the income year; and
(b) the conditions in the table in proposed subsection 12-400(1) are satisfied at the time the payment is made.
These conditions are:
The Explanatory Memorandum states that the requirement to ignore the objects of a trust in the condition in paragraph (b) of table item 3 is to ensure that a trust is widely held as a matter of substance.[23] Without this condition, a person could establish a trust that purports to be widely held (by having more than 50 discretionary beneficiaries) but is not widely held as a matter of substance.
The condition in paragraph (c) of table item 3 in proposed subsection 12-400(1) is to ensure that a trust will be considered to be widely held even if it has less than 50 members, if one of the members of the trust is an entity of a kind specified in proposed subsection 12-400(2).
The entities specified are:
In addition, proposed paragraph 12-400(2)(e) provides that a trust where:
(i) the interests in which are owned directly or indirectly by an entity covered by an earlier paragraph; or
(ii) the interests in which are held indirectly by an entity covered by an earlier paragraph through a chain of trusts
where the trust or each trust in the chain satisfy the conditions in proposed paragraph 12-400(2)(c), is a specified entity.
Proposed section 12-405 of new Subdivision 12-H of the TAA 1953 provides a meaning of ‘fund payment’.
Proposed subsection 12-405(1) states that the object of this section is to ensure that the total of the fund payments that the trustee of a trust makes in relation to an income year equals, as nearly as practicable, the net income of the trust, disregarding certain excluded amounts,
These excluded amounts are:
(a) a dividend, interest or royalty payment that is subject to, or exempted from a requirement to withhold under Subdivision 12-F of Schedule 1 of the TAA 1953,
(b) a capital gain or capital loss from a CGT event that happens in relation to a CGT asset that is not taxable Australian property,
(c) amounts that are not from an Australian source,
and disregarding deductions relating to excluded amounts.
The reader is referred to paragraphs 1.45 to 1.57 on pages 16 to 22 of the Explanatory Memorandum for details of the ascertainment of a fund payment with an example.
Proposed subsection 12-405(2) contains a three step method statement for working out the ‘fund payment’.
Steps 2 and 3 involve anticipating the expected amounts of net income for the year and any later fund payments in relation to an income year respectively by the standards of a reasonable person. It involves an estimating process which calls for subjective judgment.
However, the Explanatory Memorandum appears to suggest that that the determination whether a payment is a fund payment is one that can be done on an objective basis:
1.57 Whether it is reasonable to conclude a specific portion of the payment is a fund payment is to be determined on an objective basis. The test is whether a reasonable person would consider that portion could be expected to form a part of the net income (suitably adjusted) of the trust at the end of the income year.[24]
It is inevitable that the practical application of the provisions of proposed subsection 12-405(2) will present compliance burdens for MITs and administrative costs to the Commissioner as indicated below. Foreign investors too may be involved in disputes with MITs as to what part of an actual payment is a fund payment. This may involve challenging the subjective forecasts made by MITs and the methodology followed in working out particular fund payments.
Proposed subsections 12-405(4) and (5) provide that a payment will not be a fund payment in relation to an income year unless it is paid:
This will involve the Commissioner being required to examine the validity of applications for extensions with additional administrative costs.
Proposed subsection 12-390(9) provides a meaning of custodian and states that an entity is a custodian if the entity is carrying on business that consists predominantly of providing custodial or depository service as defined in section 766E of the Corporations Act 2001, pursuant to an Australian financial service licence.
However, under proposed subsection 12-390(10) the provisions for withholding by custodians and other entities in proposed section 12-390 do not apply:
(a) to a company unless the company would, apart from proposed section 12-420, be acting in the capacity as agent for the recipient, or
(b) to an amount paid or received by an entity to the extent that no managed investment trust withholding tax is payable in respect of the amount or an amount reasonably attributable to the amount.
The reader is referred to the Explanatory Memorandum, paragraphs 1.106 to 1.120,[25] for details and examples of when withholding is not required by custodians and other entities.
Part 2 of Schedule 1 inserts new Division 840 into the Income Tax Assessment Act 1997 (ITAA 1997) to provide the rules to determine whether a foreign resident is liable to pay income tax in respect of certain Australian sourced income paid by an MIT (other than dividends, interest and royalties) to such foreign resident or which such foreign resident is entitled to receive.
Briefly, the liability for MIT withholding tax is imposed on foreign residents in respect of amounts received or amounts they are entitled to receive, in respect of fund payments of a MIT. The operative provisions are in proposed section 840-805 and covers payments from MITs (proposed subsection 840-805(2)), payments from custodians (proposed subsection 840-805(3)) and entitlements from other entities (proposed subsection 840-805(4)).
When a liability to pay MIT withholding tax is established, the liability is formally imposed, and the applicable rate is provided for in Income Tax (Managed Investment Trust Transitional) Bill 2008 and the Income Tax (Managed Investment Trust Withholding Tax) Bill 2008, considered below.
Part 3 of Schedule 1 includes consequential amendments to the following Acts:
Item 58 of Part 4 of Schedule 1 provides that the amendments made by Schedule 1 apply to fund payments made in relation to the first income year starting on or after 1 July after the day on which this Act receives the Royal Assent and later.
The amendments proposed by Schedule 2 are intended to exempt the Prime Minister’s Literary Awards from income tax.
Item 1 to the Bill amends section 11-10 of the Income Tax Assessment Act 1997 (ITAA 1997) to add the Prime Minister’s Literary Awards at the end of table item headed “prizes”.
Item 2 adds proposed subsection (3) at the end of section 51-60 of the ITAA 1997 to exempt from income tax the Prime Minister’s Literary Award, if it would otherwise be assessable income.
Item 3 provides that the amendments made by Schedule 2 apply to assessments for the 2007-08 income year and later income years.
The Income Tax (Managed Investment Trust Transitional) Bill 2008 imposes income tax on amounts attributable to fund payments derived by foreign resident investors in accordance with section 840-805 of the Income Tax (Transitional Provisions) Act 1997.
This Bill, when enacted, meets the requirement in section 55 of the Constitution that a law imposing taxation shall deal only with the imposition of taxation and any provision therein dealing with any other matter shall be of no effect.
Proposed section 3 of the Bill provides that tax known as income tax, to the extent that that tax is payable on an entity in accordance with section 840-805 of the Income Tax (Transitional Provisions) Act 1997, is imposed on amounts to which that section applies.
Proposed section 4 of the MIT Transitional Bill provides that the rate of tax imposed by this Act is 22.5%.
Proposed section 2 of the MIT Transitional Bill provides that the Act commences on the day on which it receives the Royal Assent.
The Income Tax (Managed Investment Trust Withholding Tax) Bill 2008 imposes income tax on amounts attributable to fund payments derived by foreign resident investors under section 840-805 of the Income Tax Assessment Act 1997.
This Bill, when enacted meets the requirement in section 55 of the Constitution that a law imposing taxation shall deal only with the imposition of taxation and any provision therein dealing with any other matter shall be of no effect.
Proposed section 3 of the Bill provides that tax known as income tax, to the extent that that tax is payable on an entity in accordance with section 840-805 of the Income Tax Assessment Act 1997, is imposed on amounts identified in that section as the fund payment part.
Proposed section 4 of the MIT Withholding Tax Bill provides that the rate of tax imposed by this Act is:
(a) if the entity is a resident of an information exchange country:
(i) 15% for fund payments in relation to the income year following the first income year starting on or after the first 1 July after the day on which the Tax Laws Amendment(Election Commitments No. 1) Act 2008 receives the Royal Assent; or
(ii) 7.5% for fund payments in relation to later income years; or
(b) Otherwise—30%.
The Explanatory Memorandum (at pages 8-9) gives a summary of the key features of the proposed law in relation to the withholding tax regime and the current law. For ease of reference this comparison is set out in Attachment A to this Bills Digest.
In considering the meaning of fund payment in the Main provisions section of this Bills Digest it was pointed out that there is a requirement for trustees of Managed Investment Trust (MITs) to make subjective judgments of expectations of the net income of a trust and the expected amounts of later fund payments in relation to an income year. This is likely to result in adding to the compliance burdens of trustees as well as additional administrative costs to the Australian Tax Office (ATO). The Explanatory Memorandum states that the Government expects that the new MIT withholding tax regime will impose compliance costs on MITs and interposed entities for the first and second transitional years as they will need to modify their systems to adjust to the new withholding regime. However, it states that ongoing compliance costs are expected to be minimal.[26]
The Regulation Impact Statement (RIS) contained in the Explanatory Memorandum states that the consultation on the draft legislation was possible for a limited period. Paragraph 1.316 states:
Consultation on the draft legislation commenced following announcement of the measure in the 2008-09 Budget. As the Government intends the measure to take effect from the 2008-09 income year, it was only possible to undertake consultation for a limited period.[27]
The proposal was first publicly announced in the 2008 Budget on 13 May 2008 and the package of bills was introduced in the House of Representatives on 4 June 2008. It would appear that the consultation period was arguably inadequate to consider the full implications of the implementation of the new final MIT withholding tax regime. The Explanatory Memorandum notes that Treasury and the ATO will monitor the new withholding tax regime, as part of the whole taxation system, on an ongoing basis.[28]
The Treasurer in his Budget Speech on 13 May 2008 proposed ‘the most comprehensive review of Australia’s tax system since World War II’, the object of which was stated as follows:
We need a tax system that is fairer, that is simpler, that better rewards people for their hard work, that responds to our environmental and demographic challenges, that makes us internationally competitive, and that creates the incentives to invest in our productive capacity. One that supports national prosperity beyond the mining boom.[29]
The new withholding tax regime for MITs may be part of an overall review of the taxation of trusts generally in the context of an entity tax regime to tax companies, trusts and partnerships in the same way as companies.
Extract from the Explanatory Memorandum - pages 8 and 9
[1]. Section 12-395 Taxation Administration Act 1953.
[2]. Explanatory Memorandum, paragraph 1.265, p. 65.
[3]. ibid., paragraph 1.266.
[4]. ibid., paragraph 1.267.
[5]. S. Crean (then Shadow Minister for Trade and Regional Development), A strong future for Australia’s exports, media release, Canberra, 21 November 2008. Accessed on 13/06/2008 from http://parlinfoweb.parl.net/parlinfo/Repository1/Library/partypol/734P60.pdf
[6].
‘Labor and Democrats Dissenting Report’, Senate Standing Committee
on Economics report into the Tax Laws Amendment (2007 Measures No.3) Bill
2007 [Provisions], Canberra, 6 June 2007. p. 34. Accessed on 13/06/2008
from
http://www.aph.gov.au/senate/committee/economics_ctte/completed_inquiries/2004-07/tlab_3_2007/report/report.pdf
[7]. W. Swan (Treasurer), Establishing Australia as a Regional Financial Hub, media release, Canberra, 13 May 2008. Accessed on 13/06/2008 from http://www.treasurer.gov.au/DisplayDocs.aspx?doc=pressreleases/2008/043.htm&pageID=003&min=wms&Year=&DocType=0
[8]. Corrie Perkin, ‘PM to reward Aussie writers’, Australian, 5 December 2007, p. 3.
[9]. P. Garrett (Minister for the Environment, Heritage and the Arts), Prime Minister’s Literary Awards – Call for entries, media release, Canberra, 22 February 2008. Accessed on 13/06/2008 from http://parlinfoweb.parl.net/parlinfo/Repository1/Media/pressrel/PSQP60.pdf
[10]. N. Wan, ‘Investment incentive gets warm reception’, Australian Financial Review, 21/05/2008 p. 38. Accessed on 13/06/2008 from http://parlinfoweb.parl.net/parlinfo/Repository1/Media/npaper_3/N0IQ60.pdf
[11]. S. Patten, ‘Timetable delights overseas investors’, Australian Financial Review, 15/05/2008, p. 12. Accessed on 13/06/2008 from http://parlinfoweb.parl.net/parlinfo/Repository1/Media/npaper_0/0SFQ60.pdf
[12]. N. Wan, ‘Investment incentive gets warm reception’, Australian Financial Review, 21/05/2008 p. 38
[13]. P. Verwer, Tax reform will level the playing field for A-REITs, media release, Property Council Of Australia, Sydney, 13 May 2008. Accessed on 13/06/2008 from http://www.propertyoz.com.au/
[14]. R. Gilbert, Budget send strong signal to international investors: Australian managed funds “open for business”, media release, ISFA, Sydney 13 May 2008. Accessed on 13/06/2008. http://www.ifsa.com.au/Media%20Releases/2008_1305_Budget2008_IFSA%20response.pdf
[15]. S. Dunne, AMP Capital welcomes Government’s reduction to withholding tax, media release, AMP Capital, Sydney, 13 May 2008. Accessed on 13/06/2008 from http://www.ampcapital.com.au/K2DOCS/F24C47CB-246A-40FB-A1DC-391865E82B8D/media-release_AMP-Capital-welcomes-Governments-reduction-to-withholding-tax_14-05-2008.pdf?DIRECT
[16]. P. Madden, Australia as a regional financial hub?, media release, Deloitte, Sydney, 13 May 2008. Accessed on 13/06/2008 from http://www.deloitte.com/dtt/press_release/0,1014,sid%253D5527%2526cid%253D205839,00.html
[17]. Other than for the appropriation of funds for the award.
[18]. K. Strickland & M. Boland, ‘Wishing upon a star … only to get a politician’, Australian Financial Review, 7 February 2008, p. 48. Accessed on 13/06/2008 from http://parlinfoweb.parl.net/parlinfo/Repository1/Media/npaper_0/53LP60.pdf
[19]. C. Perkin, ‘Song and dance about arts, The Australian, 4 February 2008, p. 4. Accessed on 13/06/2008 from http://parlinfoweb.parl.net/parlinfo/Repository1/Media/npaper_3/NTJP60.pdf
[20]. R. Sorensen, ‘Judges find Rudd has final say on literary awards’, The Australian, 1 April 2008, p. 3. Accessed on 13/06/2008 from http://parlinfoweb.parl.net/parlinfo/Repository1/Media/npaper_2/D91Q60.pdf
[21]. Explanatory Memorandum, p. 3
[22]. Explanatory Memorandum, p. 4.
[23]. Explanatory Memorandum, paragraph 1.33, p.12.
[24]. Explanatory Memorandum, paragraph 1.57, p. 18.
[25]. Explanatory Memorandum, pp. 30–33.
[26]. Explanatory Memorandum, pp. 3-4.
[27]. Explanatory Memorandum, p. 74.
[28]. Paragraph 1.328, p. 75.
[29]. The Hon. Wayne Swan, ‘Budget Speech 2008-09’, Second Reading of Appropriation Bill (No. 1) 2008-09, 13 May 2008. Accessed on 14 May 2008 from http://www.aph.gov.au/Budget/2008-09/content/speech/html/speech-01.htm
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