Press Release - Maintaining the Momentum of Business Tax Reform [14/05/2002]
C57/02
14 May 2002
MAINTAINING THE MOMENTUM OF BUSINESS TAX REFORM
The Minister for Revenue and Assistant Treasurer, Senator Helen Coonan, today
announced the Government's programme for delivering the next stage of business
tax reform measures.
Senator Coonan said "these measures affirm the Government's commitment
to maintain the momentum of business tax reform and build on the far-reaching
reforms that are already in place". Some of the major measures already
working for Australia include the cuts in the company tax rate; halving of the
capital gains tax for individual investors; the simplified tax system for small
business; the uniform capital allowance system (which also recognised a number
of blackhole expenditures); enhanced incentives for research and development;
and thin capitalisation rules.
The Government has also signed a protocol to amend our double tax agreement
with the United States that will benefit many Australian companies operating
in the world's biggest economy. More broadly, the review of international tax
arrangements will focus on those aspects of taxation that affect the decisions
of businesses to locate in Australia and their ability to attract foreign and
domestic capital and expand offshore.
Senator Coonan emphasised that "the aim of the Government's business tax
reforms is to deliver a modern, competitive and fair tax system with a reduction
in compliance costs facing business, particularly small business. The ultimate
aim of tax reform is to promote better living standards and employment opportunities
for Australians".
Senator Coonan said "managing the scope and pace of tax reform is another
important consideration in delivering the next phase of business tax reform.
The business community's concerns about managing change, while continuing business
tax reform, have featured strongly in developing the implementation timetable".
A list of business tax reform measures and their date of commencement is at
Attachment A. Some specific changes are outlined below.
Consolidated Taxation of Corporate Groups
The consolidation measure will involve taxing companies within a wholly-owned
corporate group as a single entity, delivering improved commercial flexibility,
reducing compliance costs and addressing integrity issues. The measure will
commence from 1 July 2002.
Further details of the consolidation measure is being announced separately.
Tax Relief for Demergers
Providing tax relief for demergers will increase efficiency by allowing greater
flexibility in structuring businesses, thereby providing an overall benefit
to the economy.
Tax relief for demergers will be made available where underlying ownership
is maintained and the original entity demerges at least 80 per cent of its ownership
interest in the demerged entity. Tax relief will be made available to both widely
held and non-widely held companies and trusts. Capital gains tax (CGT) relief
is to be provided at the member and entity level. An exemption from the existing
dividend rules will be provided, subject to an integrity rule. This measure
will commence from 1 July 2002.
Further details of the demerger measure was announced on 6 May 2002.
Taxation of Financial Arrangements
The remaining reforms to the taxation of financial arrangements (TOFA) will
be implemented in stages over the next 2 years (debt/equity reforms came into
effect on 1 July 2001). These reforms were recommended by the Review of Business
Taxation and have previously received in-principle support from the Government.
The TOFA reforms are designed to remove anomalies, distortions and gaps in existing
laws, facilitate desirable financial innovation, improve risk management and
enhance the efficient operation and competitiveness of Australia's business
sector.
The next stage of the TOFA reforms will involve revamping the taxation laws
relating to foreign currency gains and losses. This will cover the resolution
of tensions and uncertainties within the existing law and will include implementing
recommendations included in the Review of Business Taxation. Further consultations
will be held over coming months (including exposure draft legislation) with
a view to introducing legislation in the Spring Sittings.
This will be followed by reform of the taxation of commodity (e.g. gold and
cotton) hedging. These reforms will remove tax uncertainties and allow more
efficient hedging arrangements. The commencement date will be 1 July 2003. Further
industry consultations will be undertaken to settle the details of the Government's
policy approach.
The final stage includes implementation of new tax-timing arrangements, including
a mark-to-market election, an accruals/realisation framework, internal hedging
rules, disposal rules and synthetic arrangements. The commencement date will
be 1 July 2004.
Removal of Taxing Point at Conversion or Exchange of Certain Financial Instruments
Under the current tax law, the point of conversion or exchange of certain financial
instruments represents a taxing point for income tax purposes. This taxing point
is to be removed from the taxation law and will apply to traditional securities
that are issued after 7.30 pm EST 14 May 2002. Relevant financial instruments
issued before this announcement will continue to be subject to the current tax
law.
The effect of this announcement will be that an investor who holds a relevant
financial instrument through conversion or exchange will not be subject to tax
until it is ultimately sold. Furthermore, where the gain or loss on disposal
is of a capital nature, the investor will be able to qualify for capital gains
treatment for the period before, and after, conversion or exchange.
Introduction of a Withholding Tax Regime for Non-Residents Without a Permanent
Presence in Australia
The Review of Business Taxation recommended the introduction of a uniform withholding
tax regime on taxable Australian-source income and gains derived by non-residents.
The Government has previously agreed in-principle with this recommendation,
to commence from 1 July 2002.
To minimise the compliance burden on Australian businesses, the Government
has decided to proceed with a modified approach to the implementation of this
measure, with obligations for withholding to be developed as required for specific
industries, and supported by the existing Pay As You Go (PAYG) withholding system.
Following further consultations, any new obligations to withhold will be introduced
progressively by regulations from 1 July 2003, with enabling legislation to
be introduced prior to 1 July 2003.
Taxation of Life Insurance Policyholders
The Government has decided not to proceed with the recommendations made by
the Review of Business Taxation to introduce measures to tax life insurance
policyholders like they are shareholders in companies due to concerns about
compliance costs.
However, the Review of Business Taxation's recommendations affecting special
investment products offered by friendly societies will be implemented, with
some modification. To ensure that investment income paid by friendly societies
is only subject to one level of tax, friendly societies will be entitled to
a deduction from 1 January 2003 for amounts paid to policyholders relating to
income bonds, funeral policies and scholarship plans taken out after 30 November
1999. Legislation to introduce these reforms will be developed in consultation
with industry.
Simplified Imputation System
The Simplified Imputation System will commence on 1 July 2002 as
previously announced, with legislation scheduled for introduction into Parliament
in the Winter sittings.
Since release of the earlier exposure draft legislation, the measure has been
subject to consultation with representatives of small and large business. Further
details of the measure will be announced shortly.
Franking Credits for Foreign Dividend Withholding Tax and the Establishment
of Foreign Income Accounts
In light of their significant linkages with the central issues identified to
date by business for consideration in the review of international tax arrangements,
the Government has decided to defer, pending the review, implementation of the
measures to provide franking credits for foreign dividend withholding tax and
to establish foreign income accounts.
Tax Exempt Leasing and Effective Life Depreciation of Building and Structures
Although there is broad agreement with the States and private sector on a framework
to replace the existing section 51AD and the associated Division 16D provisions,
significant boundary and implementation issues remain to be resolved. Further
consultation on these issues will be undertaken through the course of 2002-03
and it is expected that legislation will be introduced in the Autumn 2003 sittings.
Reform of general leasing rules remains under development.
The Government accepted in principle the RBT recommendation that new buildings
and structures should be included in the uniform capital allowance system. The
Treasurer's press release of 22 March 2001 noted that this issue still
required further policy development and consultation.
This measure raises a number of extremely difficult practical issues, including
separating land value from that of the buildings and structures, and defining
the asset unit (a single building or many smaller assets). In light of the need
for significant amounts of further work and competing tax priorities, the measure,
if proceeded with, will not commence until at least July 2005.
The General Value Shifting Regime
The general value shifting regime is designed to prevent the manipulation of
ordinary tax rules by shifting taxable value between assets by related parties.
The general value shifting regime will apply to arrangements and dealings involving
entities that are not part of the same consolidated group, but are nevertheless
related in some other way. The measure will commence from 1 July 2002
and legislation is scheduled for introduction into Parliament in the Winter
sittings.
Tax Value Method
The Board of Taxation is currently receiving public comments on its prototype
legislation for the Tax Value Method (TVM). The Board expects to be able to
provide its recommendation by the middle of the year to the Government as to
whether and when the TVM should be introduced.
Without prejudicing the Board's or the Government's views on whether TVM should
proceed, it is clear that any implementation could not occur before July 2005,
at the earliest. In the meantime, consideration of reforms to the taxation of
rights and any blackhole expenditures will continue to be undertaken on a case-by-case
basis.
Attachment A
TIMETABLE FOR BUSINESS TAX REFORMS
|
Measure
|
Commencement Date
|
Legislation Introduced
|
|
Consolidated taxation of corporate groups
|
1 July 2002
|
Initial package of legislation to be introduced in Winter 2002 sittings.
Remainder of legislation to be introduced in Spring 2002 sittings.
|
|
The general value shifting regime
|
1 July 2002
|
Legislation to be introduced in Winter 2002 sittings.
|
|
Tax relief for demergers
|
1 July 2002
|
Legislation expected to be introduced in Winter 2002 sittings.
|
|
Taxation of financial arrangements (TOFA)
Stage 1: debt/equity borderline
Stage 2: foreign currency gains and losses
Stage 3: commodity hedges
Stage 4: tax-timing rules, disposal rules and synthetic arrangements
|
1 July 2001
To be decided
1 July 2003
1 July 2004
|
Legislation enacted.
Legislation to be introduced in Spring 2002 sittings.
Legislation to be introduced in Winter 2003 sittings.
Legislation to be introduced in Winter 2004 sittings.
|
|
Removal of taxing point at conversion or exchange of financial instruments
|
From date of announcement
|
Legislation to be introduced in Spring 2002 sittings
|
|
Introduction of a withholding tax regime for non-residents without a
permanent establishment in Australia
|
1 July 2003
|
Legislation to be introduced prior to 1 July 2003
|
|
Taxation of life insurance policyholders
|
Current law to remain unchanged.
|
|
|
Measure
|
Commencement Date
|
Legislation Introduced
|
|
Special investment products offered by friendly societies
|
1 January 2003
|
Legislation to be developed in consultation with industry.
|
|
Simplified imputation system
|
1 July 2002
|
Legislation to be introduced in Winter 2002 sittings.
|
|
Franking credits for foreign dividend withholding tax and the establishment
of foreign income accounts
|
To be considered in the review of international taxation arrangements
|
|
|
Tax exempt leasing
|
1 July 2003
|
Legislation to be introduced in Autumn 2003 sittings.
|
|
Effective life depreciation of buildings and structures
|
Not before July 2005
|
|
|
Tax Value Method and other high level rules
|
Not before July 2005
|
|
|
Taxable leasing and the treatment of partnerships and joint activities
|
Under further development
|
To be determined.
|
|
General anti-avoidance rule
|
Date of introduction of legislation
|
To be determined.
|