Bills Digest No. 179 2001-02
Taxation Laws Amendment Bill (No. 4) 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
Taxation
Laws Amendment Bill (No. 4) 2002
Date Introduced:
30 May 2002
House:
House of Representatives
Portfolio:
Treasury
Commencement:
The majority of the Bill commences on Royal
Assent, however the various measures have differing application dates
which are detailed below.
Purpose
To:
- make largely technical amendments to the thin capitalisation regime
- introduce a statutory maximum life for certain assets for depreciation
purposes
- provide tax exemptions for temporary residents for certain earnings
not related to their Australian employment, and
- provide roll-over relief from capital gains tax for certain transfers
from fixed trusts to companies.
Background
As there is no central theme to the Bill the background
to the various measures will be described below.
Thin capitalisation refers to the rules relating to the
allowance of interest deductions on borrowings and acts to disallow deductions
to the extent that borrowings exceed the allowable ratio to capital. The
rules aim not only to discourage excessive borrowings but also to prevent
artificial arrangements where principally foreign corporations arrange
their affairs so that their Australian operations have high debt levels
to take advantage of the available deductions.
From 1 July 2001 a new thin capitalisation regime was
introduced which extended the regime to domestic Australian companies
and extended the definition of which debt is covered by the rules. The
basic rule for general (other than financial companies) is that they may
claim a deduction only for the interest on borrowings which is less, or
equal to, a 3:1 ratio of debt to capital.(1)
The measures contained in the Schedule 1 of the
Bill are of a technical nature and reflect the first years experience
of the operation of the new regime and do not implement new policy. In
particular, Schedule 1 inserts definitions of controlled foreign
entity debt and equity which are to be used when calculating the overall
position of the entity claiming the deduction. According to the explanatory
memorandum to the Bill the measures will prevent revenue loss of $50 million
in 2002-03 and $30 million annually from 2003-04 onwards.(2)
The explanatory memorandum to the Bill provides a description
of the technical amendments contained in Schedule 1 of the Bill.
Owners of capital plant and equipment are able to claim
a deduction for the cost of the item based on the value of the item and
its effective life. There are also special provisions which allow for
accelerated depreciation allowing a greater deduction than would otherwise
be available.
The effective life of an asset is based on either the
taxpayer’s claim or the Commissioner’s ruling as to the effective life
of an asset. In either case the determination is to be based on the period
for which the asset could be used having regard to wear and tear, assuming
normal maintenance. The Income Tax (Effective Life of Depreciating Assets)
Amendment Determination 2002 (No. 2) proposes to increase the effective
life for a number of assets acquired after 1 July 2002. The assets include
cars; aeroplanes and helicopters; gas distribution and transmission; gas,
oil, condensate, LNG, LPG manufacturing; and assets used in gas and oil
production. The determination substantially increases the effective life
of such assets, reducing the amount of depreciation which may be claimed
each year.
On 14 May 2002 the Minister for Revenue and Assistant
Treasurer announced that statutory caps would be placed on the effective
life of the assets mentioned above to ‘ensure depreciation deductions….remain
appropriate following reviews of the effective life of these assets by
the Commissioner of Taxation.’(3) It was also stated:
The new statutory life caps will provide certainty
for the industries concerned, and provide an appropriate balance between
meeting the needs of those industries as well as maintaining the integrity
of the effective life depreciation system.(4)
The statutory caps range from substantial increases compared
to the current effective life for some goods, eg aeroplanes, marginal
increases for others and others which are the same as the current life.
According to the explanatory memorandum to the Bill the statutory life
amendments will increase revenue by approximately $825 million between
2002 and 2012 compared to current effective lives but result in a cost
to revenue of approximately $2.2 billion over the same period when compared
to the ATO proposals.(5)
Division 40 of the Income Tax Assessment Act 1997
(ITAA97) deals with capital allowances and provides for an entity to choose
to depreciate an asset either by the life determined by the Commissioner
or that determined by the taxpayer (section 40-95). Part 1 of
Schedule 4 of the Bill will amend section 40-95 and related sections
to provide that:
- where an asset has been depreciated by an owner according to the Commissioner’s
effective life determinations
- the ownership changes after 1 July 2002, and
- the depreciation would, but for these measures, become subject to
the new ATO ruling
the new owner is required to use the new effective life
calculations contained in proposed section 40-102.
Application: From 1 July 2002 (item 15).
A recommendation of the Review of Business Taxation
– A Tax System Redesigned (Ralph Report) was that certain income of
people who are working in Australia on temporary entry visas, of 4 years
or less, be exempt from tax. The major recommendation was that income
from foreign sourced assets owned prior to their residence in Australia
be exempt.
The recommendation was designed to enhance the position
of previous non-residents who had come to work in Australia, such as high
level executives, and so improve the chances of such people taking up
employment in Australia. The Ralph Report stated:
On taking up residence in Australia executives and
other key personnel are likely to own overseas assets and housing
that will produce income that will be taxable in Australia even if
the executives are here for less than four years. Taxing the income
from these pre-resident investments at Australia’s top rate of personal
tax could increase the overall tax burden and deter executives from
taking up opportunities in Australia.(6)
A contrary argument is that if the overseas executive
is to provide a benefit to an entity, principally companies, it is the
responsibility of that entity to provide sufficient conditions to attract
the desired person to match the benefit they would provide. Whether it
should be the Commonwealth revenue which effectively pays to make the
Australian position more attractive to the non-resident is open to debate.
After initially endorsing the recommendations contained
in the Ralph Report, the Treasurer announced on 15 October 2001 that the
exemption from tax would be extended to cover foreign sourced income of
eligible temporary residents from assets regardless of when they were
acquired (ie. the exemption would apply to income from foreign assets
acquired while the person was working in Australia). The Treasurer also
announced a number of related measures, including that no capital gain
or loss would arise from the disposal of assets which did not have a sufficient
connection to Australia. The measures were seen as assisting to attract
skilled foreign workers and assisting in retaining and attracting corporate
headquarters to Australia.(7)
The explanatory memorandum to the Bill estimates that
the measures will cost between $40 and $50 million per year.(8)
Item 9 of Schedule 3 will insert a new section
51-52 into the ITAA97 to exempt the foreign sourced income of temporary
residents from income tax. The exemption will not apply to foreign income
earned as a result of employment undertaken or services provided while
a temporary resident.
Item 11 will insert a new section 118-575
into the ITAA97 to exempt capital gains and losses for temporary residents
derived from a source outside Australia. As well, the gain or loss must
not have a ‘necessary connection with Australia’. This term is defined
in section 136-25 of the ITAA97 and, in addition to things with a physical
attachment to Australia, includes shares in resident public companies
and units in resident unit trusts where the shares or units represent
at least 10% of the value of the company or trust.
Application: From 1 July 2002 (item 14).
Roll-over relief involves relief from capital gains tax
(CGT) when assets are transferred from one ownership structure to another
without there being a change in the underlying interests in the ownership
of the assets or the income from the assets subject to the roll-over.
The concept is not new and, for example, currently applies for the transfer
of interests from an individual, trustee or partnership to a company where
the company is wholly-owned by those who had interests in the former body
and there is no change in the ratio of those interests (Division 122 of
the ITAA97). The result of the roll-over relief is that a capital gains
tax event does not arise on the disposal of the entity which transfers
assets to a company and the cost base and indexed cost base are transferred
to the new company to determine any future capital gains tax liability.
As part of the government’s response to the Ralph Report’s
recommendation for the introduction of an entity taxation regime (the
introduction of which appears to have been postponed indefinitely), it
was announced that roll-over relief would be made available where assets
are transferred from a fixed trust to a company, provided that all assets
were transferred and the trust ceased to exist after the transfer was
completed.(9)
The explanatory memorandum to the Bill estimates that
the measure will have a small but unquantifiable impact on revenue.(10)
Schedule 2 of the Bill will insert a new Subdivision
124-N into the ITAA97 dealing with roll-overs from fixed trusts to
companies. To be eligible for roll-over relief:
- the company to which the assets are transferred must not be tax exempt,
must never have carried on commercial activities, have no CGT assets
of its own other than small amounts of cash or debt and have no losses
- after the assets have been transferred, each entity which owned an
interest in the trust must have an interest in the same proportion in
the company and the market value of the interests held must be substantially
similar, and
- the company must be an Australian resident (proposed section 124-860).
Both the trust and company must chose to have the roll-over
relief apply (proposed section 124-865).
If roll-over relief is elected, capital gains and losses
are to be ignored, the cost base of an asset transferred and pre-CGT assets
will retain their CGT exemption (proposed section 124-875).
Application: The amendments will apply from 11 November
1999, the date of the original response to the Ralph Report (item 17).
- For further information on the previous and current thin-capitalisation
regimes, refer to the Bills
Digest for the New Business Tax System (Thin Capitalisation)
Bill 2001, No. 16, 2001–02.
- Explanatory memorandum to the Bill, p. 3.
- Minister for Revenue and Assistant Treasurer, Press Release,
14 May 2002.
- ibid.
- Explanatory memorandum, p. 7.
- Review of Business Taxation – A Tax System Redesigned, p. 675.
- Treasurer, Press Release, 15 October 2001.
- Explanatory memorandum, p. 5.
- Treasurer, Press Release, 11 November 1999.
- Explanatory memorandum, p. 4.
Chris Field
26 June 2002
Bills Digest Service
Information and Research Services
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ISSN 1328-8091
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