Chapter 2 - The bill
Schedule 1—Foreign loss and foreign tax credit amendments
Overview
2.1
Schedule 1 amends the income tax law to abolish foreign loss and foreign
tax credit quarantining and to streamline the remaining foreign tax credit
rules. These amendments include transitional rules for the treatment of
existing quarantined foreign losses and credits.[1]
Background and Summary
2.2
The 1986 tax reforms introduced foreign tax credit and foreign loss
quarantining rules aimed at protecting Australia's tax base. Since 1986, there
has been a shift towards a participation exemption system that has removed the
tax asymmetries that were the original reason for quarantining foreign losses
and foreign tax credits.
2.3
Under the new law, taxpayers will be entitled to a non-refundable tax
offset for foreign income tax paid. This aims to reduce double-taxation on
assessable income. The potential Australian tax will be reduced by the amount
of foreign income tax already paid on those double-taxed amounts, or reduced to
zero where the foreign income tax paid exceeds the potential Australian tax payable.[2]
Intended benefits of changes
2.4
Theses changes are intended to provide the following benefits:
- provide greater certainty to taxpayers, and reduce compliance and
administration costs;
- assist small and medium enterprises looking to expand offshore by
removing the need to implement systems to perform the tracking and collection
of different classes of income, deductions and taxes when they try to penetrate
a foreign market;
- improve the relative attractiveness of Australia as a destination for international
capital;
- The regional headquarters of a foreign group will no longer need to
establish and maintain costly systems to comply with the redundant quarantining
rules[3];
and
- enhance the competitiveness and reduce the compliance costs of
Australian based managed funds.
- The removal of quarantining will assist Australians in using Australian managed
funds to diversify their investments overseas.
- It will also improve the competitiveness of Australian managed funds in
attracting the management of funds from other countries.[4]
Schedule 2—Capital gains tax roll-over provisions
Overview
2.5
Schedule 2 amends the Income Tax Assessment Act 1997 (ITAA 1997) to
provide a capital gains tax (CGT) roll-over for membership interests in medical
defence organisations (MDO).[5]
Background and Summary
2.6
This Schedule amends Division 124 of the ITAA 1997 by inserting
Subdivision 124-P which provides a CGT roll-over when a membership interest in
an MDO is replaced with a similar membership interest in another MDO and both
MDOs where companies limited by guarantee.[6]
2.7
This roll-over ensures that any capital gain made on the exchange of the
original shares or trust interests is deferred until after the exchange and a further
transaction generating CGT happens to the replacement shares or trust
interests.[7]
Intended benefits of changes
2.8
This roll-over aims to provide a better allocation of the nation’s
capital resources by removing CGT as an impediment to mergers and takeovers.[8]
Schedule 3—Superannuation investment amendments
Overview
2.9
Schedule 3 amends the borrowing restriction contained in the Superannuation
Industry (Supervision) Act 1993 to allow superannuation funds to invest in
instalment warrants of a limited recourse nature over any asset a fund would be
permitted to invest in directly.[9]
Background and Summary
2.10
Although there are some exceptions, Section 67 of the Superannuation
Industry (Supervision) Act 1993 prohibits superannuation fund trustees from
borrowing money. This prohibition has been in place since the 1980s, and is
one of a number of rules in superannuation legislation designed to limit risk
in superannuation fund investment.[10]
2.11
The proposed changes in Schedule 3 will allow superannuation funds to
invest in instalment warrants of a limited recourse nature over any asset a
fund would be permitted to invest in directly. As explained in the Explanatory
Memorandum:
- Instalment warrants are a derivative-based investment product;
they derive their value from the underlying asset. Traditionally, such arrangements
provide the investor with the right, but not the obligation, to buy the
underlying asset through instalments. Once the investor has made the first
instalment they are likely to be entitled to income from the underlying asset.[11]
Intended benefits of changes
2.12
These changes are intended to provide superannuation funds with greater
flexibility in their investment options, while still maintaining the integrity
of the risk provisions that apply to superannuation funds.
Schedule 4—Trust disclosure reforms
Overview
2.13
Schedule 4 amends the Income Tax Assessment Act 1936 (ITAA 1936) so
that trustees of closely held trusts are not required to report the details of
the ultimate beneficiaries of trust income to the Commissioner of Taxation.[12]
Background and Summary
2.14
In 1999 amendments were introduced to the ITAA 1936 regarding the ultimate
beneficiary rules. The aim was to prevent complex chains of trusts being used
to avoid or indefinitely defer tax.
2.15
Ultimate beneficiary statements will be replaced by trustee beneficiary
statements. A trustee of a closely held trust must make a correct trustee
beneficiary statement to the Commissioner in respect of each trustee
beneficiary who has a share of the trust’s net income or is presently entitled
to tax-preferred amounts. Trustee beneficiary statements must be provided by
the due date for the trust’s tax return or at the Commissioner's discretion.[13]
2.16
Trusts that are covered by a family trust election, or an interposed
entity election, or wholly-owned by the family trust are not covered by these
trustee beneficiary reporting requirements as these trusts are restricted in
the range of beneficiaries they can distribute to without penalty tax.[14]
Complementary Bills
2.17
Two complementary Bills – the Taxation (Trustee Beneficiary
Non-Disclosure Tax) Bill (No. 1) 2007, and the Taxation (Trustee Beneficiary
Non- Disclosure Tax) Bill (No. 2) 2007 – were introduced with the Tax Laws
Amendment (2007 Measures No. 4) Bill 2007. The two bills introduce amendments
to complement the proposed changes in Schedule 4 by providing mechanisms to
introduce a 46.5% non-disclosure tax. The Explanatory Memorandum explains the
purposes of the bills:
- The Taxation (Trustee Beneficiary Non-Disclosure Tax) Bill (No. 1) 2007
introduces a provision where if the trustee of the closely held trust does not
make a correct trustee beneficiary statement within the specified period in
respect of a trustee beneficiary’s share of the trust’s net income, the trustee
is liable for a 46.5 per cent trustee beneficiary non-disclosure tax on the
trustee beneficiary’s share of that net income.[15]
- The Taxation (Trustee Beneficiary Non- Disclosure Tax) Bill (No. 2) 2007
introduces a penalty tax of 46.5 per cent where a share of the net income of a closely
held trust is included in the assessable income of a trustee beneficiary and
the share, or part of it, ‘comes back’ to the closely held trust.[16]
Intended benefits of changes
2.18
The amendments proposed in Schedule 4 will reduce the costs of complying
with the ultimate beneficiary rules by requiring trustees of closely held
trusts to only report to the Commissioner details of trustee beneficiaries,
rather than trace benefits through to the ultimate beneficiaries.[17]
Schedule 5—Transitional Simplified Superannuation amendments
Overview
2.19
Schedule 5 amends various Acts to assist in the smooth transition to the
Simplified Superannuation regime.[18]
Background and Summary
2.20
This Schedule limits strategies which could be used to evade the minimum
drawdown requirements for account-based pensions, facilitates the provision of
tax file numbers (TFN) to superannuation and retirement savings account (RSA) providers,
and revises the application provision for small business capital gains tax (CGT)
relief.[19]
Tax File Numbers and Pay As You Go
(PAYG)
2.21
The Tax Laws Amendment (Simplified Superannuation) Act 2007 amended
the ITAA 1997 to establish a new category of income for superannuation and RSA
providers. This consists of superannuation contributions which are included in
their assessable income where no TFN is attached to the receiving member’s
account. Such income is known as no-TFN contributions income and is taxed at a
higher rate than if a TFN is quoted.
2.22
The amendments also ensure that where the Commissioner of Taxation gives
notice of a TFN to a superannuation or RSA provider, it is taken to have been
quoted by the individual. The higher rate of tax does not then apply. The
Commissioner may provide a TFN to a superannuation or RSA provider under the
general administration provisions of existing legislation. These amendments
will ensure that superannuation and RSA providers do not need to take account
of their no-TFN contributions income when working out their PAYG instalments.[20]
Segregated pension assets
2.23
Pensions receive concessional tax treatment in the form of a tax-exemption
for income derived from the assets supporting that pension. The ITAA 1997 gives
complying superannuation funds an exemption for income derived from assets
which, at the time of derivation, are segregated current pension assets.
2.24
In return for this concessional tax treatment, pensions are subject to
rules designed to ensure that the capital in the pension is drawn down over
time. The amendments in this Schedule clarify that, in the case of
account-based pensions, assets which are not included in the income stream
account balance will be ineligible for the tax concession available to
segregated current pension assets.[21]
Capital gains tax business relief
2.25
Relief from CGT is available for qualifying small businesses on proceeds
of transactions generating CGT that are used for retirement. Under Simplified
Superannuation reforms, the relevant CGT provisions were amended to exclude
references to eligible termination payments and allow for the payment of a
contribution to a complying superannuation fund or RSA. These changes applied
to transactions generating CGT occurring during financial year 2007-08 or later
financial years.
2.26
The application provision is amended to provide for transactions
generating CGT which occur before 2007-08 where an individual chooses either to
take advantage of this relief, or the proceeds from the CGT events are received
after 30 June 2007. The provisions are also amended to apply to a company or
trust that makes a payment to a CGT concession stakeholder after 30 June 2007.
2.27
These amendments are to the application provisions which incorporate new
CGT concepts introduced by the Tax Laws Amendment (2006 Measures No. 7) Act
2007 that apply to transactions generating CGT happening in the 2006-07 financial
year and beyond.[22]
Rewrite of superannuation law
2.28
As part of the Simplified Superannuation reforms, the provisions dealing
with the taxation of superannuation in the ITAA 1936 were rewritten and
consolidated into the ITAA 1997 by the Tax Laws Amendment (Simplified
Superannuation) Act 2007.
2.29
These amendments ensure the rewritten provisions operate in a manner
consistent with the original policy.[23]
Intended benefits of changes
2.30
These amendments contribute to the preservation of the tax system's integrity,
and streamline tax reporting requirements.
2.31
These amendments also improve the readability of provisions rewritten as
part of the Simplified Superannuation reforms and clarify their intended
operation.
Schedule 6—Deductible gift recipients
Overview
2.32
Schedule 6 amends the Income Tax Assessment Act 1997 (ITAA 1997) to
update the list of deductible gift recipients (DGR) to include two new
organisations.[24]
Background and Summary
2.33
DGR status assists relevant funds and organisations to attract public
support for their activities. The income tax law allows taxpayers to deduct
gifts of $2 or more made to DGRs. To be a DGR, an organisation must fall
within a category of organisations set out in the ITAA 1997, or be listed by
name under its provisions.
2.34
These amendments add a further two names to the DGR list. They are:
- the Australian Peacekeeping Memorial Project Incorporated; and
- Social Ventures Australia Ltd.
Intended benefits of changes
2.35
These amendments will assist the Australian Peacekeeping Memorial
Project to construct a national memorial in Canberra to commemorate and
celebrate Australian peacekeeping, and assist Social Ventures Australia Ltd to
improve the effectiveness of other charitable organisations by providing a
tailored combination of financial support, business skills development and mentoring.[25]
Schedule 7—Miscellaneous amendments
Overview
2.36
Schedule 7 makes technical corrections and other minor amendments to the
taxation laws.[26]
Background and Summary
2.37
Through the introduction of long and complex amendments, occasionally
the definitions and prose of amendments leave the final legislation difficult
to read and understand. This Schedule clarifies the language on a variety of
Bills.
Intended benefits of changes
2.38
The amendments rectify errors such as duplicate definitions, missing
asterisks from defined terms, and inoperative references. The aim to clarify
the relevant laws, and make the laws more readable.[27]
For a full list of the proposed changes, see the Explanatory Memorandum.[28]
Schedule 8—Family trust loss regime amendments
Overview
2.39
Schedule 8 amends the trust loss regime in the Income Tax Assessment
Act 1936 to allow family trust elections and interposed entity elections to
be revoked or varied in certain limited circumstances.[29]
Background and Summary
2.40
These amendments provide more flexibility to family trusts in relation
to the trust and company tax loss, bad debt deductions and franking credit
trading rules. They allow family trust elections and interposed entity
elections to be revoked or varied in certain circumstances, and they broaden
the definition of ‘family’ and ‘family group’.[30]
2.41
These amendments will allow a family trust election to be revoked unless
tax losses have been recouped or bad debt deductions or franking credits have
been claimed, during a specified period where the recoupment or claim was only
possible because of the family trust election.[31]
2.42
The trust loss rules protect the integrity of the income tax system by
preventing the tax benefits arising from the recoupment of trust losses and bad
debt deductions being transferred to persons who did not bear these losses or
debts when they were incurred. These measures achieve this aim by examining
whether there has been a change in underlying ownership or control of a trust
or whether certain schemes have been entered into to take advantage of a
trust’s losses.[32]
Intended benefits of changes
2.43
These amendments increase flexibility for taxpayers with family trusts
while maintaining the integrity of the income tax system by:
- allowing family trust elections and interposed entity elections to
be revoked in certain limited circumstances;
- allowing the test individual specified in a family trust election
to be changed in certain limited circumstances;
- broadening the definition of ‘family’ to include lineal descendants
of family members;
- ensuring that the death of a family member does not by itself result
in another family member ceasing to be a member of the family; and
- exempting distributions made to former spouses, former widows/widowers
and former step-children from family trust distribution tax by including them
within the definition of ‘family group’.[33]
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