Today, the Assistant Treasurer, Chris Bowen MP announced that the Government has commenced consultation on draft legislation to reform Division 6C of the Income Tax Assessment Act 1936.
This forms a key part of the Rudd Government's election commitment to reform Division 6C of the Income Tax Assessment Act 1936 that was outlined in August last year and as part of the 2008 Budget.
"These reforms will reduce compliance costs for Australian managed funds and form an important part of the Government's commitment to make Australia a financial hub in the Asia-Pacific region," Mr Bowen said.
"The Government has already consulted widely with industry over the last few months on reforms to Division 6C."
"Consultation on the draft legislation represents a final stage of consultation on these important reforms first promised by the Government at last year's IFSA conference in Brisbane."
Key changes include:
- clarifying the scope and meaning of investment in land for the purpose of deriving rent;
- introducing a 25 per cent safe harbour allowance for non-rental, non trading income from investments in land;
- expanding the range of financial instruments that a managed fund may invest in or trade; and
- following consultation with industry, providing a further 2 per cent safe harbour allowance at the whole of trust level for non-trading income.
These modifications will make it easier for a trust to comply with the eligible investment business rules. Details of the proposed changes are in the attachment.
The Government expects the legislation to be ready for introduction in the Spring 2008 sittings.
Access to the draft legislation can be obtained by contacting:
Aaron Bennett
Trusts Unit
Business Tax Division
Treasury
Ex: (02) 6263 2978
Aaron.Bennett@treasury.gov.au
The closing date for comments is 14 August 2008.
Attachment
Clarifying the scope and meaning of investing in land for the purpose of deriving rent
The meaning of 'land' in Division 6C is to be clarified to ensure land includes related investments in immovable improvements and fixtures on land. Investing in movable property (that is, chattels) customarily supplied, incidental and relevant to the renting of the land and ancillary to the ownership and utilisation of the land would not disqualify the investment from being an 'investment in land'.
A safe harbour allowance of 25 per cent for non-rental income
The proposed 25 per cent non-rental income allowance is to apply at the whole of trust level to its aggregate portfolio of investments in land. The allowance would operate as an annual safe harbour and in conjunction with the existing rental purpose test which applies to an investment in land. A public unit trust will, in an income year, be taken to be investing in land for the purpose, or primarily for the purpose, of deriving rent, if
- each of the trust's investments in land are for purposes (other than trading), which include a purpose of deriving rent; and
- at least 75 per cent of the gross revenue from the investments in land is rent and the gross non-rental revenue of 25 per cent or less does not include any revenue from the trust carrying on a trading activity on a commercial basis on the land.
The meaning of rent for the purpose of meeting the safe harbour will also be clarified.
Expanding the range of financial instruments
The scope of financial instruments covered by the eligible investment rules will be extended to include financial instruments that are defined as financial arrangements in the Income Tax Assessment Act 1997. The definition of financial arrangement will be based on the comprehensive definition (as qualified by the various exceptions) in the proposed Division 230 of the forthcoming Bill dealing with the Taxation of Financial Arrangements.
A technical amendment to the eligible investment business rules will also be made to clarify that investing or trading in 'shares in a company', includes shares in certain foreign hybrid companies.
An additional 2 per cent safe harbour allowance at the trust level
To reduce the scope for inadvertent minor breaches of the Division 6C rules, which would otherwise trigger company taxation for a trust, an additional safe harbour allowance will be provided. Each year the safe harbour will allow a trust to earn up to 2 per cent of its revenue from non-trading activities.