The Government tonight announces its next major steps to promote Australia as a financial hub in our region and support Australian jobs in the financial services sector.
These important reforms allow Australian managed funds and other businesses to compete on the world stage to ensure they can continue to grow, increase services exports and support more jobs.
Small and medium sized businesses wanting to expand offshore to access markets will also benefit from lower compliance costs.
The changes will also simplify the tax law and bring the consolidation of the two income tax Acts a significant step closer.
The Government tonight releases its response to the Board of Taxation's (the Board) review of the foreign source income anti-tax-deferral (attribution) rules and to the Board's interim advice on the review of taxation of managed investment trusts (MITs). I would like to thank the Board for its work in these areas.
The Government will implement all but one of the Board's recommendations in relation to the attribution regimes review.
The Government will implement the Board's interim advice on taxation of managed funds to provide deemed capital account treatment for gains and losses made on disposal of investment assets by MITs, subject to appropriate integrity rules.
Allowing for deemed capital account treatment for MITs will provide more certainty and ensure Australia's tax regime is competitive in attracting foreign funds.
Reform of the attribution rules will dramatically reduce compliance costs for managed funds and other businesses, saving business up to $80 million each year.
These important measures build on the steps taken in the 2008 Budget to cut the withholding tax rate for MITs and establish the Australian Financial Centre Forum – moves both widely welcomed by the financial sector.
Reform of the attribution rules and deemed capital account treatment of certain assets will address two significant areas of uncertainty and complexity for the Australian financial sector.
Implementing the Board's recommendation on the taxation of managed funds will provide certainty to the managed funds sector, especially in light of Tax Office concerns that some disposals by MITs should be treated on revenue account.
This measure will mean that where an Australian MIT makes an irrevocable election to apply the capital gains tax (CGT) regime to disposals of eligible assets, resident investors will be entitled to the CGT discount on eligible taxable gains distributed by MITs and non‑resident investors will be exempt from Australian tax on distributions of gains on disposal of eligible MIT assets unless the assets are taxable Australian property.
The Board's recommendations on the attribution rules will dramatically reduce complexity and compliance costs for affected businesses.
Australia's attribution rules, the controlled foreign company (CFC) rules, foreign investment fund (FIF) rules, transferor trust rules and the deemed present entitlement rules, are notoriously complex. The Australian Financial Centre Forum, established by the Government in September 2008, has emphasised the need for reform of this area based on representations from industry through the Forum.
The Government will repeal the FIF provisions and replace them with a specific, narrowly-defined anti avoidance rule. The Government will also modernise and rewrite the CFC provisions into the Income Tax Assessment Act 1997, repeal the deemed present entitlement rules, and amend the transferor trust rules to enhance their effectiveness and improve their integrity.
These measures form a key part of the Rudd Government's election commitment to make Australia a leading financial services centre in the Asia-pacific region and will help boost financial services exports and support Australian jobs.
These reforms constitute a major modernisation of the attribution rules, in line with the Government's aim of making Australia a more attractive financial centre by improving the competitiveness of Australian business and cutting red tape.
The reforms will also improve the competitiveness of Australian businesses which have offshore operations by modernising and simplifying the attribution rules to better target areas at risk of inappropriate tax deferral, while substantially reducing compliance costs.
Tax system integrity is an important consideration for the Government. In responding to the Board's recommendations, and to industry concerns raised through the Australian Financial Centre Forum, the Government has focussed on removing impediments without allowing exploitation.
The abolition of the FIF rules - in conjunction with rewriting the CFC rules (which together comprise almost 25 per cent of the Income Tax Assessment Act 1936) into the Income Tax Assessment Act 1997 - will bring the consolidation of the two income tax acts much closer.
Given that the revenue implications of the proposed reforms must be balanced against other pressing needs within the Australian budget, the listed public company exemption (recommendation 2 of the Board) will not proceed. However this is not fundamental to proceeding with the framework reforms to the attribution rules recommended by the Board.
The reforms are fiscally responsible and will help Australian companies compete in global markets at minimal revenue cost, while delivering major compliance cost benefits.
The Board is continuing to review the taxation treatment of MITs and is expected to provide its final report by mid‑2009. The Australian Financial Centre Forum continues work on preparing a policy blueprint for promoting Australia as a leading financial services Centre.
For further information on the Board's reviews see the Board's website: http://www.taxboard.gov.au
Summary of capital account election:
- Where an Australian MIT makes an irrevocable election to apply the capital gains tax (CGT) regime to disposals of eligible assets (generally shares, units and real property), resident investors will be entitled to the CGT discount on eligible taxable gains distributed by MITs. In addition, non‑resident investors will be exempt from Australian tax on distributions of gains on disposal of eligible MIT assets unless the assets are taxable Australian property.
- The proposal will apply to Australian MITs and to unit trusts that are 100% owned and controlled by MITs that meet the eligible investment business rules in Division 6C of the Income Tax Assessment Act 1936. It will not apply to Public Unit Trusts or Corporate Unit Trusts which are trusts that are taxed like companies.
- An integrity rule will be included in the measure. If an MIT elects into this CGT regime, the election will be irrevocable and it will also apply to all disposals of eligible investments in the first income year that commences on or after the 2008-09 income year. This will reduce the incentive for MITs to dispose of existing assets and claim deductions for losses on revenue account against other income, before the measure is implemented or an election is made.
- There remain a number of implementation details that need to be considered which will be canvassed in a Treasury consultation paper to be released shortly.
Summary of reforms to the attribution rules:
- The CFC provisions will be retained as the primary set of rules designed to counter tax deferral arrangements. The CFC provisions will be modernised by updating the definitions of what constitutes active and passive income together with the removal of the base company income rules.
- The existing exemptions within the CFC rules will be retained, including the listed country and Australian financial institution subsidiary exemptions, and additional exemptions introduced for complying superannuation entities.
- A choice of attribution methods will apply (the branch equivalent calculation, market value, and deemed rate of return methods) where taxpayers are required to include attributable income in their assessable income.
- The CFC provisions will be rewritten in the Income Tax Assessment Act 1997.
- The FIF provisions will be repealed and replaced with a specific, narrowly defined anti avoidance rule that applies to offshore accumulation or roll up funds. The scope of this rule will be carefully monitored as part of reviewing the effectiveness of the reforms. In the absence of FIF rules, closely held fixed trusts will be brought into the rewritten CFC rules where needed to prevent deferral.
- The deemed present entitlement rules will be repealed.
- The transferor trust rules will be retained with amendments to enhance their effectiveness and improve their integrity.