27 September 2002

Business Tax Legislation Introduced

The Minister for Revenue and Assistant Treasurer, Senator Helen Coonan, welcomed the introduction into Parliament yesterday of another key tranche of business tax reform legislation.

The New Business Tax System (Consolidation and Other Measures) Bill (No. 1) 2002 contains further measures relating to the implementation of the Consolidation regime for the taxation of wholly-owned corporate groups and further amendments to the new Simplified Imputation System.

"This legislation includes the important third stage measures in the progressive introduction of the consolidation regime into Parliament, and builds on the core consolidation platform introduced in May and June 2002." Senator Coonan said.

Consolidation will allow wholly-owned corporate groups to be treated as a single entity for taxation purposes, reducing the compliance burden and providing greater flexibility to businesses.

For most corporate groups the measures contained in this Bill will provide the necessary legislation to allow them to finalise their planning for implementation of consolidation.

The measures deal with outstanding matters necessary for implementation of the regime commencing on 1 July 2002.

Further consolidation legislation scheduled for introduction later this year relates to remaining discrete and specialist areas of the regime, including rules relating to the life insurance industry.

The imputation measures contained in this Bill form part of the package of amendments needed to implement the new simplified imputation system which simplifies and gives more flexibility to companies franking dividends to shareholders.

The bill delivers some of the previously announced aspects of the simplified imputation system and reduces compliance costs associated with the operation of other provisions as a result of issues raised during further consultation with business.

"All of the tax reform measures introduced in this bill have been the subject of on-going consultation with the business community to ensure the measures are responsive to the needs of business," Senator Coonan said

Further imputation amendments to apply from 1 July 2002 are listed in the attachment and will be introduced into Parliament as soon as practicable.

IMPUTATION LAW MODULES TO FOLLOW AFTER SEPTEMBER 2002

MODULE

DESCRIPTION

Life insurance company amendments

These amendments deal with the special imputation rules that apply to life insurance companies. Broadly speaking, these rules have the effect that life insurance companies only receive franking credits from the payment of tax to the extent that the tax is attributable to income derived on behalf of the company's shareholders.

Venture capital franking

These amendments are designed to encourage venture capital investment in Australia by allowing resident complying superannuation funds (and like entities) a special imputation tax offset which enables them to receive venture capital gains free of tax through pooled development funds.

Share capital tainting

These amendments are integrity rules designed to ensure that a company cannot transfer profits to its share capital account and then distribute those profits to shareholders in the guise of preferentially taxed share capital.

Holding period and related payment rules

These amendments are also integrity rules intended to prevent franking credit trading.

Currently, SIS indirectly relies on the 1936 Act imputation provisions to give effect to the holding period and related payment rules. In determining whether a taxpayer is a "qualified person" and therefore entitled to franking benefits, SIS relies on the provisions contained in Division 1A of Part IIIAA of the ITAA 1936 as if those provisions had continued to apply. This indirect approach will be replaced so that the relevant provisions are actually contained within the SIS.

As part of this process, consequential amendments will be made to these rules to take into account the new SIS. For example, the small shareholder exemption and the benchmark portfolio ceiling method rules will be amended to reflect the new SIS terminology and processes.

Machinery provisions

These amendments relate to the provisions dealing with returns, assessments and the collection of the various taxes associated with the imputation system including franking deficit tax and offset entitlements, additional franking deficit tax (formerly deficit deferral tax) and overfranking tax. These amendments also include the cum-dividend and security lending arrangement provisions.

The amendments will also ensure that the various anti-avoidance rules that were part of the imputation system in the ITAA 1936 continue to apply under the new SIS. These include:

  • the debt/equity aspects of the dividend streaming rules;
  • the section 46G to M anti-avoidance provisions; and
  • the anti-avoidance rules that apply to refunds of excess imputation credits for certain tax-exempt bodies.

Various consequential amendments

These amendments largely deal with ensuring that the new terminology and processes introduced by the SIS operate appropriately across the tax laws. Examples include:

  • the dividend withholding tax provisions to ensure that the exemption for dividend withholding tax will apply to dividends franked in accordance with the SIS;
  • the special deduction that applies under section 46FA and 46FB of the ITAA 1936 for the on-payment of unfranked non-portfolio dividends;
  • the various anti-avoidance rules including those contained in Part IVA of the ITAA 1936 to ensure, for example, that section 177EA can apply to schemes that give rise to franking benefits under the SIS;
  • the tax offset rules in respect of franked dividends contained in ITAA 1997 (including preventing companies getting a refund of excess imputation credits); and
  • the provision of a deduction in certain cases where a franking credit is included in a taxpayer's assessable income as a result of receiving a franked dividend but the taxpayer is not entitled to a tax offset because, for example, the dividend is exempt from income tax.