Maintaining the Momentum of Business Tax Reform

The Minister for Revenue and Assistant Treasurer, Senator Helen Coonan, today announced the Government's programme for delivering the next stage of business tax reform measures.

Senator Coonan said "these measures affirm the Government's commitment to maintain the momentum of business tax reform and build on the far-reaching reforms that are already in place". Some of the major measures already working for Australia include the cuts in the company tax rate; halving of the capital gains tax for individual investors; the simplified tax system for small business; the uniform capital allowance system (which also recognised a number of blackhole expenditures); enhanced incentives for research and development; and thin capitalisation rules.

The Government has also signed a protocol to amend our double tax agreement with the United States that will benefit many Australian companies operating in the world's biggest economy. More broadly, the review of international tax arrangements will focus on those aspects of taxation that affect the decisions of businesses to locate in Australia and their ability to attract foreign and domestic capital and expand offshore.

Senator Coonan emphasised that "the aim of the Government's business tax reforms is to deliver a modern, competitive and fair tax system with a reduction in compliance costs facing business, particularly small business. The ultimate aim of tax reform is to promote better living standards and employment opportunities for Australians".

Senator Coonan said "managing the scope and pace of tax reform is another important consideration in delivering the next phase of business tax reform. The business community's concerns about managing change, while continuing business tax reform, have featured strongly in developing the implementation timetable".

A list of business tax reform measures and their date of commencement is at Attachment A. Some specific changes are outlined below.

Consolidated Taxation of Corporate Groups

The consolidation measure will involve taxing companies within a wholly-owned corporate group as a single entity, delivering improved commercial flexibility, reducing compliance costs and addressing integrity issues. The measure will commence from 1 July 2002.

Further details of the consolidation measure is being announced separately.

Tax Relief for Demergers

Providing tax relief for demergers will increase efficiency by allowing greater flexibility in structuring businesses, thereby providing an overall benefit to the economy.

Tax relief for demergers will be made available where underlying ownership is maintained and the original entity demerges at least 80 per cent of its ownership interest in the demerged entity. Tax relief will be made available to both widely held and non-widely held companies and trusts. Capital gains tax (CGT) relief is to be provided at the member and entity level. An exemption from the existing dividend rules will be provided, subject to an integrity rule. This measure will commence from 1 July 2002.

Further details of the demerger measure was announced on 6 May 2002.

Taxation of Financial Arrangements

The remaining reforms to the taxation of financial arrangements (TOFA) will be implemented in stages over the next 2 years (debt/equity reforms came into effect on 1 July 2001). These reforms were recommended by the Review of Business Taxation and have previously received in-principle support from the Government. The TOFA reforms are designed to remove anomalies, distortions and gaps in existing laws, facilitate desirable financial innovation, improve risk management and enhance the efficient operation and competitiveness of Australia's business sector.

The next stage of the TOFA reforms will involve revamping the taxation laws relating to foreign currency gains and losses. This will cover the resolution of tensions and uncertainties within the existing law and will include implementing recommendations included in the Review of Business Taxation. Further consultations will be held over coming months (including exposure draft legislation) with a view to introducing legislation in the Spring Sittings.

This will be followed by reform of the taxation of commodity (e.g. gold and cotton) hedging. These reforms will remove tax uncertainties and allow more efficient hedging arrangements. The commencement date will be 1 July 2003. Further industry consultations will be undertaken to settle the details of the Government's policy approach.

The final stage includes implementation of new tax-timing arrangements, including a mark-to-market election, an accruals/realisation framework, internal hedging rules, disposal rules and synthetic arrangements. The commencement date will be 1 July 2004.

Removal of Taxing Point at Conversion or Exchange of Certain Financial Instruments

Under the current tax law, the point of conversion or exchange of certain financial instruments represents a taxing point for income tax purposes. This taxing point is to be removed from the taxation law and will apply to traditional securities that are issued after 7.30 pm EST 14 May 2002. Relevant financial instruments issued before this announcement will continue to be subject to the current tax law.

The effect of this announcement will be that an investor who holds a relevant financial instrument through conversion or exchange will not be subject to tax until it is ultimately sold. Furthermore, where the gain or loss on disposal is of a capital nature, the investor will be able to qualify for capital gains treatment for the period before, and after, conversion or exchange.

Introduction of a Withholding Tax Regime for Non-Residents Without a Permanent Presence in Australia

The Review of Business Taxation recommended the introduction of a uniform withholding tax regime on taxable Australian-source income and gains derived by non-residents. The Government has previously agreed in-principle with this recommendation, to commence from 1 July 2002.

To minimise the compliance burden on Australian businesses, the Government has decided to proceed with a modified approach to the implementation of this measure, with obligations for withholding to be developed as required for specific industries, and supported by the existing Pay As You Go (PAYG) withholding system. Following further consultations, any new obligations to withhold will be introduced progressively by regulations from 1 July 2003, with enabling legislation to be introduced prior to 1 July 2003.

Taxation of Life Insurance Policyholders

The Government has decided not to proceed with the recommendations made by the Review of Business Taxation to introduce measures to tax life insurance policyholders like they are shareholders in companies due to concerns about compliance costs.

However, the Review of Business Taxation's recommendations affecting special investment products offered by friendly societies will be implemented, with some modification. To ensure that investment income paid by friendly societies is only subject to one level of tax, friendly societies will be entitled to a deduction from 1 January 2003 for amounts paid to policyholders relating to income bonds, funeral policies and scholarship plans taken out after 30 November 1999. Legislation to introduce these reforms will be developed in consultation with industry.

Simplified Imputation System

The Simplified Imputation System will commence on 1 July 2002 as previously announced, with legislation scheduled for introduction into Parliament in the Winter sittings.

Since release of the earlier exposure draft legislation, the measure has been subject to consultation with representatives of small and large business. Further details of the measure will be announced shortly.

Franking Credits for Foreign Dividend Withholding Tax and the Establishment of Foreign Income Accounts

In light of their significant linkages with the central issues identified to date by business for consideration in the review of international tax arrangements, the Government has decided to defer, pending the review, implementation of the measures to provide franking credits for foreign dividend withholding tax and to establish foreign income accounts.

Tax Exempt Leasing and Effective Life Depreciation of Building and Structures

Although there is broad agreement with the States and private sector on a framework to replace the existing section 51AD and the associated Division 16D provisions, significant boundary and implementation issues remain to be resolved. Further consultation on these issues will be undertaken through the course of 2002-03 and it is expected that legislation will be introduced in the Autumn 2003 sittings. Reform of general leasing rules remains under development.

The Government accepted in principle the RBT recommendation that new buildings and structures should be included in the uniform capital allowance system. The Treasurer's press release of 22 March 2001 noted that this issue still required further policy development and consultation.

This measure raises a number of extremely difficult practical issues, including separating land value from that of the buildings and structures, and defining the asset unit (a single building or many smaller assets). In light of the need for significant amounts of further work and competing tax priorities, the measure, if proceeded with, will not commence until at least July 2005.

The General Value Shifting Regime

The general value shifting regime is designed to prevent the manipulation of ordinary tax rules by shifting taxable value between assets by related parties. The general value shifting regime will apply to arrangements and dealings involving entities that are not part of the same consolidated group, but are nevertheless related in some other way. The measure will commence from 1 July 2002 and legislation is scheduled for introduction into Parliament in the Winter sittings.

Tax Value Method

The Board of Taxation is currently receiving public comments on its prototype legislation for the Tax Value Method (TVM). The Board expects to be able to provide its recommendation by the middle of the year to the Government as to whether and when the TVM should be introduced.

Without prejudicing the Board's or the Government's views on whether TVM should proceed, it is clear that any implementation could not occur before July 2005, at the earliest. In the meantime, consideration of reforms to the taxation of rights and any blackhole expenditures will continue to be undertaken on a case-by-case basis.

Attachment A

TIMETABLE FOR BUSINESS TAX REFORMS