A temporary deferral of the commencement date for the Government’s tax exempt asset financing reforms was announced today by the Minister for Revenue and Assistant Treasurer, Senator Helen Coonan.
The reforms are designed to improve the tax framework for asset financing arrangements between private sector taxpayers and tax preferred entities. The Government is committed to introducing the reforms by 1 July 2004, with the reforms commencing from the date of Royal Assent of the legislation.
“The new regime will now only apply to legally enforceable arrangements entered into on or after the enactment of legislation. This will improve certainty and clarify the tax treatment of projects starting after 1 July 2003,” Senator Coonan said.
Legislation to implement reforms to the taxation treatment of tax preferred asset financing arrangements was released as an exposure draft on 26 June 2003. The legislation, proposed to commence from 1 July 2003, reflected recommendations made by the Review of Business Taxation and was developed with extensive consultation with industry and with the States and Territories.
The Government received many submissions on the draft legislation. Those submissions, while noting substantial progress towards an improved tax framework, raised varied and sometimes conflicting issues about key parameters of the proposed reforms.
Issues raised largely concern the scope of the new provisions and the appropriateness of risk tests developed to represent a more appropriate measure of the predominant economic ownership of assets. Further details of the types of issues raised in the submissions are attached (see Attachment A).
“The Government remains committed to implementing an effective, comprehensive package of reforms to ensure the tax treatment of asset financing arrangements between taxpayers and tax exempt entities is more coherent, neutral and certain,” Senator Coonan said.
“In addition, the Government has consistently maintained an integrated approach is required to deal effectively with the agreed deficiencies of the existing tax treatment of asset financing for tax preferred entities.”
The Government has therefore rejected calls for a transitional regime to apply pending finalisation of comprehensive reform as it would represent a piecemeal approach and would not adequately reconstruct arrangements so that financial outcomes are taxed appropriately.
“Deferring the commencement date allows further opportunity for consultation with stakeholders and more time for the community to gain a better understanding of the proposed amending legislation,” Senator Coonan said.
“It also reflects the Government’s commitment to use consultative processes to develop tax legislation.”
ATTACHMENT A
SUMMARY OF KEY ISSUES RAISED IN SUBMISSIONS ON THE TAX EXEMPT FINANCING EXPOSURE DRAFT LEGISLATION
This table outlines key issues raised in submissions on the Exposure Draft of the New Business Tax System (Tax Preferred Entities – Asset Financing) Bill 2003.
Exposure draft legislation |
Views in raised in submissions |
Proposed Division250 of the Income Tax Assessment Act 1997 applies to arrangements with tax exempt end-users that currently come within the scope of section51AD of the Income Tax Assessment Act 1936 – including entities subject to a Tax Equivalent Regime. STS entities and other entities with some of their income subject to tax, such as clubs, are excluded. |
Proposed Division250 may apply to some arrangements that were not previously affected by section51AD and Division16D of the Income Tax Assessment Act 1936. The scope should be limited to tax exempt end-users currently subject to Division16D and exclude entities subject to a Tax Equivalent Regime. |
Proposed Division250 denies tax benefits from timing effects of deferred income and accelerated allowances. |
Tax benefits should be allowed for certain arrangements such as:
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Proposed Division250 denies tax benefits and applies loan treatment where a tax exempt entity has a predominant economic interest in the asset, such as where the present value of agreed level of low risk financial benefits to be provided by tax exempt entity to the private sector are greater than 50% of the value of an asset. |
The present value of low risk of financial benefits boundary should be increased from 50% to 90% of the value of an asset – that is, a tax exempt entity should be able to provide low risk financial benefits up to 90% of the value of an asset. Financial benefits should only include assessable amounts. |
Proposed Division250 denies tax benefits and applies loan treatment where a taxable entity does not have a minimum investment risk (assumed risk) of 20%. |
The assumed risk should be reduced from 20% to 10%. |
Proposed Division250 denies tax benefits and applies loan treatment where the asset was previously owned by a tax exempt entity. |
Prior ownership of asset by the tax exempt entity should be allowed. |
Proposed Division250 denies tax benefits and applies loan treatment where the asset is subject to purchase options at other than market value. |
Assets subject to purchase options on an arm’s length basis should be excluded. |
Proposed Division250 denies tax benefits and applies loan treatment where the asset is subject to a long term non-cancellable arrangement greater than 75% of effective life (50% if real property). |
The 75% effective life test should apply to all assets. |
De minimis exclusions ensure that proposed Division250 does not apply if:
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Proposed Division250 should not apply where the tax exempt entity does not have control of the asset. The payments threshold for exclusion should be increased from 10% to 20% or 50%. |
Proposed Division250 applies notional loan treatment to provide an outcome equivalent to a loan or a vendor financed sale to neutralise tax benefits from timing effects of deferred income and accelerated allowances.
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End values should be tax written down values or residual values set in agreement. Notional interest should be:
An option to adopt financial accounting methodology should be included. |