Changes to the taxation treatment of certain foreign hybrid business entities have been announced by the Minister for Revenue and Assistant Treasurer, Senator Helen Coonan, to rule out such unintended consequences as double taxation and inhibiting overseas expansion of Australian companies.
"Typically, foreign hybrids are business structures that are treated for foreign tax purposes as partnerships but are treated as companies under Australia's current taxation laws. Examples include United Kingdom & United States (US) limited partnerships and US limited liability companies," Senator Coonan explained.
By treating foreign hybrids as companies for Australian income tax purposes, taxpayers with interests in them are also subject to the controlled foreign companies (CFC) regime or foreign investment fund (FIF) regime.
However, the current treatment of foreign hybrids under the CFC regime (and to a lesser extent the FIF regime) has lead to inappropriate and unintended consequences for taxpayers, including the double taxation risk and significant compliance costs.
"To alleviate these inappropriate and unintended consequences for taxpayers the Government has decided to treat foreign hybrids as partnerships (instead of as companies) for the purposes of Australia's income tax laws" Senator Coonan said.
"The Government has acted to deal comprehensively with these issues and has developed a response providing taxpayers with compliance costs savings and greater certainty while ensuring an appropriate application of the foreign income rules."
Senator Coonan pointed out that the new rules had been developed in consultation with business to ensure they address business concerns and provide clear and consistent rules.
"The new rules provide a better alignment of Australian and foreign tax rules which will accord with the way that many of these foreign hybrids are regarded for commercial purposes. They put Australia at the forefront in adapting our international tax arrangements to accommodate more flexible business structures and remove impediments to Australian businesses expanding offshore."
"Legislation to give effect to the changes will apply from the start of the 2003-04 income year. Taxpayers will also have an option to apply the new rules from the start of the 2002-03 income year."
"As taxpayers have experienced significant and genuine uncertainty in the application of the CFC rules (and to a lesser extent the FIF rules) to their interests in foreign hybrids, additional legislation will deal with income years prior to the start date for the new rules," Senator Coonan said.
The new rules are of a technical nature and are provided in more detail as an attachment to this media release on the Treasury website at www.treasury.gov.au under Published Information.