Draft legislation for much needed tax reform of infrastructure and other asset financing has been released for technical comment, the Minister for Revenue and Assistant Treasurer, Senator Helen Coonan, said today.
The proposed reforms have been the subject of intensive consultation with the relevant key stakeholders and the Government has taken into account comments received in the development of this exposure draft legislation.
Given the range of complex financing arrangements which might be affected by these measures, the Government is providing a short extension of time for interested parties to consider the implications of the legislation and provide any technical comments on its intended operation prior to introduction of the Bill.
"As indicated in my media release of 14 May 2002, the Government is committed to reforming the Income Tax Assessment Act 1936 provisions (Section 51AD and the associated Division 16D), which have particular relevance to financing arrangements in the infrastructure industry," Senator Coonan said.
"These provisions are in urgent need of reform," Senator Coonan said.
"The exposure draft legislation proposes the replacement of these provisions with a more coherent, neutral, certain and appropriate taxation framework for asset financing arrangements between taxable entities, on the one hand, and tax preferred entities and non-resident entities (`tax exempt entities'), on the other," Senator Coonan said.
"The Government considers that the policy framework set out in the exposure draft legislation represents a significant improvement over the current law and is committed to its early introduction into Parliament in the Spring Sittings 2003," Senator Coonan said.
Technical comments on the draft legislation can be sent to The Manager, Taxation of Financial Arrangements and Leasing, The Treasury, Langton Crescent, Parkes ACT 2600 ( tofa&leasing@treasury.gov.au) by Tuesday 15 July 2003. The exposure draft and explanatory material can be viewed on the Treasury's web site (www.treasury.gov.au).
ATTACHMENT A
Current law
The current tax law seeks to deny a taxpayer deductions for various types of expenditure on assets which are used by, on behalf of, or for the benefit of a tax exempt entity who is the economic owner of the relevant asset rather than the taxpayer who holds the asset for income tax purposes.
This is necessary to prevent entities getting the benefit of income tax deductions in relation to assets they economically own but in respect of which they are not subject to income tax. The revenue would be at significant risk without integrity measures to prevent the tax deferral opportunities of such arrangements. In certain respects, however, existing section 51AD and Division 16D use inappropriate tests to determine who is the economic owner of the asset. Also, these provisions can be harsh and deficient in their application.
In particular, where section 51AD applies, it denies business tax deductions such as capital allowances and interest deductions that would otherwise be available in respect of the ownership or holding of property. At the same time, income from the property continues to be subject to income tax in the hands of the holder for tax purposes.
Proposed law
The exposure draft legislation sets out more appropriate risk tests to determine whether the taxable entity who holds the asset for tax purposes should be treated as the economic owner. In essence, the proposed measures will deny a taxpayer access to deductions for capital allowances and associated tax timing benefits where the taxpayer does not have the predominant economic interest in the asset.
Predominant economic interest will be determined by reference to whether sufficient risk in relation to the asset has been allocated to, or assumed by, entities outside the tax exempt sector as well as by whether the holder of the asset has sufficient risk in relation to the asset.
The new framework will, however, also introduce a fairer basis for treating arrangements to which the new measures will apply. The arrangement will be notionally reconstructed and financial benefits in relation to the asset will be notionally broken into principal and interest. Notional interest will be assessed on an accruals basis, subject to adjustments that take into account the amount and level of risk of amounts actually provided.
Notional loan treatment will alter, for income tax purposes, the timing of recognition of the cost of the relevant asset and the financial benefits in relation to the asset. However, it is not designed to alter the net amount that is taken into account for income tax purposes over the term of the arrangement, including the net deductible cost for tax purposes of the asset.
The measures will also facilitate election into the notional loan treatment. This will improve certainty and neutrality of treatment.