25 March 2003

Tax Reform Highlights

Note

This document is an attachment to the Assistant Treasurer's Address to the National Press Club, A Tax System Redesigned - Taking Stock

The Government has introduced the most comprehensive and successful tax reform ever attempted in Australia's history.

A New Tax System

Goods and Services Tax - from 1 July 2000, a broad based consumption tax of 10 per cent applies on most goods and services consumed in Australia. In return, wholesale sales tax and other inefficient taxes were abolished.

Personal Tax Cuts - a $12 billion annual cut in personal income tax means that more than three-quarters of taxpayers now face a marginal tax rate of no more than 30 cents in the dollar. Family assistance and government pensions and allowances were increased.

Removing Various State Taxes - the introduction of the GST has also enabled the States and Territories to abolish taxes such as Financial Institutions Duty (FID), stamp duty on shares and bed taxes have also been abolished.

Australian Business Number - the introduction of the ABN has made it much more difficult for those operating in the cash economy to avoid their tax responsibilities.

Diesel and Alternative Fuels Grants Scheme - reduced transport costs, particularly for regional and rural Australia, by reducing the effective excise payable on diesel fuel used on-road of vehicles over 4.5 tonnes.

Extension of the Diesel Fuel Rebate Scheme - provided a full rebate of excise duty to all eligible activities as well as being extended to cover rail and marine transport.

Fuels Sales Grants Scheme - provided a grant to fuel retailers for sale of petrol and diesel in non-metropolitan and remote areas of 1 cent per litre and 2 cents per litre respectively.

New Business Tax System

Reducing Company Tax Rates - reduced from 36% to 34% for the 2000-01 income year and from 34% to 30% for the 2001-02 income year and beyond.

Consolidation - implemented a system that treats wholly-owned groups as a single entity for income tax purposes. This addresses efficiency and integrity problems in the existing taxation of wholly-owned groups, including compliance and general tax costs, double taxation, tax avoidance through intra-group dealings, loss cascading and value shifting. It also assists in the simplification of the tax system, reducing taxpayer compliance costs and ATO administration costs, improves the efficiency of business restructuring and strengthens the integrity of the income tax system.

Capital Gains Tax - streamlined existing CGT concessions for small businesses, provided CGT roll-overs in certain circumstances as a result of takeovers, and allowed certain non-resident tax exempt superannuation funds an exemption on gains made on the disposal of particular Australian venture capital investments.

Uniform Capital Allowances - corrected inconsistencies in the capital allowance regime by introducing a system that offered significant simplification benefits as well as improving neutrality.

Simplified Tax System - reduced the tax compliance burden on small businesses by simplifying their income tax liability calculations, reducing their tax payable through generous depreciation allowances and removing the need to do physical stocktakes.

Debt / Equity - defined what constitutes equity in a company and what constitutes debt. This determines the tax treatment of a return on a financing interest issued by a company (i.e. whether it is frankable or may be deductible). The definition of debt also constitutes a key component of the new thin capitalisation regime since it is used to determine what deductions may be disallowed.

Thin Capitalisation - ensured that multinational entities do not allocate an excessive amount of debt to their Australian operations, preventing them from taking advantage of the differential tax treatment of debt and equity to minimise their Australian tax.

Simplified Imputation System - simplified the existing rules, increased the flexibility in the method in which corporate tax entities frank distributions and provided consistent treatment across entities receiving franked dividends.

Refunding Excess Imputation Credits - enabled taxpayers whose tax rates are below the company tax rate to receive a refund of excess imputation credits (franking rebates) obtained from franked dividends.

Alienation of Personal Services Income - addressed individuals reducing their income tax by diverting the income generated by their personal services to a company, partnership or trust and limited work-related deductions available in these cases.

Other Integrity Measures - amended various areas of law in respect of capital gains tax, value shifting, loss duplication and artificial loss creation and non-commercial losses to maintain the integrity of the tax system.

Measures expected to be introduced in later sittings

Taxation of Financial Arrangements

Foreign Currency Gains and Losses - removes anomalies, distortions and gaps in existing laws, and enhances the efficient operation and competitiveness of Australia's business sector. Also includes provisions for the removal of taxing point at conversion or exchange of financial instruments.

Tax Exempt Leasing - replaces the existing section 51AD and associated Division 16D provisions.

Commodity Hedging - reforms the taxation of commodity (such as gold and cotton) hedging to remove tax uncertainties and allow more efficient hedging arrangements.

Tax Timing Rules - implements new tax-timing arrangements, including a mark-to-market election, an accruals/realisation framework, internal hedging rules and synthetic arrangements.

Other

Rights and Blackhole Expenditures - commencement not before July 2005. A systematic tax treatment of rights and blackhole expenditures is to be explored. In the meantime, consideration of reforms to the taxation of rights and any blackhole expenditures will continue to be on a case-by-case basis.

Taxable Leasing and the Treatment of Partnerships and Joint Activities - resolves non-routine leasing issues. Reform of leasing rules remains under development.

General anti-avoidance rule - further consideration is being given to the recommendations by the Ralph report on streamlining the anti-avoidance provisions.

Effective Life Depreciation of Buildings and Structures - this issue still requires further policy development and consultation. It raises a number of difficult practical issues and, if proceeded with, would not commence until at least July 2005.