Today the Government is announcing the timetable for delivering the remaining elements of the business tax reform package.
The major elements of the business tax reform package have already been introduced, including delivery of an internationally competitive company tax rate, a halving of the CGT rate for individuals, scrip for scrip rollover relief and improved arrangements to facilitate venture capital to assist start-up and innovative enterprises.
Significant progress has been made in developing further aspects of the reform package. In most cases, the Government has adopted the practice of releasing exposure drafts of legislation in order to identify issues of concern to the business community and to consult on implementation.
An orderly phasing of the further changes will assist business adjust to the new provisions and ensure that the benefits of the new tax system and business tax arrangements can be fully captured. The Government is consulting with the Board of Taxation on progressing further measures. The Board has also recommended staging implementation to allow greater time for adjustment.
Implementation of the remaining business tax changes will therefore be staged, with the commencement date for several measures originally intended for 1 July this year being deferred to 1 July 2002. Details are outlined in the attachment.
The measures which will begin as planned from 1 July this year, include the simplified tax system for small business, a new unified capital allowances system to streamline the present law and to recognise certain ‘blackhole expenditures’, the proposed thin capitalisation measures applying to multi-national corporations which will strengthen the Australian tax base and a new test in the tax law to distinguish debt from equity.
Those measures which will be deferred to 1 July 2002 include the consolidation regime, general value shifting rules, foreign income account and non resident withholding tax regime, and simplified imputation arrangements.
While some large businesses are prepared and ready for the consolidation regime, consultation has shown that the majority of business (particularly small and medium enterprises) is not yet ready. The Board of Taxation has recommended deferral for a year and this will also allow finalisation of outstanding issues.
As previously announced, the Government will not be proceeding with the draft legislation on entity taxation. As a consequence, the current tax law for trusts will continue to apply, including ongoing access to the 50 per cent CGT discount, providing the trust asset had been held for at least 12 months. For beneficiaries with fixed interests in a trust, from 1 July 2001 cost base adjustments will not be required for distributions from the 50 per cent CGT discount, but an adjustment will need to be made on receipt of distributions of non-assessable amounts associated with building allowances. In addition, neither the rollover relief that was to be provided to facilitate restructuring as a result of the unified entity regime nor the early refund of excess franking credits for closely held entities is now required. (Refunds of excess imputation credits will be available upon assessment for dividends paid from 1 July 2000.)
The exposure draft legislation on entity taxation also contained provisions for simplifying the imputation system, including imputation credits for foreign dividend withholding tax. The consultation process has raised several issues and options which could reduce compliance costs. In giving close consideration to these, the Government recognises that sufficient advance notice and certainty of the detail of the final arrangements is necessary for taxpayers and accordingly will defer their commencement.
Where the commencement date of a measure is being deferred, it is still the Government’s intention to introduce legislation into the Parliament at the earliest opportunity to assist taxpayers in the lead up to commencement.
ATTACHMENT
REVISED TIMELINE FOR BUSINESS TAX REFORM IMPLEMENTATION
Measures to commence from 1 July 2001
The following measures will commence from 1 July 2001:
- The Simplified Tax System, providing eligible small businesses with a cash basis of recognising income and deductible expenses, simpler depreciation and trading stock rules.
- The Unified Capital Allowances system, which will simplify the many amortisation regimes currently in the law and thus reduce compliance costs. It will also recognise certain capital allowance ‘blackhole’ expenses.
- New thin capitalisation arrangements, which will prevent multi-national corporations allocating a disproportionate amount of debt to their Australian operations. Exposure draft legislation has been released for this measure as part of ongoing consultation with industry.
- A debt/equity test, which establishes a coherent and certain basis for classifying hybrid (part debt/part equity) instruments as either debt (eligible for ‘deductibility’) or equity (eligible for ‘frankability’).
Measures to commence from 1 July 2002
The following measures will now commence from 1 July 2002:
- The proposed consolidation regime which will allow groups of wholly owned companies to be treated as single taxpaying entity. The Government has released exposure draft legislation in relation to the measure. As a result of the deferral, existing grouping and loss integrity rules will continue for a further 12 months.
- The proposed general value shifting rules, which will ensure that appropriate tax treatment is given to capital gains and losses generated through arrangements which cause shifts in value between assets. As a result of the deferral, existing value shifting rules will continue for a further 12 months.
- The Government has announced its in-principle support for a demerger mechanism in the tax law to improve flexibility in business structures. This issue will continue to be developed with some priority, including linkages with the consolidation regime.
- Simplified imputation arrangements, which will streamline the operation of the existing imputation system, and provision of imputation credits for foreign dividend withholding tax.
- The introduction of foreign income accounts.
- Exemption from tax of temporary residents on their foreign source income, so as to encourage skill intensive businesses to locate in Australia.
- Introduction of a Non Resident Withholding Tax regime.
- The Government is committed to giving recognition in the tax law to 'blackhole' expenditures. The new capital allowance system commences this process, and other blackholes will be considered through a comprehensive treatment under the tax value method – see below. Where other blackholes are identified, they will be considered on a case-by-case basis, with possible commencement prior to 1 July 2002.
- Remodelling the tax treatment of life insurance policyholders to ensure bonuses are taxed at policyholders’ marginal tax rates. The issues involved require further development in consultation with the life insurance industry.
Measures with commencement dates yet to be determined
Other measures, including those which the Government supported ‘in principle’ in its original announcement but without specific start-up dates, will be deferred in terms of their final consideration and commencement (not before 1 July 2002).
- Taxation of financial arrangements (TOFA). This set of proposals provides a comprehensive and coherent framework for taxing financial arrangements. Whilst this framework is well developed, further consultation is required with industry on technical aspects of the proposals.
- The issues of leasing, the treatment of partnerships and joint activities, the application of the uniform capital allowance regime to buildings and structures, and changes to the transfer pricing provisions still require considerable further policy development and consultation, and it is not currently expected that any resulting measures will commence prior to 1 July 2002.
- The treatment of gains on the disposal of non-resident interposed entities will be considered further following a review of Double Taxation Agreement policy.
- As part of a more general review of foreign source income rules, changes to the rules applying to foreign trusts require further consideration.
- Tax Value Method/rights. Work on the tax value method is being progressed with the assistance of the Board of Taxation. As part of that work, the Board will also consider those aspects of the associated high level rules (including the ‘arms-length’ rule) and ‘rights’ issues outlined in the Ralph Report that are relevant to the development of the tax value method. Other aspects of these recommendations also require considerable further policy development and consultation, and any resulting measures are not expected to commence prior to 1 July 2002.
Other measures
General anti-avoidance rule. The Government is continuing to develop measures that will streamline the existing anti avoidance provisions along the lines identified by the Ralph Report. Any amendments to the existing Part IVA provisions announced by the Government will now have effect from the time of introduction into the Parliament of the relevant legislation (rather than 11 November 1999 as originally intended).