10 May 2007

Further Improvements to the Tax System

The Minister for Revenue and Assistant Treasurer, Peter Dutton, today introduced Tax Laws Amendment (2007 Measures No. 3) Bill 2007 to implement the following changes and improvements to Australia’s taxation system.   

Distributions to entities connected with private companies and related issues

The Government will amend the tax integrity rules concerning private company distributions to shareholders or their associates (Division 7A of the Income Tax Assessment Act 1936).  The amendments will reduce both the punitive nature of the provisions and the extent to which taxpayers can inadvertently trigger a deemed dividend under the provisions. 

The automatic debiting of the company’s franking account will be removed when a deemed dividend arises under Division 7A.  The amendments also provide the Commissioner with a discretion to disregard a deemed dividend that has arisen because of an honest mistake or inadvertent omission by a taxpayer.

A range of other amendments will be made to reduce the scope for taxpayers to inadvertently trigger a deemed dividend, and to provide more certainty and flexibility for taxpayers, including allowing certain shareholder loans to be refinanced without triggering a deemed dividend.  In addition, Division 7A compliant loans will be exempted from fringe benefits tax.

These measures will reduce ongoing compliance costs for private companies and reduce tax penalties, especially for the many small businesses that use a company structure

Transitional non‑concessional contributions cap

This Bill will make amendments to the Income Tax (Transitional Provisions) Act 1997 to support the Simplified Superannuation reforms by including certain contributions made on someone’s behalf (such as those made by a friend) in their $1 million cap on non‑concessional contributions.  The measure applies to contributions made between 7 December 2006 and 30 June 2007 but does not apply to Government co‑contributions or spouse, child, or employer contributions.

Capital gains of testamentary trusts

These amendments to the Income Tax Assessment Act 1997 will ensure that the income beneficiary of a resident testamentary trust need not be assessed on capital gains of the trust from which they will not benefit.

These amendments, which take effect from the 2005-06 income year, will allow the trustee of a testamentary trust to choose to be assessed on the capital gains of the trust which would otherwise be assessed to an income beneficiary.  The trustee will be able to make the choice if, under the terms of the trust, the income beneficiary cannot benefit from the capital gains.

Taxation of superannuation death benefits to non-dependants of defence personnel and police killed in the line of duty

This legislation will align the tax treatment of lump sum superannuation death benefits paid to non-dependants with that applying to dependants where the deceased was killed in the line of duty as a member of either the Australian Defence Force or any Australian police force, or as an Australian Protective Service Officer, with effect from 1 July 2007. 

The Government will also be making ex gratia payments equivalent to additional tax paid in relation to lump sum superannuation death benefits received by eligible non-dependants over the period from 1 January 1999 to 30 June 2007

Thin capitalisation

The legislation extends by one year a transitional period relating to the application of accounting standards under the thin capitalisation rules.

The original three-year transitional period was implemented to provide time for the Government to consult with industry and practitioners to determine whether any permanent changes to the thin capitalisation rules were appropriate in light of the adoption in 2005 of Australian equivalents to International Financial Reporting Standards.  Consultation is progressing, and this extension will ensure that all interested stakeholders have an opportunity to put their views to the Government, and that any permanent changes to the thin capitalisation rules are adequately examined before implementation.

Repeal of the dividend tainting rules

The dividend tainting rules will be repealed in relation to distributions made on or after 1 July 2004.  Following the removal of the inter‑corporate dividend rebate under the simplified imputation system and the introduction of the consolidation regime, the dividend tainting rules are no longer necessary.

The removal of the dividend tainting rules will significantly reduce compliance costs and will also overcome concerns raised by the business community that those rules are inadvertently triggered by the accounting entries required under the Australian Equivalent of the International Financial Reporting Standards.

Clarification of exemption from interest withholding tax

The bill also clarifies exemptions from interest withholding tax by more closely specifying the types of financial instruments that will be eligible for the exemption.  Broadly, the instruments eligible for exemption now are debentures, non-equity shares, syndicated loans and other instruments where so prescribed by regulation. 

These amendments reduce uncertainty for taxpayers by confirming the policy intent in relation to debt interests — which is broadly that Australian business should not face a greater cost of capital because of interest withholding tax.

The amendments will take effect from 7 December 2006.

Forestry managed investment schemes: statutory deduction and trading

This Bill introduces a statutory deduction for contributions to forestry managed investment schemes (MIS).  The statutory deduction was announced by the Government on 21 December 2006. 

Initial investors in MIS will receive a tax deduction equal to 100 per cent of their contributions provided that at least 70 per cent of the scheme manager’s expenditure under the scheme is expenditure attributable to establishing, tending and felling trees for harvesting (‘direct forestry expenditure’ or ‘DFE’). 

Where the scheme manager enters into a transaction with a third party which is not at arm’s length and the amount paid is (or will be) more or less than the market value of what the amount is for, then the market value is to be substituted for the prices actually used in determining the amount of DFE.

The new provision retains the existing principle that the managers of forestry schemes must include the investors’ contributions in assessable income in the year in which the deduction is first available to the investors for those contributions. 

The Government has previously announced that forestry investors who use the specific deduction for income tax purposes will be treated as passive investors for GST purposes and will be removed from the GST net.  The Government does not propose to make any amendments to the GST law at this time but it will monitor the situation and will take into account any future court decisions. 

As announced in the 2006-07 Budget, the Government will proceed with rules to encourage secondary market trading of interests in existing and future forestry MIS.  Allowing trading of interests introduces pricing information into the market and increases the liquidity of the investments.  Initial investors will be subject to a four year holding period rule and a market value pricing rule to address some tax arbitrage situations.  The income tax treatment of sale or harvest proceeds received by investors for interests in future forestry MIS is specified in the legislation.  These rules take effect from 1 July 2007.   

Non-resident trustee beneficiaries

The Government announced in the 2006-07 Budget that it would amend the income tax law to ensure that trustees pay tax in relation to non-resident beneficiaries that are trustees, in a similar way to the taxation arrangements currently applying to beneficiaries that are non-resident companies or individuals.

These amendments will ensure the integrity of the income tax system and make the taxation treatment of trustees more consistent.

New withholding arrangements for managed fund distributions to foreign residents

It was also announced in the 2006-07 Budget that amendments would be introduced to simplify the tax collection arrangements for Australian sourced income (other than dividend, interest and royalty income) distributed to foreign residents by Australian managed funds and Australian custodians.

This Bill makes amendments so that Australian managed funds and Australian custodians will collect a non-final withholding at a single rate – the company tax rate – on distributions of this income to foreign residents, whether the foreign resident is a company, individual, trustee or foreign superannuation fund. 

The investor will be able to claim a credit for the amount withheld when they lodge an Australian income tax return to determine their final tax liability.

By simplifying withholding obligations, the measure improves the efficiency of Australia’s managed funds industry and gives foreign investors further certainty when they invest into Australian managed funds.