Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
2002-2003-2004
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
NEW INTERNATIONAL TAX ARRANGEMENTS (PARTICIPATION EXEMPTION AND OTHER MEASURES) BILL 2004
SUPPLEMENTARY EXPLANATORY MEMORANDUM
Amendments to be moved on behalf of the Government
(Circulated by authority of the
Treasurer, the Hon Peter
Costello, MP)
Table of contents
General outline and financial impact
Amendments 2 to 4 amend Schedule 1 to the New International Tax Arrangements (Participation Exemption and Other Measures) Bill 2004 to ensure that the capital gains tax (CGT) concession for active foreign companies has its intended effect.
Date of effect: These amendments will apply to the specified CGT events relating to shares in foreign companies occurring on or after 1 April 2004.
Proposal announced: These amendments have not previously been announced.
Financial impact: Nil.
Compliance cost impact: Nil.
Amendment 5 amends Schedule 2 to the New International Tax Arrangements (Participation Exemption and Other Measures) Bill 2004, by inserting a transitional provision that will ensure that the terms ‘listed country’ and ‘section 404 country’ operate as intended.
Amendment 1 is a correction to the commencement provision in the bill and adds the new item number that inserts the transitional provision. This will ensure the transitional provision commences at the same time as related measures commence.
Date of effect: Amendment 5 will apply for a transitional period from 1 July 2004 until new amendments to the Income Tax Regulations 1936 are made to define listed country and section 404 country as intended.
Proposal announced: These amendments have not previously been announced.
Financial impact: Nil.
Compliance cost impact: Nil.
Chapter
1
Amendments to the
capital gains tax concession: active foreign companies
1.1 This chapter explains the amendments to item 3 in Schedule 1 to the bill, which deals with the capital gains tax (CGT) concession for active foreign companies. These amendments operate to ensure that the law has its intended effect.
1.2 The amendments to Schedule 1:
• bring the description of the nature of the right or options that are to be excluded from the classification of active assets in line with the treatment under the controlled foreign companies regime; and
• for Australian financial institution subsidiaries, align the treatment of rights or options in respect of certain financial instruments under the controlled foreign companies regime with the modified definition of ‘active foreign business assets’ under the CGT concession.
1.3 This amendment extends the nature of the rights or options that are excluded from the classification of active foreign business assets to a right or option in respect of certain assets. The proposed provision in the bill covers only a right or option to acquire certain assets. This amendment provides consistency with the treatment of such assets as tainted assets under the controlled foreign companies regime. [Schedule 1, item 3, paragraph 768-540(2)(e)]
1.4 The modifications to the meaning of ‘active foreign business assets’ for Australian financial institution subsidiaries are provided in recognition of the fact that financial institutions hold, trade in and dispose of certain financial instruments as part of their active business rather than mere passive investment activities.
1.5 These amendments remove the small mismatch that would otherwise exist for a right or option in respect of a financial instrument between the treatment under the controlled foreign companies regime and that under the CGT concession.
1.6 Subsections 450(1) and (2) of the Income Tax Assessment Act 1936 (ITAA 1936) operate to exclude from attribution, for Australian financial institution subsidiaries, income or gains derived from the trading in or disposal of a right or option in respect of any of the following:
• non-share futures contracts;
• non-share forward contracts;
• interest rates swap contracts;
• currency swap contracts;
• forward exchange rate contracts;
• forward interest rate contracts; and
• any similar financial instrument.
1.7 These amendments ensure that a right or option in respect of any of the tainted assets that are listed in paragraph 450(1)(b) of the ITAA 1936 will be an ‘active foreign business asset’ of Australian financial institution subsidiaries. [Schedule 1, item 3, paragraph 768-540(3)(c)]
Chapter
2
Listed countries and
section 404 countries
2.1 This chapter explains a transitional provision that has been inserted into the bill at the end of Schedule 2 to ensure new definitions for ‘listed country’ and ‘section 404 country’ operate as intended.
2.2 A new transitional provision is required because new definitions for listed country and section 404 country in the bill refer to Income Tax Regulations 1936 to which amendments could not be made before those definitions take effect.
2.3 A transitional provision provides new definitions for listed country and section 404 country which will operate from 1 July 2004. The transitional definition for listed country has the meaning of ‘broad-exemption listed country’ as it is currently defined before this bill applies (i.e. as defined at 30 June 2004). A section 404 country has the meaning of ‘limited-exemption listed country’ as defined before this bill applies. [Amendment 5]
2.4 The definitions of broad-exemption listed country and limited-exemption listed country to which the transitional rule refers are those contained in section 320 of the Income Tax Assessment Act 1936 that applied before the changes made by the bill. Those definitions will apply under the transitional rule until new regulations are made that define listed country and section 404 country. The old definition of listed country in section 320 will not apply once the bill takes effect and the new definition in the bill will apply after the transitional period.
2.5 A broad-exemption listed country means a foreign country that is a country on a particular list contained in Part 1 of Schedule 10 to the regulations. There are seven countries on that list (New Zealand, Canada, United Kingdom, United States, Germany, Japan and France) and the bill envisages that those countries will in future be referred to as listed countries. A limited-exemption listed country means a foreign country that is a country on a particular list contained in Part 2 of Schedule 10. It was intended that all countries on that list (over 50 countries) would be section 404 countries.
2.6 Amendment 1 is a minor amendment to clause 2 of the bill to include a reference in the commencement provisions to the new item that is the transitional provision.
2.7 The transitional rule will apply from 1 July 2004 until new amendments to the Income Tax Regulations 1936 are made that will define listed countries and section 404 countries. The rule amends the meaning of listed country in the Income Tax Assessment Act 1936 for the transitional period with the effect that references in other legislation to listed country as defined in the Income Tax Assessment Act 1936 will have the meaning provided in the transitional rule.
2.8 A listed country will then mean a foreign country on the list contained in Part 1 of Schedule 10 to the regulations. A section 404 country will mean a foreign country on the list contained in Part 2 of Schedule 10.