Australia Passes Tax Reforms

by Mary Swire, Tax-News.com, Hong Kong

28 June 2010

The Australian government has announced the passage through parliament of a number of tax reforms dealing with foreign source income, thin capitalization rules, goods and services tax (GST) administration and managed investment trust (MIT) definition, together with simplifications of corporate reporting requirements.

The passage of the relevant bill through the Senate enacts significant reforms to Australia's foreign source income anti-tax-deferral (attribution) rules by repealing the foreign investment fund (FIF) and deemed present entitlement rules in the income tax laws.

These measures, when combined with the government's wider package of foreign source income attribution reforms, are estimated to reduce compliance costs for Australian taxpayers and businesses by between AUD40m (USD35m) and AUD80m a year, and should contribute to the government's objective of promoting Australia as a financial hub.

Once Royal Assent is received, the repeal of the FIF and deemed present entitlement rules will apply to the 2010-11 and later income years. The other reforms, to be introduced to parliament shortly, are the modernization of the controlled foreign company rules, improvements to the transferor trust rules and the introduction of the anti-roll-up fund rule, which will apply from the time the FIF rules are repealed.

Reforms to Australia's thin capitalization tax laws, as they apply to authorized deposit taking institutions, have also been passed. The reforms clarify the treatment of treasury shares, the business insurance asset known as 'excess market value over net assets' and capitalized software costs under the thin capitalization rules.

The reforms to the thin capitalization rules were made necessary following changes to Australian accounting standards and were originally announced in the 2009-10 budget. Following Royal Assent, the amendments will take effect from January 1, 2009.

In addition, parliament passed legislation that streamlines the administration of the goods and services tax (GST), and reduces compliance costs for taxpayers. Compliance costs are reduced for taxpayers for cross border transport supplies; the GST treatment of global roaming in Australia is ensured to be consistent with Australia's treaty obligations; and the appropriate treatment for GST groups under the recent amendments concerning third party payments is also assured.

The amendment to the GST treatment of global roaming applies from July 1, 2000. The other reforms apply from July 1, 2010.

Furthermore, an amended definition of a MIT will apply for the purposes of the withholding tax concessions and will more closely align the definition used across different parts of the tax law. It will now allow widely held wholesale unregistered managed investment schemes and government owned managed investment schemes to be recognized as MITs for withholding tax and capital account election purposes.

The government professes that these amendments better reflect general industry practices and ensure that, while continuing to attract and retain foreign capital, the Australian funds management industry continues to be supported and enhanced.

At the same time, the government welcomed the passage of legislation that will reduce the red-tape burden on business and improve Australia's corporate reporting framework.

The key measures to reduce red-tape include significantly reducing the regulatory burden on companies limited by guarantee; streamlining parent-entity reporting; providing greater flexibility for companies to pay dividends, by replacing the profits test with a solvency-type test; and allowing companies to more easily change their year-end date to minimize the burden on companies and their auditors during peak reporting periods.

The reforms will also implement refinements to the regulatory framework, including improving disclosure of non-financial information in the directors' report; refining the statement of compliance with International Financial Reporting Standards contained in the directors' declaration; and clarifying the circumstances in which a company can cancel its share capital.

The main provisions of the legislation will come into effect for the financial year ending June 30, 2010, subject to Royal Assent. Associated regulations are scheduled to be considered at an Executive Council meeting on June 29, 2010.

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