Australian Government Slow To Legislate For New Corporate Tax Regime
Mary Swire, Tax-news.com, Hong Kong
15 January 2001
About eighteen months
ago, the Australian government received and basically adopted
the Ralph Report which reommended sweeping changes to the basis
of business taxation. With less than six months to go until implementation
of the various changes on 1st July 2001, the government has delivered
some but not all of the legislative detail that companies need
in order to be able to make crucial decisions about the treatment
of assets, and whether or not to consolidate their accounts. Foreign
groups are in a particularly uncertain situation.
Exposure drafts of
two key pieces of legislation were published before Christmas,
but raise many difficult questions for business. Some of the key
features are as follows:
- The new consolidation
regime laid down in the New Business Tax System (Consolidation)
Bill 2000 will treat wholly owned Australian entities as a single
taxpayer for income tax purposes - groups can choose not to
consolidate, but if they don't do so will be unable to transfer
losses between companies, defer tax on transfer of assets between
wholly owned companies, or obtain rebates on unfranked dividends.
Among other things, the exposure draft:
- sets out the
complex rules under which the tax losses of group members
may be transferred to the head entity when they enter the
group, and how those losses may be used by the head entity;
- provides for
franking credits and other tax attributes of group members
to be transferred to the head entity - these rules are yet
to be released;
- sets out rules
for the treatment of cost bases of assets, spreading the
cost of acquiring a joining entity plus its liabilities
among the entity's assets to determine their cost base.
On a disposal, it is this cost structure that will be used
to calculate gains or losses for capital gains tax.
- deals with
the timing of the change to consolidation in the context
of a company's financial accounting date - company groups
with a year end other than 30 June have to decide whether
they should consolidate on 1 July 2001, or at the beginning
of their tax year next following that date. Since the old
group relief rules lapse on 1st July 2001, if a group with
a year end of 31 December defers its election to consolidate
until 1 January 2002, only half its losses for the year
ending 31 December 2001 will be accessible. Some groups
may decide to change their accounting year. 30th June 2002
is the last day on which a group can choose to consolidate
and take advantage of the transitional option to retain
the "joining values" of entities wholly owned
as at 30 June 2001, or apply concessional loss rules.
- The adoption of
a comprehensive capital allowance regime under New Business
Tax System (Capital Allowances) Bill 2000 will replace the many
capital allowance provisions that currently exist, provide consistent
treatment for capital expenditure and is supposed to allow write-offs
of capital expenditure based on several alternate bases. An
Exposure Draft was published over Christmas which raises almost
as many questions as it answers:
- The draft
provides consistent meanings to key concepts such as 'depreciating
asset', 'taxable purpose', and 'effective life', but crucially
does not clearly define the term 'asset'. As a result, businesses
will continue to have to grapple with three different concepts
of an asset in accounting, CGT, and capital allowance terms.
- The new rules
will allow the write-off of a limited range of 'blackhole'
costs such as expenditure on business establishment, converting
business structures, and equity raising, which will be deductible
under the new regime, until on or after 1 July 2001; but
business is disappointed in the limited range of 'blackhole'
expenses that are included - better rules will probably
have to await 'Option 2' treatment, which may be long delayed
(see below).
- businesses
(and especially mining businesses) will need to review and
update their asset registers to reflect the new concepts
of 'depreciating asset' and 'hold'; ownership structures
will have to be reviewd (especially in non-consolidated
groups) to ensure that assets are held so that the most
appropriate entity is entitled to the capital allowance
deduction; and any asset sale likely to take place in the
next year or two needs to be scrutinised carefully to get
the timing and structure right - in some cases it may be
desirable to accelerate disposals, in other cases to defer
them.
The Government seems
to be backing off some of the more extreme recommendations of
the Ralph Report, although this may just be a matter of legislative
overload rather than a failure of nerve. In particular, there
is no sign of any detail on 'Option 2', otherwise known as 'the
tax value method'. This is the radical proposal to abolish the
traditional distinction between income and capital and to determine
taxable income on the basis of cash flows and the changing value
of assets. The Capital Allowances rules were originally supposed
to allow either a traditional (as set out in the Draft) or a 'tax
value' approach, but it is now clear that Option 2, if it ever
arrives, will not be available before 2002 or even 2003, and that
when it does arrive it will require the rewriting of all the legislation
over which the government is already making such slow progress.
The problem for businesses
is obvious: they have to make major decisions about consolidation
on the basis of a 2 to 3-year tax planning horizon - the whole
point of the Ralph changes was that they were supposed to deliver
a stable long-term planning horizon. Yet the opposite is being
achieved so far.
The taxation of trusts
is one example of a Ralph proposal which has emerged in bowdlerised
form: originally, the plan was to introduce uniform taxation of
entities. In fact, the exposure draft which was publicised in
October amounted to no more than an attack on discretionary trusts,
bringing them largely within the existing (and future) corporate
taxation regime. The same exposure draft included revised sets
of rules for franking of corporate dividends, a new imputation
regime, and new rules for franking credits for foreign withholding
tax:
- A franking credit,
up to 15% of a gross distribution received by an Australian
corporate tax entity, will be available for foreign withholding
tax paid on foreign distributions. The credit will be allowed
whether the distribution relates to a portfolio interest (less
than 10%) or non-portfolio interest in the non-resident entity,
and whether or not the distribution is assessable. This would
allow a franking credit for withholding tax on non-portfolio
dividends received by Australian resident companies from companies
in listed (comparable tax) countries;
A further franking credit may be allowed to an Australian corporate
tax entity if both of the following apply:
- withholding
tax on the distribution the entity receives is less than
15% of the gross distribution; and
- withholding
tax was paid by its foreign 100% subsidiaries on foreign
distributions those subsidiaries received.
In all cases, to
be eligible for the credit, the foreign distributions must be
equivalent to frankable distributions. That is, no credit will
be allowed for any portion of foreign withholding tax which relates,
for example, to a return of capital. These rules represent an
improvement for Australians investing offshore, but they don't
help investors in countries such as the UK where there is no withholding
tax.
The application and
transitional provisions in relation to this measure are not included
in the October exposure draft bill, but it is expected that the
measure will apply from 1 July 2001.
Other, not minor,
sets of rules that are awaited include:
- the matter of
related-party transactions - the Ralph Report threatened that
all such transactions outside a consolidated entity would be
subject to 'arms-length' rules, but there is no word yet about
this;
- international
taxation, including
- improvement
of conduit taxation rules;
- the introduction
of imputation credits for foreign dividend withholding tax;
- expansion
of the thin capitalisation regime;
- reform of
taxation in relation to foreign expatriates;
- improvement
of the double tax agreements.
- a new regime
to deal with the taxation of leases and rights to provide consistency
of tax treatment among these types of assets.;
- 'significant
changes' to the taxation of distributions from an entity and
disposals of membership interests;
- new measures
affecting the application of capital gains tax to include:
- abolition
of averaging;
- freezing
of indexation at 30 September 1999;
- the exclusion
of gains and losses from the disposal of plant from the
CGT regime;
- partial CGT
exemption for individuals, complying superannuation funds
and some trusts;
- strengthening
of the anti-avoidance regime.
.
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