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Australia To Make Further Improvements To Tax System

by Mary Swire,, Hong Kong

21 August 2007

Australia's Minister for Revenue and Assistant Treasurer, Peter Dutton, last week introduced Tax Laws Amendment (2007 Measures No. 5) Bill 2007 to implement a number of improvements to Australia’s taxation system.

The bill proposes to modify several areas of tax law, including: public private partnerships, thin capitalisation, company tax losses, capital gains treatment in relation to statutory licences, Australian property trusts and stapled securities, deductible gift recipients, film production offsets, research and development, and the government's venture capital programme.

The main changes are as follows:

Public private partnerships

This Bill modifies the taxation treatment of leasing and similar arrangements between taxpayers and tax exempt entities (including foreign residents) for the financing and provision of infrastructure and other assets. The measure will apply if, broadly, a tax exempt entity effectively controls the use of an asset and the taxpayer does not have the predominant economic interest in the asset. Certain relatively short-term and lower value arrangements are specifically excluded from the scope of the measure.

If the measure applies to an arrangement, it will be treated as a loan that is taxed as a financial arrangement on a compounding accruals basis.

The measure applies to arrangements entered into on or after 1 July 2007. Under transitional provisions, the measure will also apply to arrangements entered into before 1 July 2007 in certain circumstances. In addition, section 51AD of the Income Tax Assessment Act 1936, which denies all tax deductions in certain circumstances, will cease to apply to arrangements entered into on or after 1 July 2003.

Thin capitalisation

The legislation will ensure that an integrity measure in the thin capitalisation rules operates as intended by removing from the definition of ‘excluded equity interest’ those equity interests that remain on issue for a total period of 180 days or more.

In addition, the legislation will reduce compliance costs for groups containing ADIs, where the only ADIs in the group are specialist credit card institutions, by allowing the head companies of such groups to apply the rules as if the group did not contain any ADIs.

Capital gains tax marriage breakdown roll-over for small superannuation funds

These amendments will provide a capital gains tax (CGT) roll-over on marriage breakdown to ensure that CGT need not be an impediment to separating spouses achieving a ‘clean break’ from each other in terms of superannuation arrangements.

Income tax treatment of the Prime Minister’s Prize for Australian History and the Prime Minister’s Prize for Science

This Bill will exempt from income tax the Prime Minister’s Prize for Australian History and the Prime Minister’s Prize for Science, to the extent that the prizes would otherwise be assessable income. The amendments apply to assessments for the 2006-07 income year and later years of income.

Company tax losses

The company loss recoupment rules will be amended to remove the A$100 million total income cap on the same business test. This measure will allow all companies to access the same business test to determine whether prior year losses can be deducted against future income and will reduce compliance costs.

Partial capital gains tax roll-over for statutory licences

A partial CGT roll-over will be provided where a statutory licence ends and is replaced by one or more new licences and the licensee is also offered non-licence capital proceeds such as money. The roll-over is partial because any capital gain or loss on the non-licence capital proceeds will not be rolled over.

The amendments will have particular application to the Achieving Sustainable Groundwater Entitlements (ASGE) programme, by ensuring that licence holders who are also offered a cash payment under this program will obtain a partial CGT roll-over where the access licence (and any other new licences) replaces the original bore licence or licences.

In addition, the amendments will make changes to the existing CGT statutory licence roll-over to provide roll-over where one or more statutory licence ends and is replaced by one or more new licences that authorise substantially similar activity to the activity authorised by the original licence or licences.

Australian property trusts and stapled securities

On 4 April 2007, the Government announced that it will allow certain stapled entities, such as Australian Listed Property Trusts, to restructure with an interposed head trust without taxation consequences.

The amendments will provide a CGT roll-over for investors in a stapled group where there has been an interposition of a unit trust between the investors in the stapled group and the stapled entities.

There will also be a consequential amendment made to Division 6C of the Income Tax Assessment Act 1936 to ensure that the restructures do not result in the interposed trust being taxed as if it were a company. In addition, all public unit trusts will be able to acquire controlling interests in, or control foreign entities whose business consists primarily of investing in land outside of Australia for the purpose, or primarily for the purpose, of deriving rent.

These amendments will improve the international competitiveness of Australian property trusts, and facilitate their acquisitions of property and property-holding entities offshore. The amendments will apply from the 2006-07 income year.

Deductible Gift Recipients

The legislation will update the list of deductible gift recipients (DGRs) to include the state and territory bodies of Kidsafe from 3 August 2007, and The Bathurst War Memorial Carillon Public Fund Trust from 3 August 2007 until 2 August 2009. In addition, the legislation will extend the DGR status of the Shrine of Remembrance Restoration and Development Trust until 30 June 2009.

Film production offsets

This legislation introduces a package of measures to reform and strengthen the Australian film industry that was announced in the 2007-08 Budget.

The main element of the package is the introduction of a refundable tax offset for Australian expenditure in making Australian films, known as the producer offset. The producer offset offers a generous incentive for Australian productions by providing a 40% offset for Australian feature films and a 20% offset for other Australian screen media.

The legislation will also enhance the existing refundable film tax offset, now to be known as the location offset, which aims to attract large budget productions to be shot in Australia. The rate has been increased from 12.5% to 15%. In addition, there will be a new tax offset for post, digital and visual effects production in Australia, which will significantly enhance Australia’s attractiveness as a location for this increasingly important part of the film production process.

Research and Development

This measure extends the premium 175% research and development (R&D) tax concession to Australian companies conducting R&D activities on behalf of a grouped foreign company. Expenditure that contributes to the calculation of the higher deduction will have a specific base 100% deduction.

The concession will encourage additional R&D expenditure in Australia and make Australia an attractive location for investment in R&D by multinational enterprises.

Innovation Australia

At present the administrative responsibility for the Industry portfolio's innovation and venture capital programmes is split between two distinct bodies, the Industry Research and Development Board and the Venture Capital Registration Board.

While the operation of these Boards has proven to be effective, the Government considers that the administration of both innovation and venture capital programmes can be enhanced and streamlined by combining their roles and the professional expertise of their members within the one entity. The Government will establish a new entity, Innovation Australia, to take on this role.

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