The Australian government hopes two documents it has just published will produce legislation aimed at enhancing the investment environment.
The documents were released over the past two months and reflect the government's push to modernise Australia's foreign source income anti-tax-deferral (attribution) rules.
In December, exposure draft legislation which will repeal the foreign investment rules (FIF) and deemed present entitlement rules was released. The legislation will also contain transition provisions.
The second document that was released was a consultation paper setting out a new design for the country's controlled-foreign company (CFC) rules.
The government targeted these anti-tax deferral regimes for reform after many within the tax community were critical of them.
Most of the criticisms related to the complexity of the rules. It is estimated that these rules constitute around a quarter of the 1936 Income Tax Assessment Act.
Other reasons include substantial compliance and administration costs, and a perception that in some cases they are poorly targeted and are adversely impacting foreign investment decisions which are not motivated by tax avoidance or deferral reasons.
The FIF exposure draft legislation provides for a taxpayer's existing FIF attribution account surplus to be converted into a post-FIF abolition surplus. This means that the taxpayer can continue to receive a credit for tax paid on attributed FIF income when it is actually received in the form of distributions from a FIF.
"The exposure draft legislation also proposes a (yet unspecified) sunset date for this transitional measure, which means that affected taxpayers are likely to have a limited time within which to use any FIF attribution credits," said Vivian Chang, tax partner at Australian law firm, Blake Dawson.
The CFC consultation paper proposes reforms to a number of key concepts. Three areas of reform comprise the circumstances in which a taxpayer will be taken to be an attributed taxpayer, the allowance of CFC grouping, and the exemption for distributions for non-portfolio interests held by companies.
However, the consultation paper does not address a number of areas including details of the exemption from the CFC rules for complying superannuation funds and details of the market value and deemed rate of return attribution methods.
"The task of re-writing and changing the CFC rules is considerable and, based on experience with other major legislative changes such as consolidation and the taxation of financial arrangements, it is likely to take years rather than months to implement the new CFC rules," said Chang.
Comments on the exposure draft legislation and consultation paper are due by February 5 and March 1, respectively.
This news comes as the Australia's Future Tax System Review Panel last month delivered its Henry tax review to the government. The aim of the review is to make the tax system fairer, simpler and more competitive.
A government response to the Henry review is expected shortly.
