11 March 1996 - 3 December 2007
INTERNATIONAL TAX REFORMS
The Australian Government announced tonight further reforms to Australia’s international taxation arrangements to further enhance Australia’s status as an attractive place for business and investment. The changes include:
- the reintroduction of the foreign income exemption for temporary residents measure (Attachment A);
- reforms to the capital gains taxation treatment of non-residents (Attachment B); and
- the abolition of the foreign loss and foreign tax credit quarantining rules (Attachment C).
These reforms build on the Government’s success in implementing fundamental changes to Australia’s taxation system that arose from the Government’s Review of International Taxation Arrangements (RITA).
The reforms are part of an ongoing process that the Government is undertaking to ensure that Australia has a competitive international tax system. By attracting foreign capital to supplement local savings, higher rates of economic growth and employment levels are possible, resulting in higher standards of living for Australians than otherwise could be achieved.
These changes will assist businesses of all sizes. Australia’s small and medium businesses are more and more globally orientated. Reforms to foreign loss and foreign tax credit rules will be of particular benefit to emerging businesses, assisting them to grow internationally.
The Government is committed to continuing the community consultation in the detailed design of these reforms that has proven to be very successful in achieving the implementation of the Government’s international taxation reforms to date.
10 May 2005
FOREIGN SOURCE INCOME EXEMPTION FOR TEMPORARY RESIDENTS
The Government will reintroduce a foreign income exemption for temporary residents. This measure was previously introduced into Parliament twice but failed to pass the Senate on both occasions.
While education and training will always be the primary means of addressing Australia’s skill needs, the Government is determined to ensure that companies can access international skilled labour to top up their skills base, maintain efficient domestic operations and compete internationally. The availability of labour is also a crucial factor in retaining and attracting regional headquarters and service centres.
The measure includes a four-year exemption for temporary residents for most foreign source income. More specifically, the measure will:
- exempt foreign source income of temporary residents for four years;
- ensure that no capital gain or loss would arise on the disposal of foreign assets by temporary residents for four years;
- remove interest withholding tax obligations of temporary residents for four years; and
- extend the existing four-year exemption from the foreign investment fund rules for temporary residents.
Under current tax arrangements, Australian tax payable may be greater than the foreign tax temporary residents would otherwise have paid if they had stayed in their home country. Should this be the case, the additional tax expense is often borne by Australian employers (who often indemnify for additional tax paid), increasing the cost of doing business in Australia. These reforms will significantly respond to the tax disincentives foreign expatriates face and are consistent with approaches other countries take.
CAPITAL GAINS TAX AND NON-RESIDENTS
Under the current tax rules, Australia applies capital gains tax (CGT) to non-residents disposing of a wide range of assets, including major shareholdings. Australia’s broad approach deters non-residents from investing in Australia, or from using Australia as a regional base, and it departs from the practice in most OECD countries which generally restrict CGT to real property.
The Government has decided to better target and strengthen the application of CGT to non-residents in Australia’s domestic law practice by:
- aligning Australia’s law more closely with OECD practice through narrowing the current range of assets on which a non-resident is subject to Australian CGT to real property, and the business assets of Australian branches of a non-resident; and
- protecting the integrity of these rules by applying CGT to non-portfolio interests in interposed entities (including foreign interposed entities), where the value of such an interest is wholly or principally attributable to Australian real property.
‘Real property’ for these purposes will be consistent with our treaty practice, extending to other Australian assets with a physical connection with Australia, such as mining rights and other interests related to Australian real property.
The proposed interposed entities rule will reinforce Australia’s rights to tax Australian real property held by non-residents. As the Government is preserving Australia’s source country taxing rights over land, it would not be appropriate to include an exemption from the measure where the gain on the sale of an interposed entity is subject to tax in listed countries, as was proposed in the Review of Business Taxation.
The changes to Australia’s domestic law will apply to relevant CGT events occurring on or after the date of Royal Assent to the relevant legislation. The Government intends to introduce this legislation before the end of the 2005-06 financial year.
The changes are consistent with Board of Taxation Review of International Taxation Arrangements (RITA) recommendations, while preserving capital gains taxation of Australia’s physical assets in line with international practice.
The changes will enable Australia’s tax treaties to be further aligned to the OECD standards.
REMOVAL OF FOREIGN LOSS AND FOREIGN TAX CREDIT QUARANTINING
The changes in this Budget streamline the foreign loss and foreign tax credit (FTC) rules and will remove impediments to Australian firms investing abroad. They will reduce tax complexity and compliance costs for Australian multinationals, regional headquarters, managed funds, and small businesses expanding offshore. They will also assist taxpayers, particularly smaller firms and individuals, by not taxing their domestic income when they suffer an overall (worldwide) loss.
The changes arise from a Review of International Taxation Arrangements (RITA) commitment to address issues on the controlled foreign company (CFC) issues register, through a consultative process with the business community. It deals systemically with one of the remaining ‘urgent’ issues.
This measure also fulfils the Government’s election commitment in Strengthening Australian Arts, A World Class Australian Film Industry to amend the law in regard to the interaction of the foreign loss quarantining rules and the Australian Film tax deductions concessions contained in Divisions 10BA and 10B.
The current foreign loss and FTC quarantining rules prevent taxpayers from applying foreign losses against domestic income and allow taxpayers to elect to apply domestic prior-year losses against foreign income. They also prevent taxpayers from receiving credit for foreign tax in excess of the Australian tax payable on assessable foreign income. Instead, they require taxpayers to carry forward these foreign losses and excess FTCs to be applied against future assessable foreign income of the same class.
These ‘quarantining’ rules were introduced as part of the 1980s tax reforms and remain largely unchanged. RITA and other changes have removed the need for these rules to be retained.
As a result, the Government has decided to remove the requirement for taxpayers to quarantine foreign losses as they arise from domestic income and the ability of taxpayers to quarantine domestic prior-year losses from foreign income. It will also remove the need for these taxpayers to quarantine their foreign losses and FTCs into separate classes.
These changes will apply to foreign losses and FTCs arising in income years first commencing on or after the date of Royal Assent to the enabling legislation.
Foreign losses and (excess) FTCs that arise before the commencement of this measure will continue to be treated under the current rules. It is expected that these losses and credits will be used before those arising after commencement. Ultimately, the old rules may be removed from the tax law.
In addition, taxpayers that earn ‘attributable income’ (in broad terms, mobile income shifted to low tax countries to defer Australian tax) through CFCs will no longer need to quarantine the revenue losses of their CFCs into separate classes. Listed country CFCs will no longer have tainted capital losses excluded from the calculation of eligible designated concession income. However, a CFC’s tainted capital losses will continue to be quarantined from its other income. Also, CFC losses will continue to be quarantined in the CFC that incurred them.