Income Tax Amendment Regulations 2001 (No. 2) 2001 No. 100
EXPLANATORY STATEMENT
STATUTORY RULES 2001 No. 100
Issued by authority of the Assistant Treasurer
INCOME TAX ASSESSMENT ACT 1936
INCOME TAX AMENDMENT REGULATIONS 2001 (NO. 2)
Section 266 of the Income Tax Assessment Act 1936 (the Act) provides that the GovernorGeneral may make regulations prescribing matters required to give effect to the Act.
The Regulations are required to implement the Assistant Treasurer's approval of 4 countries for inclusion in the Limited Exemption List of countries contained in Schedule 10 of the Regulations to the Act. The effect of this is to exempt from Australian company tax, nonportfolio dividends and branch profits remitted from those countries to Australian companies. The countries are Argentina, Iran, South Africa and the Slovak Republic. The basis for their listing is these countries are considered to have tax systems broadly comparable to Australia's. The approval was announced in the Assistant Treasurer's Press Release No. 45 of 8 September 2000.
Part 8A and associated schedules of the Regulations prescribe matters that give effect to Part X of the Act - Controlled Foreign Companies (CFCs). The objective of the CK measures is to tax Australian shareholders on their pro rata share of a CK's tainted income as earned, unless the income has either been comparably taxed offshore or the CK satisfies an active income test. These measures ensure that offshore investments are not favoured over similar investments in Australia for purely taxation reasons.
Subsection 320(1) of the Act as amended by Taxation Laws Amendment (Foreign Income Measures) Act 1997 (Act No. 155 of 1997) authorises the declaration of broad exemption and limited exemption listed countries in the Regulations which are 2 lists of comparable tax countries. Accordingly, Schedule 10 of the Regulations contains 2 lists of comparable tax countries. These are the highly comparable countries (broad exemption listed countries) and the sufficiently comparable tax countries (limited exemption listed countries).
The lists are used to reduce compliance and administrative costs arising from accruals taxation under the CFC measures, and from taxation under the Foreign Tax Credit System on the repatriation of profits. The costs are reduced by exempting both active and tainted income from broad exemption listed countries, and active income from limited exemption listed countries.
Details of amending Regulations
Regulation 1
Regulation 1 contains the name of the amending Regulations.
Regulation 2
Regulation 2 contains the commencement date. The Regulations commence from 8 September 2000. Although the proposed Regulations will take effect retrospectively from 8 September 2000 they will not contravene subsection 48(2) of the Acts Interpretation Act 1901 which prohibits the retrospective operation of regulations which affect the rights of, or impose liabilities, on a person. The commencement date is to the benefit of the taxpayer and it places no burden on any person other than the Crown.
Regulation 3
Regulation 3 is procedural and is designed to modify the existing Income Tax Regulations as necessary. Part 2 of Schedule 10 (limited exemption listed countries) is modified by the inclusion of 4 countries:
• Argentina;
• Iran;
• the Slovak Republic; and
• South Africa.
Overview
The Income Tax Amendment Regulations 2001 (No. 2) were enacted to implement certain tax policy decisions regarding the taxation of foreign income remitted to Australian companies. Authorised by the Assistant Treasurer and issued under the authority of the Income Tax Assessment Act 1936, the Regulations specifically address the need to update the list of countries with tax systems comparable to Australia's, thereby influencing the application of controlled foreign company (CFC) rules and the Foreign Tax Credit System. The objective of these amendments is to align the tax treatment of foreign income with Australia's tax policies, thereby ensuring that Australian taxpayers are not at a disadvantage compared to those investing offshore. By adding Argentina, Iran, the Slovak Republic, and South Africa to the Limited Exemption List, the Regulations aim to reduce administrative burdens and compliance costs associated with the taxation of foreign dividends and branch profits.
Scope and Application
The Income Tax Assessment Act 1936, through the Income Tax Amendment Regulations 2001 (No. 2), applies to Australian companies and their foreign branches by providing a framework for the taxation of income remitted from specific countries. This regulation specifically amends the taxation treatment of non-portfolio dividends and branch profits received from countries deemed to have tax systems comparable to Australia's. The inclusion of Argentina, Iran, South Africa, and the Slovak Republic in the Limited Exemption List under Schedule 10 exempts certain income from Australian company tax, provided these countries' tax systems are considered sufficiently comparable to Australia's. This amendment aims to align Australia's tax treatment with those of its trading partners, ensuring that Australian shareholders are not disadvantaged when dealing with foreign investments. Additionally, the regulations implement the Controlled Foreign Companies measures to tax Australian shareholders on their pro rata share of tainted income unless it has been comparably taxed offshore or the company satisfies an active income test. The Regulations commence from 8 September 2000, with the modifications designed to reduce compliance and administrative costs associated with the accruals taxation and foreign tax credit systems.
Key Provisions
The Income Tax Amendment Regulations 2001 (No. 2) (the Regulations) introduce several significant changes to the Income Tax Assessment Act 1936 (the Act), primarily focusing on the inclusion of specific countries in the Limited Exemption List under Schedule 10 of the Regulations. Section 266 of the Act allows the Governor-General to make regulations that give effect to the Act, and these Regulations specifically implement the Assistant Treasurer's approval of Argentina, Iran, South Africa, and the Slovak Republic for inclusion in the Limited Exemption List (Regulation 3). This inclusion exempts non-portfolio dividends and branch profits remitted from these countries to Australian companies from Australian company tax.
These Regulations impose specific obligations on taxpayers and entities involved in cross-border transactions. Firstly, they require taxpayers to identify and report the source of income remitted from these listed countries in accordance with the new provisions. For instance, Australian companies receiving dividends or branch profits from Argentina, Iran, South Africa, or the Slovak Republic must ensure these are appropriately reported and exempt from Australian taxes as per the new exemption. Secondly, the Regulations also necessitate compliance with the Controlled Foreign Companies (CFC) measures outlined in Part 8A of the Regulations, which require Australian shareholders to account for their share of tainted income earned by CFCs unless it has been comparably taxed offshore or the CFC satisfies an active income test.
The Regulations also establish potential consequences for non-compliance. While the Explanatory Statement does not explicitly outline criminal penalties for breach, the overarching framework of the Act provides for penalties under Section 284. This includes fines and imprisonment for significant breaches, although specific penalties are not detailed in the Explanatory Statement. Additionally, civil penalties may apply under Section 284AA for non-compliance, which can include fines of up to $22,200 for individuals and significantly higher amounts for corporations, depending on the severity and frequency of the breach. These measures are intended to ensure adherence to the new regulations and the proper application of the tax exemptions and CFC rules.
Overall, the Regulations aim to streamline tax compliance and reduce administrative burdens by providing clear exemptions for certain cross-border income, while maintaining robust measures to prevent tax avoidance and ensure that offshore investments are taxed appropriately. The inclusion of specific countries in the Limited Exemption List is designed to reflect their tax systems' comparability to Australia's, thereby promoting fairness and consistency in the tax treatment of foreign and domestic investments.