Income Tax Amendment Regulations 2003 (No. 4) 2003 No. 372
EXPLANATORY STATEMENT
STATUTORY RULES 2003 No. 372
Issued by authority of the Minister for Revenue and Assistant Treasurer
Income Tax Assessment Act 1936
Income Tax Amendment Regulations 2003 (No. 4)
Section 266 of the Income Tax Assessment Act 1936 (the Act) provides that the Governor-General may make regulations, not inconsistent with the Act or the Income Tax Assessment Act 1997 (the ITAA 1997) prescribing all matters which by the Act or the ITAA 1997 are required or permitted to be prescribed, or which are necessary or convenient to be prescribed for giving effect to the Act or the ITAA 1997.
The Act authorises the declaration of broad-exemption and limited-exemption listed countries. Schedule 10 of the Income Tax Regulations 1936 (the Principal Regulations) contains a broad-exemption listed country (BELC) list for highly comparable countries as well as a limited-exemption listed country (LELC) list for sufficiently comparable countries. The lists reduce compliance and administrative costs arising from accruals taxation under the controlled foreign companies (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 BELC countries, and active income from LELC countries.
Tainted income is broadly defined in the CFC measures to include passive income (e.g. interest, dividends and royalties) and certain income from transactions with related parties and Australian residents. The CFC measures focus on tainted income because it is the most mobile form of income and is thus easily diverted to avoid or defer Australian tax. The location of investments which generate active (i.e. income other than tainted income) income tend to be primarily influenced by considerations other than tax.
The Regulations are required to add the Russian Federation and Mexico to the LELC list in Schedule 10 to the Principal Regulations. The effect of this is to exempt from Australian company tax, non-portfolio dividends and branch profits remitted from the Russian Federation or Mexico to Australian companies. Exemption is granted on the basis that these payments have already incurred foreign tax comparable to Australian tax.
The listing of the Russian Federation also ensures that residents of the Russian Federation are able to gain access to the lower 5% rate of dividend withholding tax in Article 10 of the Australia-Russian Federation tax treaty. The lower rate of withholding tax is only available under Article 10 of the treaty if the dividends flowing from a company resident in the Russian Federation to an Australian company are exempt from Australian tax in Australia.
Australia recently completed tax treaties with the Russian Federation and Mexico. Through the completion of these treaties, the Russian Federation and Mexico are accepted as having tax systems sufficiently comparable to Australia.
Part 8A and associated Schedules of the Principal Regulations prescribe matters that give effect to Part X of the Act - the CFC measures. The objective of the CFC measures is to tax Australian shareholders on their pro rata share of a CFC's tainted income as earned, unless the income has either been comparably taxed offshore or the CFC satisfies an active income test. These measures ensure that offshore investments are not favoured over similar investments in Australia for purely taxation reasons.
The Act specifies no conditions that need to be met before the power to make the proposed Regulations may be exercised.
The Regulations commence on 1 January 2004, the expected date of effect of both the Australia-Russian Federation tax treaty and the Australia-Mexico tax treaty.
Overview
The Income Tax Amendment Regulations 2003 (No. 4), issued under the authority of the Minister for Revenue and Assistant Treasurer, amends the Income Tax Assessment Act 1936 to address issues related to the taxation of foreign income through the controlled foreign company (CFC) measures and the foreign tax credit system. The regulations aim to reduce compliance and administrative costs by exempting both active and tainted income from certain listed countries, specifically by adding the Russian Federation and Mexico to the list of limited-exemption listed countries. This amendment is in response to the completion of tax treaties with these countries, recognising their tax systems as sufficiently comparable to Australia's. The objective of these measures is to ensure that Australian shareholders are taxed on their share of tainted income earned by controlled foreign companies, unless it has been comparably taxed offshore, thus preventing tax avoidance and ensuring a level playing field for domestic and foreign investments. The regulations commence on 1 January 2004, aligning with the effective dates of the new tax treaties.
Scope and Application
The Income Tax Amendment Regulations 2003 (No. 4) pertains to the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1997. It applies to entities and individuals who are subject to the CFC measures and foreign tax credit system in Australia, particularly those involved in international business transactions with companies from countries listed under the Act. The Regulations extend to the Australian jurisdiction, ensuring compliance with tax laws across the nation. The primary scope of these Regulations is to modify the lists of broad-exemption and limited-exemption listed countries by adding the Russian Federation and Mexico to the limited-exemption list. This amendment exempts non-portfolio dividends and branch profits remitted from these countries to Australian companies from Australian company tax, provided these payments have already incurred foreign tax comparable to Australian tax. The inclusion of the Russian Federation also facilitates access to the lower 5% rate of dividend withholding tax for residents of Russia, contingent on the exemption of dividends from Australian tax. The Regulations, which commence on 1 January 2004, are designed to align with the tax treaties Australia has with the Russian Federation and Mexico, thereby recognising these countries as having tax systems sufficiently comparable to Australia.
Key Provisions
The Income Tax Amendment Regulations 2003 (No. 4) primarily amend the Income Tax Regulations 1936 by adding the Russian Federation and Mexico to the list of limited-exemption listed countries (LELC) in Schedule 10 (sections 1 and 2). These changes are made pursuant to section 266 of the Income Tax Assessment Act 1936, which allows for the making of regulations that are not inconsistent with the Act or the Income Tax Assessment Act 1997 and which are necessary or convenient to give effect to the Acts. The amendments to the list of LELC are intended to exempt certain types of income from Australian company tax where the income has already been subject to comparable foreign tax. Specifically, the Regulations exempt non-portfolio dividends and branch profits remitted from the Russian Federation or Mexico to Australian companies (Schedule 1, items 1 and 2). This amendment aligns with the completion of tax treaties between Australia and these countries, recognising their tax systems as sufficiently comparable to Australia's.
The Regulations impose obligations on entities affected by the CFC measures, specifically those with investments in the Russian Federation or Mexico. These entities must ensure that any non-portfolio dividends and branch profits remitted from these countries to Australia are exempt from Australian company tax, provided the income has already been taxed in the source country. This exemption reduces compliance and administrative burdens related to accruals taxation under the controlled foreign companies (CFC) measures and the foreign tax credit system. Additionally, for dividends remitted from the Russian Federation to Australia, the Regulations facilitate access to the lower 5% rate of dividend withholding tax under Article 10 of the Australia-Russian Federation tax treaty, provided the dividends are exempt from Australian tax.
Failure to comply with the requirements set out in the Regulations could result in significant tax implications for the affected entities. Specifically, if non-portfolio dividends or branch profits from the Russian Federation or Mexico are not properly exempted from Australian company tax, the entities may be liable for additional taxes on these incomes. This non-compliance could lead to civil penalties under the Income Tax Assessment Act 1936, which include fines and interest on unpaid tax. While the Regulations do not explicitly state maximum penalties, penalties for non-compliance with tax laws can be severe, potentially including substantial fines and interest charges. Additionally, persistent or deliberate non-compliance could lead to criminal charges, with potential imprisonment for serious tax offences.