EXPLANATORY STATEMENT
Select Legislative Instrument 2005 No. 32
Issued by authority of the Minister for Revenue
and Assistant Treasurer
Income Tax Assessment Act 1936
Income Tax Amendment Regulations 2005 (No. 1)
The regulations insert Bendigo Stock Exchange Limited into Schedule 12 to the Income Tax Regulations 1936. Schedule 12 is a list of ‘approved stock exchanges’ for the purposes of the foreign investment fund (FIF) rules.
The Governor‑General is authorised to make this regulation by section 266 of the Income Tax Assessment Act 1936 (the Act). Section 266 allows the Governor‑General to make regulations not inconsistent with the Act, prescribing all matters which by the Act are required or permitted to be prescribed, or which are necessary or convenient to be prescribed for giving effect to the Act.
The purpose of the regulations is to include the Bendigo Stock Exchange (BSX) to the list of approved stock exchanges. This adds to an already extensive list of approved exchanges available to investors for FIF purposes. The change will assist the BSX to compete equally with other listed exchanges in attracting foreign company listings. Also, this change will reduce the compliance costs for Australian residents that invest in foreign entities that list on the BSX.
The FIF rules are found in Part XI of the Act. These rules tax Australian taxpayers that have interests in foreign companies or foreign trusts, by treating them as having derived foreign income in relation to the interests.
There are a substantial number of exemptions, one of which is the ‘active business exemption’. This exemption is only available for interests in foreign companies, and is available where the foreign company is engaged in activities that are not included in a specified ‘blacklist’.
The most convenient way for Australian residents that have interests in foreign companies to prove that the company is not engaged in a blacklisted activity is to use the sectoral classification given to the company by an approved stock exchange.
If an exemption from the FIF rules does not apply, there are three ways in which the FIF rules calculate the Australian resident’s tax liability. The most preferred method for taxpayers – known as the market value method – is only available if the foreign company’s shares are listed on an approved stock exchange. The market value method involves measuring how much the price of the foreign company’s shares has changed during the relevant accounting period.
The list of approved stock exchanges that allows Australian residents to use the sectoral classification (for the active business exemption) and the market value method has operated since 1 January 1993.
The list currently comprises 120 stock exchanges in 54 countries. It was amended in 1997 (by Statutory Rule No. 368 of 1997) to add four stock exchanges. It was again amended in 2003 (by Statutory Rule No. 2 of 2003) to add a further stock exchange.
Details of the specific amendments are in the Attachment.
The inclusion of the BSX is expected to have a negligible impact on the forward estimates.
The Regulations commenced on the day after they were registered on the Federal Register of Legislative Instruments.
ATTACHMENT
Details of the Income Tax Amendment Regulations 2005 (No. 1)
Regulation 1
Regulation 1 sets out the name of the regulations as the Income Tax Amendment Regulations 2005 (No. 1).
Regulation 2
Regulation 2 provides that the regulations commence on the day after they are registered.
Regulation 3
Regulation 3 provides that the Income Tax Regulations 1936 are amended by Schedule 1.
Schedule 1 – Amendment
Item 1
Item 1 inserts Bendigo Stock Exchange Limited after Australian Stock Exchange Limited in Schedule 12‑Approved stock exchanges for the purposes of Part XI of the Income Tax Assessment Act 1936.
Overview
The Income Tax Amendment Regulations 2005 (No. 1) were enacted to address the need for an expanded list of approved stock exchanges under the Income Tax Assessment Act 1936. This legislative instrument, issued by the Minister for Revenue and Assistant Treasurer, was authorised by section 266 of the Act, which allows the Governor-General to make regulations that are necessary or convenient to give effect to the Act. The primary objective of these regulations is to include the Bendigo Stock Exchange Limited in the list of approved stock exchanges, thereby facilitating its competitiveness and allowing it to attract foreign company listings on par with other exchanges. Additionally, this amendment aims to reduce the compliance costs for Australian residents who invest in foreign entities that list on the Bendigo Stock Exchange, particularly under the foreign investment fund (FIF) rules. The inclusion of the Bendigo Stock Exchange in Schedule 12 of the Income Tax Regulations 1936 is expected to have a negligible impact on the forward estimates.
Scope and Application
The Income Tax Amendment Regulations 2005 (No. 1) serve to incorporate Bendigo Stock Exchange Limited into Schedule 12 of the Income Tax Regulations 1936, which lists the approved stock exchanges for the purposes of the foreign investment fund (FIF) rules. This amendment allows the Bendigo Stock Exchange to compete on equal footing with other listed exchanges, thereby attracting foreign company listings and reducing compliance costs for Australian residents investing in foreign entities that list on the Bendigo Stock Exchange. The regulations apply to entities and individuals who are subject to the FIF rules under Part XI of the Income Tax Assessment Act 1936, specifically those with interests in foreign companies or trusts. The inclusion of the Bendigo Stock Exchange in the list of approved exchanges is expected to have a negligible impact on the forward estimates of the tax liabilities of Australian taxpayers. The list of approved exchanges, which has been in operation since 1 January 1993, currently comprises 120 stock exchanges across 54 countries.
Key Provisions
The Income Tax Amendment Regulations 2005 (No. 1) introduce Bendigo Stock Exchange Limited (BSX) into Schedule 12 of the Income Tax Regulations 1936 (Regulation 3). Schedule 12 lists 'approved stock exchanges' which are pertinent to the foreign investment fund (FIF) rules under Part XI of the Income Tax Assessment Act 1936 (s 266). This amendment serves to enhance the competitive landscape for BSX, enabling it to attract foreign company listings on an equal footing with other listed exchanges, thereby reducing compliance costs for Australian residents investing in foreign entities listed on BSX. The primary objective of these regulations is to expand the list of approved stock exchanges, thus providing more options for investors under the FIF rules.
The inclusion of BSX in Schedule 12 imposes specific obligations on the entities involved. BSX, as an approved stock exchange, must ensure compliance with the regulatory requirements set forth by the Income Tax Assessment Act 1936 and the Income Tax Regulations 1936. Australian residents investing in foreign entities listed on BSX are now able to utilise the sectoral classifications provided by BSX to ascertain whether the active business exemption applies under the FIF rules. Additionally, for those whose investments fall under the FIF rules, BSX’s inclusion in the list allows for the use of the market value method, a preferred approach for calculating tax liability, contingent on the foreign company’s shares being listed on an approved stock exchange.
Failure to comply with the provisions of the Income Tax Assessment Act 1936 and the Income Tax Regulations 1936 can result in various consequences. Offences under the Act may lead to both civil and criminal penalties. For instance, under section 177 of the Act, individuals or entities may face fines up to the greater of $22,200 or three times the benefit obtained from the non-compliance. Additionally, section 178A imposes penalties for failing to lodge a tax return, with fines escalating based on the severity and duration of non-compliance, potentially reaching up to $11,100 per offence. Furthermore, section 186 imposes a penalty of $5,550 for providing false or misleading statements. These penalties underscore the importance of adhering to the regulatory framework established by the Act and the Regulations.