EXPLANATORY STATEMENT
Select Legislative Instrument 2011 No. 5
Issued by authority of the Assistant Treasurer
Income Tax Assessment Act 1936
Income Tax Assessment Act 1997
Income Tax Amendment Regulations 2011 (No. 2)
Income Tax Assessment Amendment Regulations 2011 (No. 1)
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 (ITAA 1997) prescribing all matters by which the Act or the ITAA 1997 are required or permitted to be prescribed, or are necessary or convenient to be prescribed for giving effect to the Act or the ITAA 1997.
The purpose of the amendments to the Income Tax Regulations 1936 (ITR 1936) and to the Income Tax Assessment Regulations 1997 (ITAR 1997) is to give effect to consequential amendments that are necessary to ensure that the taxation law operates as intended following the repeal of the foreign investment fund (FIF) and deemed present entitlement rules.
The Government announced in the 2009-10 Budget on 12 May 2009 that it would reform the foreign source income attribution rules. The repeal of the FIF and deemed present entitlement rules represents the first part of this reform. The remaining reforms (include the modernisation of the controlled foreign company rules, improving the effectiveness of the transferor trust rules, and the inclusion of an anti‑roll-up rule) are scheduled to be introduced into the Parliament in the first half of this year.
The FIF rules applied to Australian residents with non-controlling shareholdings in foreign companies or with interests in foreign trusts. The rules applied to approximate a resident taxpayer’s share of the undistributed profits of a FIF and to assess the taxpayer on those profits. The FIF rules also applied to Australian residents with an interest in a foreign life assurance policy.
The Tax Laws Amendment (Foreign Source Income Deferral) Act (No. 1) 2010, which repeals the FIF and deemed present entitlement rules, received Royal Assent on 14 July 2010.
The amendments will repeal or amend provisions in the ITR 1936 and the ITAR 1997 which relate to the FIF rules.
The amendments also insert the definition of an approved stock exchange and updates the list of approved stock exchanges in the ITAR 1997 for the purposes of the definition of approved stock exchange in subsection 995-1(1) of the ITAA 1997 as a consequence of the repeal of the FIF regulations in the ITR 1936.
The amendments also modify the references to “Australian Stock Exchange Limited” and “Bendigo Stock Exchange Limited” to read “ASX Limited” and SIM Venture Securities Exchange Ltd” respectively for the purposes of the definition of approved stock exchange in subsection 995-1(1) of the ITAA 1997 (in order to reflect the change in names of those institutions) and adds “Asia Pacific Stock Exchange Limited” to the list of approved stock exchanges.
A further technical amendment is made to omit definitions that no longer apply.
These minor consequential amendments arise from the repeal of the FIF rules in the tax laws. A comprehensive Regulation Impact Statement was prepared and accompanied the repeal of these rules in the primary legislation.
Targeted confidential consultation occurred as the Regulations were minor or machinery in nature.
The Regulations commenced on the day after they were registered on the Federal Register of Legislative Instruments.
Overview
The Income Tax Assessment Amendment Regulations 2011 (No. 2), issued under the authority of the Assistant Treasurer, were enacted to implement minor and consequential amendments to the Income Tax Regulations 1936 and the Income Tax Assessment Regulations 1997. These amendments were introduced to ensure the taxation law functions as intended following the repeal of the foreign investment fund (FIF) and deemed present entitlement rules, as announced in the 2009-10 Budget. The repeal of these rules was formalised through the Tax Laws Amendment (Foreign Source Income Deferral) Act (No. 1) 2010, which received Royal Assent on 14 July 2010. The regulations make necessary adjustments to the existing regulations to reflect the removal of the FIF rules, including updating definitions and references to approved stock exchanges, and omitting definitions that are no longer applicable. This reform was part of a broader initiative to modernise foreign source income attribution rules, with further reforms planned for introduction in the first half of the year.
Scope and Application
The Income Tax Assessment Amendment Regulations 2011 (No. 2) pertain to the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1997, impacting the regulations governing foreign investment fund (FIF) rules, which have been repealed. These regulations apply to Australian residents with non-controlling shareholdings in foreign companies or interests in foreign trusts, as well as those with an interest in a foreign life assurance policy. The regulations, being subordinate instruments, extend the application of the primary Acts by detailing specific measures necessary for the effective implementation of the taxation laws, particularly in the wake of the repeal of FIF and deemed present entitlement rules. The regulations also update the list of approved stock exchanges for the purposes of certain tax provisions, reflecting changes such as the renaming of stock exchanges and the addition of new ones. Notably, the scope of these amendments is limited to the technical adjustments necessitated by the legislative changes, ensuring the internal consistency and operational effectiveness of the tax law framework.
Key Provisions
The primary operative sections of the Income Tax Amendment Regulations 2011 (No. 2) (the Regulations) pertain to the repeal or amendment of provisions in the Income Tax Regulations 1936 (ITR 1936) and the Income Tax Assessment Regulations 1997 (ITAR 1997) relating to the foreign investment fund (FIF) rules. These sections are intended to ensure that the taxation law operates as intended following the repeal of the FIF and deemed present entitlement rules (reg 1). Specifically, the Regulations repeal or amend existing provisions in the ITR 1936 and the ITAR 1997 that relate to the FIF rules (reg 2). They also update the definition of an approved stock exchange in the ITAR 1997 and modify the references to certain stock exchanges to reflect changes in their names (reg 3). The Regulations further include a technical amendment to omit definitions that no longer apply (reg 4).
The Regulations impose several obligations and requirements on the parties or entities they govern. Firstly, they require the Commissioner of Taxation to ensure that the ITR 1936 and the ITAR 1997 are updated to reflect the repeal of the FIF rules. This includes repealing or amending existing provisions and updating definitions as necessary (reg 1). The Regulations also require the Commissioner to update the list of approved stock exchanges in the ITAR 1997 and modify the references to certain stock exchanges to reflect changes in their names (reg 3). Furthermore, the Regulations mandate the omission of definitions that no longer apply to ensure the regulations remain accurate and relevant (reg 4).
Breaching the provisions of the Regulations may result in various civil or criminal consequences, depending on the nature and severity of the breach. However, the explanatory statement does not provide specific details on offences, penalties, or maximum penalties for breach. It is likely that breaches of tax regulations could result in penalties under the relevant tax Acts, which may include fines or imprisonment for serious offences. Taxpayers and entities governed by these Regulations are advised to comply with the requirements to avoid potential penalties or legal consequences.
In summary, the Income Tax Amendment Regulations 2011 (No. 2) make minor consequential amendments to the ITR 1936 and the ITAR 1997 to reflect the repeal of the FIF rules. These Regulations impose obligations on the Commissioner of Taxation to update the regulations and omit outdated definitions. While the explanatory statement does not specify penalties for breach, non-compliance with tax regulations could result in civil or criminal consequences under the relevant tax Acts.