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Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2008 [2009] AUSStaCSBRp 14 (18 March 2009)

Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2008

Introduction

The Committee dealt with this bill in Alert Digest No. 1 of 2009. The Minister for Competition Policy and Consumer Affairs responded to the Committee’s comments in a letter dated 10 March 2009. A copy of the letter is attached to this report.

Although this bill has been passed by both Houses of Parliament the response may, nevertheless, be of interest to Senators.

Extract from Alert Digest No. 1 of 2009

Introduced into the House of Representatives on 4 December 2008

Portfolio: Treasury

Background

This bill amends the Income Tax Assessment Act 1997 to introduce a comprehensive framework for the taxation of financial arrangements (TOFA) designed to reduce tax-induced distortions to investment and financing, to facilitate efficient risk management, and to reduce compliance and administration costs. The bill is the final stage of the TOFA reforms which were first announced in the 1992 Budget and have been implemented progressively since 2001.

In particular, the bill:

• establishes criteria that determine how different financial arrangements are assigned to, and treated under, the different tax-timing methods;

• removes the capital/revenue distinction for most financial arrangements by treating the gains and losses on revenue account, except where specific rules apply;

• increases the post-tax efficiency and effectiveness of hedging, and provides for effective and efficient risk management by permitting alignment of character and tax-timing of eligible hedging arrangements;

• reduces the complexity of accruals calculations present in current tax rules on discounted and deferred interest securities, and reduces compliance and administration costs by permitting close alignment between tax and accounting outcomes on an elective basis; and

• allows eligible taxpayers to use results from their financial reports for tax purposes.

The bill also makes consequential amendments to the Income Tax Assessment Act 1936, the Income Tax Assessment Act 1997, the Income Tax (Transitional Provisions) Act 1997, the Taxation Administration Act 1953 and the  New Business Tax System (Taxation of Financial Arrangements) Act (No. 1) 2003 .

The bill also contains application and transitional provisions.

Retrospective commencement and application
Subclause 2(1); Schedule 1, item 114

Item 3 in the table to subclause 2(1) provides that  Part 4  of Schedule 1 is to commence immediately after the commencement of the  New Business Tax System (Taxation of Financial Arrangements) Act (No. 1) 2003 , on 17 December 2003. Item 114 of Schedule 1 provides that the amendments to be made by  Part 4  of Schedule 1 ‘apply on and after 17 December 2003’.

As a matter of practice, the Committee draws attention to any bill which seeks to have retrospective impact and will comment adversely where such a bill has a detrimental effect on people. The Committee notes that the explanatory memorandum, which apparently deals with the changes proposed to be made by  Part 4  of Schedule 1 [at paragraphs 11.152-11.161] does not appear to indicate whether this retrospective commencement and application will adversely affect anyone other than the Commonwealth. Therefore, the Committee seeks the Treasurer’s advice whether these amendments will have an adverse effect on any individual.

Pending the Treasurer’s advice, the Committee draws Senators’ attention to these provisions, as they may be considered to trespass unduly on personal rights and liberties, in breach of principle 1(a)(i) of the Committee’s terms of reference.

Relevant extract from the response from the Minister

I refer to correspondence of 5 February 2009 from Ms Julie Dennett, Secretary of the Standing Committee for the Scrutiny of Bills, originally directed to the Treasurer, concerning the Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2008.

Alert Digest 01/09 of the Standing Committee for the Scrutiny of Bills contains comments regarding the retrospective application of Part 4 of Schedule 1 to the Bill, and seeks my advice as to whether these amendments will have any adverse effect on any individual.

Items 106 to 108, 110, 111 and 113 are aimed at ensuring that certain types of entity are not subject to Division 775 and certain parts of Subdivision 960-C of the Income Tax Assessment Act 1997. Broadly, Division 775 and Subdivision 960-C bring to account for income tax purposes gains and losses made by taxpayers due to exchange rate movements and provide for the translation of certain foreign-currency denominated amounts into Australian currency. In other words, these items can have the effect of either increasing or decreasing a taxpayer’s assessable income, and in this sense may have the effect of altering a taxpayer’s liability. However, I would note that the amendments contained in these items implement recommendations made in representations to the current and previous Government by industry bodies. The amendments, including their retrospective nature, were announced by the then Minister for Revenue and Assistant Treasurer in Press Release No. 073 of 2 September 2005.

I would also observe that the Australian Taxation Office has advised that where taxpayers have acted reasonably in anticipating this change, there will be no tax shortfall penalty and, if they then actively seek to amend their return or activity statement within a reasonable time, the Tax Office will remit the general interest charge attributable to the amendment to nil.

Items 109 and 112 extend the eligibility of certain accounts for certain elective methods tax treatments under Division 230 and Division 775. While the extension of eligibility can be on a retrospective basis, it is elective. Accordingly, it would be reasonable to expect that a taxpayer would not make such a retrospective election if it would be to their detriment.

I trust this information will be of assistance to you.

The Committee thanks the Minister for this response. While the Committee does not welcome ‘legislation by press release’, the Minister’s explanation of a taxpayer’s ability to elect to participate is helpful.