Sussan Ley (Farrer, Liberal Party, Shadow Assistant Treasurer) Share this | Hansard source

I am pleased to talk on the Tax Laws Amendment (Foreign Source Income Deferral) Bill (No. 1) 2010. This bill concerns the foreign investment fund measures of the Income Tax Assessment Act. The FIF measures, as they are called, are one of three components of the accruals taxation system, which has as its broad objective to tax Australian residents on an accruals basis on their share of income derived by certain foreign entities—income which has not been comparably taxed in an offshore jurisdiction. The three parts of the accruals taxation system are the controlled foreign company, or CFC, rules; the transferor trust measure; and the foreign investment fund measures about which this bill is concerned.

The FIF measures are designed to counter tax avoidance opportunities that remained after the earlier introduction of the controlled foreign company and transferor trust measures. So they were the third measure implemented. The FIF measures apply where a foreign company or trust, though not controlled by Australian residents, is an attractive investment vehicle because it allows for the accumulation of income offshore in low-tax or tax-free countries, thereby allowing the investor to minimise or to defer payment of Australian tax.

The FIF measures also apply to Australian residents who have invested offshore in life bonds or life policies that have an investment component. So these measures apply to Australian residents who have an interest in a foreign company or trust at the end of a year of income and those who held a foreign life assurance policy at any time in the income year. There are a large number of exceptions to the foreign investment fund measures. That describes the measures in general.

Turning to this bill in particular, it implements changes to the FIF rules and the deemed present entitlement rules. These changes were announced by the government in the 2009-10 budget on 12 May 2009. I should note that the legislation before the House follows on from initiatives of the previous coalition government and therefore explain at the outset that we see this as entirely noncontroversial. The existing attribution rules which apply were introduced in 1992 and were based on the rules developed in the 1960s by the United States of America. The former coalition government recognised that those rules had become outdated and that the global economy had significantly changed since those rules were introduced.

The former coalition government announced on 10 October 2006 that the Board of Taxation would conduct a review of the attribution rules. The terms of reference for the review were: to identify ways to reduce the complexity and compliance costs associated with the current foreign source income anti-tax-deferral regimes, including whether the regimes can be collapsed into a single regime; and to examine whether the anti-tax-deferral regimes strike an appropriate balance between effectively countering deferral and unnecessarily inhibiting Australians from competing in the global economy. In September 2008 the board provided its report to the current government. On 12 May 2009 the then Assistant Treasurer announced a number of changes to the tax law in response to the Board of Taxation’s review. This bill implements some of the changes announced at that time.

The amendments in this bill are based on the recommendations made by the Board of Taxation to reduce compliance costs for affected taxpayers. The bill abolishes the foreign investment fund rules and the deemed present entitlement rules contained within the Income Tax Assessment Act 1936 and is largely consistent with the operation of the tax law prior to the introduction of the FIF and deemed present entitlement rules in 1992.

The amendments in this bill will mean that resident taxpayers who are beneficiaries holding interests in foreign trusts will apply the normal trust tax rules that are contained in division 6 and the transferor trust provisions in division 6AAA. The Board of Taxation argued that the abolition of the foreign investment fund rules would significantly reduce compliance costs for Australian managed funds and would enhance global competitiveness and attractiveness to foreign investors. The Board of Taxation argued that their recommended changes would also significantly reduce compliance costs for Australian companies and superannuation funds. They are clearly important initiatives.

As I said, the coalition initiated this piece of legislation and we therefore support it. We recognise the good work that the Board of Taxation does. We think there is actually scope for it to do more and to involve itself in some of the difficult aspects of tax law and tax provisions that the tax office and the profession deal with on a day-to-day basis. I commend this bill to the House.

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