NO.109

BOARD OF TAXATION REVIEWS

As part of the Government’s commitment to ensuring that the tax system is operating effectively, I have asked the Board of Taxation to undertake reviews of two different aspects of the tax system.

First, I have asked the Board to undertake a review of the foreign source income anti-tax-deferral regimes.  This review builds on the significant inroads that the Government has achieved to simplify and reduce the complexity of the tax laws through the Government’s responses to the Review of International Taxation Arrangements (RITA). 

Australia has several anti-tax-deferral regimes which are designed to prevent resident taxpayers from using foreign entities to defer or avoid Australian tax — the controlled foreign company, foreign investment fund, transferor trust and deemed present entitlement regimes.

Business has raised a number of concerns with Government about the anti-tax-deferral regimes, including that they are complex and involve substantial compliance and administration costs.  Additionally, in some cases they are poorly targeted, potentially impacting on offshore investment decisions that are not motivated by tax deferral reasons.

Against this background, I have asked the Board to review the operation of the anti-tax-deferral regimes.  The objectives of the review are:

• to reduce the complexity and compliance costs associated with the anti-tax-deferral regimes including whether the current regimes can be collapsed into a single regime; and
• to examine whether the anti-tax-deferral regimes strike an appropriate balance between effectively countering tax deferral and unnecessarily inhibiting Australians from competing in the global economy.

The review will involve extensive consultation with stakeholders.  Following this broad consultation, the Board will report to Government in mid‑2007 on the outcome of the review.

Second, I have asked the Board to undertake a review of the taxation treatment of off‑market share buy‑backs.  This review will help the Government to determine whether the taxation treatment of off‑market share buy‑backs should be changed with a view to increasing certainty for businesses and reducing compliance costs.

In conducting the review, the Board will take into account:

• the factors influencing the increasing trend towards the use of off‑market share buy‑backs;
• the implications of the current taxation treatment of off‑market share buy‑backs for different types of shareholders;
• the compliance cost impacts of off‑market share buy‑backs;
• the administrative practices of the Australian Taxation Office relating to off‑market share buy‑backs;
• the basis for splitting the proceeds of off‑market share buy‑backs into a dividend component and a capital component;
• the application of the dividend streaming rules to off‑market share buy‑backs;
• the capital gains tax implications of off‑market share buy‑backs; and
• any other matters the Board considers to be appropriate.

The Board will conduct consultations with stakeholders and make recommendations on the appropriate taxation treatment of off‑market share buy‑backs.  It will report to Government in the second half of 2007.

The Board of Taxation’s charter includes providing advice to the Government on the quality and effectiveness of tax legislation along with the general integrity and functioning of the tax system.  Details about the Board of Taxation can be found at http://www.taxboard.gov.au.

CANBERRA

10 October 2006

Contact: Renae Stoikos – 02 6277 7340