As part of wider reforms to Australia's foreign source income anti-tax-deferral
rules, originally announced in the 2009-10 budget, the Assistant Treasurer,
Nick Sherry has released a consultation paper on reforms to the controlled foreign
company (CFC) tax rules.
As part of the same reforms, draft legislation to repeal the foreign investment
fund rules and deemed present entitlement rules was released for comment last
month. The remaining parts of those reforms, to the transferor trust and anti-roll
up rules, are still being developed.
The Australian Treasury, in the consultative paper, lays down the benchmarks
of the new reform. There are, it says, legitimate commercial reasons why residents
invest capital in foreign active businesses, which should be taxed at the same competitive level as other investments in that jurisdiction.
There will continue to be an “active business test”, where the
active conduct of a trade or business by an entity “means the competitive
participation by the entity in industrial, commercial or financial undertakings,
evidenced by human activity through a permanent establishment”, the Treasury explained.
However, it continued, foreign passive investment should not be favoured over
domestic passive investment. Foreign passive investment will continue to be
treated the same as capital that is invested in Australia, and the benefit of
deferral should be eliminated to remove any potential bias in favour of capital
exported.
As a consequence, the policy objective of the CFC rules is to ensure that passive
investment decisions of Australian resident taxpayers are not distorted by tax
considerations, thereby protecting Australian tax revenue. In achieving
this objective, however, the rules should also minimise compliance and administrative
costs.
The actual policy giving effect to this objective is therefore to tax resident
taxpayers on an accruals basis on their calculated share of the passive income
accumulating in a foreign entity that they hold an interest in.
Releasing the paper, Nick Sherry explained that: "The existing CFC rules were
designed to address integrity risks to the Australian tax base – but this
must be balanced against other policy objectives such as equity, efficiency,
simplicity and low compliance costs."
"These proposals will further improve the competitiveness of Australian
businesses which have offshore operations by better targeting the rules to those
areas at risk of inappropriate tax deferral while reducing red tape and compliance
costs for those businesses."
He added that further input from interested parties will assist significantly
in drawing up the final legislation. Submissions must be made by March 1,
2010.
LAWANDTAX-NEWS.COM
