Chapter 1: Introduction

Background to the review

1.1 On 10 October 2006, the former Treasurer announced a review of Australia's foreign source income anti-tax-deferral (attribution) rules.

1.2 These regimes include the controlled foreign company (CFC) rules, the foreign investment fund (FIF) rules, the transferor trust rules and the deemed present entitlement rules. The regimes are designed to ensure that no undue tax deferral benefit arises as a result of resident taxpayers accumulating income in offshore entities.

Review's terms of reference

1.3 The Board of Taxation was tasked to review the operation of these regimes. The review's terms of reference are:

• to identify ways to reduce the complexity and compliance costs associated with the 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 tax deferral and unnecessarily inhibiting Australians from competing in the global economy.

1.4 The review addresses a number of concerns raised by business about these regimes, including that they are complex and involve substantial compliance and administration costs. Business has also raised concerns that, in some cases, the regimes are poorly targeted, impacting on offshore investment decisions that are not motivated by tax deferral reasons.

The review team

1.5 The Board of Taxation is an independent, non-statutory body established to advise government on various aspects of the Australian taxation system.

1.6 The Board appointed a Working Group of its members comprising Chris Jordan AO (Chairman), Keith James, and Dick Warburton AO to oversee the review of the attribution rules. The Working Group was assisted by members of the Board's Secretariat and Treasury's Attribution Project Team.

1.7 The Board also engaged Professor Richard Vann (The University of Sydney) and Professor Lee Burns (The University of Sydney) to provide technical advice on the operation of the existing attribution rules and on possible options for reform.

1.8 In addition, the Board consulted with the Treasury on the development of the current policy and legislation relating to the attribution rules and with the Australian Taxation Office about its administrative practices for these regimes.

Review process

1.9 The Board has consulted widely in developing the recommendations in this report. The Board's consultation processes involved:

• preliminary targeted consultation with key stakeholders representing the various sectors impacted by the attribution rules;
• the development of a discussion paper which was released in May 2007;
• holding consultation meetings in Sydney and Melbourne during July 2007 to explore the issues raised in the discussion paper;
• the development of a position paper which was released in March 2008;
• the development of issues papers which were released in May 2008;
• holding further consultation meetings in Sydney and Melbourne in late May and early June 2008 to explore the issues raised in the position and issues papers; and
• inviting written submissions on each of the papers to assist with the review.

Discussion Paper

1.10 The discussion paper was developed as a basis for further discussion. In developing the paper the Board conducted targeted consultations with key stakeholders.

1.11 The views received in the targeted consultation process assisted the Board in developing the discussion paper which was released in May 2007.

1.12 The discussion paper outlined:

• The key factors that needed to be taken into account in considering, at a general level, possible changes to the attribution rules: the environment in which the regimes operate; the historical development of the regimes; and the policy drivers behind the regimes. It also canvassed the concept of a harmonised regime.
• The range of issues that are associated with the current regimes in respect of interests and entities and canvassed possible solutions.
• How the attribution rules might better target the kinds of income that present the best opportunity for inappropriate tax deferral.
• The appropriateness of the current attribution methods and record keeping requirements, and how they might be improved.

1.13 Following the release of the discussion paper, the Board conducted further consultation forums in Sydney and Melbourne in June 2007 as an additional mechanism for obtaining views and to assist stakeholders in preparing written submissions. The Board received over 25 submissions in respect of the issues raised in the discussion paper.

Position and Issues Papers

1.14 In response to submissions and consultations, the Board prepared a position paper to provide a framework for further consideration of the key issues so that they could be addressed in a systemic way. Given the time available, and the potential breadth of issues associated with the scope of the review, the position paper set out the Board's considered views on the high-level principles that should apply to the future design of the attribution rules.

1.15 To provide a framework for consultation and to focus attention on issues requiring particular development, the Board released issues papers on the following five key topics:

• Listed public company exemption.
• Active investment exemption.
• Distribution exemption.
• Identification of interests.
• Branch-equivalent calculations.

1.16 To settle the detail underlying the high-level principles, the Board conducted further consultation forums in Sydney and Melbourne in May 2008 as well as more targeted consultations in early June 2008. The Board received over 20 submissions in response to the issues raised in the position and issues papers.

1.17 Consultations and submissions also raised related international tax issues, particularly in relation to the taxation of foreign hybrid limited partnerships. The Board notes these issues but considers them to be outside this review's terms of reference. Consequently, the Board has not made any recommendations on these issues.

Submissions

1.18 The Board acknowledges the assistance provided by those who made submissions to the review. In total the Board received 45 submissions in response to the discussion paper, the position paper and the issues papers. These submissions made a vital contribution to the review and, together with views expressed during consultations¹, were integral in helping to shape the recommendations contained in this report. Except for those made in confidence, submissions will be published on the Board's website and a list of individuals and organisations that provided public submissions to the review is at Appendix A.

Board's report

1.19 The Board has considered the issues raised by stakeholders in their submissions and at the consultation meetings. However, the Board's recommendations reflect the Board's independent judgment, after taking into account all of the information and experience available to it.

Future consultation

1.20 In presenting its recommendations to the Government, the Board also recommends that further consultations be undertaken as part of the legislative design process to settle the detail surrounding any reforms to the attribution rules.

1.21 As part of this process, the Board sees merit in Treasury, when developing any draft legislation, involving the Board and other stakeholders that have participated in the review's processes. The review has been well-served by these participants and their further involvement will help ensure that Australia has world-class attribution rules.

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¹ A full list of organisations that were represented at the consultation meetings is available in Appendix B.

 

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