Mr BROUGH (Minister for Revenue and Assistant Treasurer) (9:28 AM) —I move:

Mr Speaker, congratulations on your appointment. I wish you well in the position.

As this House was advised when a similar bill was introduced before the last election, only to lapse when the election was called, this bill continues the modernisation of Australia's international tax regime which flows from the government's review of international taxation.

Australia has a significant managed funds industry, sustained by strong economic performance, a highly educated work force, low-cost infrastructure, advanced regulatory systems and sophisticated financial markets. This bill focuses on Australian managed funds and making them more attractive to foreign investors by removing taxation impediments to further growth.

I note the strong business support for this bill. The business community has played a valuable and constructive role in helping develop the proposed legislation. This bill again demonstrates that the government has listened and been responsive to industry calls for specific tax reforms to remove distortions from the tax system and allow Australian businesses to grow.

Under current capital gains tax arrangements, nonresidents investing in assets through an Australian managed fund may be taxed more heavily than if they invested in the assets directly or through a foreign fund. Schedule 1 of the bill makes three changes to the income tax law to eliminate these distortions.

It amends the law to disregard a capital gain or capital loss made by a foreign resident from disposing of an interest in an Australian fixed trust, if the underlying assets of the trust are not Australian assets. A second amendment will disregard a capital gain made by a foreign resident in respect of the taxpayer's interest in a fixed trust, if the gain ultimately relates to an asset of the trust which is not an Australian asset. In both cases, had the underlying asset been directly held by the foreign investor, Australian capital gains tax would not apply.

Reflecting the conduit principle of international taxation, foreign source income flowing through an Australian trust to nonresidents is not taxed in Australia. Nevertheless, under current arrangements when a trust interest is sold, previously distributed foreign source income is, on a delayed basis, subject to Australian capital gains taxation. On the other hand, nonresidents investing directly, or through an offshore managed fund, do not pay Australian capital gains tax in respect of the foreign source income. A third amendment will eliminate this distortion.

Schedule 2 amends the rules for determining the source of income derived by certain residents of treaty partner countries. The interaction of treaty source rules and other treaty rules relating to nonresident beneficiaries of income derived by business trusts operating in Australia has implications for the managed funds industry. This interaction may result in foreign source passive income derived by those foreign beneficiaries through an Australian trust being treated as sourced in Australia and therefore taxed in Australia.

For example, if a New Zealand resident invests in an Australian managed fund investing offshore, this interaction inappropriately exposes the New Zealand beneficiary to Australian tax on conduit income. The amendments ensure the domestic source rules rather than treaty source rules (which have a wider potential reach) apply in this case. The effect of this amendment will be to relieve the conduit income from Australian taxation.

The amendments will align the tax treatment of foreign residents investing in managed funds which derive income from sources outside Australia with the tax treatment that would apply if those foreign residents made such investments directly.

Schedule 3 to the bill contains three measures to finetune interest withholding tax arrangements to be consistent with recent developments in the tax law. The first measure in schedule 3 includes `debt interests' in the range of financial instruments eligible for interest withholding tax exemption. The second treats as interest, for interest withholding tax purposes, payments of a non-capital nature on some upper tier 2 hybrid capital instruments issued by banks as interest.

Finally, the bill facilitates the transfer of additional assets and debts from Australian subsidiaries of foreign banks to their Australian branches without losing interest withholding tax exemptions.

Full details of the measures in this bill are contained in the explanatory memorandum.

I commend the bill to the House and present the explanatory memorandum.

Debate (on motion by Mr Bevis) adjourned.