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Corporations (National Guarantee Fund Levies) Amendment Bill 2007 and related bills

Mr Graziani —No.

Mr Cicchini —I have.

CHAIR —Would you happen to have briefed Mr Graziani in relation to the introductory procedural matters?

Mr Graziani —I have had some briefing from some of my superiors.

CHAIR —In relation to answering questions, taking objections and questions on opinions of policy et cetera?

Mr Graziani —Broadly, yes. I think my colleagues can probably hold me in good stead if I cannot answer certain things.

CHAIR —Unfortunately the obligations are on me, as opposed to you. I take it that you are both aware of those matters. Would you like to make an opening statement first and then we will move to questions.

Mr Graziani —The key objectives of the new foreign income tax offset rules were to remove the quarantining of foreign losses from domestic income, and the associated ability to quarantine domestic prior year losses from assessable foreign income, to remove the need to quarantine foreign losses and excess foreign tax into classes of foreign income, and to streamline the remaining foreign tax credit rules and their requirements, rewriting them into the Income Tax Assessment Act 1997. They were the key objectives.

CHAIR —Nothing further to add?

Mr Graziani —No.

Senator STEPHENS —We have not received very many submissions on this issue, but those we have received have expressed their concerns about the way in which the amendments create inconsistencies. Have you had a chance to read the submissions?

Mr Graziani —I have. We understand that there is only one submission that pertains to schedule 1, the new foreign income tax offset rules, and that is from the Australian Bankers Association.

CHAIR —That is correct.

Senator STEPHENS —Yes, that is right. They make some commentary about their concerns with those inconsistencies. In particular, they suggest that the transitional provisions need to be amended and that there needs to be clarification in drafting the foreign tax offset limit to ensure there is consistency. They also commented on the way in which the anti-avoidance provisions have been drafted. They have some concerns that that might put Australian lenders at a commercial disadvantage. Do you have any response to those concerns?

Mr Graziani —There are five issues, effectively, that the ABA submission raises. The first three pertain to the OBU regime, the fourth one pertains to the treatment of debt deductions in relation to the new foreign tax offset cap, and the last one pertains to the anti-avoidance rules. Going from last back to first, the anti-avoidance rule is basically a rewriting of the current rule, section 6AB(5A). Treasury’s view is that the scope of the rule has not been materially affected, in which case the example of concern raised by the ABA here would be a concern under the current rules as well. That is our view on that matter.

Senator CHAPMAN —We have received a submission from Pitcher Partners advisers about the amendments relating to family trusts in which they assert that the issues which were raised by the Institute of Chartered Accountants and which I also raised, which resulted in this legislation, have only partially been addressed. They raised about 15 or 16 points. I assume you have considered those. I wonder what your response is to those issues raised by Pitcher Partners.

Mr Cicchini —I will be dealing with the family trust election measure in chapter 8 of the bill. This piece of legislation is basically intended to amend the family trust loss regime to provide more flexibility to family trusts. It does this by allowing family trust elections and interposed entity elections to be revoked or varied in more circumstances than is currently available under the law. It also broadens the scope for who can be members of the family in terms of the definition. It exempts certain other people from being subject to family trust distribution tax when they receive a benefit if they are no longer within the family group. It is designed to provide more flexibility.

The submission from Pitcher Partners has been considered. The background to this measure is that the government made an announcement in the 2006-07 budget to do certain things. Earlier this year, Treasury undertook consultation on the details of how that would be implemented. Pitcher Partners were involved in that process. Pitcher Partners were also involved in the process of consultation on the draft legislation. The draft legislation that was consulted on reflected the decisions of the government in terms of what it would or would not allow.

A couple of issues that were raised in Pitcher Partners’ submission—which is comprehensive but I note that it attached a submission from the Institute of Chartered Accountants—have been previously considered by the government. In fact, many of these issues have been considered by the government but it has not adopted all of them. I will take you through some of the key ones. There is a suggestion that, once a trust has incurred losses and there is no requirement for the family trust election to be in place, they should be able to revoke it. One needs to appreciate that the family trust election regime is a concessional regime. It allows you to access losses that you would not normally be able to access because you do not meet the normal rules for carrying forward and deducting tax losses.

It is a concessional regime. By opting into it, it allows you to utilise the losses and keep them within the family group, but there is also a penalty if you distribute outside the family group. So these are tax losses and benefits that you would not normally be able to utilise but for being able to elect into the regime. Of course, once you elect into the regime, you are subject to its rules and therefore need to consider whether or not it is necessarily appropriate for you to do that. If you had a regime where you could just fill in a form, obtain your tax benefits and then say, ‘I’ve got my tax benefits and I would like to get out now,’ then arguably there would not be much point to such a regime. The rules are designed to say that once you are in, you are in. There are certain ways to revoke elections in special circumstances, and this piece of legislation identifies those particular circumstances.

Senator CHAPMAN —What stage are you at with finalising the response to the related issue that I raised, which was to remove as a capital gains tax event the amendment of a trust deed to remove the vesting date?

Mr Cicchini —It is not part of this bill—

Senator CHAPMAN —No, it is not.

Mr Cicchini —so I cannot comment on that. We do not have the capital gains tax people here. It is not a part of this bill.

CHAIR —You would have seen the commentary from AFMA in relation to schedule 3.

Mr Cicchini —Yes, investment in instalment warrants. We have someone here from the superannuation area. I will put him on. It is Mr Mallory.

CHAIR —Mr Mallory, AFMA have thanked you for your consultation process. They say they believe the provisions in the bill will maintain the high level of regulatory protection afforded superannuation fund investors in instalment warrants. They did recommend an amendment to exclude an instalment trust. What views did Treasury have on that?

Mr Mallory —I think we need to look at the background for the amendments that we actually have in the bill. What gave rise to the amendments was the government’s decision to allow longstanding industry practice to continue following a conclusion by the Commissioner of Taxation and APRA that instalment warrants constituted borrowing. So these amendments that we have in the bill at the moment are specifically directed at facilitating the continued investment by superannuation funds, particularly small self-managed super funds, in instalment warrants.

The issue raised by AFMA is in respect of instalments where there is no borrowing involved, so it is somewhat outside the scope of the provisions of the bill. We actually have not formulated a view on this issue yet. I think we would need to ascertain a bit more as to what the scope of that particular market is. It appears to be a very narrow market. But, as I said, the scope of the bill is specifically to deal with the issue about instalment warrants and the borrowing that is involved with them. The issue raised by AFMA is similar to instalment receipts where there is no borrowing involved.

CHAIR —Thank you for that. Thank you very much, gentlemen, for your assistance to the committee. You are now excused.

 [3.37 pm]