Review of the Foreign Source Income Anti-Tax-Deferral Regimes

Background

On 10 October 2006 the then Treasurer announced that it had asked the Board of Taxation to undertake a review of the anti-tax-deferral regimes — the controlled foreign company, foreign investment fund, transferor trust and deemed present entitlement regimes and provide a report to the Treasurer.

The objectives of this review were:

• 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 Board appointed a Working Group of its members comprising Chris Jordan AO (Chairman), Keith James and Dick Warburton AO to oversee the Board’s review of the anti-tax-deferral regimes.

Discussion Paper

On 25 May 2007, the Board of Taxation released its discussion paper on the Review of Anti-tax-deferral regimes. The Chairman of the Board of Taxation announced the release of the discussion paper via a press release.

The discussion paper:

• provides some background to and the framework under which the anti-tax-deferral regimes operate;
• explores possible options for reform including whether the current regimes can be collapsed into a single regime; and
• examines issues relating to each of the abovementioned review criteria.

To assist in the Review process, the Board conducted consultation forums in June 2007. Consultation forums were held on 18 June 2007 in Sydney and 20 June 2007 in Melbourne. The consultation forums were attended by representatives from taxation professional bodies, major law and accounting firms, various major corporations and business associations.

The Board requested written submissions on the Review of the Anti-tax-deferral regimes by 6 July 2007. All submissions received were acknowledged and public submissions are available for review below.

Position Paper

On 12 March 2008, the Chairman of the Board of Taxation announced the release of the Board’s position paper [PDF 1.3MB] on possible reforms to Australia’s foreign source income anti-tax-deferral regimes (the controlled foreign company rules, the foreign investment fund rules, the transferor trust rules and the deemed present entitlement rules).

The Board considers the principles set out in the paper provide a framework to reduce compliance costs and complexity while not inhibiting the ability of Australian businesses to compete globally.

The release of the position paper was welcomed by the Assistant Treasurer who noted that:

“The position paper will form the basis of further consultations with industry to allow the Board to formulate final recommendations for the Government to consider.”

Issues Paper

On 19 May 2008, the Chairman of the Board of Taxation announced the release of the Board’s issues paper [PDF 310KB] on possible reforms to Australia’s foreign source income anti-tax-deferral regimes (the controlled foreign company rules, the foreign investment fund rules, the transferor trust rules and the deemed present entitlement rules).

These issues papers complement the Board’s position paper on the review of anti-tax-deferral regimes which was released on 12 March 2008.

These issues papers, which should be read together with the Board’s discussion and position papers, covers the following topics:

• Public company exemption;
• Active investment exemption;
• Distribution exemption;
• Identification and measurement of interests; and
• Branch-equivalent calculations.

To assist in the Review process, the Board held consultation meetings in Melbourne on 26 May 2008 and in Sydney on 30 May 2008. The purpose of those meetings was to enable interested stakeholders to seek clarification on any aspects of the review’s position paper and issues papers and any other relevant issues.

The Board requested written submissions on the Review of Anti-Tax-Deferral Regimes by 20 June 2008. All submissions received were acknowledged.

Board Report and Government Response

On 12 May 2009, the Assistant Treasurer announced the release of the Board of Taxation’s report on its review of the foreign source income anti-tax-deferral regimes and the Government’s response to the Board’s report. The Government’s announcement that it had accepted all but one of the Board’s recommendations was welcomed by the Chairman of the Board of Taxation, Mr Richard Warburton AO.

In framing its recommendations the Board consulted extensively with industry and tax practitioners. The Board’s key findings were to retain and modernise the controlled foreign company (CFC) provisions, repeal the foreign investment fund (FIF) provisions and the deemed present entitlement rules, and to amend the transferor trust rules to enhance their effectiveness and improve their integrity.

The Board believes that these recommendations will make an important contribution towards ensuring that Australia’s tax policy does not unnecessarily impede Australian businesses with offshore operations, while maintaining appropriate levels of integrity.

Treasury developed a discussion paper that sought comments from interested parties on suggested legislative design approaches that could be used to implement the recommendations accepted by the Government.

In December 2013 the Abbott Government announced it would no longer proceed with measures that were announced but unenacted. At that point, the Government had partly implemented recommendation 1 of the Boards report and fully implemented recommendation 8. The remaining recommendations were abandoned.

Further information on this review can be obtained from the Board of Taxation Secretariat on 02 6263 4366 or at taxboard@treasury.gov.au.

Submissions received