4 July 2008 - Submission on Issues Papers lodged 
 
The Institute has lodged a submission on the Board of Taxation’s Issues Papers on possible reforms to Australia’s foreign source income anti-tax-deferral regimes that follow on from aspects of the Board’s position paper released on 12 March 2008 (see update item below).  
 
The covering letter and attached submission are available via these links. The Issues Papers are on the Board of Taxation's website 
 
Some key matters raised in the Institute’s submission include:  
 
Issues Paper 1 - Public company exemption 
The Institute supports the introduction of a listed public company exemption, subject to appropriate integrity measures but observes that it needs to provide compliance benefits. The integrity measures should be targeted at the nature of the activities and income of the entity, rather than its dividend payout ratio or franking percentage. 
 
Issues Paper 2 - Active investment exemption 
The Institute supports the FIF style active investment test proposed by the Board. That test should be a consolidated approach, consistent with the existing active business exemption under the FIF measures. The categories of tainted income should be modernised in accordance with the modernisation of the ineligible activities. The introduction of an additional active investment test for those taxpayers with greater access to detailed information is supported.  
 
Issues Paper 3 - Distribution exemption 
The Institute supports the introduction of a distribution exemption as there is little or no policy basis for attributing income from foreign entities that already repatriate their income to Australia as it is derived. However, a key weakness of the current proposal is the proposed application of the market value method as the measurement of whether a foreign entity has fully or sufficiently distributed its income.  
 
Issues Paper 4 - Identification and measurement of interests 
Although an ‘economic interests’ approach could result in a more accurate reflection of a taxpayer's interest in the underlying attributable income of the applicable foreign entity, the Institute is concerned about the possible compliance issues that may arise if the suggested methods are utilised. There are also concerns with utilization of a debt test to exclude such interests. The Institute is concerned with the use of the term “fixed” for the purpose of the proposed provisions.  
 
Issues Paper 5 - Branch-equivalent calculations 
The Institute considers that a branch equivalent basis for calculating attributable income can be simplified by excluding amounts which are not mobile passive income or amounts that are likely to have borne foreign tax at a level similar to that imposed in Australia. Specifically, the Institute agrees that base company should be excluded, passive income should be redefined and the list of listed countries should be expanded. The Institute considers that the branch equivalent calculation should offer an alternative, being an approach based on accounting data or one based on modified application of Australian tax laws. 
 
Update 19 May 2008 
 
The Board of Taxation has released issues papers on possible reforms to Australia’s foreign source income anti-tax-deferral regimes that follow on from aspects of the Board’s position paper released on 12 March 2008 (see below).  
 
The March 2008 position paper gave the Board’s considered views on the high level principles that should apply in the future design of the foreign source attribution rules. The issues papers are designed to help settle the detail underlying some of the Board's proposals, namely in relation to the following five topics:

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

• The kinds of interests and entities that attribution should apply to (Chapter 3)
 

• The types of income that the attribution regimes should target (Chapter 4)
 

• The methods for attributing income (Chapter 5), and 
  
• Options for a harmonised regime (Chapter 6).

• A change to an economic interests test for the purposes of the attribution rules should be carefully considered in light of additional compliance issues that could arise.
 

• The introduction of a purpose test as a complement to a range of exemptions that should be available under the revised anti-tax-deferral regimes is supported.
 

• The active income test should be retained, but with thresholds and the definition of what is tainted income revised so that it does not encompass commercial offshore activity.
 

• Passive income and base company income should be redefined so that the concepts do not encompass commercial activity offshore.
 

• The listed country exemption should be retained in order to minimise compliance costs.
 

• Taxpayers should be able to use any of the attribution methods to calculate their attributed income.
 

• Harmonising the regimes would, prima facie, appear to offer some benefits to taxpayers, although important factors such as the need to meet policy objectives and retention of positive features in the existing regime should be borne in mind.
 

• Of the three harmonisation options proposed in the Discussion Paper, Option C: merging some regimes (or aspects of regimes) is preferred.