Commonwealth Numbered Regulations - Explanatory Statements

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INCOME TAX AMENDMENT REGULATIONS 2004 (NO. 5) 2004 NO. 248

Section 266 of the Income Tax Assessment Act 1936 (the Act) provides that the Governor-General may make regulations not inconsistent with the Act or the Income Tax Assessment Act 1997 (ITAA 1997), prescribing all matters which by the Act or the ITAA 1997 are required or permitted to be prescribed, or which are necessary or convenient to be prescribed, for giving effect to the Act or the ITAA 1997.

Currently, the Income Tax Regulations 1936 (the Principal Regulations) provide which countries are broad-exemption listed countries and which are limited-exemption listed countries for the purposes of the Act. Countries on either of these lists are classed as listed countries. Different income tax treatment is accorded to a company resident in a country on a list than to a country not on a list (an unlisted country). For instance, any non-portfolio dividend paid to an Australian company from a company resident in a listed country is exempt from Australian tax, whereas a non-portfolio dividend paid by a company resident in an unlisted country is not necessarily exempt. Further, any dividend (whether or not a non-portfolio dividend) paid to a controlled foreign company resident in a listed country from a company resident in a listed country is also exempt from Australian tax because of section 404 of the Act.

The types of income attributed to Australian residents from a controlled foreign company resident in a broad-exemption listed country are much more limited than those from a company resident in a limited-exemption listed country or an unlisted country. This results in more generous tax treatment for companies resident in broad-exemption listed countries.

The purpose of the amending Regulations is to align the Principal Regulations with changes made to the Act by the New International Tax Arrangements (Participation Exemption and Other Measures) Act 2004 (NITA Act) that relate to the listing of countries.

The NITA Act, which applies from 1 July 2004, expands the Australian tax exemptions for non-portfolio dividends to all non-portfolio dividends paid to an Australian company from any foreign company. This change means that there is no need to determine the residence of a foreign company (whether in a listed or unlisted country) that pays a non-portfolio dividend. However, there is a continuing need to distinguish between countries on a list and countries that are not on a list for the purposes of section 404 of the Act.

The NITA Act changed the meaning of 'listed country' and introduced a new definition which defines a 'section 404 country'. A transitional provision in the NITA Act provided temporary meanings for those terms until amending regulations are made at which time the transitional provision will no longer operate.

These amending Regulations ensure that a listed country now means a foreign country that is a country listed in Part 1 of Schedule 10 to the Principal Regulations. There are seven countries on that list (New Zealand, Canada, United Kingdom, United States, Germany, Japan and France) and they were previously known as broad-exemption listed countries. A 'section 404 country' means a country on a particular list contained in Part 2 of Schedule 10 to the Principal Regulations) (there are over 50 countries on that list). These countries were formally referred to as limited-exemption listed countries. The countries on this list are treated differently to unlisted countries only for the purpose of section 404 of the Act.

The amending Regulations also remove any reference to the terms 'broad-exemption listed country' and 'limited-exemption listed country' previously contained in the Principal Regulations.

There are no compliance impacts associated with the changes to the regulations as they simply provide the intended meanings for a 'listed country' or 'section 404 country' and replace the current transitional provision in the NITA Act that provided the meanings for those terms.

The amending regulations commenced on the date of their notification in the Gazette.