Option 2: The obligation to account for RWT on all dividends paid between companies should be optional. Recommended. Overall efficiency: objective. Fairness/neutrality: Meets objective. Efficiency in Meets objective. Option 3: The obligation to account for RWT on all fully-imputed dividends paid between companies should be maintained (status quo). Not recommended. Overall efficiency: Does not meet objective. Fairness/neutrality: Does not meet objective. Efficiency in Does not meet objective. RWT on concurrent cash and non-cash dividends Options to address concerns around the over-taxation of cash and non-cash dividends paid concurrently, as well as the unnecessary compliance costs arising from the RWT obligations which apply are: Options: Recommendations Analysis against objectives Option 1: A taxpayer should be able to opt to cash and non-cash dividends paid concurrently as a single dividend, when the cash dividend is sufficient to cover the RWT obligations for both dividends. Recommended. Overall efficiency: Meets objective. Fairness/neutrality: Meets objective. Efficiency in costs: Meets objective Option 2: A taxpayer should not be able to opt to treat cash and non-cash dividends paid concurrently as a single dividend, with the two dividends remaining separate for the purposes of the RWT obligations (status quo). Not recommended. Overall efficiency: Does not meet objective. Fairness/neutrality: Does not meet objective. Efficiency in costs: Does not meet objective. Rules which restrict commercial practice LTC restriction on share classes Options to address the concern that the restriction applying to LTC shares unduly restricts commercial practice are: Options: Recommendations Analysis against objectives Option 1: LTCs should have the option of having more than one class. Not recommended. Overall efficiency: Partly objective. Fairness/neutrality: Partly meets objective. Efficiency in costs: Does not meet objective. Option 2: A LTC should be able to have more than one of shares provided all shares still have uniform entitlements to distributions from the LTC (i.e. differentiate on voting rights only). Recommended. Overall efficiency: Meets objective. Fairness/neutrality: Mostly meets objective. Efficiency in costs: Meets objective. Option 3: LTCs should continue to be restricted to having just one share class (status quo). Not recommended. Overall efficiency: Does not meet objective. Fairness/neutrality: Does not meet objective. Efficiency in costs: No impact.
Option 2: The entry tax formula should not be amended to change the tax rate that applies to any income calculated by the adjustment (status quo). Not recommended. Overall efficiency: Does not meet objective. Fairness/neutrality: Does not meet objective, as does not address unfairness in current over/under taxation depending on applicable personal tax rates. Efficiency in costs: Does not meet objective. No impact on compliance costs but may be enforcement costs. Debt remission in the LTC context Options to address the concern that the interaction of the financial arrangement rules and LTC rules results in unintended debt remission income for creditor-shareholders, are listed below: Options: Recommendations Analysis against objectives Option 1: Debt remission income should not arise for the shareholder-creditor when the debt is forgiven. Recommended. Overall efficiency: Meets objective. Fairness/neutrality: Meets objective. Efficiency in costs: No impact. Option 2: Debt remission income should arise for the shareholder-creditor when the debt is forgiven, but they should get a bad debt deduction to offset the income. Not recommended Overall efficiency: Does not meet objective, as it may remove one distortion but it is inconsistent with the general treatment of capital losses. Fairness/neutrality: May not meet objective. Efficiency in No impact. Option 3: Debt remission income should arise for the shareholder-creditor when the debt is forgiven, and they should not get a bad debt deduction to offset the income (status quo). Not recommended Overall efficiency: No effect. Fairness/neutrality: Does not meet objective. Efficiency in costs: No impact. QC status Options for what should be done with remaining grand-parented QCs are listed below: Options: Recommendations Analysis against objectives Option 1: Repeal the QC regime. Not recommended. Overall efficiency: Meets objective by limiting the number of available structures, but forces for current QCs. Fairness/neutrality: Partly meets objective. Efficiency in costs: Does not meet objective as raises costs for current QCs which must convert. Option 2: Maintain grand-parenting but allow remaining QCs to continue (status quo). Not recommended. Overall efficiency: Does not meet objective, as allows any tax advantage to be traded. Fairness/neutrality: Does not meet objective, as allows QCs to maintain any tax advantage. Efficiency in No impact.
Option 4: Maintain the status quo. Does not give rise to a fiscal cost. No legislative change is required. Does not reduce compliance costs. Would not resolve concerns over technical errors in the rule. The deduction limitation rule: If the rule is amended or repealed, what should happen to previously restricted deductions? Option 1: Repeal the rule in part (refer option 2 above) and release previously restricted deductions in one lump at a particular point. Allows for quick use of previously restricted deductions. Avoids the compliance and administrative costs associated with re-stating past periods. Does not address the tax impact of having deferred the deductions in the interim for the few owners (around 1%) that have suspended deductions. Requires legislative changes. Gives rise to a fiscal cost of $17m in the 2017-18 year. This is due to the fact that deductions will no longer be restricted and can be offset against owners’ other income. Option 2: Repeal the rule in part option 2 above) and require restatement of prior period returns on the basis that the rule had not existed. Allows for the recognition of previously restricted deductions. Addresses the tax impact of having deferred the deductions in the interim for the few owners (around 1%) that have suspended deductions. The need to re-state past periods increases compliance and administrative costs. Overall, the increased administrative and compliance costs are unlikely to outweigh the benefits to the few owners (around 1%) that have suspended deductions. In other words, the economic costs are likely to outweigh the economic benefits. Requires legislative changes. Fiscal cost, as per option 1 above, except the 2017-18 cost would be spread retrospectively across past periods. Option 3: Repeal the rule in part option 2 above) and gradually release previously restricted deductions over three years. Spreads the fiscal cost. Does not create additional compliance and administrative costs incurred in re-stating past periods. For some, may not be much different than full release in 2017/18, when there is insufficient other income to apply deductions against. Requires legislative changes. Minor additional compliance and administration costs relative to full release of deductions in 2017/18. Delays utilisation of deductions that have been effectively Gives rise to a fiscal cost, as per option 1 above except the effect may be spread across three periods.
Dividend rules: RWT on dividends between companies Should the RWT obligation to withhold 5% on dividends paid between all companies be removed? Option 1: The obligation to account for RWT on all dividends paid between companies should be removed. Eliminates the current over-taxation of dividends paid between companies. Reduces compliance costs for some companies that pay dividends to other companies. Potential increase in compliance costs for paying companies, by requiring them to: establish whether or not shareholders are corporate can be difficult for widely held companies); and differentiate between corporate and non-corporate recipients in systems (i.e. in order to ensure RWT is withheld only on dividends to non-corporate). Requires legislative changes. Fiscal cost of $9m in first year of operation. Option 2: The obligation to account for RWT on all dividends paid between companies should be optional. Alleviates the current over-taxation of dividends paid between companies. Reduces compliance costs for all companies that choose to not account for the RWT and does not increase compliance costs for other companies who cannot or choose not to identify which shareholders are corporate. Requires legislative changes. Fiscal cost same as option 1. Option 3: The obligation to account for RWT on all dividends paid between companies should be maintained (status quo). No fiscal implications. Does not require paying companies to establish which shareholders are corporate and/or differentiate between corporate and non-corporate recipients. No legislative change is required. Does not eliminate nor alleviate the current over-taxation of dividends paid between companies. Does not reduce compliance costs associated with the obligation to withhold RWT on fully-imputed dividends paid between companies.
Dividend rules: RWT on concurrent cash and non-cash dividends Should a company paying cash and a non-cash dividends concurrently, be able to opt to treat the two dividends as a single dividend, for the purposes of the RWT obligations when the cash dividend is sufficient to cover the RWT due? Option 1: A taxpayer should be able to opt to treat cash and dividends paid concurrently as a single dividend, when the cash dividend is sufficient to cover the RWT obligations for both dividends. Addresses the concern that the current rule over-taxes the dividend (as a result of the gross up requirement) in these circumstances. Reduces the compliance and administrative costs associated with the refund of the over-taxation. Does not affect the RWT payment, as the RWT due on both dividends is covered in the cash dividend. Requires legislative changes. Option 2: A taxpayer should not be able to opt to treat cash and non-cash dividends paid concurrently as a single dividend, with the two dividends remaining separate for the purposes of the RWT obligations (status quo). No legislative change is required. Does not address the concern that the current rule over-taxes the non-cash dividend (as a result of the gross up requirement) which may then require a refund if credit cannot be used against the tax liability on other income. Theme Rules which restrict commercial practice
Option 2: Trusts that own LTCs should be allowed to have corporate beneficiaries so long as no distributions are made to those corporate beneficiaries. Supports the integrity of the prohibition on corporate ownership of LTCs by restricting the economic benefits of LTC ownership from flowing through to corporate beneficiaries. Does not result in restructuring of existing structures, as corporate beneficiaries in and of themselves do not cause the LTC to fail the eligibility criteria, so long as no distributions are made to those beneficiaries. By not allowing for any distributions to corporate beneficiaries, including ones where the total number of counted owners (including all shareholders of the corporate beneficiary) is below 5, this proposal would preclude distribution to those corporates that meet the LTC requirements but who have not elected into the LTC rules. Currently such distributions are allowed. It will result in some trusts incurring costs in restructuring to remove corporate beneficiaries and/or tax costs (incurred due to the consequences of LTC share disposal). Requires legislative changes. Option 3: Trusts that own LTCs should be allowed to have corporate beneficiaries. Allows for broader use of the LTC regime. Has no effect on existing or future structures. Undermines the policy intent that LTCs should not be widely held vehicles. Poses a risk to the tax base by encouraging planning opportunities involving corporates. Requires legislative changes. Option 4: Trusts that own LTCs should be allowed to have corporate beneficiaries, only if the total number of counted owners (including all shareholders of the corporate beneficiary) remains below 5(status quo). Has no effect on existing or future structures as is current requirement. No legislative change is required. Partly meets objective of LTCs not being able to be widely held. The integrity of the prohibition on corporate ownership of LTCs continues to be undermined. Only partly meets objective of ensuring LTCs are not able to be widely held.
LTC entry tax Should the entry tax formula be amended to change the tax rate that applies to any income calculated by the adjustment? Option 1: The entry tax formula should be amended to change the tax rate that applies to any income calculated by the adjustment, to the LTC shareholder’s personal tax rates. Promotes equity by addressing the tax advantage which is currently only available to shareholders whose personal tax rate exceeds 28% (those on the 30% or 33% marginal tax rate). Equally addresses the tax disadvantage for shareholders with personal tax rates below 28%. Creates certainty and reduces enforcement costs, by preventing the potential for avoidance of tax by cashed up companies who elect into the LTC regime and then subsequently liquidate. Gives rise to a small fiscal gain. Requires legislative changes. Option 2: The entry tax formula should not be amended to change the tax rate that applies to any income calculated by the adjustment (status quo). No legislative change is required. Does not address the potential over or under-taxation of shareholders (depending on their personal tax rates) which the current formula causes. Does not resolve uncertainty over when a company that elects into the LTC regime and then subsequently liquidates, will be challenged on tax avoidance grounds. Does not reduce enforcement costs associated with disputes on whether a company that elects into the LTC regime and then subsequently liquidates is guilty of tax avoidance. Debt remission in LTC context: When a shareholder loans money to their LTC and the debt is subsequently forgiven; should debt remission income Option 1: Debt remission income should not arise for the shareholder-creditor when the debt is forgiven. Addresses the current over-taxation in the hands of the owner who remitted the debt. Is conceptually more than allowing the bad debt deduction, given that the deduction represents a capital loss. Requires legislative changes.