Source: Australian Tax Forum Journal Article
Published Date: 1 Apr 2005
The Government's review of Australia's international taxation arrangements in 2002-2003 considered the treatment of foreign source income in Australia's dividend imputation system. The Board of Taxation had recommended providing a 20% tax credit to shareholders on unfranked dividends paid from foreign source income. The Board also recommended allowing dividend streaming of foreign source income. The Treasurer announced, on 14th May 2003, that the Government did not believe that it was appropriate to implement the Board's proposals at that time but that the Government did not rule out future consideration of the issues examined by the Board.
This article examines the effects that the Board's 20% credit proposal would have on underlying Australian resident shareholders. The article also examines the effects of alternative options canvassed by the Australian Treasury in the Consultation Paper produced as part of the Review of Australia's International Taxation Arrangements, of options considered in the Review of Business Taxation, and of other options proposed by commentators. In the case of each option the position where an Australian company has non portfolio foreign source income is considered. At the underlying resident shareholder level consideration is given to positions where the underlying shareholder is: (i) natural persons on 48.5% and 31.5% marginal rates; (ii) a company that is not part of a consolidated group; and (iii) a complying superannuation fund. The effects of announced changes in the Australian tax treatment of corporate foreign source income are discussed in respect of each option. Each option is evaluated by reference to likely revenue costs and against international tax policy criteria. Key areas for further research are then identified.
In its February 2003 Report to the Treasurer on International Taxation the Board of Taxation recommended that:
When announcing the outcome of the Government's review of Australia's international taxation arrangements the Treasurer indicated that the Government did not believe that it was appropriate to implement the board's proposals at that time. The Treasurer went on to indicate, however, that the Government did not rule out future consideration of the issues examined by the Board.
After a brief review of international tax policy criteria this article identifies the features in the Australian dividend imputation system that led to these recommendations by the Board of Taxation. It then evaluates a selection of possible approaches to the treatment of foreign source income in an imputation system in terms of likely revenue costs and international tax policy criteria. Key issues for further research are then identified.
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