The Tax Laws Amendment (Loss Recoupment Rules and Other Measures) Bill 2005 was referred to the Senate Economics Legislation Committee for inquiry and the report was tabled on 10 November 2005.

This Bill will amend the taxation law, amongst others. to reform the loss recoupment rules for companies and provide tax relief for conduit foreign income.

Foreign loss and FTC quarantining proposed removal

Generally, under the existing foreign loss and foreign tax credit measures, quarantining rules:

-		prevent taxpayers from applying foreign losses against domestic income; and
-		require classes of foreign income to be quarantined in determining the availability of foreign tax credits.

The government has announced that it will (i) remove the requirement to quarantine foreign losses from domestic income, and (ii) remove the need to quarantine foreign losses and foreign tax credits into separate classes. It is proposed that the new measures will apply to foreign losses and foreign tax credits arising in income years that commence after the date of Royal Assent to the amending legislation (not yet known). Foreign losses and foreign tax credits that arise before that date will continue to be treated under the current rules.

Dividends attributable to foreign-owned branches new tax treatment

Changes introduced in June 2005 impact the Australian tax treatment of dividends paid by an Australian company to a non-resident individual or company that are attributable to an Australian branch of the non-resident.

Under Australia's previous domestic law, such dividends were subject to Australian withholding tax. However, where the non-resident was a resident of a tax treaty partner, the tax treaty would generally require that that branch be taxed on a "net profit" basis (i.e. by deducting expenses associated with the branch from the income of the branch, including dividends).

Under the changes, dividends paid by an Australian company to a non-resident company or individual that are attributable to an Australian branch of the non-resident will be taxed on a "net assessment" basis (i.e. relevant expenses will be allowed as deductions from the non-resident's assessable income). Such dividends will not be subject to Australian withholding tax.

CGT rules for non-residents changed

Under the current capital gains tax (CGT) rules, Australia seeks to tax capital gains derived by non-residents from a specified list of CGT assets that "have the necessary connection with Australia". The list includes shares in private companies and certain shares in listed companies (subject to a minimum shareholding requirement).

The government has announced that the range of assets that will be subject to CGT will be narrowed to real property and business assets of Australian branches of a non-resident. "Real property" for these purposes will extend to assets with a physical connection with Australia (e.g. mining rights and "other assets related to Australian real property").

In addition, CGT will apply to the sale of non-portfolio interests in interposed entities (including foreign interposed entities) where the value of such an interest is "wholly or principally" attributable to Australian real property. (But it is unclear how Australia will seek to impose tax on interposed entities, particularly foreign interposed entities.)

The government has stated that the proposed changes will apply to CGT events occurring on or after the date of Royal Assent to the relevant legislation. The government intends to introduce the legislation before 30 June 2006.