House of Representatives

Explanatory Memorandum PART B

(Circulated by authority of the Treasurer, the Hon. P.J. Keating, M.P.)

Notes on Clauses

TAXATION LAWS AMENDMENT BILL (No.2) 1985

PART I - PRELIMINARY

Clause 1: Short title

By this clause the amending Act is to be cited as the Taxation Laws Amendment Act (No.2) 1985

Clause 2: Commencement

Under clause 2, the amending Act is to come into operation on the day on which it receives the Royal Assent. But for this clause, the amending Act would, by reason of sub-section 5(1A) of the Acts Interpretation Act 1901, come into operation on the twenty-eighth day after Royal Assent.

PART V - AMENDMENTS OF THE INCOME TAX ASSESSMENT ACT 1936

Clause 9: Principal Act

This clause facilitates references of the Income Tax Assessment Act 1936 which, in Part V of the Bill, is referred to as "the Principal Act".

Clause 10: Officers to observe secrecy

Clause 10 proposes two amendments of section 16 (the secrecy provisions) of the Principal Act, under which the disclosure by officers of information concerning the income tax affairs of other persons acquired in the course of official duties is prohibited except in certain specified circumstances.

The first amendment (by paragraph (a)) is of a technical nature to ensure that the deeming effect of that sub-section applies not only for the purposes of the definition of "officer" in sub-section 16(1), but also for the purposes of section 16 as a whole. The effect of the amendment is to make it clear that, for all purposes of the income tax secrecy provisions, a person who, although not actually appointed or employed by the Commonwealth, performs services for the Commonwealth (e.g., an officer of an overseas government serving in Australia under exchange arrangements) is deemed to be employed by the Commonwealth.

By paragraph (b) of clause 10, paragraph 16(4)(c) of the Principal Act, which provides that the secrecy provisions do not prohibit the disclosure of information to certain State revenue authorities, is being omitted consequent upon the proposed insertion by clause 45 of new section 13J of the Taxation Administration Act 1953. New section 13J will provide a single general authority for the Commissioner of Taxation to provide taxation information to State, Northern Territory or Australian Capital Territory taxation authorities (see notes on clause 45).

Clause 11: Exemptions

This clause will amend section 23 of the Principal Act which exempts certain income from tax.

The amendment proposed by this clause will exempt from tax the income derived by a society, association or club which is established for the encouragement or promotion of animal races, and which is not carried on for the purposes of profit or gain to individual members. The proposed amendment will apply to animal racing clubs, such as horse-racing and greyhound-racing clubs, where they are established and conducted for the primary purpose of encouraging or promoting racing activities. The exemption will not be available where a predominant part of a body's objects and activities is concerned with other than animal racing, e.g., social activities.

The bodies which will be exempted are already free from tax on amounts received from members in accordance with the principle of mutuality which recognises that members of an association or club do not make a profit from dealing collectively amongst themselves. Such bodies pay tax, however, on their investment income, rents and income from trading with non-members.

Paragraph (a) of clause 11 is a drafting measure necessary as a consequence of the insertion by paragraph (b) of a new sub-paragraph (iv) in paragraph 23(g) which presently exempts from tax the income of certain bodies not carried on for purposes of profit or gain to individual members. New sub-paragraph 23(g)(iv) will exempt from tax the income derived by a society, association or club established for the encouragement or promotion of animal races.

The amendments will apply, by the operation of sub-clause 34(2), to exempt the income of animal racing clubs for the 1985-86 and subsequent years of income.

Clause 12: Interpretation

Clause 12 of the Bill proposes a technical amendment of section 27A of the Principal Act, which contains a number of definitions and interpretation provisions necessary for the operation of Sub-division AA of Division 2 of Part II of the Act relating to superannuation and other termination of employment payments.

The amendment to be made to the definition of "undeducted purchase price" in sub-section 27A(1) is consequential on the proposed repeal, by clause 28 of the Bill, of section 159N of the Principal Act - the operative provision for the income tax concessional expenditure rebate. The amendment will ensure that the undeducted purchase price of an annuity or superannuation pension includes an amount paid before 1 July 1983 and not treated as a rebatable amount for the purposes of section 159N as in force prior to its repeal.

Clause 13: Election expenses of candidates for local governments, & c.

This clause will amend the Principal Act to insert a new section - section 74A - that will allow a deduction of up to $1000 for expenditure incurred in the 1985-86 or a subsequent year of income by a taxpayer in seeking election, whether successful or not, to a local governing body or to the Australian Capital Territory House of Assembly. The $1000 limit is to apply to each election contested, and will apply whether the expenditure is incurred in one or more years of income.

Where the election expenditure allowed or allowable as a deduction is reimbursed to a taxpayer, or is paid on his or her behalf, the amount of that reimbursement or payment will be included in the taxpayer's assessable income of the year in which the amount is so reimbursed or paid.

Where, in respect of an election, a taxpayer incurs deductible expenditure over more than one year of income, the $1000 limit will operate to restrict the total deduction allowed or allowable over the relevant years to that amount. Any reimbursement or payment on the taxpayer's behalf of election expenditure that is included in the taxpayer's assessable income will be taken to have effectively reduced the deduction allowed or allowable in those years for the purpose of imposing the $1000 limit on the deductions allowable.

If a taxpayer incurs election expenses some or all of which are not allowable as a deduction in a year of income because of the $1000 limit, any reimbursement or payment on the taxpayer's behalf of expenses in respect of that election, whether made in that year of income or a subsequent year of income, will only be included in assessable income to the extent the amount of the reimbursement or payment (or the sum of the amounts) exceeds the expenditure not allowable as a deduction.

Sub-section (1) of new section 74A contains definitions of terms used in the section:

"eligible election expenditure" is the term used to identify the expenditure that will qualify for deduction under section 74A. It is to mean any expenditure incurred in being elected as a member, or in contesting election for membership, of a local governing body or of the Australian Capital Territory House of Assembly. The expenditure must be incurred in 1985-86 or in a subsequent income year. Expenditure incurred in 1984-85 or earlier in contesting an election held in 1985-86 will not qualify for deduction.

"local governing body" is a term used to describe the type of local government body to which a taxpayer must seek election if the relevant expenditure is to be an allowable deduction. Deductions will therefore be allowable for contesting election to membership of bodies such as city, town, municipal or shire councils. The election must be for membership of the particular body, whether in the capacity of mayor, president, chairman, alderman or councillor. A deduction will not be available, however, for any additional expenditure incurred after gaining membership of such a body in seeking election to a higher office, such as mayor, on the vote of members of the body concerned.

"non-deductible amount" is an expression used in sub-section (5). That sub-section in conjunction with sub-section (4), will operate to determine the amount of any reimbursement to a taxpayer, or payment on a taxpayer's behalf, of election expenditure that is to be included in his or her assessable income. When election expenditure incurred in a year of income is not allowed as a deduction because of the operation of the $1,000 limit per election, any reimbursement or payment on the taxpayer's behalf of expenditure on the election in the year of income or a succeeding year will be included in the taxpayer's assessable income only to the extent it exceeds the expenditure not allowed as a deduction. In the year of income in which any such reimbursement or payment (together with any earlier relevant reimbursement or payment that was not included in assessable income) exceeds the expenditure not allowed as a deduction, the excess will be assessable income in that year of income. For this purpose, the term "non-deductible amount" will establish the amount of the expenditure incurred by a taxpayer on a particular election which, at the end of a year of income, has not been allowed as a deduction and which, in effect, has not been reduced by a reimbursement or payment that has not been included in assessable income. In practical terms the "non-deductible amount" is the amount obtained by subtracting from the total election expenditure incurred by a taxpayer in respect of an election as at the end of a year of income the sum of -

•

the amount of the expenditure allowed or allowable as a deduction to the taxpayer in the year of income or a preceding year (paragraph (a)); and

•

any reimbursement of the expenditure, or payment of the expenditure on the taxpayer's behalf, in a preceding year of income that was not included in the taxpayer's assessable income because of the operation of sub-section (5) (paragraph (b)).

"unused deduction limit" is an expression used in sub-section (3). That sub-section, in conjunction with sub-section (2), will operate to determine the amount of the eligible election expenditure of a taxpayer that is allowable as a deduction in a year of income. By sub-section (3), the deduction allowable to a taxpayer under section 74A for election expenditure incurred in a year of income is not to exceed the "unused deduction limit" of the taxpayer in respect of the election as at the end of the year of income. For a year of income, the "unused deduction limit" will be calculated as follows -

•

where a deduction is not allowable for expenditure on an election in a preceding year of income, that is, it is the first year in which allowable expenditure related to the particular election is incurred, the limit will be $1,000 (paragraph (a));

•

where a deduction or deductions have been allowed or are allowable in a preceding year for expenditure on an election, but no reimbursement, or payment on the taxpayer's behalf, of the expenditure has been included in his or her assessable income under sub-section (4) in a preceding year, the limit will be $1,000 reduced by the deduction (or deductions) allowed or allowable in the preceding year or years of income in respect of the election (paragraph (b)); and

•

where a deduction or deductions have been allowed or are allowable in a preceding year for expenditure on an election, and an amount of reimbursement, or payment on the taxpayer's behalf, of the expenditure has been included in the taxpayer's assessable income under sub-section (4) in a preceding year, the limit will be $1,000 reduced by the amount by which the deduction (or deductions) allowed or allowable exceeds the reimbursement or payment included in the taxpayer's assessable income (paragraph (c)).

Sub-section (2) of new section 74A is the operative provision that will authorise, subject to the operation of sub-section (3), the deduction allowable for eligible election expenditure (as defined in sub-section (1)) incurred by a taxpayer in a year of income.

Sub-section (3) qualifies the operation of sub-section (2) by limiting the deduction allowable to a taxpayer for eligible election expenditure in a year of income to the unused deduction limit (as defined in sub-section (1)) as at the end of the income year.

When either paragraph (a) or (b) of the definition of "unused deduction limit" applies to determine the relevant limit as at the end of a year of income, the deduction allowable will be restricted to the amount by which $1000 exceeds the deductions for expenditure on the election (if any) that have been allowed or are allowable to the taxpayer in an earlier year. If paragraph (c) of the definition applies to determine the relevant limit, the taxpayer may have already been allowed deductions for eligible election expenditure that in total exceed $1000, but in respect of which, when the amounts included in the taxpayer's assessable income by sub-section (4) (being reimbursement or payment on the taxpayer's behalf of the election expenditure) are taken into account, the taxpayer has effectively obtained an allowable deduction of less than $1000. In that case, the deduction allowable in a year of income will be $1000 reduced by the "net" deduction effectively allowed or allowable to the taxpayer in the earlier years.

Sub-section (4) will ensure that where an amount of eligible election expenditure incurred by a taxpayer is reimbursed to the taxpayer, or is paid for or on his or her behalf, by another person or by an organisation, the amount of that reimbursement or payment will, subject to sub-section (5), be included in the taxpayer's assessable income in the year in which it is so reimbursed or paid. This sub-section will not operate to include in a taxpayer's assessable income for 1985-86 or a subsequent income year any reimbursement or payment of expenses incurred in the 1984-85 or earlier income years.

Sub-section (5) will operate to limit the amount of any reimbursement or payment on the taxpayer's behalf of election expenses that is to be included in the taxpayer's assessable income under sub-section (4), where some of the expenses on the election are not allowed as a deduction because of the $1000 limit per election. As outlined in the earlier notes on the definition of "non-deductible amount" in sub-section (1), the amount of any reimbursement or payment in a year of income that will otherwise be included in a taxpayer's assessable income will be reduced by the non-deductible amount as at the end of the year of income. The assessable income of a year of income will include the amount obtained by subtracting from the reimbursement or payment the amount (if any) by which the sum of the expenses not allowed as a deduction because of the $1000 limit exceeds any reimbursement or payment received in a preceding year, but not included in assessable income because of the application of this sub-section.

The practical application of these provisions is illustrated by the following example.

Assumed Facts:

A taxpayer incurs expenditure of $700 in 1985-86 in contesting a local government election and is reimbursed $200 of the expenditure by a party organisation during the year. In 1986-87 he incurs further expenditure of $600 in relation to the same election and is reimbursed a further $400.

Summary:

The taxpayer actually incurred net expenditure of $700

($1300 - 600)


on the election. The income tax position is that he has received deductions for $1200 expenditure and had $500 included in assessable income - so that a "net" deduction of $700 has been allowed.

Clause 14: Gifts, calls on afforestation shares, pensions, & c.

This clause will amend the provisions of the Principal Act that authorise income tax deductions for gifts of the value of $2 and upwards of money - or of property other than money that was purchased by the taxpayer within the twelve months preceding the making of the gift - to the funds, authorities and institutions in Australia that are listed in the provisions. The proposed amendments will extend the provisions to include gifts made to the Australian Academy of the Humanities and the Royal Australian and New Zealand College of Psychiatrists.

Clause 14 will insert new sub-paragraphs 78(1)(a)(lxxxii) and (lxxxiii) in the Principal Act. Sub-paragraph (lxxxii) will authorise deductions for gifts to the Australian Academy of the Humanities for the Advancement of Scholarship in Language. Literature, History, Philosophy and the Fine Arts (known as the Australian Academy of the Humanities), while sub-paragraph (lxxxiii) will authorise deductions for gifts to the Royal Australian and New Zealand College of Psychiatrists. By the operation of sub-clause 34(3) of the Bill, gifts made to the Academy or to the College will qualify for deduction only where made after 20 August 1985 - the date on which the proposal to include these organisations in the income tax gift provisions was announced.

Clause 15: Deductions for expenses of self-education

This clause will effect an amendment of sub-section 82A(2) of the Principal Act that is consequential on the proposed repeal, by clause 28 of the Bill, of sections 159N, 159T and 159U to give effect to the discontinuance of the general concessional expenditure rebate.

Section 82A applies where a deduction would otherwise be allowable to a taxpayer under the general deduction provision - section 51 of the Principal Act - for "expenses of self-education" (as defined - see notes on proposed new sub-section (2) below). In these cases, section 82A presently operates so that a taxpayer's entitlement to any deduction for income tax purposes in respect of the net amount of such expenses is only considered in relation to the excess over $250 in a year; the first $250 being considered by reference to the rebate provisions of section 159N and 159U. The "net amount of expenses of self-education" is presently defined in sub-section 82A(2) as, in broad terms, the total amount of "expenses of self-education" incurred by a taxpayer in the year of income as reduced by the sum of any relevant scholarship benefits and payments in the nature of reimbursements of such expenses. Other expressions used in the section are tied to definitions in the rebate provisions of sections 159T (education expenses) and 159U (self-education expenses).

The new sub-section 82A(2) to be substituted by clause 15 will redefine the terms that are used in the section so as to ensure that, where self-education expenses that qualify for deduction under section 51 are of the type that would have also qualified as a rebatable amount under former sections 159N and 159U, only the excess of such expenses over $250 will be deductible under section 51.

The expression "educational assistance" is defined to mean amounts payable under a scheme for the provision by the Commonwealth of secondary, technical or tertiary education or post-graduate study. Amounts payable for maintenance or accommodation are specifically excluded from the definition. This new expression will replace the present definition of "scholarship benefits" that is now defined in sub-section 82A(2) by reference to the definition of that term in section 159T which is to be repealed, and takes account of the present schemes of educational assistance provided by the Commonwealth.

The term "expenses of self-education" retains the same meaning as it presently has in sub-section 82A(2).

Another term, "net amount of expenses of self-education", is defined to mean, broadly, the total amount of expenses of self-education incurred by the taxpayer in the year of income as reduced by the sum of the payments of educational assistance and payments in the nature of reimbursements of self-education expenses, received or receivable during the year of income.

Paragraph (a) of this definition excludes from the calculation educational assistance payments that have been, or will be, included as assessable income of the taxpayer or that are applicable to an earlier year of income.

Paragraph (b) of the definition refers to payments (other than payments that have been, or will be, included as assessable income of the taxpayer) received by the taxpayer, or that the taxpayer was entitled to receive, in the year of income, from his employer or from any other person in respect of expenses of self-education. It is necessary that the payment relate to such expenses incurred in the year of income, or be in respect of a deduction or rebate allowed or allowable under former section 159N in a preceding year of income. In terms of the definition, such payments are to be offset against the taxpayer's total amount of expenses of self-education for the year in calculating the net amount of those expenses for purposes of section 82A.

The reference to a "prescribed course of education" remains unchanged, in effect, by being expressed in the same terms as it is presently defined in section 159U that is being repealed by clause 28 of the Bill.

Clause 16: Deduction for contributions to fund for employees

This clause will amend section 82AAC of the Principal Act which authorises an income tax deduction for contributions made by an employer to a superannuation fund for the purpose of providing superannuation benefits for an employee or for an employee's dependants.

The clause will insert a new sub-section 82AAC(3) to deny a deduction for contributions made during the 1985-86 or a subsequent year of income if proposed new section 121CC applies to the fund for that year of income. Broadly, new section 121CC - being inserted by clause 23 - will apply to a fund where it has failed to comply with the new rules relating to investments by employer-sponsored superannuation funds with sponsoring employers (see notes on clause 20).

By sub-clause (2) of clause 34, new sub-section 82AAC(3) is to apply to income tax assessments for the 1985-86 and subsequent years of income.

Clause 17: Deductions for superannuation contributions by eligible persons

This clause will amend, in a number of respects, section 82AAT of the Principal Act. Section 82AAT authorises an income tax deduction, to a present limit of $1,200 in a year of income, for contributions made to certain superannuation funds by self-employed persons or by employees not entitled to superannuation benefits funded by their employers.

The amendment to be made by paragraph (a) of clause 17 will ensure that the operative sub-section, sub-section 82AAT(1), is subject to the application of proposed new sub-section (3), being inserted by paragraph (c) of this clause, as well as existing sub-section (2).

Paragraph (b) of clause 17 will amend sub-section 82AAT(2) to increase from $1,200 to $1,500 the limit on the deduction available under section 82AAT.

New sub-section 82AAT(3), which is being inserted in the Principal Act by paragraph (c) of this clause, provides that a deduction is not allowable under section 82AAT for contributions made during the 1985-86 or a subsequent year of income to a superannuation fund to which new section 121CC - being inserted by clause 23 - applies for that year of income. As previously explained new section 121CC will, broadly, apply where the fund breaches the rules relating to investments by a superannuation fund with an employer sponsor of the fund (see notes on clause 20).

Although section 82AAT applies only in respect of superannuation contributions made by self-employed persons or by employees not entitled to employer-funded superannuation benefits, there may be some situations where new section 121CC applies to the fund to which section 82AAT contributions are made. For example, in terms of new sub-sections 121C(2) and (3) (see notes on clause 20), an employee making section 82AAT contributions to a fund can be an "employer sponsor" of that fund for the purposes of the application of the new investment rules if that employee has a controlling interest in his or her employer company. If the fund in question breaches the investment rules by virtue of its level of investment in the employer company - that company being an "associate" (as defined) of the employee who is an "employer sponsor" - section 121C would apply to the fund.

By sub-clause (2) of clause 34, the amendments of section 82AAT by clause 17 are to apply to income tax assessments for the 1985-86 and subsequent income years.

Clause 18: Interpretation

This clause contains technical amendments of section 82KH of the Principal Act, which contains definitions and associated interpretation provisions relevant to the operation of Subdivision D of Division 3 of Part III of the Act relating to the disallowance of losses and outgoings incurred under certain tax avoidance schemes known as expenditure recoupment schemes.

The amendments to be made by the clause are consequential on the proposed repeal, by clause 28 of the Bill, of section 159W - under which an amount equal to one-third of calls paid on afforestation shares qualify as a rebatable amount for purposes of the concessional expenditure rebate - and section 159N, which is the operative provision for the concessional expenditure rebate.

Paragraphs (a) and (b) of the clause relate to the omission of paragraph (t) of the definition of "relevant expenditure" in sub-section 82KH(1), which presently operates to extend the expenditure recoupment provisions to calls paid on shares in afforestation companies that would, apart from the operative provision of Subdivision D of Division 3, be treated under section 159W as a rebatable amount for the purposes of the concessional expenditure rebate provisions of section 159N.

Paragraph (c) will omit paragraph 82KH(1AD)(b), which explains the meaning of the term "tax benefit" in the expenditure recoupment provisions in relation to expenditure to which paragraph (t) of the definition of "relevant expenditure" in sub-section 82KH(1) applies, i.e., effectively calls paid on shares in an afforestation company. This omission of paragraph 82KH(1AD)(b) is consequential upon the omission of paragraph (t) of the definition of "relevant expenditure" by paragraph (b) of this clause.

Clause 19: Definitions

Section 121B of the Principal Act defines a number of terms used in Division 9B, which provides the basis on which superannuation funds and approved deposit funds are subject to tax on income not qualifying for exemption.

Clause 19 will insert in section 121B a definition of "investment income" - a term used to define the net income of a superannuation fund that may be subject to income tax under proposed new section 121CC (being inserted by clause 23) if the fund fails to comply with the investment rules contained in new section 121C (being inserted by clause 20). Broadly, the term means an amount ascertained by calculating, as if the trustee of the fund were a resident taxpayer, the amount that would have been assessable income (not including contributions to the fund) if the fund were not exempt from income tax under section 23F or 23FB, and deducting from that amount all expenses, etc., that would be allowable deductions (other than concessional deductions and deductions in respect of benefits). In the case of a fund to which section 23F or 23FB applies, any income of the fund that does not qualify for exemption from tax under those sections (certain private company dividends and excessive non-arm's length income) will not be investment income. That income will not, therefore, be taxed both as investment income under section 121CC and as taxable income under section 121CA or 121CB.

Clause 20: Limitation of exemption from tax of income of certain superannuation funds

New section 121C, being inserted in the Principal Act by clause 20, sets out certain rules, relating to investments with sponsoring employers, with which a superannuation fund that would otherwise be exempt from income tax under section 23F or 23FB must comply in order to qualify for the exemption. The proposal to introduce these investment rules was announced on 11 March 1985 and, in terms of sub-clause (2) of clause 34, they are to first apply for the 1985-86 year of income.

Sub-section 121C(1) contains a number of definitions of terms used in section 121C -

"agreement" is defined in a manner common to other provisions of the Principal Act and covers the various forms of agreement, whether formal or informal, express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings. The term is relevant to the application of sub-section 121C(11).

"associate", in relation to a person, is defined to have the same meaning as that term has in section 26AAB of the Principal Act. The definition in section 26AAB specifies who is an associate in relation to a natural person, a company, a trustee of a trust estate or a partnership and, in broad terms, refers to those persons who, by reason of family or business connections, might appropriately be regarded as being associated with a particular person. The term is particularly relevant to the definition of "in-house asset" which includes a loan to, or an investment in, an associate of an employer sponsor of a superannuation fund.

"employee" is defined to make it clear that any reference in section 121C to an employee includes a reference to a director of a company.

"in-house asset" is defined to mean an asset of a superannuation fund that consists of a loan to, or an investment in, an employer sponsor (see notes below on new sub-section 121C(2)) of the fund or an "associate" (also a defined term) of an employer sponsor. Specifically excluded from the meaning of an in-house asset is a "life policy" (also a defined term) in respect of an employee of a "life assurance company" (another defined term) that contributes to the fund for the benefit of that employee or the dependants of that employee. What constitutes an in-house asset of a superannuation fund is relevant to determining whether section 121C has application and thus whether the investment income of the fund is subject to tax (see notes on sub-sections 121C(4) and (5)).

"investment" is defined to mean any manner or form in which money is applied for the purpose of gaining interest, income or profit. The term therefore includes debentures or shares. An investment by a superannuation fund in an employer sponsor of the fund or in an associate of an employer sponsor constitutes an "in-house asset" of the fund.

"life assurance company" means a company that, because it is registered under the Life Insurance Act 1945, is authorised to carry on life insurance business in Australia. The term also includes a public authority constituted under a State or Territory law that carries on a business of, or in relation to, the issuing of, or the undertaking of liability under, life policies. The term is relevant to the definition of an "in-house asset".

"life policy" has the same meaning as the term has in sub-section 4(1) of the Life Insurance Act 1945 where, broadly, it is defined to mean a policy providing for payment of money on death or on the happening of any contingency dependent on the termination or continuance of human life. The term is relevant to the definition of an "in-house asset".

"superannuation fund" is defined to mean a fund to which section 23F or 23FB of the Principal Act applies. The investment rules contained in section 121C will have no application to funds that do not meet the conditions of exemption specified in section 23F or 23FB.

Sub-section 121C(2) specifies those persons who will be taken to be employer sponsors of a superannuation fund. This term is relevant to the definition of "in-house asset" in sub-section 121C(1).

With one exception (see notes on the definition of "in-house asset"), a loan to, or an investment in, an employer sponsor of a superannuation fund (or an associate of an employer sponsor) constitutes an "in-house asset". Depending on the level of such in-house assets in a particular year of income, the investment income of the fund may be subject to tax - see notes on sub-sections 121C(4) and (5).

A person will be taken to be an employer sponsor of a fund if that person contributes to the fund in respect of an employee or the dependants of an employee having a right to receive benefits from the fund. In addition to an employer of the employee (paragraph (a)), an employer sponsor may be a company in which an employer of an employee has a controlling interest (paragraph (b)) or, if an employee's employer is a company, a person who is connected, in terms of sub-section 121C(3), with that company (paragraph (c)).

Sub-section 121C(3) complements sub-section 121C(2) by specifying those persons who, for the purposes of paragraph 121C(2)(c), are connected with a company that is an employer of an employee. Under paragraph 121C(3)(a), a person who has a controlling interest in the employer-company is a person connected with the company. Thus, for example, a parent company contributing to a fund for the benefit of employees of its subsidiary company is an employer sponsor of that fund with the result that any loan to or investment in the parent company by the fund will fall within the definition of an "in-house asset".

Paragraph 121C(3)(b) deals with those cases where a person has a controlling interest in both the employer-company and the contributing company - for example, a parent company of two subsidiary companies. The effect of paragraph (b) in these circumstances is that a subsidiary company that contributes to a fund for the benefit of the employees of the other subsidiary is an employer sponsor of the fund.

By paragraph 121C(3)(c), a person who beneficially owns shares in the employer-company is taken to be connected with that company for the purposes of paragraph 121C(2)(c), so that, where a shareholder contributes to a fund for the benefit of the company's employees, that shareholder is an employer sponsor of the fund.

Sub-section 121C(4) contains the investment rule with which section 23F and section 23FB superannuation funds established after 11 March 1985 (the date of announcement of the decision to introduce statutory investment rules for employer-sponsored superannuation funds) must comply to qualify for exemption from income tax. In terms of the sub-section, the investment income of such a fund in a year of income is not exempt unless, at all times during that year of income, the cost of the in-house assets of the fund did not exceed 10% of the cost of all the assets of the fund. By definition (but with one exception in relation to life policies covering employees of a life assurance company), the in-house assets of the fund are those assets that consist of loans to or investments in an employer sponsor of the fund or an associate of an employer sponsor. Sub-section 121C(2) (see notes on that sub-section) specifies the persons who are taken to be employer sponsors of a fund, and sub-section 121C(1) (see notes on that sub-section) defines the terms "investment income", "in-house asset", "investment" and "associate".

Sub-section 121C(5) contains the investment rules with which section 23F and section 23FB superannuation funds that were in existence at 11 March 1985 must comply to qualify for exemption from income tax. The basic rule is the same as for funds established after 11 March 1985 (dealt with in sub-section 121C(4)), but it will apply only from and including the 1995-96 year of income. For the years 1985-86 to 1994-95, a transitional rule is to apply. That transitional rule is designed to enable the funds to satisfy the basic rule by natural growth over the 10 year period.

In terms of sub-section 121C(5), the investment income of a pre-12 March 1985 section 23F or 23FB fund derived during a year of income is not exempt from tax unless, at all times during that year of income, the cost of the in-house assets of the fund did not exceed -

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for the 1994-95 or a preceding year of income (paragraph (a) - the transitional rule), the greater of -

• .

the cost of the fund's in-house assets as at 11 March 1985 (sub-paragraph (a)(i)); and

• .

10% of the cost of all the assets of the fund (sub-paragraph (a)(ii)); and

•

in any other case (that is, for the 1995-96 or any later income year), 10% of the cost of all the fund's assets (paragraph (b) - the basic rule).

Under the transitional rule contained in paragraph 121C(5)(a), the cost of a fund's in-house assets may, over the 10 year period from 1985-86 to 1994-95, exceed 10% of the cost of all its assets provided that the cost of the in-house assets does not exceed their cost as at 11 March 1985. For the years following 1994-95, however, the basic 10% rule in paragraph 121C(5)(b) must be adhered to or the fund becomes subject to tax.

For the purposes of the above rules, in-house assets of a fund are those assets that consist of loans to or investments in an employer sponsor of the fund or an associate of an employer sponsor, but not assets consisting of life policies covering employees of a life assurance company that is an employer sponsor. "Investment income", "in-house asset", "investment" and "associate" are terms defined in sub-section 121C(1), while persons taken to be employer sponsors are specified in sub-section 121C(2).

Sub-section 121C(6) qualifies, in certain circumstances, the operation of the transitional rule contained in paragraph 121C(5)(a). Under that rule, applicable until 1994-95, the cost of a fund's in-house assets may exceed 10% of the cost of all its assets provided their cost does not exceed that as at 11 March 1985. That rule is qualified by sub-section 121C(6) where the cost of a fund's in-house assets as at 11 March 1985 exceeded 70% of the cost of all its assets, so that the fund could not, as at 11 March 1985, have satisfied the previously applicable tax exemption requirement that funds hold at least 30% of their assets in arm's length investments.

In such a case, sub-section 121C(6) deems the cost of the in-house assets of the fund as at 11 March 1985 to be equal to 70% of the cost of all its assets for the purposes of the application of sub-paragraph 121C(5)(a)(i). The effect is that a fund that failed to comply with the 30% rule because of excessive loans to, or investment in, an employer sponsor will be unable to comply with the first limb of the transitional rule until the cost of its in-house assets is equal to, or less than, 70% of the cost of all the assets of the fund as at 11 March 1985.

Sub-section 121C(7) modifies the operation of sub-sections (4) and (5) by requiring the Commissioner of Taxation to disregard a failure of a fund to meet the requirements of those sub-sections if he is satisfied -

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that the trustee of the fund made a bona fide and genuine attempt to ensure that the fund met those requirements (paragraph (a)); or

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that the failure was caused by a temporary delay in investing the moneys of the fund (paragraph (b)),

and that, in all the circumstances, it would be reasonable to do so.

The effect of sub-section 121C(8) is to exclude, from the operation of section 121C, superannuation funds that have no connection with Australia except that they invest moneys here. To come within the exclusion provided by sub-section (8) in a year of income -

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the relevant terms and conditions of the fund must not, at any time during that income year, provide for benefits for residents of Australia (paragraph (a)); and

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there must be no contributions to the fund during that income year in respect of which income tax deductions were allowed or are allowable to any taxpayer (paragraph (b)).

Sub-section (9) will overcome a practical difficulty in determining the in-house assets and total assets of a fund in those cases where a superannuation fund is entitled to a portion of the income from certain assets - for example, where a number of funds are jointly entitled to the income derived from a common pool of assets.

Where such circumstances exist, the sub-section deems, for the purposes of the section 121C investment rules, all the assets from which the income of the fund is derived to be assets of the fund (paragraph (a)). The sub-section also specifies that, for the purposes of the investment rules, the cost of those assets and of any in-house assets included in those assets will be such respective amounts as, in the opinion of the Commissioner, are reasonable in the circumstances (paragraph (b)). Relevant factors to be taken into account in determining these amounts would include the cost of the assets from which the income to which the fund is entitled arises, the cost of any in-house assets included in those assets, the cost of the fund's investment in the assets and the portion of the total income from the assets to which the fund is entitled.

Sub-section 121C(10) applies where a superannuation fund acquires an asset gratuitously, or for inadequate or excessive consideration (paragraph (a)) or for consideration other than money (paragraph (b)). In such a case, the Commissioner of Taxation will be able, for the purposes of section 121C, to ascribe such cost to the asset as, in his opinion, is reasonable in the circumstances.

The sub-section provides for situations where the cost of any assets (including in-house assets) of a fund is not a realistic basis on which to determine whether the fund has satisfied or breached the section 121C investment rules. For example, the acquisition, for excessive consideration, of an asset that is not an in-house asset might have the effect of artificially inflating the total asset base and thus the maximum amount that a fund may lend to a sponsoring employer. In such circumstances, the Commissioner will be able, for the purposes of the rules, to ascribe to the asset a reasonable cost.

Sub-section 121C(11) is a safeguarding provision that will operate to counter devices under which a superannuation fund may indirectly make a loan to, or invest in, an employer sponsor or an associate of an employer sponsor. The sub-section will ensure that the section 121C investment rules are not able to be circumvented by the use of arrangements such as on-lending (for example, where a fund lends to a third party which in turn lends to, or buys shares in, an employer sponsor) or cross-loans (for example, where the fund sponsored by employer A invests in the business of employer B and the fund sponsored by employer B in turn invests in the business of employer A).

The sub-section will apply where -

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an asset of a superannuation fund consists of a loan or investment which does not constitute an in-house asset, as defined (for example, because the borrower does not meet the description of an employer sponsor) - paragraph (a);

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the loan or investment resulted from an agreement, as defined, that was entered into or carried out (for example, an agreement between two funds to make loans to their respective employer sponsors) - paragraph (b); and

•

a purpose of entering into or carrying out the agreement in question was to have a loan made to or an investment made in an employer sponsor of the fund referred to in paragraph 121C(11)(a) or an associate of an employer sponsor of the fund (for example, a loan by the fund in question to a non-employer sponsor was made so that a reciprocal loan would be made to its employer sponsor) - paragraph (c).

Sub-section 121C(12) will operate to increase the in-house assets of a superannuation fund by the amount of any indirect investment by the fund in the employer sponsor or an associate of the employer sponsor. The sub-section will have application where the assets of a superannuation fund include a loan to, or an investment in, a person - other than an employer sponsor of the fund (sub-paragraph (a)(i)) or an associate of an employer sponsor of the fund (sub-paragraph (a)(ii)) - who has a financial link (in terms of sub-section 121C(13)) with an employer sponsor, or an associate of an employer sponsor, of the fund (paragraph (b)). The sub-section will not, however, apply if sub-section 121C(11) applies to the loan or investment (paragraph (c)) - that is, where the loan or investment resulted from an agreement that was intended to achieve the result that a loan or investment would be made to or in an employer sponsor, or an associate of an employer sponsor, of the fund.

The amount, if any, by which the in-house assets of a fund will be increased in those cases where sub-section (12) applies is such amount as, in the opinion of the Commissioner, is reasonable in the circumstances. Sub-section (12) would generally not operate to increase the in-house assets of the fund if the trustees of the fund could not reasonably be expected to have known that a person with whom the fund invested had a financial link with an employer sponsor, or an associate of an employer sponsor, of the fund. Further, the in-house assets would not be increased if the fund's indirect investment in the employer sponsor or associate was so remote as to have little effect on the fund's compliance with the section 121C investment rules.

Sub-section 121C(13) specifies those circumstances in which a financial link exists for the purposes of sub-section 121C(12). By paragraph (a), a financial link exists between two persons if an asset of one of those persons consists of a loan to, or an investment in, the other person. Thus, for example, a financial link would exist between a unit trust and an employer sponsor company if the unit trust owns shares in the employer sponsor. The effect of paragraph (b) is that a financial link may exist between two persons irrespective of the number of entities interposed between those persons. For example, a financial link would exist between a unit trust and an employer sponsor company if the unit trust owns shares in a company that owns shares in another company that, in turn, owns shares in the employer sponsor.

Sub-section 121C(14) is a further safeguarding provision to ensure that, for the purposes of the section 121C investment rules, the cost of in-house assets of a superannuation fund include certain amounts that the fund may become liable to pay to or on behalf of the fund's employer sponsor or an associate of an employer sponsor. Where the trustee of a fund has given a guarantee in relation to an employer sponsor, or an associate of an employer sponsor (for example, where the trustee has guaranteed repayment of a loan made by a third party to an employer sponsor), the cost of the in-house assets of the fund are to be increased by the amount that the fund would be liable to pay if the guarantee were enforced (paragraph (a)).

By paragraph (b), the cost of the in-house assets of a fund is to be increased by the amount of any mortgage on fund assets for the benefit of an employer sponsor of the fund or an associate of an employer sponsor (for example, where a loan made by a third party to an employer sponsor is secured by mortgage on the fund's assets). The cost of the fund's assets will be so increased even though the mortgage may have been given for the benefit of other persons as well as an employer sponsor or associate.

Paragraph (c), which may be limited in its operation by sub-section 121C(15), increases the cost of the in-house assets of a fund by the amount of unpaid calls (whether or not the amount has actually been called up) on shares in a company that is an employer sponsor, or is an associate of an employer sponsor. The cost of the fund's assets will be so increased even though liability to pay the calls may be a joint liability with others.

Sub-section 121C(15) may apply to limit the operation of paragraph 121C(14)(c) in those cases where a superannuation fund owns partly-paid shares in an employer sponsor, or an associate of the employer sponsor, but the amount unpaid has not been called up. In those cases, the Commissioner may, for the purposes of paragraph 121C(14)(c), disregard the amount of unpaid calls (paragraph (a)) where he is satisfied that the assets of the company are sufficient to enable it to meet its debts without having to call up the amount outstanding on the fund's shares (paragraph (b)).

Where an employee of a company owns shares in that company and contributes to a superannuation fund from which the employee or the dependants of the employee have a right to receive benefits, that employee is - by the combined operation of paragraphs 121C(2)(c) and (3)(c) - an employer sponsor of the fund. In terms of sub-section 121C(16), where those circumstances exist (paragraphs (a), (b) and (c)) and the fund makes a loan to the employee, being a loan that, because the employee is an employer sponsor of the fund, constitutes an in-house asset of the fund (paragraphs (d) and (e)), the loan is deemed not to be an in-house asset of the fund if, having regard to certain matters, the Commissioner is satisfied that, by reason of special circumstances, that would be reasonable. The matters to which the Commissioner is to have regard are the amount of the loan (paragraph (f)), the value of the shares (paragraph (g)) and any other matters considered relevant (paragraph (h)). Other matters that may be considered relevant would include the amount of the benefits to which the employee is entitled relative to the amount of the loan and the effect that default by the employee would have on the security of members' benefits.

Where a superannuation fund incurs liabilities to, or on behalf of, an employer sponsor or associate, as provided for in sub-sections 121C(14) and (15) (for example, by guaranteeing repayment of a loan made to an employer sponsor by a third party), or makes a loan to an employee who is an employer sponsor, as provided for in sub-section 121C(16), it may result in the fund failing to satisfy the conditions for income tax exemption set out in section 23F or 23FB (for example, the liabilities may jeopardise the rights of members to receive benefits from the fund). If that is the case, section 121C will have no application but, so there can be no suggestion that the provisions of sub-section 121C(14), (15) or (16) indicate otherwise, sub-section 121C(17) specifically provides that nothing in those sub-sections is to be taken as implying that a fund that does any of the acts or things specified in those sub-sections has not contravened section 23F or 23FB.

Sub-section 121C(18) is a drafting measure to provide for the case where a superannuation fund exists for only part of a year of income. In such a case, references throughout section 121C to all times during a year of income are to be treated as references to all times during the part of the year of income that the fund was in existence.

Two transitional provisions relevant to the operation of new section 121C are contained in sub-clauses 34(4) and (5) of the Bill. Because of their transitional nature (the first is to apply only in relation to the 1985-86 year of income and the second only in relation to the 1985-86 and 1986-87 years of income), the provisions are not being inserted in the Principal Act.

Sub-clause 34(4) provides that, where a superannuation fund has adopted an accounting period that commenced on or before 11 March 1985 (the date on which the investment rules were announced) in lieu of the 1985/86 financial year (being the year of income in respect of which the section 121C investment rules first apply by virtue of sub-clause 34(2)), references in new section 121C to all times during the 1985/86 year are to be taken as references to all times after 11 March 1985. By this provision, such a fund cannot have breached the investment rules before they were announced.

Sub-clause 34(5) will apply in the first two years of operation of the section 121C investment rules - that is, the income years ending 30 June 1986 and 1987. The sub-clause deems a superannuation fund in existence at 11 March 1985 (the date of announcement of the rules) to have complied with the rules if the Commissioner is satisfied that, as a result of a decision made before 12 March 1985, an in-house asset is acquired by the fund on or after that date (paragraph (a)) and that special circumstances exist whereby it would be reasonable to accept the fund as having complied with the rules (paragraph (b)). The sub-clause would only apply where it can be established that a firm decision to acquire a particular asset had in fact been made - for example, an application for shares in an employer sponsor company had been made, but allotment had not occurred at 11 March 1985 - and that there are special circumstances - for example, the circumstances are such that the acquisition would preserve or enhance the value of assets already acquired and so would be in the best interests of fund members. The fund will have the two-year period in which to satisfy the rules by natural growth.

Clause 21: Assessment of income of superannuation funds to which section 23F applies

Existing section 121CA of the Principal Act provides that the trustee of a superannuation fund to which section 23F applies is to be assessed and is liable to pay tax on income (after deductions) derived by the fund, other than income that is exempt from tax by virtue of section 23F. Income subject to tax under section 121CA is certain private company dividends and excessive non-arm's length income. The amendment of section 121CA proposed by clause 21 will ensure that the investment income of a fund that, but for its failure to comply with the new section 121C investment rules (see notes on clause 20), would be exempt from tax by virtue of section 23F is not subject to tax under section 121CA. Such income will instead be subject to tax under proposed new section 121CC, being inserted by clause 23 (see notes on that clause).

Clause 22: Assessment of income of superannuation funds established for benefit of employees and other persons

Existing section 121CB of the Principal Act provides that the trustee of a superannuation fund to which section 23FB applies is to be assessed and is liable to tax on the income (after deductions) of the fund - that is, certain private company dividends and excessive non-arm's length income not exempt from tax under section 23FB. Clause 22 will amend section 121CB so that the investment income of a fund that would be exempt from tax by virtue of section 23FB, but for the fund's failure to comply with the new section 121C investment rules (see notes on clause 20), is not subject to tax under section 121CB. Such income will instead be taxed under proposed new section 121CC, being inserted by clause 23 (see notes on that clause).

For drafting purposes, the clause will omit the reference in section 121CB to assessable income (paragraph (a)) and substitute a reference to income other than income that is exempt under section 23FB or would be exempt under that section but for section 121C (paragraph (b)).

Clause 23: Assessment of investment income of superannuation funds to which section 23F or 23FB applies

Proposed new section 121CC, which is being inserted in the Principal Act by clause 23, provides for the imposition of tax on the investment income of a section 23F or 23FB superannuation fund where that income is subject to tax by reason of the fund's failure to comply with the investment rules contained in new section 121C (see notes on clause 20).

The trustee of the fund is the person who is to be assessed and liable to pay tax under new section 121CC. Tax will be assessed at the rate declared by the Parliament. By the accompanying Income Tax (Companies Corporate Unit Trusts and Superannuation Funds) Bill 1985, that rate is to be 30%.

By sub-clause (2) of clause 34, new section 121CC will apply to income tax assessments for the 1985/86 and subsequent years of income.

Clause 24: Assessment of income of other superannuation funds

Clause 24 will amend existing section 121DA as a consequence of the insertion by clause 23 of new section 121CC in the Principal Act. Section 121DA imposes tax (presently at the rate of 60%) on the income of non-exempt superannuation funds generally, but not those funds taxed in specific circumstances under section 121CA, 121CB or 121DAB. Clause 24 will ensure that funds taxed under new section 121CC, for failure to satisfy the investment rules contained in section 121C (see notes on clause 20), are also excluded from the scope of section 121DA.

Clause 25: Assessment of income of certain superannuation funds

Clause 25 will amend existing section 121DAB of the Principal Act in consequence of the insertion of new section 121CC by clause 23. Section 121DAB imposes tax (presently at the rate of 46%) on the income of superannuation funds that are established for traditional superannuation purposes (namely, to provide benefits for members on their retirement or for dependants on a member's death), but fail to meet the conditions laid down in the Principal Act for income tax exemption. Section 121DAB does not apply to such a superannuation fund that is subject to tax in specific circumstances under section 121CA or 121CB and clause 25 will ensure that it also does not apply to funds taxed under section 121CC for failure to satisfy the investment rules contained in section 121C (see notes on clause 20).

Clause 26: Diverted income and diverted trust income

This clause will amend section 121G of Division 9C of Part III of the Principal Act. Division 9C has the purpose of countering tax avoidance arrangements that seek to exploit the tax-exempt status of certain bodies. In broad terms, income diverted to such tax-exempt bodies from persons who would otherwise be taxable on that income is subject to tax at the maximum personal rate of tax - presently 60%.

Sub-sections 121G(4), (5) and (6) deal with income that is diverted to a tax-exempt trustee by way of the trustee acquiring the property that gives rise to the income, whether it is property as such (sub-section 121G(4), property being an interest in a partnership (sub-section 121G(5)) or property being an interest in another trust estate (sub-section 121G(6)). Income specifically not subject to tax under these sub-sections is investment income subject to tax under other provisions of the Principal Act. Reflecting that principle, clause 26 proposes the exclusion from the scope of each sub-section income in respect of which the trustee of a superannuation fund may be taxed under new section 121CC (being inserted by clause 23) because the fund has failed to satisfy the investment rules contained in new section 121C (being inserted by clause 20).

Paragraph (a) of clause 26 is a drafting measure to accommodate the insertion, by paragraph (b) of the clause, of a new paragraph in each of sub-sections 121G(4), (5) and (6). The effect of new paragraphs 121G(4)(d), 121G(5)(d) and 121G(6)(d) is that income taken into account in calculating the investment income of a superannuation fund for the purposes of new section 121CC (see notes on clause 23) will not be subject to tax as diverted income of the fund in terms of section 121G.

Clause 27: Division 16D - Certain arrangements relating to the use of property

Introductory Note

This clause will insert new Division 16D in Part III of the Principal Act to provide that income tax deductions in respect of the cost of, or capital expenditure incurred on, items of property that are the subject of certain finance leases or similar arrangements are not allowable to the owner of that property. Where the Division applies, the finance lease or similar arrangement (in either case termed a qualifying arrangement) is, in effect, to be treated as being a loan arrangement and the payments made under it as having principal and interest components. A finance lease is generally accepted as one under which all, or substantially all, the risks and benefits of property ownership are transferred from the lessor to the lessee.

The proposed new Division 16D specifies a number of tests for determining whether an arrangement is a qualifying arrangement to which the Division applies. these tests broadly follow those developed for accounting and commercial purposes in identifying a finance lease and include whether the arrangement provides for payment of a guaranteed residual value, whether the user has the right to purchase the property, whether the payments to the owner are equal to, or greater than, 90% of the property's cost or depreciated value when the arrangement commenced and whether the period of the arrangement exceeds 75% of the property's effective life at the time the arrangement is entered into. Where there are successive arrangements entered into by the owner and the user in relation to the same item of property (for example, the exercise of an option to renew the original arrangement), those arrangements are to be treated as one for the purposes of the Division. If any one of the tests is met in a particular case, the arrangement will be a qualifying arrangement unless the circumstances are such that it would be unreasonable for the arrangement to be treated as a qualifying arrangement.

Investment allowance, depreciation and other capital expenditure deductions in respect of property the subject of a qualifying arrangement will be denied where -

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the property is used by a government or tax-exempt government authority under such an arrangement entered into after 5:00pm on 15 May 1984 - the time at which this aspect of the proposal was announced; or

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under such an arrangement entered into after 5:00pm on 16 December 1984 - the time at which this further aspect of the proposal was announced - the property is used outside Australia to produce income which is wholly or partly exempt from income tax.

New Division 16D will not operate to deny deductions for interest incurred on borrowings to finance the acquisition of, or capital expenditure on, the property in question.

Nor will the Division apply to an arrangement in respect of an item of property, or part of an item of property, in respect of which deductions for depreciation or capital expenditure would not otherwise be available. In certain circumstances, therefore, it will be necessary to apportion payments made, or liable to be made, under an arrangement into amounts referable to the component of an item of property that attracts deductions and into amounts referable to the component that does not attract deductions. Proportionate depreciation and capital expenditure deductions will also be available to the property owner where the property is used by a partnership, or under a joint venture arrangement, and some of the partners or joint venturers are not governments, tax-exempt government authorities or other persons not subject to Australian tax on income derived from use of the property outside Australia.

Under Division 16D, the taxable income of the owner of the property will be calculated as if the qualifying arrangement were a loan by the owner to enable the user, or the person effectively controlling the use, of the property to acquire that property. For that purpose, the loan principal will be the lesser of the cost and the written down value of the property at the commencement of the arrangement and will be deemed to be repaid over the period of the arrangement on the same basis as that on which payments under the arrangement are to be made. A repayment equal to the amount of any guaranteed residual value or the market value of the property at the expiration of the period of the arrangement will, for this purpose, be deemed to have been made at the time of expiration.

Payments made under the arrangement will be split into principal components that will not be assessable and into assessable interest components. The calculation of the interest component will be made on an actuarial basis, by applying the interest rate underlying the transaction to the principal outstanding at the commencement of a payment period. The outstanding principal will be progressively reduced during the period of the arrangement by the amount of the excess of a payment over the calculated interest component.

Provision is made for the new Division to not apply in certain limited circumstances - that is, where, if it were applied, a person entitled to capital expenditure deductions in respect of a building under Divisions 10C or 10D of the Principal Act would receive a taxation advantage by effectively receiving (by reason of being taxed on only the interest component of payments) the benefit of deductions over a shorter period of time than would otherwise be the case.

In the event that the property is used for the purpose of producing assessable income subsequent to the expiration or termination of the arrangement, the value of the property at the time of that expiration or termination will be taken to be, for income tax purposes, the amount of the reduced principal at that time.

Section 159GE : Interpretation

Section 159GE contains a number of definitions and interpretational provisions necessary for the operation of proposed new Division 16D.

Sub-section (1) of section 159GE defines certain terms used in the Division -

"arrangement" is given an extended meaning, common to other provisions of the Principal Act, so as to include any agreement, arrangement, understanding, promise or undertaking, and any scheme, plan, proposal, action, course of action or course of conduct. The term is particularly relevant for the purposes of section 159GG, which specifies those arrangements - that are to be taken to qualifying arrangements - that is, arrangements to which Division 16D applies.

"arrangement payment" means so much of any payment made or liable to be made under an arrangement as represents consideration for the use, or the control of the use, of property that is the subject of the arrangement, or consideration for the sale or disposal of the subject property. An "assessable arrangement payment" (also a defined term) is included in assessable income to the extent required by section 159GK.

"arrangement period" is defined to mean, in relation to an item of "eligible property" (also a defined term), the total period during which an arrangement is likely to be in force in relation to that item of property. The term (the meaning of which is expanded by sub-section 159GE(2)) is particularly relevant to determining whether the arrangement is a qualifying arrangement in accordance with section 159GG.

"arrangement property" (a term also relevant to determining whether an arrangement is a qualifying arrangement in accordance with section 159GG) is defined to mean property used, or the use of which is controlled, under an arrangement.

"assessable arrangement payment" means an arrangement payment that would constitute, in whole or part, assessable income of the taxpayer apart from the application of the Division. Assessable arrangement payments are dealt with in section 159GK.

"associate", in relation to a person other than an "exempt public body" (also a defined term), is defined - by paragraph (a) of the definition - to have the same meaning as the term has in sub-section 26AAB(14) of the Principal Act. The sub-section 26AAB(14) definition specifies who is an associate in relation to a natural person, a company, a trustee of a trust estate or a partnership, and, broadly, refers to those persons who by reason of business or family connections might appropriately be regarded as being associated with a particular person.

Paragraph (b) of the definition specifically defines the term associate as it applies to an "exempt public body". An associate of such a body means -

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a partner of the body or a partnership in which the body is a partner (sub-paragraph (b)(i));

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the spouse or child of a partner of the body (sub-paragraph (b)(ii));

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a trustee of a trust estate under which, directly or indirectly, the body or an associate of the body does or can benefit (sub-paragraph (b)(iii)); or

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a company, where -

• .

the company or its directors would carry out the directions, etc. of the body or of an associate or associates of the body (sub-sub-paragraph (b)(iv)(A)); or

• .

the body and/or associates of the body can cast, or control the casting of, more than 50% of the votes at a general meeting of the company (sub-sub-paragraph (b)(iv)(B)).

The term "associate" is another term that has particular relevance to determining whether an arrangement is a qualifying arrangement in accordance with section 159GG and thus is an arrangement to which Division 16D applies.

"capital expenditure deduction" means a deduction for capital expenditure available under Division 10 (general mining expenditure), 10AAA (expenditure on the transport of certain minerals), 10AA (petroleum mining expenditure), 10A (expenditure on timber operations or timber mill buldings), 10C (expenditure on traveller accommodation buildings) or 10D (expenditure on non-residential income -producing buildings) of the Principal Act. Such deductions are, in terms of section 159GJ, generally to be denied where Division 16D applies.

"control" is used in new Division 16D to mean effective control - that is, practical control, whether or not more formal control exists. Control by an exempt public body over an item of property which is the subject of a qualifying arrangement under section 159GG will result in the application of the Division to the arrangement.

"depreciation deduction" refers to any deduction available for depreciation in respect of an item of property under the depreciation provisions of the Principal Act. Such deductions are, in terms of section 159GJ, generally to be denied where Division 16D applies.

"Division 10, 10AA or 10A property" means property in respect of which there has been incurred -

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allowable capital expenditure to which Division 10 (general mining) or Division 10AA (petroleum mining) applies - paragraph (a);

•

capital expenditure to which the former Division 10 applied and that has been brought forward for the purposes of the present Division 10 - paragraph (b); or

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capital expenditure to which Subdivision A (timber operations) or Subdivision B (timber mill buildings) of Division 10A applies - paragraph (c).

Divisions 10, 10AA and 10A are brought together in the definition because deductions for expenditure under each Division are allowable on the same basis. Where Division 16D applies to Division 10, 10AA or 10A property, sub-section 159GJ(2) operates to deny deductions in respect of the property.

"Division 10AAA property" is defined as property in relation to which there has been incurred capital expenditure under Division 10AAA, which provides deductions for certain capital expenditure associated with mineral transport. Where Division 16D applies to Division 10AAA property, sub-section 159GJ(3) operates to deny those deductions.

"Division 10C or 10D property" is the term used to describe those buildings in relation to which qualifying expenditure, within the meaning of Division 10C or 10D, has been incurred. Those Divisions provide periodic deductions for capital expenditure incurred on certain income-producing buildings. As with the other definitions relating to property, the classification of an item as Division 10C or 10D property is relevant for the purposes of sections 159GF and 159GJ.

"effective life" is defined, in relation to "eligible property" (also a defined term), to mean a period estimated by the Commissioner to be the effective life of the property assuming it is maintained in reasonably good order and condition. The effective life of property may be relevant in determining whether an arrangement is a qualifying arrangement in terms of section 159GG.

"eligible amount" means, by paragraph (a), for "eligible depreciation property" (also a defined term), the cost of the property in terms of sub-section 62(1) of the Principal Act (which provides the means of determining the cost of property at a particular time), and, by paragraph (b), for other items of "eligible property" (another defined term), the amount of "eligible capital expenditure" (as defined) on that property. The term is relevant in determining the residual amount in respect of an item of eligible property for the purposes of section 159GF, and also whether an arrangement is a qualifying arrangement in terms of section 159GG.

"eligible capital expenditure" is defined to mean capital expenditure on property that, by reason of the expenditure, qualifies as "eligible capital expenditure property". The definition of this latter term follows.

"eligible capital expenditure property" is a drafting aid to refer, as the case requires, to "Division 10, 10AA or 10A property", "Division 10AAA property" or "Division 10C or 10D property", all of which are defined terms. If an item of property (or part of an item) is not eligible capital expenditure property or "eligible depreciation property" (see the following definition), the Division will have no application to that item, or that part of the item, as the case may be.

"eligible depreciation property" means property that is plant or articles within the meaning of section 54 of the Principal Act. That section authorises depreciation deductions for plant or articles and specifically includes reference to certain items of property that might not otherwise be considered to be plant.

"eligible property" is the collective term to describe the separate items of property in relation to which Division 16D applies. The term is defined by reference to the terms used to describe those separate items of property - namely, "eligible depreciation property" (paragraph (a)), "Division 10, 10AA or 10A property" (paragraph (b)), "Division 10AAA property" (paragraph (c)) or "Division 10C or 10D property" (paragraph (d)).

"eligible real property" is eligible property that is the whole or part of a building (paragraph (a)) or fixed structure (paragraph (b)). Land itself is excluded from the operation of the Division. The term is relevant in determining whether an arrangement is a qualifying arrangement in accordance with section 159GG.

"exempt public body" is defined, for the purposes of new Division 16D, to mean the Commonwealth, a State or Territory (paragraph (a)), a municipal corporation or other local governing body not subject to tax on its income (paragraph (b)) or a public authority constituted under a Commonwealth, State or Territory law (sub-paragraph (c)(i)), the income of which is exempt from income tax (sub-paragraph (c)(ii)). In terms of section 159GH, the Division will apply to qualifying arrangements entered into after 5.00pm on 15 May 1984, where the user of the property is an exempt public body.

"payment portion" means, in effect, that portion of any arrangement payment (as defined) as the Commissioner considers is attributable to the cost of, or other capital expenditure on, eligible property. The term is relevant for determining, in accordance with section 159GK, the amount of arrangement payments to be included in a taxpayer's assessable income.

"person" is given an extended meaning for the purposes of Division 16D, to include an exempt public body (as defined).

"total notional principal" means, in effect, the sum of all non-assessable principal components of payments made under an arrangement. The term, the meaning of which is expanded by sub-section 159GE(4), is particularly relevant in determining, in accordance with section 159GJ, a residual amount for an item of property after the Division has ceased to apply.

Sub-section 159GE(2) expands the definition of "arrangement period" in sub-section (1). It provides that a reference in that definition to the likely period of an arrangement at a particular time is a reference to the period (if any) specified in, or ascertainable in accordance with, the arrangement as being the total period during which the arrangement is or was to operate in respect of the subject item of eligible property, including any period before the particular time (paragraph (a)). It also provides that, where that period is not so specified or ascertainable, it will be the period that is or would be the likely period of the arrangement, having regard to the provisions of the arrangement itself and any other relevant associated considerations (paragraph (b)). In that context, a relevant consideration might be the existence of a bargain renewal option as a term of the arrangement. That option may, for example, allow the user to renew the arrangement for a rental that, at the time the option becomes exercisable, will be sufficiently lower than the anticipated rental of the property as to reasonably assure the exercise of the option. The length of an arrangement period will be relevant in determining whether a qualifying arrangement exists, in terms of section 159GG.

An item of property can qualify as an item of eligible property under two or more of the paragraphs in the definition of eligible property in sub-section (1). Plant or articles, for example, are items of eligible depreciation property, as defined, and may also qualify as items of Division 10, 10AA or 10A property, as defined. Sub-section 159GE(3) is a drafting measure that makes it clear that property is not prevented from being eligible property by reason that it qualifies under two or more paragraphs of the definition. Section 159M deals with property that is both eligible depreciation property and eligible capital expenditure property.

Sub-section 159GE(4) amplifies the definition of "total notional principal" in sub-section (1) to provide for the calculation of the non-assessable principal component of an arrangement payment where only part of the payment comes within the scope of Division 16D. For sub-section (4) to apply, there must be an assessable interest component - that is, an interest amount within the meaning of section 159GK (paragraph 159GE(4)(a)) - and the part of the payment to which the Division applies (the payment portion, as defined) must exceed that interest component (paragraph 159GE(4)(b)). In these cases, the principal component is taken to be the excess of the payment portion over the interest component of that payment portion. The concept of total notional principal is embodied in section 159GJ which operates, in part, to determine the extent to which deductions are available in respect of an item of property after the Division has ceased to apply to an arrangement. Under that section, the total notional principal during an application period (as described in sub-section 159GE(7)) is treated as either a depreciation or capital expenditure deduction.

In terms of sub-section 159GE(5), where, under two or more successive arrangements the same person (or persons who are associates) uses, or controls the use of, the same item of property (paragraph (a)) those successive arrangements will, if the Commissioner considers they should (paragraph (b)), be treated as a single arrangement entered into and coming into force at the same time as the first of those arrangements, and continuing in force until the expiration of the last of those arrangements. The sub-section is a safeguarding measure to provide for those cases where the parties to an arrangement that would otherwise come within the scope of new Division 16D might structure the transaction as a series of arrangements, each of which individually would not be a qualifying arrangement in terms of section 159GG.

Successive arrangements under sub-section 159GE(5) are described in sub-section 159GE(6) as including two or more arrangements, the arrangement periods of which overlap (paragraph (a)), and as including arrangements that the Commissioner considers should be taken as being successive arrangements, even though there is a period between the expiration of one and the commencement of another (paragraph (b)).

Sub-section 159GE(7) interprets the meaning of "application period" for the purposes of new Division 16D. Under this sub-section, a reference to the application period is to be taken to be a reference to the period from the time the Division commences to apply to an item of property the subject of a qualifying arrangement to the time at which it ceases to apply. The term is particularly relevant for the purposes of section 159GJ in order to determine the consequences of the Division applying.

Sub-section 159GE(8) is another interpretative provision that makes it clear that, where a partner in a partnership uses or controls the use of property, each partner in the partnership shall be deemed to use or control the use of that property. The partnership itself will not be taken to use or control the use of the property.

Section 159GF : Residual amounts

Section 159GF specifies amounts that are to be taken to be residual amounts in relation to eligible property for the purposes of Division 16D. For example, the residual amount in relation to eligible depreciation property as at the commencement of the period of an arrangement would be its cost (if a new item of property) or its depreciated value at that time. The concept of residual amount is important to the operation of the Division, as it is used as a basis for determining -

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whether a qualifying arrangement exists (section 159GG);

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the amount of any arrangement payment that will be brought to account as assessable income of the owner of the property (section 159GK); and

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any depreciation or capital expenditure deductions or balancing charges in relation to the use of the item of property after the Division has ceased to apply (section 159GJ).

Sub-section 159GF(1) specifies the amount that is, in various circumstances, to be taken to be the residual amount in relation to an item of eligible depreciation property (as defined) at a particular time (in the sub-section called the "relevant time"). The residual amount of an item of eligible depreciation property at the relevant time - that is, at the commencement of the application period (see notes on sub-section 159GE(7)) - is its eligible amount, as defined, reduced by amounts of depreciation as ascertained in accordance with sub-section 159GF(1). By the definition in sub-section 159GE(1), "eligible amount" in relation to an item of eligible depreciation property is its cost or the amount that would be its cost for the purposes of sub-section 62(1) of the Principal Act. Thus, the eligible amount can be the actual cost of the property, its depreciated value at the time of acquisition (if depreciation deductions were previously allowed) or its deemed cost (if the property was acquired in a non-arm's length transaction and sub-section 62(3) of the Principal Act applies to deem an arm's length amount to be its cost).

Sub-section 159GF(1) essentially reduces the eligible amount in relation to eligible depreciation property by depreciation deductions that have been or would have been allowed to the owner of the property, under the depreciation provisions of the Principal Act, prior to the commencement of the relevant application period. The residual amount of an item of eligible depreciation property that is new at that time is, therefore, its cost of acquisition or construction by the taxpayer.

Paragraph 159GF(1)(a) sets out the basis for determining the residual amount of an item of eligible depreciation property where that item has not at any time previously been dealt with by the taxpayer in the prescribed manner - described in paragraph 159GF(2)(a) as the use of the property to produce assessable income or having the property installed ready for use in producing assessable income and held in reserve. In these instances, the eligible amount in relation to the property is reduced by the amount that would, but for a deduction denying provision (described in paragraph 159GF(2)(b) as a provision of the Principal Act that would deny in whole or part a deduction otherwise allowable), have been allowable to the taxpayer as depreciation up to the relevant time (called the "relevant period") if -

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the taxpayer had, at all times during the relevant period wholly and exclusively dealt with the property in the prescribed manner (sub-paragraph 159GF(1)(a)(i));

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the depreciation that would have been allowable were calculated on a diminishing value basis as provided in paragraph 56(1)(a) of the Principal Act (sub-paragraph 159GF(1)(a)(ii)); and

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section 57AG of the Principal Act - which provides a special depreciation loading (presently 18%) on certain plant - did not apply (sub-paragraph 159GF(1)(a)(iii).

Where the property was wholly and exclusively dealt with by the taxpayer in the prescribed manner at all times during the relevant period, paragraph 159GF(1)(b) provides that its eligible amount is to be reduced by the amount that was or, but for a deduction denying provision, would have been allowed or allowable to the taxpayer as depreciation in respect of that property.

Paragraph 159GF(1)(c) operates in any case not covered by paragraphs (a) and (b) - that is, where the property has previously been used by the taxpayer but only partly for the purpose of producing assessable income or for part only of an income year or a combination of both. Broadly, paragraph (c) applies to determine the residual amount in those cases by reference to the depreciation that would have been allowed if the property had been used wholly for that purpose during the whole of the period prior to the commencement of the application of Division 16D and if the basis on which depreciation was actually allowed had applied throughout that prior period. For that latter purpose, regard is had to the more recent basis of depreciation that applied.

More specifically, in these particular cases, the residual amount is the eligible amount reduced by the total amount of depreciation that would have been allowable to the taxpayer if the property had at all times during the relevant period been dealt with wholly and exclusively in the prescribed manner (sub-paragraph (i)) and that depreciation were allowable -

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in respect of any part of the relevant period for which depreciation was or, but for a deduction denying provision, would have been allowed or allowable - on the same basis and at the same percentage as was or would have been so allowed or allowable (sub-paragraph (ii); and

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in relation to any part of the relevant period for which no depreciation was or, but for a deduction denying provision, would have been allowed or allowable, on whichever of the following bases is applicable (sub-paragraph (iii)) -

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if depreciation was or would have been allowed or allowable in an immediately succeeding part of the relevant period - on the same basis and at the same percentage as was or would have been so allowed or allowable (sub-sub-paragraph (A)); and

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in any other case - on the same basis and at the same percentage as was or would have been allowed or allowable in the immediately preceding part of the relevant period (sub-sub-paragraph (B)).

Sub-section 159GF(2) is an interpretative provision that applies for the purposes of sub-section (1). It describes what is meant by the references in sub-section (1) to property dealt with in the prescribed manner and to a deduction denying provision.

By paragraph (a) of sub-section (2), an item of eligible depreciation property is dealt with by a taxpayer in the prescribed manner at a particular time if it is used by the taxpayer at that time for the purpose of producing assessable income (sub-paragraph (i)) or it is, at that time, installed ready for use for that purpose and held in reserve by the taxpayer (sub-paragraph (ii)).

Paragraph (b) specifies that a reference to a deduction denying provision is a reference to a provision of the Principal Act under which a deduction otherwise wholly allowable is denied in whole or in part. The term is used in sub-section (1) in determining the residual amount in relation to eligible depreciation property, where depreciation that, but for a deduction denying provision, would have been allowable may be taken into account. An example of a deduction denying provision is sub-section 54(3) of the Principal Act, which provides that a depreciation deduction is not allowable in respect of property that is a leisure facility for the purposes of section 51AB of the Act - for example, certain boats.

Sub-section 159GF(3) specifies what are residual amounts in relation to Division 10, 10AA or 10A property (as defined). The residual amount at any time during a year of income is to be ascertained by reference to relevant amounts of expenditure determined under the appropriate Division.

Divisions 10 (general mining), 10AA (transport of minerals) and 10A (timber operations/timber mill buildings) operate to effectively spread relevant capital expenditure over the lesser of the life of the property in question or a specified number of years. In the case of Division 10 or 10A property, that number of years varies according to the time at which the relevant expenditure was incurred. In the case of Division 10A property, that number of years is 25.

In broad terms, capital expenditure that has not already been allowed as a deduction under the relevant Division is determined at the end of each year of income.

It is to those end-of-year amounts that sub-section 159GF(3) is directed for the purposes of determining the residual amount of the particular expenditure that is within the scope of new Division 16D. Under the sub-section, so much of any of those amounts (set out in the paragraphs of the sub-section) that can be attributed to Division 16D expenditure is a residual amount.

Paragraph (a) of sub-section (3) specifies one of the end-of-year amounts determined under Division 10 or 10AA - that is, an amount of "residual previous capital expenditure". The amount represents, broadly, Division 10 or 10AA capital expenditure incurred up to the end of an income year and on or before 17 August 1976 that has not been allowed as a deduction in a previous year of income. Under those Divisions, a deduction is allowed of an amount ascertained by dividing residual previous capital expenditure by the life of the mine or petroleum field, respectively, or by 25, whichever is the less.

Paragraph (b) of sub-section (3) similarly specifies another end-of-year amount, that amount being an amount of "residual capital expenditure" within the meaning of Division 10, 10AA or 10A, while paragraphs (c), (d) and (e) specify other various end-of-year amounts relevant to Division 10 or 10AA - amounts of "residual (1 May 1981 to 18 August 1981) capital expenditure", "residual (19 August 1981 to 19 July 1982) capital expenditure" and "allowable (post 19 July 1982) capital expenditure". The different terms describe particular Division 10, 10AA or 10A expenditure which, depending on its nature and on the time it was incurred, may be deductible over the lesser of the life of the relevant property and 5,6,10 or 25 years.

The residual amount in relation to an item of Division 10AAA (mineral transport) property at a particular time is, in terms of sub-section 159GF(4), the amount of the expenditure on the property reduced by any part of it that has been allowed or is allowable as a Division 10AAA deduction to any taxpayer in any preceding year of income. Deductions are allowable under this Division over 10 or, at the option of the taxpayer, 20 years.

The residual amount in relation to expenditure on an item of Division 10C (traveller accommodation buildings) or 10D (non-residential income-producing buildings) property is determined under sub-section 159GF(5). That sub-section provides that the residual amount at a particular time is the residual capital expenditure at that time within the meaning of whichever of Division 10C or 10D is applicable. Both Divisions provide for a straight-line deduction, in a year of income, of an amount equal to either 2.5% or 4% (depending on the time construction commenced) of capital expenditure on the construction, extension, etc. of relevant buildings. Residual capital expenditure is, in effect, the amount of the qualifying capital expenditure reduced by the total of the deductions that would have been allowable if the building had at all times been used to produce assessable income.

Section 159GG : Qualifying arrangements

Section 159GG determines whether a particular arrangement relating to the use, or the control of the use, of property in respect of which a depreciation or capital expenditure deduction would be available if Division 16D did not operate, is of such a nature as to bring it within the scope of the Division.

Sub-section 159GG(1) sets out the tests which, if satisfied, mean that an arrangement for the use of a particular item of eligible property is an arrangement to which new Division 16D applies - that is, a qualifying arrangement. Essentially the tests are whether the owner of the property is, under the arrangement, transferring ownership risks and benefits to the person (referred to in the sub-section as the "end-user") who uses or controls the use of the eligible property that is the subject of the arrangement. By virtue of paragraph (a) of sub-section (1), an arrangement is a qualifying arrangement if it contains any one of four provisions described in the sub-paragraphs of that paragraph.

By sub-paragraph (a)(i), an arrangement is a qualifying arrangement if it contains a provision to the effect that the end-user (or an associate) will pay to the owner of the property (or an associate) an amount at least equal to the "guaranteed residual value", being an amount specified or ascertainable under that provision of the arrangement, in the event that -

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on termination or expiration of the arrangement, the owner disposes of the property that is the subject of the arrangement (the "arrangement property", as defined) or a part of that property that is or includes the particular item of eligible property (sub-sub-paragraph (A)); and

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no consideration, or consideration less than the guaranteed residual value is received by the owner (or an associate) in respect of the disposal (sub-sub-paragraph (B)).

A provision in an arrangement to the effect that the arrangement property (or a part of that property that is or includes the item of eligible property) will be transferred (for consideration or not) to the end-user or an associate at or after the termination or expiration of the arrangement will, by sub-paragraph (ii), mean that the arrangement is a qualifying arrangement.

Similarly, if an arrangement contains a provision to the effect that the end-user or associate can purchase or require the transfer of the arrangement property (or a part consisting of or including the item of eligible property), the arrangement is, by sub-paragraph (iii), a qualifying arrangement.

By virtue of sub-paragraph (iv), an arrangement is a qualifying arrangement if it contains a provision to the effect that the end-user or an associate is to carry out or pay for repairs, or reimburse the owner or an associate for the cost of repairs, in respect of the arrangement property (or a part consisting of or including the eligible property item). This test will only apply in respect of arrangements for periods in excess of 12 months, and will have no application where the user is merely required to maintain, or incur or reimburse expenditure on maintenance (as distinct from repairs) in respect of, the property.

An arrangement is a qualifying arrangement in terms of paragraph (b) of sub-section (1) where certain tests in relation to the arrangement period are satisfied. If the property under the arrangement is a item of "eligible real property" (a building or fixed structure or part thereof), and the arrangement period represents 50% or more of the effective life of the item at the commencement of the arrangement period, the arrangement will qualify (sub-paragraph (i)). In the case of other items of eligible property, where the arrangement period represents 75% or more of the effective life of the item at the commencement of the arrangement period, the arrangement will similarly qualify (sub-paragraph (ii)).

Paragraph (c) of sub-section (1) provides a test of a qualifying arrangement that relates to the connection between the value of the property and the amount of payments made in respect of the property. Sub-paragraphs (i) and (ii) identify the payment portions (a term defined in sub-section 159GE(1) to mean, in effect, the portion of an arrangement payment considered attributable to eligible property) liable to be made at or before the time at which it is being determined whether the arrangement is a qualifying arrangement (called the relevant time) or likely to become liable to be made after the relevant time. The payment portions are those to be made in relation to the eligible amount or amounts (defined in sub-section 159GE(1) as the effective cost of, or expenditure on, eligible property), including eligible amounts in respect of expenditure incurred or likely to be incurred during the arrangement period. The payment portions likely to be made and expenditure likely to be incurred are determined having regard to the provisions of the arrangement and any other relevant circumstances.

Sub-paragraphs (iii) and (iv) of paragraph 159GG(1)(c) identify the residual amounts (determined in accordance with section 159GF) in respect of expenditure incurred in relation to the eligible property before the arrangement period commenced and the relevant expenditure incurred or likely to be incurred in relation to the property during that period.

If the sum of the sub-paragraph (i) and (ii) amounts (in effect, the payments made under the arrangement that relate to the subject property) equals or exceeds 90% of the sum of the sub-paragraph (iii) and (iv) amounts (in effect, the value of the subject property) the arrangement is a qualifying arrangement under paragraph (c).

In terms of paragraphs (d) and (e) of sub-section 159GG(1), an arrangement that is a qualifying arrangement under paragraphs (a), (b) or (c) is such an arrangement at the particular time it satisfies any of the conditions in those paragraphs and at all prior times that the arrangement was in force in respect of the eligible property.

Sub-section 159GG(2) operates to ensure that the Division will apply where an item of property which is the subject of an arrangement relating to the use or the control of the use of that property, being property owned by a person who is also a party to the arrangement, (paragraph (a)), is transferred to the end-user or an associate within 1 year of the arrangement ceasing to be in force (paragraph (b). In these circumstances, the arrangement will be taken to have been a qualifying arrangement in relation to that item of property at all times during which it was in force.

Sub-section 159GG(3) makes it clear that, for the purposes of the section, a lease is an arrangement relating to the use of property (paragraph (a)). In terms of paragraph (b), any arrangement entered into in relation to the lease referred to in paragraph (a) will be taken to be part of a total arrangement involving the lease.

By virtue of sub-section 159GG(4), an arrangement that would otherwise be a qualifying arrangement is not to be taken to be a qualifying arrangement in certain circumstances - that is, where the Commissioner, having regard to the circumstances which result in the arrangement being a qualifying arrangement (paragraph (a)) and any other relevant circumstances (paragraph (b)), considers it unreasonable that the arrangement should be treated as a qualifying arrangement. The Commissioner might, for example, consider that, in all the circumstances, a short-term hiring arrangement in respect of property should not be treated as a qualifying arrangement even though that property was acquired by an associate of the hirer within 12 months of the expiration of the hiring arrangement.

Sub-section 159GG(5) operates where an arrangement, which is a qualifying arrangement in terms of sub-sections (1) and (2) at a particular time (the 'relevant time'), subsequently ceases to be a qualifying arrangement. The sub-section provides, in effect, that in this event the Division will apply to the arrangement until the time when it ceases to qualify even though, had the arrangement been for the shorter period from the start, the arrangement would not have been a qualifying arrangement. This could happen where, for example, an arrangement is a qualifying arrangement because the payments that were to be made under the arrangement exceeded 90% of the value of the property (see notes on paragraph 159GG(1)(c)), but the arrangement is terminated after the first payment is made. In such circumstances, Division 16D would apply to deny relevant deductions during the shortened arrangement period and bring to account as assessable income the interest component of the single payment made, that interest component being calculated on the basis of the arrangement as originally proposed. In these circumstances, if the Division ceases to apply at any time during the arrangement period, the taxpayer's assessable income for the period during which the Division has applied is not to be re-calculated.

Section 159GH : Application of Division in relation to property

Section 159GH sets down the circumstances in which Division 16D applies in relation to property that is the subject of a qualifying arrangement in terms of section 159GG.

Under sub-section 159GH(1), Division 16D applies to an item of property that is the subject of a qualifying arrangement at a particular time (paragraph (a)) where either -

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in terms of sub-paragraph (b)(i), the qualifying arrangement was entered into after 5:00pm (by standard time in the Australian Capital Territory) on 15 May 1984 and the person using the property, or having effective control of its use, is an exempt public body (as defined); or

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the qualifying arrangement was entered into after 5:00pm (by legal time - i.e., summer time - in the Australian Capital Territory) on 16 December 1984 and the use of the property takes place, or will take place, outside Australia wholly or partly for the purpose of producing exempt income (sub-paragraph (b)(ii)).

As the Division is only to apply to non-leveraged arrangements - that is, arrangements which do not involve the financing of the acquisition of the property by means of a non-recourse debt - sub-section 159GH(2) excludes from the application of the Division eligible property to which section 51AD of the Principal Act applies. That section applies to deny income tax deductions in respect of property subject to leveraged leases and similar arrangements.

Section 159GJ : Effect of application of Division on certain deductions, & c.

Section 159GJ operates to disallow deductions in respect of property (or part of property) or capital expenditure on property (or part of property) to which the Division applies. The differing methods of determining those deductions reflect the different approaches of the relevant other Divisions of the Principal Act under which the deductions would otherwise be allowable.

Sub-section 159GJ(1) applies to determine the extent to which deductions are to be disallowed in relation to an item of eligible depreciation property, as defined. By virtue of paragraph (a), if a taxpayer would have been entitled to an investment allowance deduction in relation to an item of property (sub-paragraph (a)(i)) and Division 16D commences to apply in relation to that property within 12 months of the property first having been used or installed ready for use (sub-paragraph (a)(ii), the taxpayer's entitlement to the investment allowance deductions will be denied. The 12 months test mirrors the investment allowance provisions, contained in Subdivision B of Division 3 of Part III of the Principal Act, which require property to be retained for 12 months and not to be put to a disqualifying use during that period if the right to investment allowance is to be retained.

Paragraph 159GJ(1)(b) operates to completely deny to a taxpayer a depreciation deduction in relation to property where the application period or part of the application period is a full year of income. The application period is defined in sub-section 159GE(7) as, in effect, the period during which Division 16D applies to a particular item of property.

Where Division 16D applies for only part of a year of income paragraph 159GJ(1)(c) operates. For any part (referred to as the "pre-application part") of the income year preceding the application period, a taxpayer is entitled to the depreciation deduction relevant to that pre-application part (sub-paragraph (c)(i)). The amount of the depreciation deduction so allowable is, if the Division has not previously applied to the property, the amount to which the taxpayer would have been entitled if Division 16D did not apply (sub-sub-paragraph (A)). Where the Division has previously applied to the property, sub-sub-paragraph (B) operates so that the depreciation deduction allowable to the taxpayer in relation to the item of property is the amount that would have been allowable apart from the present application of section 159GJ but taking into account any depreciation deductions disallowed by any previous application of the section in respect of a period prior to the application period.

A taxpayer is not, under sub-paragraph (c)(ii) entitled to any depreciation deduction in respect of property for any part of an income year during which Division 16D applies.

Sub-paragraph (c)(iii) operates to determine the depreciation deduction available to a taxpayer in relation to that part of an income year (the "post-application part") remaining after the Division has ceased to apply. That allowable depreciation is based on a depreciated value ascertained in accordance with sub-sub-paragraph 159GJ(1)(c)(iii)(A). That depreciated value (called the residual amount), at the expiration of the application period, effectively represents the residual amount of the property at the commencement of the application period (in terms of section 159GF, the lesser of the cost or depreciated value) reduced by an amount equal to the total of the notional principal components of arrangement payments. The notional principal component of a payment is the amount of a payment reduced by the interest component as calculated in accordance with the provisions of section 159GK. The concept of total notional principal is modified by section 159GN, which allows proportionate deductions in certain circumstances. In those cases, the total notional principal is increased by the amount of the deduction allowed.

Sub-sub-paragraph 159GJ(1)(c)(iii)(A) provides the formula to enable the residual amount, in relation to an item of property, to be calculated at any time (called the "relevant time") during the post-application part. The formula will have no application at any time when the Division has re-commenced to apply to an item of property. Essentially, the formula takes the depreciated value of an item of property at the relevant time during the post-application part (component A), adds back depreciation referable to the application period (component B) and deducts the principal components of payments made during the application period (component C). This avoids any double deductions by ensuring that the principal components not subject to tax do not, after Division 16D has ceased to apply, form part of the depreciated value of the property for income tax purposes. Where the diminishing value method of calculating depreciation is used, the "ordinary" depreciation relevant to the period between the end of the application period and the relevant time is added back as part of component B and instead depreciation, calculated as if the "ordinary" depreciated value had been reduced by the principal components, is deducted as part of component C.

Component A of the formula is the amount that would, but for the present application of section 159GJ (that is, taking into account any previous application), be the residual amount in relation to the item of depreciation property, as ascertained in accordance with the provisions of section 159GF. To this amount is added the amount of depreciation referable to the application period. This amount - component B of the formula - is also calculated in accordance with the provisions of section 159GF. The same method of depreciation adopted in respect of the item of property for the purposes of determining the residual amount under sub-section 159GF(1) is to be used to calculate the amount of depreciation otherwise allowable during the application period. Where the diminishing value method of depreciation is used, component B includes the depreciation relevant to the period between the end of the application period and the relevant time.

Deducted from the total of components A and B is component C. This amount is, in cases where the diminishing value method of depreciation (provided for in paragraph 56(1)(a) of the Principal Act) is not used, the total notional principal (as defined in sub-section 159GE(1) and expanded by sub-section 159GE(4)) in relation to the item of property that is referable to the application period.

Where the diminishing value method of depreciation is used, the value of component C is the sum of the total notional principal referable to the application period in respect of the item of property and an amount equal to the depreciation that would have been depreciation in terms of sub-section 159GF(1) - in calculating the residual amount - if the depreciated value of the property at the beginning of the year of income in which Division 16D ceased to apply was equal to the residual amount at the beginning of the application period as reduced by the total notional principal in respect of the application period.

By virtue of sub-sub-paragraph 159GJ(1)(c)(iii)(B), the depreciated value of the item of property at any time during the post-application part for the purposes of sub-section 56(2) or section 59 of the Principal Act is taken to be equal to the residual amount ascertained under sub-sub-paragraph (A). Sub-section 56(2) provides that the depreciation deduction allowable in respect of an item of property shall not exceed its depreciated value, while section 59 provides for balancing adjustments to be made on disposal of an item of depreciated property.

Sub-sub-paragraph 159GJ(1)(c)(iii)(C) provides that the depreciation deduction allowable to a taxpayer in relation to the post-application part is to be the amount that would be allowable if Division 16D did not apply. For the purposes of calculating that amount where the diminishing value method of depreciation is used, the residual amount at the commencement of the post-application period, ascertained under sub-sub-paragraph (A), shall be taken to be the depreciated value of the property at the beginning of the year of income.

Paragraph (d) of sub-section 159GH(1) provides that the residual amount at any time (the "relevant time") in any year of income after the application period ceases is to be calculated in the same manner as for determining the residual amount under sub-sub-paragraph (c)(iii)(A). This paragraph will enable a residual amount to be determined in relation to an item of property, for any subsequent applications of the Division.

Paragraph (e) provides that, for the purposes of the depreciation provisions of the Principal Act, the total notional principal in relation to an item of property is to be taken to have been allowed as a depreciation deduction during the application period.

Sub-section 159GJ(2) applies to deny deductions in respect of capital expenditure under Division 10 (general mining), 10AA (petroleum mining) or 10A (timber operations/timber mill buildings) in any year in which the relevant Division applies to an item of property. Under paragraph (a), those deductions will not be allowable in respect of any expenditure incurred before the application period, for any year in which the whole or a part of the application period occurs.

As with depreciation property, after Division 16D has ceased to apply, paragraph (b) provides that the residual amount of Division 10, 10AA or 10A expenditure is to be taken to be the amount ascertained under sub-section 159GF(3) as being the residual amount at the commencement of the application period reduced by the total notional principal amounts of payments made, or liable to be made, during the application period and any prior application period in respect of the expenditure. The total notional principal is defined in sub-section 159GE(1) and expanded by sub-section 159GE(4).

The total notional principal is deemed, by virtue of paragraph (c), to have been allowed as a capital expenditure deduction during the application period under whichever of Division 10, 10AA or 10A is applicable.

If Division 10AAA property, as defined in sub-section 159GE(1), is the subject of a qualifying arrangement, sub-section 159GJ(3) provides that a deduction is not allowable under Division 10AAA (mineral transport) in respect of the capital expenditure on that property in a year of income in which the whole or a part of the application period occurs (paragraph (a)).

Under paragraph (b), the residual amount of Division 10AAA expenditure after the Division ceases to apply, other than in a subsequent application period, is to be calculated in the same manner as for Division 10, 10AA and 10A property. That is, the residual amount at the commencement of the application period is reduced by the total of the notional principal components of arrangement payments that relate to the expenditure.

In ascertaining the amount of expenditure available for deduction under Division 10AAA after new Division 16D has ceased to apply, paragraph (c) of sub-section 159GJ(3) operates as a qualification to Division 10AAA. In order to prevent the possibility of a taxpayer effectively gaining Division 10AAA deductions in excess of the actual expenditure, the paragraph provides that Division 10AAA shall be taken to contain a requirement limiting capital expenditure deductions available to the residual amount calculated under paragraph (b).

Sub-section 159GJ(4) applies to determine the residual amount of qualifying expenditure on traveller accommodation and non-residential income-producing buildings, for the purposes of Division 10C or 10D of the Principal Act, once Division 16D has ceased to apply. In addition, the sub-section operates to deny completely a deduction under Division 10C or 10D where Division 16D has applied for a full year of income (paragraph (a)).

In respect of a part of an income year which precedes that part in which Division 16D has application (the "pre-application part") sub-paragraph (b)(i) provides that a taxpayer is entitled to that deduction in respect of the property, or part of the property, that would otherwise be available under whichever of Division 10C or 10D would be applicable if the new Division did not apply. In terms of sub-sub-paragraph (A), if Division 16D has not previously applied to the expenditure by reason of which the property is Division 10C or 10D property, the deduction allowable is that available under Division 10C or 10D. Where the Division has previously applied in relation to that expenditure, sub-sub-paragraph (B) provides that the allowable deduction is the deduction that would be available under the applicable Division apart from the present application of section 159GJ, but taking into account any previous application of the section.

Where Division 16D applies during a part of a year of income, sub-paragraph (b)(ii) provides that no Division 10C or 10D deduction is allowable in respect of that part of the year.

Where the Division ceases to apply during a year of income, the residual amount at any time during the year after which the Division ceases to apply (the "post-application part") is to be taken to be the residual amount at that time, calculated in accordance with the provisions of sub-section 159GE(5), reduced by the total notional principal in relation to the application period (sub-sub-paragraph (b)(iii)(A)). It is this amount that is to be taken as the residual capital expenditure for the purposes of section 124ZE or 124ZK of the Principal Act. Those sections provide for the determination of the deduction available at a particular time for the purposes of Division 10C and 10D respectively in the event of the destruction of a building on which an amount of qualifying expenditure (as defined in those Divisions) has been incurred (sub-sub-paragraph (B)).

The amount of any deduction allowable under Division 10C or 10D in respect of the period after the operation of Division 16D is governed by sub-sub-paragraph (C). The deduction available is the amount that would be allowable in respect of the capital expenditure under the relevant Division, if Division 16D did not apply and as if a provision were incorporated into whichever of Division 10C or 10D is applicable limiting the deduction to the residual amount calculated under sub-sub-paragraph (A). This latter provision is necessary to ensure that a taxpayer does not, by reason of the principal component of arrangement payments not being brought to account as assessable income under section 159GK, effectively receive deductions in excess of the capital expenditure.

The residual amount applicable to subsequent years of income is, under paragraph 159GJ(4)(c), the amount that would be the residual amount at the particular time in accordance with sub-section 159GF(5), reduced by the total notional principal in relation to the application period.

To prevent the deductions available under Division 10C or 10D in respect of qualifying expenditure on a building exceeding the amount of that qualifying expenditure, paragraph 159GJ(4)(d) provides that, after Division 16D has applied to an amount of expenditure, it shall be taken to be a requirement of Division 10C or 10D that any deduction allowable to a taxpayer under those Divisions will not exceed the residual amount ascertained under paragraph 159GJ(4)(c).

Section 159GK : Effect of application of Division on assessability of arrangement payments

Section 159GK provides for the inclusion in assessable income of the interest component of payments relating to an item of eligible property that are made to the taxpayer under a qualifying arrangement. The interest component is determined under the section by reference to the residual amount in respect of the property (as ascertained under section 159GF), the amount of the payments made under the arrangement and the periods to which those payments relate. Provision is made for any guaranteed or other residual value to be taken into account where the property is to be retained by the owner at the end of the arrangement.

Sub-section 159GK(1) provides that, where the Division applies to an item of eligible property, in relation to which there is an assessable arrangement payment (defined in sub-section 159GE(1) to mean an arrangement payment that would, apart from Division 16D, be included in whole or in part in the taxpayer's assessable income), only the interest amount - determined in accordance with sub-section (2) - of any payment portion of that payment will be brought to account as assessable income. The payment portion of an arrangement payment is defined in sub-section 159GE(1) as, broadly, the amount of an arrangement payment that the Commissioner considers is attributable to the item of eligible property.

For the purposes of sub-section (1), the interest amount is calculated in accordance with the formula specified in sub-section 159GK(2). In broad terms, it is ascertained by applying the effective annual interest rate underlying the arrangement to the amount of "eligible principal" (described in sub-section (3) and component A in the sub-section (2) formula) outstanding at the commencement of a payment period. Later notes provide an example of the manner in which the formula operates.

The effective annual rate of interest (component B in the formula) relies on the concept of present values and is the rate at which, at the time the Division commences to apply to an arrangement, the sum of the present values of the payment portions of the likely arrangement payments that relate to the item of property during the likely application period equals the residual amount, as ascertained at the commencement of the period in accordance with section 159GF. The terms, "likely arrangement payments" and "likely application period" are defined in sub-section (6). The rate so ascertained can never, by virtue of paragraphs (a) and (b) of component B, be less than zero.

As the period between payments may vary during the course of an arrangement, the length of that period (component t in the formula) is taken into account in making the individual calculations of an assessable interest amount of a payment. That period is expressed as a fraction of a year.

The present value, at a given interest rate, of a future payment is the amount which if invested now, at that rate, would accumulate to an amount equal to that future payment at the time that payment is to be made. If both the amount of the future payment, at time 't', and its present value are known, the interest rate can be calculated using the formula -

v = (P)/((1 + i)^t)


where -

v is the present value;

P is the future payment;

i is the interest rate per period;

t is the period.

Sub-section 159GK(3) describes a number of terms used in sub-section 159GK(2). Paragraph (a) of that sub-section specifies the method by which the amount of eligible principal (component A of the formula - being the amount to which the effective interest rate is applied in calculating the assessable interest component of a payment) of a payment portion of an arrangement payment is to be determined. If the payment being made is the first payment under the arrangement the eligible principal is, by virtue of sub-paragraph (3)(a)(i), the residual amount, as determined under the provisions of section 159GF, at the commencement of the arrangement period.

The eligible principal in respect of any other arrangement payment is ascertained in accordance with the formula

A-B+C


specified in sub-paragraph (3)(a)(ii), so that the amount is determined by reference to the eligible principal of the preceding payment portion (component A), the total amount of that payment portion (component B) and its interest amount (component C).

Paragraph (b) of sub-section 159GK(3) clarifies the meaning of references in sub-section (2) to the arrangement payment period of an arrangement payment. This period is, in the case of the first payment liable to be made, the period between the commencement of the arrangement and the time when the payment is liable to be made (sub-paragraph (i)). In all other cases, it is, by virtue of sub-paragraph (ii), the period between the relevant payment and the immediately preceding payment.

Sub-section 159GK(4) applies in relation to those qualifying arrangements that do not provide for the sale or disposal of the item of eligible property to a person (or an associate) who is a party to the qualifying arrangement. In those circumstances, the sub-section operates to deem as liable to be made at the end of the likely application period (as defined in sub-section (6)) an arrangement payment that includes a payment portion in relation to an eligible amount (both defined terms in sub-section 159GE(1)). That payment portion is, for the purposes of section 159GK, termed a notional final payment portion. The amount of the notional final payment portion is included as a likely arrangement payment only for the purposes of calculating the effective interest rate (component B of the formula in sub-section (2)).

Where the arrangement has qualified by reason of the application of sub-paragraph 159GG(1)(a)(i) - that is, by reason of provision under the arrangement for payment of a guaranteed residual value - paragraph (4)(a) operates to deem as a notional final payment portion so much of that residual value as is attributable to the eligible amount (the cost for depreciation purposes or the eligible capital expenditure). In cases where there is no guaranteed residual value, the amount that the Commissioner considers would be, when the Division commenced to apply to the arrangement, the market value of that part of the property attributable to the eligible amount at the end of the application period is taken to be a notional final payment portion.

Where the property is to be transferred to a party to the arrangement at or after the termination or expiration of the arrangement for no consideration, only the assessable arrangement payments are taken into account. In those instances, the payments under the arrangement would, in effect, be equal to the cost of the item of property plus an amount in respect of interest on that cost. The inclusion of a notional final payment portion equal to the market value of the item at the expiration of the arrangement period would therefore distort the calculation of the effective interest rate.

Sub-section 159GK(5) ensures that further capital expenditure on an item of property to which Division 16D has commenced to apply will result in the Division applying separately in respect of that additional expenditure, as if a new application period had commenced in relation to that expenditure when the expenditure was incurred.

The term "likely application period" used in section 159GK is defined by paragraph (a) of sub-section 159GK(6) to mean the period that, having regard to the provisions of the arrangement and any other relevant circumstances, would be, at the time Division 16D commenced to apply to the arrangement, the likely period during which the Division would apply. Similarly, paragraph (b) defines the term "likely arrangement payment" to mean an arrangement payment that, at the time the likely application period commenced, was likely to become liable to be made during that period.

The following example serves to illustrate the application of section 159GK to a particular transaction.

Assumed facts : A government authority leases a new item of plant, the cost of which is $97,084 for a lease term of four years. During this period annual rentals of $30,000 are paid at the end of each year. The lease agreement provides for a guaranteed residual value of $20,000 at the expiration of the lease.

The effective annual interest rate ("i") for the purposes of component B of the formula in sub-section (2) is calculated, using the present value concept, as follows -

(30,000)/((1 + i)^1) + (30,000)/((1 + i)^2) + (30,000)/((1 + i)^3) + (50,000)/((1 + i)^4) = 97,084


(For the purposes of the calculation, the amount of the guaranteed residual value is deemed to be a payment in the final year in accordance with the provisions of sub-section (4).)

Under this equation,

i = 15% per annum


.

For the purposes of the formula in sub-section (2), the amounts of the various components for the first arrangement payment are, therefore -

The value of A is determined in accordance with sub-section (3) and is the residual amount ascertained under section 159GF at the commencement of the lease - that is, in this case, $97,084.

Using the formula contained in sub-section (2), the interest amount is -

$97,084 * 1.15 - $97,084 = $14,563


This amount would be brought to account as assessable income of the lessor, in terms of sub-section (1).

For the purposes of the application of the provisions in the subsequent year, the eligible principal for the purposes of sub-section (2), as ascertained in accordance with sub-section (3), is -

A - B + C


= 97,084 - 30,000 + 14,563


= 81,647


The application of the sub-section (2) formula results in an assessable interest component of the lease payment made at the end of the second year of $12,247, i.e.,

81,647 * 1.15 - 81,647


, leaving a non-assessable amount of eligible principal of $17,753.

Subsequent applications of the formulae result in the following figures being obtained :

Section 159GL : Special provision relating to Division 10C or 10D property

Section 159GL operates to exclude from the operation of new Division 16D certain qualifying arrangements relating to buildings in respect of which capital expenditure deductions are available under Division 10C or 10D of the Principal Act. The section ensures that a taxpayer cannot, because of the application of Division 16D, receive a benefit that would not have been available had the Division not applied.

Under Divisions 10C and 10D, capital expenditure deductions are available over a set period (either 25 or 40 years depending on the time at which the qualifying expenditure was incurred). However, under Division 16D, because the owner of the property has only the interest components, and not the principal components, of arrangement payments included in assessable income, effective capital expenditure deductions may, at least in part, be allowed over the period of the arrangement. That period may be shorter than the set period for Division 10C or 10D purposes so that the owner could, in the absence of section 159GL, receive a tax advantage from the application of Division 16D.

Sub-section 159GL(1) provides that sections 159GJ and 159GK (under which, respectively, deductions are denied and the interest components of arrangement payments are included in assessable income) do not apply where -

•

section 159GH (under which it is determined whether Division 16D applies to a particular qualifying arrangement) applies in relation to Division 10C or 10D property (paragraph (a)); and

•

when section 159GH commenced to so apply, the sum of the present values of the net Division 16D amounts (described in sub-section 159GL(2) for each year of income during the likely application period) will be less than the sum of the present values of net Division 10C or 10D amounts (also described in sub-section 159GL(2)) for each of those years of income (paragraph (b)).

The concept of present values is the same as that embodied in section 159GK, in determining the effective annual interest rate.

Sub-section 159GL(2) describes what is meant by certain terms used in sub-section (1). Paragraph (a) of sub-section (2) provides that a reference in sub-section (1) to net Division 10C or 10D amounts is a reference to the sum of those portions of assessable arrangement payments in a year of income that are referable to Division 10C or 10D qualifying expenditure, as reduced by the deduction (if any) otherwise allowable in the year of income under Division 10C or 10D in respect of that expenditure. In effect, the net Division 10C or 10D amounts represent the assessable income of the taxpayer attributable to a building's use, less the Division 10C or 10D deductions that would, but for Division 16D, be available to the taxpayer in respect of the building. Paragraph (b) provides that a reference in sub-section 159GL(1) to net Division 16D amounts is a reference to the sum of so much of those same payment portions as would, but for section 159GL, be included in the taxpayer's assessable income under section 159GK. That amount is the interest amount that would otherwise be included in assessable income by virtue of sub-section 159GK(1), and ascertained in accordance with sub-section (2) of that section.

The term "likely application period" is defined in paragraph (c) as having the same meaning as in section 159GK - that is, the period which, having regard to the provisions of the arrangement, is the likely length of the application period.

Section 159GM : Special provision where cost of plant, & c., is also eligible capital expenditure.

Section 159GM operates in circumstances where an item of eligible property qualifies as both eligible depreciation property and eligible capital expenditure property (both defined terms) for the purpose of ascertaining the residual amount to be ascribed to that property. In terms of the definitions of those terms, items of plant, for example, can qualify as either depreciation property or property in respect of which capital expenditure deductions are available.

The structure of sections 159GF and 159GJ, which provide the means of determining the residual amount in relation to an item of eligible property at a particular time, is such that the amount determined will vary depending upon whether the property is classified as depreciation or capital expenditure property. Section 159GM will, therefore, eliminate any ambiguity that might otherwise arise in making that determination.

The section will only have application where at a particular time, referred to as the relevant time, an item of eligible property is both eligible depreciation property and eligible capital expenditure property (paragraph (a)) and, in terms of paragraph (b), where the amount of eligible capital expenditure in respect of an item of property equals the cost price of the property for depreciation purposes.

Paragraph (c) provides that, in these circumstances, an item of eligible property will be taken to be capital expenditure property at the relevant time if a capital expenditure deduction would, apart from the operation of Division 16D, have been allowable in respect of the year of income in which that relevant time occurs. In any case that does not fall within paragraph (c) - that is, where a capital expenditure deduction would not have been allowable in that year of income - paragraph (d) provides that the item of eligible property qualifies as depreciation property.

As a consequence of the application of section 159GM, it will not be necessary to make any re-calculations for Division 16D purposes where there is a change in the nature of the deduction otherwise allowable for a year of income during an application period.

Section 159GN : Effect of use of property under qualifying arrangement for producing assessable income

Although the general application of Division 16D will result in a taxpayer being denied depreciation or capital expenditure deductions in respect of an item of property that is the subject of a qualifying arrangement, section 159GN modifies that application in situations where an exempt public body uses the property, or controls the use of the property, jointly with persons who are not exempt public bodies and so derive assessable income, or where the property is used outside Australia partly for the purpose of producing assessable income. At the same time, it provides that the Division will not apply to the arrangement payments relevant to such assessable income. In appropriate situations, the effect of section 159GN is to allow the taxpayer deductions in respect of the property to the extent that it is used to produce assessable income.

Sub-section 159GN(1) operates in the case of property used or controlled jointly by an exempt public body and other persons. It allows the owner deductions in respect of an item of eligible property by reference to the proportionate use of the property for the purpose of producing assessable income. Before the sub-section can operate, a number of pre-conditions - set out in paragraphs (a), (b), (c) and (d) - must be met.

Paragraph (a) requires that Division 16D apply to the item of eligible property by reason of sub-paragraph 159GH(1)(b)(i) applying. That sub-paragraph brings within the operation of the Division a qualifying arrangement (as determined under section 159GG) entered into after 5.00 pm on 15 May 1984 where the end-user of the property is an exempt public body. In terms of paragraph (b), that exempt public body must jointly use or control the use of the item of eligible property with another person or persons who or which are not exempt public bodies.

By virtue of paragraph (c), it is a requirement that property is or will be used under the qualifying arrangement during the arrangement period to produce income that, having regard to the provisions of the qualifying arrangement and any other relevant circumstances, is unlikely to be less than the arrangement payments that relate to the item of property. In other words, viewed objectively, it is unlikely that the use of the property during the arrangement period will result in losses being made for the use of the property.

Paragraph (d) requires that the income, or part of the income, referred to in paragraph (c) will be included in the assessable income of a person. That person is termed an assessable person for the purposes of sub-section (1).

Where these conditions are met, paragraphs (e) and (f) have effect. Paragraph (e) provides that, where all the income produced from the use of the item of eligible property (that is, the income referred to in paragraph (c)) is assessable, sections 159GJ and 159GK do not apply in relation to the property. In effect, therefore, the deductions allowed or allowable in respect of the property and the assessability of income will not be altered in these cases.

In all other cases, paragraph (f) applies. Sub-paragraph (f)(i) operates to allow, during the application period, a proportion of the deduction that would otherwise be disallowed by section 159GJ in respect of the item of eligible property. The amount of the allowable deduction is ascertained by multiplying the deduction (either capital expenditure or depreciation) disallowed under section 159GJ by the "assessable person fraction" (component B in the sub-paragraph (f)(i) formula) - a term that, by sub-section 159GN(2), means the proportion of the income produced by use of the property during the arrangement period that is assessable income.

Sub-paragraph (f)(ii) ensures that, in calculating the residual amount for the purposes of section 159GJ, regard is had to the fact that sub-paragraph (i) has operated to allow a proportionate deduction to the taxpayer in respect of the item of eligible property. To this end, the sub-section provides that a reference in section 159GJ to the total notional principal (a term otherwise defined in sub-sections 159GE(1) and (4)) is a reference to the amount that, but for the sub-paragraph, would be the total notional principal as increased by the amount of any deduction allowable under sub-paragraph (i).

By virtue of sub-paragraph (f)(iii), for the purposes of section 159GK (which operates to effectively apportion arrangement payments into assessable interest amounts and non-assessable principal amounts), the amount of any eligible amount will also be ascertained on a proportionate basis. That amount is to be calculated by multiplying component A in the formula, the eligible amount (for section 159GK purposes), by component B, the "non-assessable person fraction" - a term that, by sub-section 159GN(2), means the difference between the number 1 and the "assessable person fraction" (component B in the sub-paragraph 159GN(1)(f)(i) formula).

A reference in sub-section 159GN to an "assessable person fraction" is, by paragraph (2)(a), a reference to the interest of all the assessable persons (in terms of paragraph (1)(d)) in the income referred to in paragraph (1)(c), expressed as a fraction of the interests of all the persons entitled to that income. Conversely, a reference to the "non-assessable person fraction" is, by paragraph (2)(b), a reference to the fraction obtained by subtracting the assessable person fraction from the number 1.

Sub-sections 159GN(3) and (4) are the counterparts of sub-sections (1) and (2) respectively, and apply where, by reason of the overseas use of property under a qualifying arrangement, some assessable income is produced. The relevant proportion of deductions to be denied and of arrangement payments to be assessed are determined by reference to the extent to which assessable income, as distinct from exempt income, is produced.

Paragraph (3)(a) and (b) set out the pre-conditions necessary for sub-section (3) to apply. By virtue of paragraph (a), the item of eligible property must be the subject of a qualifying arrangement (in terms of section 159GG) to which Division 16D applies by reason of sub-paragraph 159GH(1)(b)(ii) applying. That sub-paragraph brings within the scope of the Division qualifying arrangements entered into after 5.00 pm on 16 December 1984 where the subject property is being or will be used outside Australia wholly or partly for producing exempt income. Sub-section 159GN(3) is, however, to apply only where such property is or will be used partly to produce exempt income and, by paragraph (b), partly to produce assessable income.

Where these conditions are satisfied, paragraphs (c), (d) and (e) have effect. Paragraph (c) provides for the allowance of partial deductions to the taxpayer in respect of the item of eligible property, in cases where deductions would not otherwise be allowable in terms of section 159GJ. The allowable amount is ascertained by multiplying the amount of the deduction that would otherwise be denied under section 159GJ (component A in the formula) by component B, the "assessable income fraction" - a term that, by sub-section (4), means the proportion of the income produced by use of the property that is assessable income.

Paragraph (d) operates in the same manner as sub-paragraph 159GN(1)(f)(ii) - see notes on that sub-paragraph - to provide that a reference in section 159GJ to the total notional principal is a reference to that amount, increased by the amount of any deduction allowable under paragraph (c).

Similarly, paragraph (e) operates in a like manner to sub-paragraph 159GN (1)(f)(iii) to determine the eligible amount for section 159GK purposes (that is, in order to split the arrangement payments into assessable interest and non-assessable principal). The eligible amount is ascertained by multiplying the amount that would, apart from section 159GN, be the eligible amount (component A in the formula) by the exempt income fraction (component B) - a term that, by sub-section(4), means the difference between the number 1 and the assessable income fraction (component B in the paragraph 159N(3)(c) formula).

Sub-section (4), states the meaning of the terms "assessable income fraction" and "exempt income fraction", as used in paragraphs (3)(c) and (e) respectively. The assessable income fraction is calculated by expressing the amount of assessable income produced by the property as a fraction of the total of that income and the exempt income produced (paragraph (a)). The exempt income fraction is ascertained by subtracting the assessable income fraction from the number 1 (paragraph (b)).

Section 159GO : Special provisions relating to partnerships.

Section 159GO operates as an anti-avoidance measure in certain limited circumstances to -

•

deny to a partner in a partnership the benefit of deductions in respect of eligible property that were taken into account in determining the partnership's net income or loss; and

•

effectively exclude from the partner's assessable income his or her share of arrangement payments that were taken into account in determining the partnership's net income or loss.

Sub-section 159GO(1) may apply where a new partner is admitted to an existing partnership, while sub-section 159GO(2) may apply where an existing partner makes further contributions to partnership capital. The circumstances in which the sub-sections apply and the consequences of their application are set out in the paragraphs of each sub-section.

Sub-section 159GO(1) applies only where all the circumstances in paragraph (a) to (e) exist. That is, where -

•

the taxpayer's share of partnership net income, or of partnership loss, has been or will be included in, or allowed as a deduction from, his or her assessable income of a year of income (paragraph (a));

•

either or both of a deduction or an arrangement payment were taken into account in calculating that partnership net income or partnership loss (paragraph (b));

•

if Division 16D applied to the partnership, the deduction (called the relevant deduction) or the arrangement payment (called the relevant arrangement payment) referred to in paragraph (b) would not have been taken into account in calculating the partnership net income or loss (paragraph (c));

•

the only reason that Division 16D does not apply to the partnership is that the qualifying arrangement was entered into before the time referred to in the applicable sub-paragraph of paragraph 159GH(1)(b) (paragraph (d)) - that is, 5.00 pm on 15 May 1984, where eligible property is used or controlled by an exempt public body, or 5.00 pm on 16 December 1984, where the property is used outside Australia to produce exempt income; and

•

the taxpayer became a partner in the partnership under a contract entered into after whichever of the times referred to in paragraph 159GH(1)(b) is relevant (paragraph (e)).

Where all of these circumstances exist, there will be included in the taxpayer's assessable income of the particular year of income a proportionate amount of the relevant deduction (paragraph (f)). That proportion is the same proportion as the taxpayer's individual interest in the partnership net income or the partnership loss bears to that net income or loss. At the same time, paragraph (g) operates to allow as a deduction to the taxpayer in the year of income a proportionate amount of the relevant arrangement payment. The proportion is the same as that determined for paragraph (f) purposes.

Sub-section 159GO(2) applies in circumstances that are similar to those that are relevant for the purposes of sub-section (1) and applies where a taxpayer, although a partner in a partnership prior to the applicable paragraph 159GH(1)(b) time (see notes on paragraph 159GO(1)(d)), made additional capital contributions to the partnership after that time (called the earliest application time). Paragraphs (a), (b), (c) and (d) of sub-section (2) mirror those paragraphs of sub-section 159GO(1), while paragraph (e) requires that the taxpayer became a partner in the partnership before the earliest application time.

In addition to the requirements of those paragraphs, paragraph (f) requires that, after the earliest application time, the taxpayer has made or agreed to make additional contributions to the partnership capital, as a result of which, in terms of paragraph (g), the taxpayer's individual interest in the net income of the partnership or the partnership loss, is greater than it would otherwise have been.

If the tests in paragraphs (a) to (g) are met, paragraph (h) operates, where a deduction was taken into account in determining the partnership net income or partnership loss, to bring to account as assessable income of the taxpayer the share of the deduction attributable to the additional capital contribution referred to in paragraph (f). As is the case where sub-section (1) applies, the taxpayer is also allowed a deduction of an amount equal to the increased share of the relevant assessable arrangement payment referable to the additional capital contribution (paragraph (j)).

The amount included in assessable income per paragraph (h) and the amount allowed as a deduction per paragraph (j) are each determined according to the formula

A(B-C)


where -

A

is the deduction or arrangement payment, as the case may be, that was taken into account in calculating the partnership net income or partnership loss;

B

is the taxpayer's share, expressed as a fraction, of the individual interests of all the partners in the partnership net income or loss; and

C

is the fraction that would have represented the taxpayer's share of the partners' individual interests in the partnership net income or loss if that share were determined on the basis of the partners' individual interests immediately before the earliest application time.

Clause 28: Repeal of sections

Clause 28 will repeal sections 159N, 159Q, 159R, 159T, 159U, 159V, 159W, 159X, 159XA, and 159Y of the Principal Act. Those sections (together with section 159P) contain the provisions relating to the allowance of the concessional expenditure rebate.

By repealing these sections, clause 28, in conjunction with clause 29, will give effect to the proposal (announced on 17 July 1985) to replace the existing general concessional expenditure rebate - for outlays exceeding $2000 on medical expenses, funeral expenses, life insurance premiums, superannuation payments, education and self-education expenses, rates and land taxes, calls on afforestation shares and adoption expenses - with a medical expense rebate for outgoings exceeding $1000.

In terms of sub-clause 34(2) of the Bill the new arrangements will apply to assessments for the 1985-86 and subsequent years of income.

Clause 29: Rebate for medical expenses

Clause 29 will give effect to the announcement (on 17 July 1985) of the introduction of a new medical expense rebate. The new rebate will be authorised by section 159P and will apply to eligible net medical expenses to the extent to which they exceed $1000 in any income year. The rebate will be available at the standard rate of tax (presently 30 per cent) and will apply to the range of medical expenses covered by the concessional expenditure rebate. These include payments to medical practitioners, nurses, hospitals and chemists in respect of an illness or operation, and payments for dental and optical treatment.

Existing section 159P treats as a rebatable amount the net amount of a taxpayer's own medical expenses, as well as those of his or her spouse (legal or defacto), children under 21, or other dependants in respect of whom a rebate is allowable under section 159J or would be allowable but for the fact that rebates for children and students were abolished in favour of payments of family allowance. The rebatable amount is determined by reducing the total amount of such expenditure by any amount which the taxpayer or any other person has been, or is entitled to be, paid in respect of those medical expenses by a government, public authority, society, association or fund (whether incorporated or not). The rebatable amount determined in accordance with section 159P is presently taken into account with other rebatable amounts for the purpose of establishing a taxpayer's entitlement to a concessional expenditure rebate in accordance with section 159N of the Principal Act.

As indicated in the notes on clause 28, section 159N is to be repealed to effect abolition of the concessional expenditure rebate. The new medical expenses rebate will be allowable under section 159P itself, and paragraph (a) of clause 29 proposes amendment of sub-sections (1) and (3) of that section to reflect these changes.

Paragraph (b) of clause 29 proposes the insertion of two new sub-sections - sub-sections (3A) and (3B) - in section 159P of the Principal Act to provide for the new medical expense rebate. New sub-section (3A) is the operative provision for this purpose. It will have the effect of providing a rebate of tax equal to 30 per cent of eligible net medical expenses in excess of $1000 incurred during a year of income by taxpayers on their own or their dependants' behalf. As the definitions of "dependant" and "medical expenses" in sub-section 159P(4) of the Principal Act are not being altered by this Bill, the kind of medical expenses to which the new rebate will apply is the same as was the case for the concessional expenditure rebate.

New sub-section (3B) is similar to existing section 159Y. It will ensure that, where medical expenses are paid by a trustee as the legal representative of a deceased person who had incurred those expenses at the time of his or her death, and who would have been entitled to a rebate of tax in respect of them if they had been paid during the person's lifetime, such expenses when paid by the trustee will be treated as rebatable amounts in the assessment of the trustee upon assessable income derived by the deceased person during the year of income in which death occurred. Amendments are proposed to section 170 by clause 32 to ensure that that section does not preclude the issue of an amended assessment to give effect to sub-section (3B).

Where a trustee pays, on or after the date that this Bill comes into operation, an amount in respect of a liability (that would presently qualify as a rebatable amount for purposes of the concessional expenditure rebate under the present law) incurred by the deceased in a year of income prior to the 1985-86 income year, the trustee will continue to be eligible for the concession conferred by existing section 159Y. This is because, notwithstanding the repeal of section 159Y (as proposed by clause 28), its provisions will, by virtue of the application provisions contained in sub-clause 34(2) of this Bill, continue to apply to assessments in respect of the 1984-85 and prior years of income.

Clause 30: Rebate in respect of certain pensions, & c.

This clause proposes to amend section 160AAA of the Principal Act to increase the maximum rebates of tax, and to increase the taxable income levels at or below which the rebates are available, for taxpayers whose assessable income includes an unemployment, sickness or special benefit paid under Part VII of the Social Security Act 1947.

Under existing sub-section 160AAA(2), a married (including de facto married) taxpayer in receipt of an unemployment, sickness or special benefit may be entitled to a rebate of tax of $75. For other taxpayers in receipt of a benefit the rebate is $50. The rebates shade-out at the rate of 12.5 cents for each dollar by which the taxpayer's taxable income exceeds a specified level - $7,989 in the case of a married taxpayer and $4,783 in any other case.

The proposed new rebate levels for recipients of the relevant social security benefits are $220 for married (including de facto married) and $170 for other beneficiaries. Both rebates will shade-out at the rate of 12.5 cents for each dollar by which the taxpayer's taxable income exceeds new specified levels - $8,795 in the case of married taxpayers and $5,275 in any other case.

Paragraph (a) of clause 30 will amend paragraph 160AAA(2)(a) of the Principal Act to increase the maximum amount of rebate - from $75 to $220 - for a married taxpayer and the taxable income level - from $7,989 to $8,795 - at or below which the maximum rebate is available. The rebate will shade out at the rate of 12.5 cents for each dollar of taxable income in excess of $8,795 and will shade-out fully at a taxable income of $10,555.

Paragraph (b) of clause 30 proposes to amend paragraph 160AAA(2)(b) of the Principal Act to increase the maximum amount of rebate from $50 to $170 - for an unmarried taxpayer and the taxable income level - from $4,783 to $5,275 - at or below which the maximum rebate is available. The rebate will shade out at the rate of 12.5 cents for each dollar of taxable income in excess of $5,275 and will shade out fully at a taxable income of $6,635.

The amendments of section 160AAA proposed by this clause will apply, by the operation of sub-clause 34(2), in assessments of the 1985-86 and subsequent years of income.

Clause 31: Rebate in respect of annual leave, long service leave and eligible termination payments

Among other things, section 160AA of the Principal Act provides a rebate of tax to reduce to a maximum of 15% the effective rate of tax on the first $50,000 of the assessable "post-June 1983" components of lump sum retirement and termination payments (called eligible termination payments) made to taxpayers aged 55 or more. By clause 31, the $50,000 threshold is to be increased to $55,000.

The purely technical amendment of sub-sub-paragraph 160AA(1)(d)(i)(A) proposed by paragraph (a) of clause 31 is consequential upon the inclusion in sub-section 160AA(2) of a new definition - "age 55 termination payment" - the meaning of which is explained in the following notes. The amendment will not affect the operation of the sub-sub-paragraph.

Paragraph (b) proposes to include in the definitions in sub-section 160AA(2) the term "age 55 termination payment". The term, which is used in the expanded definition of "residual amount" that is also proposed to be included in sub-section 160AA(2), means an eligible termination payment made in relation to a taxpayer on or after the date on which he or she attained the age of 55 years.

By reference to the definition of "residual amount" in sub-section 160AA(2), sub-section 160AA(1) of the Principal Act operates to ensure that the 15% tax rate applies only to the first $50,000 of the assessable "post-June 1983" components of eligible termination payments made to a taxpayer aged 55 or more - that is, "age 55 termination payments" as defined. The new definition of "residual amount" that paragraph (c) of clause 31 proposes to insert in sub-section 160AA(2) will have the same effect as the present definition, except that -

(i)

the 15% tax rate will apply generally to the first $55,000 of age 55 termination payments, instead of the first $50,000 (paragraph (c) of the definition);

(ii)

if, before the 1985-86 income year a taxpayer has had age 55 termination payments in excess of $50,000 included in assessable income, the 15% tax rate will apply to the first $5,000 of further payments included in assessable income of that year or of a later income year (paragraph (a) of the definition); and

(iii)

if, in any year of income before the year of income in question, age 55 termination payments were included in assessable income but the present $50,000 threshold was not exceeded before the 1985-86 income year, the extent to which further payments will qualify to be taxed at the 15% rate is $55,000 minus the sum of the age 55 termination payments previously included in assessable income (paragraph (b) of the definition).

By sub-clause (2) of clause 34, the amendments of section 160AA by clause 31 are to apply to income tax assessments for the 1985-86 and subsequent income years.

Clause 32: Amendment of assessments

By this clause it is proposed to make three amendments of section 170 of the Principal Act, which governs the power of the Commissioner to amend income tax assessments. Two of the proposed amendments are consequential on the abolition of the concessional expenditure rebate and its replacement with a medical expense rebate as proposed by clauses 28 and 29 of this Bill.

Paragraphs (a) and (b) propose that references in sub-section 170(9A) to section 159Y (to be repealed by clause 28) be replaced by a reference to new sub-section 159P(3B). As explained in the notes on clause 29, under new sub-section 159P(3B) eligible medical expenses paid by a trustee after the date of death of a deceased person are to be regarded as rebatable amounts for the purpose of the assessment of the deceased person's income up to the date of death. Section 159Y presently provides for eligible concessional expenditure to be treated as rebatable amounts in the assessment for the period up to the date of death in similar circumstances.

By sub-section 170(9A) it is provided that nothing in section 170 prevents the amendment of an assessment up to the date of death of a deceased person to give effect to section 159Y, if within 3 years of the date of death the trustee applies in writing and provides all information necessary for the Commissioner to decide the application.

Sub-section 170(9A) as amended will, therefore, enable an assessment to the date of death of a deceased person to be amended if, after the assessment has been made, the trustee pays eligible medical expenses and makes application for an amended assessment within the prescribed time.

The power to amend an assessment in respect of a year of income prior to the 1985-86 year of income to give effect to section 159Y is preserved, notwithstanding the substitution of the reference to sub-section 159P(3B) for the reference to section 159Y in sub-section 170(9A), because the relevant application provisions of the Bill, in sub-clause 34(2), will effectively allow the continued application of the existing terms of section 159Y and 170(9A) in relation to such assessments.

Paragraphs (c) and (d) of clause 32 will amend sub-section 170(10), which provides that nothing in the section prevents the amendment of an assessment at any time for the purposes of giving effect to certain provisions specified in the sub-section.

Paragraph (c) will include new Division 16D, being inserted in the Principal Act by clause 27, within the provisions already specified in sub-section 170(10). Division 16D effectively treats certain non-leveraged finance leases and similar arrangements as being loan arrangements (see notes on clause 27). Its inclusion in sub-section 170(10) will provide for income tax assessments to be amended at any time to give effect to the provisions of the Division.

The effect of paragraph (d) will be to omit the reference in sub-section 170(10) to sub-section 159R(4), to be repealed by clause 28, under which rebates previously allowed in respect of premiums paid on a life insurance policy may in certain circumstances be disallowed if subsequently the policy is forfeited or surrendered before it has been in force for 10 years. As section 159R is being repealed because of the removal of the concessional expenditure rebate, the reference to sub-section 159R(4) is no longer required.

Sub-clause 34(2) will also operate to effectively maintain the right to amend assessments in respect of a year of income prior to the 1985-86 year to give effect to sub-section 159R(4) of the Principal Act, notwithstanding the omission of the reference to sub-section 159R(4) in sub-section 170(10). This right will continue to be exercised in any case in which a premium paid prior to 1 July 1985 ceases to be rebatable because the policy on which it was paid is forfeited or surrendered before it has been in force for 10 years.

Clause 33: Release of taxpayers from liability in cases of hardship

This clause proposes a technical amendment of section 265 of the Principal Act. Section 265 provides that a Board consisting of the Commissioner of Taxation, the Secretary to the Department of Finance and the Secretary of the Department dealing with matters arising under the Customs Act 1901, or of such substitutes for all or any of them as the Treasurer appoints from time to time, may grant a release from payment of tax, either in whole or in part, where the payment of the full amount due would entail serious hardship -

•

because of any loss that the taxpayer has suffered;

•

because of the circumstances of the taxpayer; or

•

because of the circumstances of the dependants of a deceased person who would have been liable to pay the tax if he or she had lived.

The proposed amendment - which substitutes "Comptroller-General of Customs" for the reference to the "Secretary of the Department dealing with matters arising under the Customs Act 1901-1975" - is consequential on the creation of the office of Comptroller-General of Customs by the Customs Administration Act 1985, which received Royal Assent on 29 May 1985 and was proclaimed on 10 June 1985. Previously matters arising under the Customs Act were the responsibility of the Secretary to the Department of Industry, Technology and Commerce. This amendment reflects the change in responsibility for the general administration of the Customs Act from the Secretary to the Department of Industry, Technology and Commerce to the Comptroller-General of Customs.

Two "savings" provisions that relate to this amendment are contained in sub-clauses 34(7) and (8). Sub-clause (7) will preserve the jurisdiction of a Board constituted under section 265 of the Principal Act from 10 June 1985, being the date of Proclamation of the Customs Administration Act 1985, to the twenty-eighth day after that on which Royal Assent is given to this Bill. By sub-clause (8), the exercise of jurisdiction of a Board constituted prior to 10 June 1985 under section 265, that included a person appointed as a substitute for the Secretary of the Department dealing with matters arising under the Customs Act (the Department of Industry, Technology and Commerce), shall continue to be valid until the twenty-eighth day after Royal Assent is given to this Bill. This provision will ensure that a decision of a Board in connection with an application for relief from tax, the consideration of which commenced or commences before the twenty-eighth day after Assent is given, cannot be challenged on a ground relating to the validity or continued validity of the appointment of the substitute for the Secretary of the Department of Industry, Technology or Commerce.

Clause 34: Application of amendments

This clause, which will not amend the Principal Act, will specify the year of income in which, or the dates from which, various amendments proposed in Part V of the Bill will first apply. The clause also contains transitional and "savings" provisions relating to certain amendments.

Sub-clause 34(1) defines the term "amended Act", as used in clause 34, to mean the Principal Act as amended by this Bill.

Sub-clause 34(2) provides that the amendments being made by clauses 11, 12, 14, 15 to 26 and 28 to 31 and by paragraphs 32(a), (b) and (d) of the Bill apply to income tax assessments for the 1985-86 and subsequent years of income. The operation of sub-clause 34(2) is explained in the notes on the relevant clauses.

By sub-clause 34(3), the amendment being made by clause 14 to authorise income tax deductions for gifts to the Australian Academy of the Humanities and to the Royal Australian and New Zealand College of Psychiatrists will apply only to gifts made after 20 August 1985 (the date on which the decision to extend the income tax gift provisions to include those organisations was announced).

Sub-clauses 34(4) and (5) are transitional provisions relevant to the investment rules being introduced for certain superannuation funds. Those rules are contained in new section 121C, being inserted into the Principal Act by clause 20 of this Bill. An explanation of the operation of the transitional provisions is given in the notes on clause 20.

By sub-clause (6) of clause 34, the amendments proposed by clause 27 and by paragraph 32(c) of this Bill will apply to income tax assessments for the year of income in which 15 May 1984 occurred and all subsequent years of income. Clause 27 will amend the Principal Act to insert new Division 16D, while paragraph 32(c) will amend sub-section 170(10) of the Principal Act to include a reference to the new Division. The application of these amendments is explained in the notes on clauses 27 and 32 respectively.

Sub-clauses 34(7) and (8) are "savings" provisions that relate to the amendment proposed by clause 33 of the Bill as a consequence of the creation of the office of Comptroller-General of Customs. The operation of these provisions is explained in the notes on clause 33.

Clause 35: Provisional tax for 1985-86 year of income

The purpose of this clause, which will not amend the Principal Act, is to specify the basis for calculating 1985-86 provisional tax for taxpayers who do not "self-assess". Broadly, the clause will ensure that the provisional tax is to be calculated by applying 1985-86 rates of tax and Medicare levy to 1984-85 taxable incomes as increased by 11 per cent. With the exception of the concessional expenditure and averaging rebates, which are discussed below, rebates are to be taken into account as allowed in 1984-85 income tax assessments.

Where a taxpayer chooses to "self-assess", that is, to have 1985-86 provisional tax based on his or her own estimate of 1985-86 income, the provisional tax will be, basically, the amount calculated by applying 1985-86 rates of tax and Medicare levy to that estimated income and by deducting estimated 1985-86 rebates.

For a taxpayer whose 1984-85 taxable income reflects a deduction allowed for capital moneys expended in producing a qualifying Australian film or for subscriptions to shares in licensed management and investment companies, 1985-86 provisional tax will be calculated as if no such deduction had been allowed, with the taxable income so adjusted increased by 11 per cent.

For a taxpayer whose 1984-85 tax payable reflects a reduction for the amount of any concessional expenditure rebate allowed under section 159N of the Principal Act, 1985-86 provisional tax will be calculated as if no such rebate had been allowed; by the operation of clause 28 of this Bill the rebate will not be available, effective for the 1985-86 and subsequent income years. Also, no reduction of 1985-86 provisional tax will be made to reflect the proposed new medical expenses rebate which is to be introduced by clause 29 of this Bill.

For primary producers who do not "self-assess", the clause will require that, for provisional tax purposes, any averaging rebate to which the primary producer is entitled, be recalculated using 1984-85 taxable income (as adjusted for any income equalization withdrawals, capital expenditure on a qualifying Australian film or subscription to shares in licensed management and investment companies) as increased by 11 per cent. 1985-86 rates of tax will be applied, on the basis of the average income for 1984-85 assessment purposes - the average income itself will not be recalculated to reflect the notional 11 per cent increase in taxable income for provisional tax purposes. A primary producer may qualify for a part only of the averaging benefit in 1984-85, that is, his or her income other than from primary production in that year may have exceeded $5,000. In such a case the clause will ensure, in effect, that the proportion of the averaging adjustment - equal to the proportion which income from primary production bears to total taxable income - to be taken into account in calculating 1985-86 provisional tax is the same as the 1984-85 proportion. That is, it is not to be reduced to reflect the notional 11 per cent increase in income other than from primary production.

For taxpayers deriving a notional income as specified by section 59AB (depreciation recouped), section 86 (lease premiums), or section 158D (abnormal income of authors or inventors) of the Principal Act, provisional tax, before deduction of rebates, is to be calculated by applying to their 1984-85 taxable income increased by 11 per cent, the 1985-86 rate of tax applicable to their 1984-85 notional income. That is, the rate of tax is not to be increased to reflect an 11 per cent increase in notional income.

Taxpayers who were minors, that is, under 18 years of age, at 30 June 1985 were liable for tax for 1984-85 under the income tax provisions applying to minors if, in the case of a non-resident, the minor had any eligible taxable income for the purposes of Division 6AA of Part III of the Principal Act for that year or if, in the case of a resident, that eligible taxable income exceeded $416. For purposes of the 1985-86 provisional tax calculation, the portion of a minor's taxable income, as increased by 11 per cent, that is to be taken as eligible taxable income, is to be the same as that which the 1984-85 eligible taxable income of the taxpayer bore to his or her taxable income for that year.

Where an amount of income tax or Medicare levy was payable in 1984-85, an amount, additional to the provisional tax (if any) otherwise payable, representing Medicare levy for 1985-86 is to be incorporated in the 1985-86 provisional tax calculation. In these situations the Medicare levy component of provisional tax will be calculated by applying the full year levy rate of 1% to 1984-85 taxable income moved up by 11%. The increased low income thresholds and the abolition of the ceiling to apply for levy purposes in 1985-86 will be taken into account. In addition, wherever a part or full exemption from levy was received by an individual in his or her 1984-85 assessment, the same exemption will be provided in the calculation of levy for 1985-86 provisional tax purposes.

Clause 36: Amendment of assessments

Clause 36, which will not amend the Principal Act, is a standard measure that will ensure that the Commissioner of Taxation has authority to re-open an income tax assessment made before the Bill becomes law if that should be necessary in order to give effect to the various amendments it contains.

PART IX - AMENDMENTS OF THE TAXATION ADMINISTRATION ACT 1953

Clause 43: Principal Act

In terms of this clause, the Taxation Administration Act 1953 is, in Part IX of the Bill, referred to as "the Principal Act".

Clause 44: Secrecy

Clause 44 of the Bill proposes a number of amendments of the secrecy provisions of the Principal Act, which prohibit the disclosure by officers, except in specified circumstances, of information about the affairs of other persons that may be acquired in the course of the officers' duties.

Proposed new sub-section 3C(1A), to be inserted by paragraph (a) of clause 44, will ensure that the same rights and obligations that apply under the secrecy provisions of the Principal Act to persons employed by the Commonwealth also apply to persons (e.g., officers of overseas governments serving in Australia under exchange arrangements) who perform duties for the Commonwealth but who are not employed by the Commonwealth. This amendment is consistent with an amendment made last year to the secrecy provisions of the income tax law.

Paragraph (b) of clause 44 will amend sub-section 3C(5) of the Principal Act, which provides that an officer breaches her or his obligation under the Act to maintain secrecy if the officer communicates information to a Commonwealth Minister of State, other than information relating to the appointment of Commissioners and Second Commissioners of Taxation. The amendment proposed will extend the application of sub-section 3C(5) to include State and Northern Territory Ministers. This extension is consequential on the insertion in the Principal Act (by clause 45) of section 13J, which will authorise the communication of information to a State, Northern Territory or Australian Capital Territory taxation officer. It will effectively prohibit the disclosure of any confidential tax information to any Commonwealth or State Minister.

New sub-section 3C(7), to be added by paragraph (c) of clause 44, will apply where a State, Northern Territory or Australian Capital Territory taxation authority communicates information to the Commissioner of Taxation. The effect of the sub-section is to impose the same limitations on the disclosure of the information so received as apply to information obtained under Commonwealth taxation laws.

Clause 45: PART IIIA - CO-OPERATION BETWEEN COMMONWEALTH AND STATE TAXATION AUTHORITIES

Introductory note

By this clause, it is proposed to insert in the Principal Act a new Part - Part IIIA. New Part IIIA, which contains 4 Divisions, is designed to facilitate co-operation between the Commonwealth and State and Territory taxation authorities in the administration of their respective revenue laws.

The main elements of Part IIIA are -

•

to permit a duly authorised Commonwealth, State or Northern Territory taxation officer to conduct in the Australian Capital Territory an investigation into a matter arising under a State or Northern Territory taxation law;

•

to permit the Commissioner of Taxation, for the purposes of the conduct of such an investigation, to require a person to provide information, to attend and answer questions and to produce documents;

•

to prohibit a State or Northern Territory taxation officer who acquires information in the course of conducting such an investigation from communicating that information except for the purposes of administering a taxation law;

•

to permit the Commissioner to provide information (including copies of documents) obtained under a Commonwealth taxation law to a State, Northern Territory or Australian Capital Territory taxation authority for the purposes of administering a State or Territory taxation law; and

•

to enable a copy of or an extract from a document obtained under a Commonwealth, State, Northern Territory or Australian Capital Territory taxation law to be admissible as evidence, as if it were the original document, in proceedings before a court or tribunal in relation to a Commonwealth taxation law.

Existing provisions in the various Commonwealth taxation laws allowing information to be provided to State or Territory taxation authorities are, as a consequence, being deleted by other clauses of the Bill.

A detailed explanation of each provision in new Part IIIA follows.

Division 1 - Interpretation

Section 13D : Interpretation

Section 13D defines various terms used in new Part IIIA and includes two interpretative provisions. By sub-section 13D(1), the following terms are defined -

"Australian Capital Territory" is, as is usual in the case of Commonwealth taxation laws, defined to include the Jervis Bay Territory.

"officer" is defined to mean an officer or employee of the Australian Public Service (paragraph (a)) or a State taxation officer (paragraph (b)). State taxation officer is also a defined term.

"State" is defined to include, for the purposes of new Part IIIA, the Northern Territory. This obviates the need to refer, where relevant, to both a State and the Northern Territory.

"State Minister" means either a Minister of the Crown of a State (paragraph (a)) or a Minister of the Northern Territory (paragraph (b)). In terms of new sub-section 13H(3) of Division 2 of Part IIIA, a person is deemed to have contravened the secrecy provisions of section 13H if that person provides relevant information to a Commonwealth or State Minister.

"State tax law" is a law of a State or, by the definition of a "State", a law of the Northern Territory relating to taxation. In this context, the meaning of "taxation" would be that given by Latham CJ in the High Court case of Matthews v Chicory Marketing Board (Victoria) (1938)
60 CLR 263 at 276 - that is, a compulsory exaction of money by a public authority for public purposes, enforceable by law, and not a payment for services rendered. "Taxation" is not, therefore, limited to taxes on income, property and the like, and would include licensing fees and transaction duties and charges. It would not, however, include specific charges for services rendered.

"State taxation officer" means a person or authority, other than a State or Northern Territory Minister, authorised under a State or Northern Territory law to perform under Part IIIA the functions of a State taxation officer (paragraph (a)). The term also means a person, other than a State or Northern Territory Minister, authorised, in writing signed by a person or authority covered by the first part of the definition, to act under Part IIIA (paragraph (b)).

"Territory" refers to the Australian Capital Territory.

"Territory tax law" is defined to mean a law of the Australian Capital Territory relating to taxation. In relation to what constitutes "taxation" in this context, see notes on the definition of "State tax law".

"Territory taxation officer" has a meaning similar to that of "State taxation officer", except that it refers to Australian Capital Territory laws and Commonwealth Ministers.

Proposed sub-sections 13D(2) and (3) provide that references in Division 3 (provision of information to State taxation authorities) or 4 (certification of copies of and extracts from documents) of Part IIIA to a State tax law and to a State taxation officer are to include references to an Australian Capital Territory tax law and to an Australian Capital Territory taxation officer respectively.

Division 2 - Trans-border investigations

Section 13E : State taxation officers may refer matters to Commissioner for investigation

New section 13E permits a State taxation officer to refer a matter to the Commissioner of Taxation for investigation in the Australian Capital Territory. The matter must be one arising under a State or Northern Territory taxation law - see notes on the definition of a "State tax law" - and the reference must be made in writing.

Section 13F : Access to documents, & c.

For the purposes of conducting in the Australian Capital Territory an investigation into a State or Northern Territory taxation law matter, new section 13F provides for the authorisation of officers, as defined in sub-section 13D(1), and for those officers to have reasonable access to places and documents in the Territory. Those access rights are similar to rights Commonwealth taxation officers have Australia-wide for the purposes of Commonwealth taxation laws.

Under sub-section 13F(1), where a matter has been referred to the Commissioner for investigation under section 13E, the Commissioner may, in a written and signed document authorise an officer to conduct an investigation into the matter. An officer so authorised is, by virtue of sub-section 13F(2), entitled to enter on land in the Territory (paragraph (a)) and to have full access to documents in the Territory (paragraph (b)) at all reasonable times, and may also take extracts from, or make copies of, documents in the Territory (paragraph (c)). Sub-section 13F(3) provides that an officer, who enters on land as authorised by sub-section (2) is not authorised to remain on the land unless, on request by the occupier, the officer produces a certificate issued by the Commissioner stating that the officer is authorised to conduct the investigation into the matter specified in the certificate.

Section 13G : Commissioner may obtain information and evidence

By new section 13G, the Commissioner of Taxation is given information-gathering powers for the purposes of conducting in the Australian Capital Territory an investigation into a State or Northern Territory taxation law matter. These powers are equivalent to those the Commissioner has for the purposes of Commonwealth taxation laws.

Once a matter has been referred to the Commissioner under section 13E, sub-section 13G(1) allows the Commissioner, by notice in writing, to require any person to furnish such information as is required (paragraph (a)), to attend at a specified time and place to answer questions (paragraph (b)), and to produce any documents kept or controlled by the person (paragraph (c)). Sub-section 13G(2) further provides that the Commissioner may require information or answers to be verified or furnished on oath or affirmation and either orally or in writing, and that the Commissioner or an authorised officer may administer the oath or affirmation. The oath or affirmation to be taken or made is that the information is or the answers will be true (sub-section 13G(3)).

By new sub-section 13G(4), copies may be made of, or extracts may be taken from, any documents that are produced pursuant to a written requirement under sub-section 13G(1). Where a person is required to attend before the Commissioner or an authorised officer in accordance with a sub-section 13G(1) notice, that person is, by virtue of new sub-section 13G(5), to be entitled to an allowance for expenses of an amount to be determined by the Commissioner in accordance with the regulations under the Principal Act.

Section 13H : State taxation officers to observe secrecy in relation to trans-border investigations

This section imposes on a State or Northern Territory taxation officer who acquires information through the exercise of powers under section 13F or 13G a similar obligation to observe secrecy in respect of that information as is imposed by the various Commonwealth taxation laws on a Commonwealth taxation officer who obtains information under those laws.

Except for the purposes of administering a Commonwealth, State, Northern Territory or Australian Capital Territory taxation law, new sub-section 13H(1) prohibits a present or former State or Northern Territory taxation officer from recording, divulging or communicating any information acquired by reason of the exercise of the powers conferred by section 13F or 13G for the purpose of conducting investigations in the Australian Capital Territory. By sub-section 13H(3), such a person is deemed to have contravened sub-section (1) if he or she communicates such information to a Commonwealth, State or Northern Territory Minister. The maximum penalty for contravening sub-section (1) is a fine of $5,000 or imprisonment for one year, or both. Sub-section 13H(2) provides that such a person will not be required to give to a court any such information, except where it is necessary to do so to carry into effect a Commonwealth, State, Northern Territory or Australian Capital Territory taxation law.

Division 3 - Provision of Commonwealth taxation information to State taxation authorities

Section 13J : Provision of Commonwealth taxation information to State taxation authorities

New section 13J provides a single general authority in respect of the various Commonwealth taxation laws for information to be communicated to State, Northern Territory or Australian Capital Territory taxation authorities. It will replace the various existing individual provisions in Commonwealth taxation laws that permit Commonwealth taxation information to be disclosed to State or Territory revenue authorities. Those provisions are being removed by clauses 4, 6, 8, 10, 38, 40, 52 and 54 of this Bill.

By new sub-section 13J(1), information (including copies of documents where appropriate) acquired under or for the purposes of a Commonwealth taxation law will be able to be passed on to a State, Northern Territory or Australian Capital Territory taxation officer for the purposes of administering a taxation law of that jurisdiction, regardless of the secrecy provisions in the various Commonwealth taxation laws. Such an officer must, however, be permitted by law to communicate similar information to the Commissioner of Taxation.

New sub-sections 13J(2), (3) and (4) are in similar terms to sub-sections 13H(1), (2) and (3) explained above, except that they relate to information communicated under sub-section 13J(1). The maximum penalty where a recipient of such information breaches the secrecy requirement of sub-section 13J(2) is a $5,000 fine or one year's imprisonment, or both.

Sub-section 13J(5) is an interpretative provision that explains that a reference in the section to a secrecy provision of a Commonwealth taxation law is a reference to a provision prohibiting the communication of information.

Because the Estate Duty Assessment Act 1914 and the regulations under that Act do not contain secrecy provisions, sub-section 13J(6) specifies that section 13J does not apply to information acquired under that Act or those regulations but makes it clear that the power to communicate information so acquired is not altered by the section.

Division 4 - Certification by State taxation officer of copies of, and extracts from, documents

Section 13K - Certification by State taxation officer of copies of, and extracts from, documents

New section 13K provides - with appropriate safeguards - an exception to the original document rule of evidence law in proceedings arising out of a Commonwealth taxation law, where a copy of, or an extract from, a document has been provided to the Commissioner of Taxation by a State, Northern Territory or Australian Capital Territory taxation authority.

Sub-sections 13K(1) and (3) provide for the certification by a State, Northern Territory or Australian Capital Territory taxation officer of a copy of or an extract from a document that is obtained pursuant to a taxation law of the State or Territory to be a true copy or true extract. Similarly, where a copy is made of, or an extract is taken from, a document pursuant to a taxation law of a State, the Northern Territory or the Australian Capital Territory - for example, pursuant to a provision equivalen to proposed new sub-section 13G(4), explained above - sub-sections 13K(2) and (4) allow certification of that copy or extract to be a true copy or extract.

Sub-section 13K(5) requires courts and tribunals, in Commonwealth taxation law proceedings, to receive, as evidence as if it were the original document, a document that purports to be a copy or extract certified under one of the preceding sub-sections. However, sub-section 13K(6) specifies that sub-section (5) does not apply if, in proceedings for an offence, evidence is adduced that the document is not a true copy or extract (paragraph (a)) or if, in other proceedings, it is proved the document is not a true copy or extract (paragraph (b)).

Under sub-section 13K(7), where -

•

a copy is made or an extract is taken from a document in pursuance of a State, Northern Territory or Australian Capital Territory taxation law (paragraph (a)); and

•

under sub-section 13K(2) or (4), a State, Northern Territory or Australian Capital Territory taxation officer has certified that copy or extract to be a true copy or extract (paragraph (b)),

such an officer may certify as a true copy or extract, as the case may be -

•

a copy of that copy or that extract (paragraph (c)); or

•

an extract from that copy or that extract (paragraph (d)).

Consistent with sub-section 13K(5) in relation to a copy of or an extract from an original document, sub-section 13K(8) requires a document that purports to be a copy or extract certified under sub-section (7) to be received as evidence as if it were the original document. Like sub-section 13K(6), sub-section 13K(9) removes that requirement where evidence is brought forward in proceedings for an offence that the document is not a true copy of or extract from the "source" copy or extract (sub-paragraph (a)(i)) or that the "source" copy or extract is not a true copy or an extract from the original document (sub-paragraph (a)(ii)). In any other proceedings, sub-section 13K(8) will not apply if either of these situations is proved (sub-paragraphs (b)(i) and (ii)).

Clause 46: Commissioner may obtain information and evidence

Section 141 of the Principal Act empowers the Commissioner of Taxation to obtain information and evidence for the purposes of Part IV of the Principal Act, which provides for the issue of tax clearance certificates in relation to certain transactions.

Paragraphs (a) and (b) of clause 46 will amend paragraph 14I(1)(c) and sub-section 14I(2) respectively to substitute the references in those provisions to "books, documents and other papers" with references to "documents" in view of the wide meaning given to that latter term by the definition recently inserted in the Acts Interpretation Act 1901 (section 25).

Clause 47: Access to documents, & c.

Clause 47 proposes amendments of section 14J of the Principal Act, which provides that authorised Commonwealth taxation officer may have access to land and documents for the purposes of Part IV of the Principal Act relating to tax clearance certificates.

In line with the amendments proposed by paragraphs (a) and (b) of clause 46, paragraphs (a) and (b) of clause 47 will replace the references to "books, documents and other papers" in paragraphs 14J(1)(b) and 14J(1)(c) with references to "documents".

Clause 48: Certification by Commissioner of copies of, and extracts from, documents

Clause 48 proposes the insertion in the Principal Act of a new section 15A.

The new section is in similar terms to new section 13K, providing for copies of, or extracts from, certain documents to be admissible as evidence as if they were the original documents (see notes on new section 13K, being inserted as part of new Part IIIA of the Principal Act by clause 45). Section 15A applies in respect of documents obtained pursuant to Commonwealth taxation laws, or copies made from or extracts taken from documents pursuant to Commonwealth taxation laws, whereas new section 13K deals with documents, and copies and extracts, obtained pursuant to State or Territory taxation laws. The copies made or extracts taken are to be certified to be true copies or extracts by Commonwealth taxation officers. In all other respects the new section is identical to new section 13K, discussed in the notes on clause 45.

PART II - AMENDMENTS OF THE AUSTRALIAN CAPITAL TERRITORY TAXATION (ADMINISTRATION) ACT 1969

Clause 3: Principal Act

This clause facilitates references to the Australian Capital Territory Taxation (Administration) Act 1969 which, in Part II of the Bill, is referred to as "the Principal Act".

Clause 4: Secrecy

Clause 4 of the Bill proposes several amendments of section 7 of the Principal Act, which contains the normal secrecy provisions found in taxation legislation.

The amendments of sub-section 7(2) of the Principal Act proposed by paragraphs (a) and (b) of clause 4 are drafting changes to accommodate the omission, by paragraph (c), of existing paragraph 7(2)(c) of the Principal Act.

By paragraph (c) of clause 4, paragraph 7(2)(c) of the Principal Act is to be omitted. This amendment is to the same effect as that proposed by paragraph (b) of clause 10 (see notes on that clause).

The amendment proposed by paragraph (d) of clause 4, to insert new sub-section (3) in section 7 of the Principal Act, is to the same effect as the amendment proposed by paragraph (a) of clause 44 (see notes on that clause).

PART III - AMENDMENTS OF THE BANK ACCOUNT DEBITS TAX ADMINISTRATION ACT 1982

Clause 5: Principal Act

This clause facilitates references to the Bank Account Debits Tax Administration Act 1982 which, in Part III of the Bill, is referred to as "the Principal Act".

Clause 6: Secrecy

This clause proposes amendments of section 7 of the Principal Act, which contains the normal secrecy provisions found in taxation legislation.

The amendment proposed by paragraph (a) of clause 6, to insert new sub-section 7(1A) in the Principal Act, is to the same effect as that proposed by paragraph (a) of clause 44 (see notes on clause 44).

Paragraphs (b) and (c) of clause 6 will amend sub-section 7(4) of the Principal Act to effect drafting changes consequential upon the proposed omission of existing paragraph 7(4)(c) of the Principal Act by paragraph (d) of clause 6.

Paragraph (d) of clause 6 proposes the omission of paragraph 7(4)(c) of the Principal Act. This amendment is to the same effect as that proposed by paragraph (b) of clause 10 (see notes on clause 10).

PART IV - AMENDMENTS OF THE GIFT DUTY ASSESSMENT ACT 1941

Clause 7: Principal Act

In terms of this clause, the Gift Duty Assessment Act 1941 is, in Part IV of the Bill, referred to as "the Principal Act". Gift duty does not apply to gifts made on or after 1 July 1979.

Clause 8: Officers to observe secrecy

This clause proposes a number of amendments of section 10 of the Principal Act, which contains the normal secrecy provisions found in taxation legislation.

The amendment proposed by paragraph (a) of clause 8, to insert new sub-section 10(1A) in the Principal Act, is to the same effect as that proposed by paragraph (a) of clause 44 (see notes on that clause).

Paragraph (b) of clause 8 is a drafting measure that will amend section 10 of the Principal Act to make it clear that the information which - under sub-section 10(2) - an officer, unless otherwise specifically authorised, is prohibited from divulging is any information in respect of the affairs of another person that was acquired under a provision of the Principal Act and was acquired by that officer during his or her appointment or employment by the Commonwealth. The existing reference in sub-section 10(2) to "any such information so acquired" is a reference back to the meaning of officer in sub-section 10(1) but the insertion of new sub-section 10(1A) will make this somewhat obscure.

Paragraph (c) of clause 8 proposes the omission of paragraph 10(4)(c) of the Principal Act. This amendment is to the same effect as that proposed by paragraph (b) of clause 10 (see notes on that clause).

As with the amendment being made by paragraph (c), the amendment proposed by paragraph (d) of this clause, to omit from paragraph 10(4)(ca) of the Principal Act the reference to a State Act, is consequential on the insertion of new section 13J of the Taxation Administration Act proposed by clause 45. The present paragraph 10(4)(ca) authorisation, under which information obtained under the Principal Act can be provided to an authority administering a State Act relating to gift duty, is being replaced by the general authorisation provided by new section 13J (see notes on clause 45).

PART VI - AMENDMENTS OF THE PAY-ROLL TAX (TERRITORIES) ASSESSMENT ACT 1971

Clause 37: Principal Act

In terms of this clause, the Pay-roll Tax (Territories) Assessment Act 1971 is, in Part VI of the Bill, referred to as "the Principal Act".

Clause 38: Secrecy

This clause proposes amendments of section 8 of the Principal Act which contains the usual secrecy provisions found in taxation laws.

The amendment of section 8 by paragraph (a) of clause 38, to insert new sub-section 8(1A), is to the same effect as that proposed by paragraph (a) of clause 44 (see notes on that clause).

The amendment proposed by paragraph (b) of clause 38 is to the same effect as that to be made by paragraph (b) of clause 8 (see notes on that clause).

Paragraph (c) of clause 38 proposes the amendment of paragraph 8(4)(b) of the Principal Act to effect a drafting change that is consequential upon the amendment proposed by paragraph (d) of this clause.

The omission of paragraph 8(4)(c) of the Principal Act by paragraph (d) of clause 38 is to the same effect as that proposed by paragraph (b) of clause 10 (see notes on clause 10).

By paragraph (e), the reference to the Commonwealth Statistician in paragraph 8(4)(d) of the Principal Act is to be replaced with a reference to the Australian Statistician, reflecting the change in the title of that office.

PART VII - AMENDMENTS OF THE SALES TAX ASSESSMENT ACT (No.1) 1930

Clause 39: Principal Act

This clause facilitates references to the Sales Tax Assessment Act (No 1) 1930 which, in Part VII of the Bill, is referred to as "the Principal Act".

Clause 40: Officers to observe secrecy

This clause will amend section 10 (the secrecy provisions) of the Principal Act in a number of respects.

Paragraph (a) of clause 40 proposes the amendment of sub-section 10(2) of the Principal Act to replace the present reference to any person with a reference to any officer. This amendment is consequential on the insertion, by paragraph (c), of a definition of "officer" in section 10.

The amendment proposed by paragraph (b) is to the same effect as the amendment proposed by paragraph (b) of clause 10 (see the notes on that clause).

New sub-section 10(6), proposed to be inserted by paragraph (c) of clause 40, will define the term "officer" for the purposes of section 10. That term is to mean any person appointed or employed by the Commonwealth, or to whom powers or functions have been delegated by the Commissioner, and who thereby acquiries information disclosed or obtained under the provisions of the Principal Act.

Paragraph (c) of clause 40 will also amend section 10 of the Principal Act to insert a new sub-section (7). That amendment is to the same effect as the amendment being made by paragraph (a) of clause 44 (see notes on that clause).

PART VIII - AMENDMENT OF THE SALES TAX PROCEDURE ACT 1934

Clause 41: Principal Act

This clause facilitates references to the Sales Tax Procedure Act 1934 which, in Part VIII of the Bill, is referred to as "the Principal Act".

Clause 42: Secrecy

Secrecy provisions relevant to the Principal Act are presently contained in the Sales Tax Procedure Regulations (regulation 35). Consistent with the approach taken in relation to other Commonwealth taxation laws, this clause will incorporate the secrecy provisions in the Principal Act itself - as new section 4A. Those provisions will impose the normal obligations as to secrecy on an "officer", as defined for the purposes of the Principal Act, and will specify the circumstances in which, and the persons to whom, information acquired by an officer with respect to the affairs of any other person under the provisions of the Principal Act may be communicated or divulged.

New sub-section 4A(1) defines an "officer" for the purposes of the secrecy provisions. The term is defined to mean any person appointed or employed by the Commonwealth, or to whom powers or functions have been delegated by the Commissioner and who thereby acquires information disclosed or obtained under the provisions of the Principal Act.

Proposed sub-section 4A(2) will ensure that the same rights and obligations that apply under the secrecy provisions to persons employed by the Commonwealth also apply to persons (e.g. officers of overseas governments serving in Australia under exchange arrangements) who perform duties for the Commonwealth but who are not employed or appointed by the Commonwealth and are therefore not officers within the meaning of that term in sub-section 4A(1).

Sub-section 4A(3) prohibits an officer or a person who has ceased to be an officer from recording, divulging or communicating information with respect to the affairs of another person that is acquired or obtained under the Principal Act, except in the performance of his or her duties as an officer or as provided in new sub-section 4A(5). Consistent with other taxation secrecy provisions, the maximum penalty upon conviction for a breach of this provision is to be a fine of $5,000 or imprisonment for 12 months, or both. The present penalty under the Sales Tax Procedure Regulations is $500.

New sub-section 4A(4) provides that an officer cannot be compelled to give to a court information (including documents) obtained for the purposes of the Principal Act, except where it is necessary to do so for carrying into effect the provisions of the Principal Act.

Under proposed sub-section 4A(5), an officer may communicate information to a Taxation Board of Review, to another officer so that he or she is able to perform duties as an officer under an Act administered by the Commissioner or to the Comptroller-General of Customs.

By new sub-section 4A(6) an officer will be deemed to have breached the general prohibition on disclosure of information - sub-section 4A(3) - if he or she communicates information acquired under the provisions of the Principal Act to any Minister of the Crown.

Proposed sub-section 4A(7) provides that an officer, if required to do so by the Commissioner or a Deputy Commissioner, shall make an oath or declaration, in a manner and form specified in writing, to maintain secrecy in conformity with the provisions of section 4A.

PART X - AMENDMENT OF THE TAXATION (INTEREST ON OVERPAYMENTS) ACT 1983

Clause 49: Principal Act

By this clause, the Taxation (Interest on Overpayments) Act 1983 is, in Part X of the Bill, referred to as "the Principal Act".

Clause 50: Secrecy

The amendment of section 8 (the secrecy provisions) of the Principal Act, as proposed by this clause, is to the same effect as that proposed by paragraph (a) of clause 44 (see notes on that clause).

PART XI - AMENDMENTS OF THE TOBACCO CHARGES ASSESSMENT ACT 1955

Clause 51: Principal Act

This clause facilitates references to the Tobacco Charges Assessment Act 1955 which, in Part XI of the Bill, is referred to as "the Principal Act".

Clause 52: Secrecy

This clause will amend section 10 (the secrecy provisions) of the Principal Act in several respects.

The amendment being made by paragraph (a) of clause 52, to insert new sub-section 10(1A) in the Principal Act, is to the same effect as that proposed by paragraph (a) of clause 44 (see notes on clause 44), and the amendment proposed by paragraph (b) of clause 52, to amend existing sub-section 10(2), is to the same effect as that being made by paragraph (b) of clause 8 (see notes on clause 8).

Also, the amendment proposed by paragraph (c) of clause 52, to omit paragraph 10(4)(c) of the Principal Act, is to the same effect as the amendment proposed by paragraph (b) of clause 10 (see notes on that clause) and the amendment being made by paragraph (d) of clause 52 is to the same effect as that proposed by paragraph (e) of clause 38 (see notes on that clause).

PART XII - AMENDMENTS OF THE WOOL TAX (ADMINISTRATION) ACT 1964

Clause 53: Principal Act

In terms of this clause, the Wool Tax (Administration) Act 1964 is, in Part XII of the Bill, referred to as "the Principal Act".

Clause 54: Secrecy

This clause proposes several amendments of section 8 (the secrecy provisions) of the Principal Act.

The amendments proposed by paragraphs (a), (b), (c) and (d) of clause 54 are to the same effect as the amendments being made by paragraph (a) of clause 44, paragraph (b) of clause 8, paragraph (b) of clause 10 and paragraph (e) of clause 38, respectively - see notes on those clauses.

INCOME TAX (INDIVIDUALS) BILL 1985

This Bill will formally impose the tax payable in respect of income derived by individuals, and by trustees generally, during the 1985-86 income year. It is complementary to the Income Tax (Rates) Act 1982 which declared the rates of tax to apply to such taxpayers. As is customary the Bill will also formally impose 1985-86 provisional tax.

The following notes are confined to the major clauses of the Bill, clauses 1, 2 and 4 being of a formal nature and clause 3 containing definitions of terms used in the Bill that are in the same terms as those contained in the Income Tax (Individuals) Act 1984.

Clause 5: Imposition of income tax

Sub-clauses (1) and (2) have the effect, when read with clause 7, of formally imposing for the 1985-86 financial year income tax payable by individuals and trustees (other than trustees of superannuation funds, ineligible approved deposit funds and corporate unit trusts, and trustees assessed under sub-section 98(3) of the Income Tax Assessment Act 1936 (the "Assessment Act") in respect of income of a non-resident company beneficiary, in respect of whom the relevant rates of tax are to be declared and imposed by the accompanying Income Tax (Companies, Corporate Unit Trusts and Superannuation Funds) Bill 1985). The rates to be imposed are those declared by the Income Tax (Rates) Act 1982 which have applied from 1 November 1984.

The general rates of tax for resident taxpayers are:

The general rates of tax for non-resident taxpayers are:

Sub-clause (3) excludes from the scope of the Bill taxes that are payable in accordance with various sections of the Assessment Act and which are imposed by separate Acts. These other taxes and the relevant sections of the Assessment Act are those imposed on diverted income (section 121H), interest paid on bearer debentures (section 126), withholding taxes (sections 128B, 128N and 128V), branch profits tax (section 128T), film and video tape royalties (section 136A) and the redemption of drought bonds in certain circumstances (section 159C).

Clause 7: Levy of tax

Clause 7 operates to formally levy the tax imposed by clause 5 of the Bill in respect of the 1985-86 financial year and, until the Parliament otherwise provides, for the 1986-87 financial year.

Clause 8: Provisional Tax

Clause 8 will formally impose provisional tax for the 1985-86 financial year, as required by sub-section 221YB(3) of the Assessment Act.

INCOME TAX (COMPANIES, CORPORATE UNIT TRUSTS AND SUPERANNUATION FUNDS) BILL 1985

Introductory Note

The main purpose of this Bill is to impose income tax for the 1985-86 financial year, at the rates declared in the Bill, on the 1984-85 incomes of companies, registered organizations and corporate unit trusts, and the 1985-86 incomes of superannuation funds and ineligible approved deposit funds. It also imposes tax on a trustee in respect of income of a non-resident company beneficiary where the trustee is assessed under sub-section 98(3) of the Income Tax Assessment Act 1936 (the "Assessment Act") on that income.

Other rates of income tax payable for the 1985-86 financial year - by individuals and by trustees generally - as declared by the Income Tax (Rates) Act 1982 will be imposed by the Income Tax (Individuals) Bill 1985; the "branch profits" tax that is payable by non-resident companies is imposed by the Income Tax (Non-Resident Companies) Act 1978; and other rates of tax payable under particular sections of the Assessment Act are imposed by the Income Tax (Dividends and Interest Withholding Tax) Act 1974, the Income Tax (Film Royalties) Act 1977, the Income Tax (Drought Bonds) Act 1969, the Income Tax (Bearer Debentures) Act 1971, the Income Tax (Withholding Tax Recoupment) Act 1971, the Income Tax (Mining Withholding Tax) Act 1979 and the Income Tax (Diverted Income) Act 1981.

The practical effect of the present Bill, apart from the imposition of tax at the rate of 30 per cent on the investment income of a superannuation fund to which section 121CC of the Assessment Act applies, will be the same as the Income Tax (Companies, Corporate Unit Trusts and Superannuation Funds) Act 1984.

Clauses 6 to 10:

The rates of income tax declared by clauses 6 to 10 of this Bill for the 1985-86 financial year are as follows -

•

by sub-clause 6(2) and paragraph (a) of sub-clause 6(3) the general rate of tax payable on taxable income of companies is to remain at 46 per cent;

•

by paragraph (b) of sub-clause 6(3) the rate of additional tax payable by a private company on the amount by which dividends paid fall short of a sufficient distribution is to remain at 50 per cent;

•

by sub-clause 6(4), the rate of tax payable by a registered organization is to remain at 20 per cent;

•

by clause 7, the rate of tax payable by a trustee on the net income of a corporate unit trust to which section 102K of the Assessment Act applies is to remain at 46 per cent;

•

by sub-clause 8(1), the rate of tax payable on certain taxable income of superannuation funds to which section 121CA or 121CB of the Assessment Act applies is to remain at 50 per cent;

•

by sub-clause 8(2), the rate of tax payable by a trustee on the investment income of an employer sponsored superannuation fund which fails to comply with certain investment rules and to which section 121CC of the Assessment Act applies is to be 30 per cent;

•

by sub-clause 8(3), the rate of tax payable on income of trusts qualifying as superannuation funds to which section 121DA of the Assessment Act applies is to remain at 60 per cent;

•

by sub-clause 8(4), the rate of tax payable on income of trusts qualifying as superannuation funds to which section 121DAB of the Assessment Act applies is to remain at 46 per cent;

•

by clause 9, the rate of tax payable by the trustee on the taxable income of an ineligible approved deposit fund is to remain at 46 per cent; and

•

by clause 10, the rate of tax payable by a trustee on the share of income in respect of which, broadly, a non-resident company beneficiary is presently entitled, is to remain at 46 per cent.

Clause 12:

Clause 12 formally levies tax imposed by clause 5 at the rates declared in clauses 6 to 10 inclusive for the 1985-86 financial year and, until the Parliament otherwise provides, for the 1986-87 financial year.

Clause 14:

Clause 14 of the Bill will authorise the collection in the 1986-87 financial year of instalments of tax payable by companies and corporate unit trusts in accordance with the relevant provisions of the Assessment Act. Under those provisions, the first of three such instalments is due not earlier than 15 August 1986.

MEDICARE LEVY BILL 1985

Clause 1: Short title

By this clause the Act imposing Medicare levy for 1985-86 will be cited as the Medicare Levy Act 1985.

Clause 2: Commencement

This clause provides for the Act to come into operation on the day on which it receives the Royal Assent. But for this clause, the Act would, by reason of sub-section 5(1A) of the Acts Interpretation Act 1901, come into operation on the twenty-eighth day after the date of Assent.

Clause 3: Interpretation

Sub-clause (1) contains formal definitions providing shorthand references to the Income Tax Assessment Act 1936 (the "Assessment Act") and the Medicare levy.

Sub-clause (2) is also a formal provision that relates references to taxable income or net income in the Bill to taxable income or net income of the relevant year of income.

Sub-section 25IR(2) of the Assessment Act provides that, for levy purposes, de facto married couples are to be treated as being legally married. Under the proposed levy arrangements a legally or de facto married couple whose combined taxable incomes do not exceed a certain amount will not be required to pay levy - see notes on clause 8. The relevant time for determining whether a couple are married is the last day of the year of income.

Sub-clause (3) modifies the classes of people who would otherwise be taken as married. By paragraph (a) of the sub-clause a couple who have separated will not be taken to be married.

By paragraph (b) a person whose spouse has died during the year and who has not re-married at year's end will be taken to have been married on the last day of the year.

By sub-clause (4) expressions in the Bill that are also used in the Medicare levy provisions of the Assessment Act are to have the meaning they have in those provisions.

Clause 4: Incorporation

This clause has the effect of providing for the Bill to operate in conjunction with the relevant Medicare levy provisions of the Assessment Act.

Clause 5: Imposition of Medicare levy

This clause formally imposes Medicare Levy that is payable in accordance with Part VIIB of the Assessment Act. Subsequent clauses deal with the rate of levy and with various circumstances affecting the amount, if any, of levy payable.

Clause 6: Rate of levy

This clause fixes the rate of Medicare levy for 1985-86 at 1 per cent.

Sub-clause (1) will apply in relation to individual taxpayers. By section 251S of the Assessment Act, levy is payable on the taxable income of an individual who is a resident of Australia for any part of the income year.

Sub-clause (2) declares a levy of 1 per cent to be payable by the trustee of a trust estate assessable under section 98 of the Assessment Act. Trustees are liable to be assessed under that section in respect of trust income to which a beneficiary who is under a legal disability, e.g., infancy, is presently entitled and may, by section 251S of the Assessment Act, be subject to the levy. The liability of such a trustee to pay levy may be affected by clause 10 of the Bill.

Sub-clause (3) declares a rate of levy of 1 per cent on income assessable to a trustee under section 99 or section 99A of the Assessment Act. A trustee is assessable under those sections in respect of trust income to which no beneficiary is presently entitled. Liability for levy in these circumstances is created by section 251S of the Assessment Act, other than where the trustee is a trustee of a deceased estate.

Clause 7: Levy in case of small income

The purpose of this clause is to grant relief from Medicare levy on low incomes and to phase in the levy above the thresholds below which no levy is payable.

By sub-clause (1) a taxpayer whose taxable income for 1985-86 is $7,526 or less will not be required to pay levy.

Where a taxpayer's taxable income for 1985-86 exceeds $7,526 but does not exceed $7,922, the amount of levy payable is, by sub-clause (2), to be limited to 20 per cent of the amount of the excess of the taxable income over $7,526. The amount of levy ascertained in this way is to be further reduced by any reduction to which the person is entitled by reason of the family income threshold provisions of the Bill (clause 8), or because the taxpayer is a prescribed person for part of the year of income (clause 9).

Under section 251S of the Assessment Act, levy is payable by a trustee (other than a trustee of a deceased estate) who is assessable and liable to pay tax under section 99 of that Act. This occurs where the income in respect of which the trustee is assessable is $417 or more. By sub-clause (3) no levy is payable where the net income of the trust estate is $416 or less. Where the net income of the trust estate in respect of which the trustee is liable to be assessed exceeds $416 but does not exceed $437, the amount of levy payable is, by sub-clause (4), to be limited to 20 per cent of the amount of the excess of the net income over $416.

Clause 8: Amount of levy - person who has spouse or dependants

The purpose of this clause is to grant relief from Medicare levy to a person who has a family if the "family's" income is not greater than a threshold amount.

Sub-clause (1) specifies two conditions for exemption from levy under this provision. The first is that the person be legally or de facto married at the last day of the year of income or that the person be entitled to a rebate in his or her assessment in respect of the year of income for a daughter-housekeeper, or a housekeeper or as a sole paretn. The second condition is that the income of the person's family (i.e. the taxable income of the person plus that of his or her spouse, if any) does not exceed the income threshold in relation to the person (i.e., $12,504 plus $1,530 for each dependent child or student of the taxpayer or his or her spouse).

Sub-clause (2) in effect "shades-in" the amount of levy payable by a couple, or a sole parent, where the couple or sole parent is not entitled to exemption from levy by sub-clause (1), because the "family income" exceeds the relevant "family income threshold" by a small or moderate amount. In such circumstances the amount of levy payable by the taxpayer is to be reduced in accordance with a formula specified in the sub-clause. The effect of the sub-clause is to limit the levy payable by the taxpayer (before the application of any reduction to which the taxpayer is entitled as a part year prescribed person) to 20 per cent of the excess of the "family income" over the "family income threshold".

Sub-clause (3) applies in the situation where both of a "married" couple are levy payers. In that situation each of the couple would, but for sub-clause (3), be entitled to have his or her levy liability reduced by the amount calculated under sub-clause (2). Sub-clause (3) avoids that result by providing, in effect, that where each of a couple are levy payers, any reduction in levy calculated in accordance with sub-clause (2) is to be apportioned between the couple on the basis of their taxable incomes.

For sub-clause (4) to operate two circumstances must be met. The first is that sub-clause (3) must operate to apportion the reduction in levy ascertained in accordance with sub-clause (2) between the couple (paragraph (a) of the sub-clause). The second is that one of a couple's share of the reduction amount ascertained in accordance with sub-clauses (2) and (3) exceeds the amount of levy he or she would be required to pay but for clause 9 (paragraph (b)). Where those circumstances are met the clause will operate to reduce the levy payable by the spouse of the person by the excess.

Sub-clause (5) defines two of the terms used in clause 8.

"Family income" is defined by the sub-clause to mean for each of a legally or de facto married couple the taxable income of the taxpayer plus that of his or her spouse, or for a person other than a married person (generally these will be sole parents), his or her taxable income.

"Family income threshold" is defined by the sub-clause to mean $12,504 increased by $1,530 for each dependent child or student in respect of whom the taxpayer or his or her spouse, if any, would have been entitled to an income tax dependant rebate if those rebates had not been replaced by family allowances.

Sub-clause (6) provides that in determining the "family income threshold" of a person who is not a legally or de facto married person at the last day of the year of income, a child or student shall not be taken into account in calculating the family income threshold of that person unless the person is receiving family allowances for the child or student. This will avoid each of a separated couple being able to increase their threshold on account of the child or student.

Clause 9: Reduction of levy - person who is prescribed person for part of the year of income

The purpose of this clause is to give a reduction in the amount of levy that would otherwise be payable under preceding provisions where the taxpayer is a "prescribed person" for part only of the year.

The meaning of the expression "prescribed person" is contained in section 251U of the Assessment Act. Under that section a person is a prescribed person during a particular period if, for example, he or she was entitled to free medical treatment as a member of the Defence Force or under any of the Repatriation Acts, and had no dependants or had dependants who also qualified as prescribed persons. By section 251T of the Assessment Act, a taxpayer is freed entirely from the levy if he or she was a prescribed person during the whole of the year of income.

Under clause 9 of the Bill, a person who qualifies as a prescribed person for part only of the year (for example, because he or she is a member of the Defence Force for part only of the year, or for any period has dependants who do not qualify as prescribed persons and who is deemed by sub-section 251U(3) of the Assessment Act to have been a prescribed person for one-half of that period) will have his or her levy reduced by an amount corresponding to the proportion of the year that the person so qualifies.

Clause 10: Levy payable by a trustee assessable under section 98 of the Assessment Act

The purpose of this clause is to calculate the levy liability of a trustee assessed under section 98 of the Assessment Act in respect of the share of trust income of a beneficiary who is under a legal disability (e.g., a minor) in the same way as if that income were assessed to the beneficiary concerned.

Levy is imposed on the trustee by clause 6(2) of the Bill and the effect of clause 10 is that if the beneficiary were to have the benefit of one of the low income thresholds if he or she were to be assessed on the income, the same rules are to apply where the income is assessed to the trustee.

Clause 11: Financial years for which levy is payable

By sub-clause (1) the Medicare levy is payable for the 1985-86 financial year.

Sub-clause (2) provides, as an interim measure, that until the Parliament formally otherwise declares, the levy imposed by the Bill is also to apply for the 1986-87 year. A provision of this kind is needed for cases where it is necessary early in the financial year to make an assessment in respect of income of that year, e.g., where a person is leaving Australia permanently.