Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon. P.J. Keating, M.P.)NOTES ON SCHEDULE
An explanation of the amendments to various Acts proposed in the Schedule to the Bill is contained in the following notes.
ADMINISTRATIVE DECISIONS (JUDICIAL REVIEW) ACT 1977
The Bill will amend the Administrative Decisions (Judicial Review) Act 1977 to exclude from review under that Act decisions of the Commissioner of Taxation related to liability for the fringe benefits tax (which will be reviewable instead under separate objection and appeal provisions contained in the proposed Fringe Benefits Tax Assessment Act 1986).
CRIMES (TAXATION OFFENCES) ACT 1980
The Crimes (Taxation Offences) Act 1980 came into operation on 4 December 1980 and provides criminal sanctions against persons who engage in stripping transactions designed to ensure that a company or trust is rendered incapable of paying income tax or sales tax. Such schemes became known as "bottom of the harbour" schemes.
The Bill will include fringe benefits tax within the categories of taxes subject to the Crimes (Taxation Offences) legislation. This will mean that it will be an offence to enter into an arrangement with a purpose of securing that a company or trustee will be, or will be likely to be, unable to pay fringe benefits tax that is then payable, or that will or may reasonably be expected to become payable in the future.
INCOME TAX ASSESSMENT ACT 1936
The Bill will insert new sub-section 6(1B) in the Income Tax Assessment Act 1936. The new sub-section is an interpretative measure that provides that references in that Act to benefits, or fringe benefits, within the meaning of the proposed Fringe Benefits Tax Assessment Act 1986 are to be taken as including references to things that would be such benefits, or fringe benefits, if the Commonwealth were an employer subject to the fringe benefits tax legislation. The need for this measure arises because benefits provided by the Commonwealth to its employees are to be dealt with under the proposed Fringe Benefits Tax (Application to the Commonwealth) Act 1986.
Exemption of certain benefits in the nature of income
The Bill will insert new section 23L in the Income Tax Assessment Act 1936 which will apply in relation to years of income commencing on or after 1 July 1986. The effect of the new section will be that employment-related fringe benefits which are dealt with under the proposed fringe benefits tax legislation will be treated as exempt income in the hands of the employee. This will mean that the income will not be assessable to the employee by virtue of sub-section 25(1) which provides, broadly, that the assessable income of a taxpayer is to include gross income that is not exempt income. Complementary measures will amend paragraphs 26(e) and 26(ea) to provide that employees will not be assessed on the fringe benefits in question by virtue of these provisions.
The categories of benefits to which the exemption will apply are specified in paragraphs (a) and (b) of new section 23L.
Paragraph (a) will apply to benefits which are "fringe benefits" within the meaning of the proposed Fringe Benefits Tax Assessment Act 1986. Broadly, the expression "fringe benefits" refers to those employment-related benefits that are taxable to the employer in accordance with the valuation rules specified in the proposed fringe benefits tax legislation.
Paragraph (b) will apply to benefits which are "exempt benefits" within the meaning of the proposed Fringe Benefits Tax Assessment Act 1986. Under that Act, certain kinds of benefits (e.g., benefits provided to ministers of religion in connection with their religious activities) are defined to be exempt benefits. With one exception, a benefit that is an "exempt benefit" under the fringe benefits tax legislation will be exempt from income tax in the hands of employees. The exception relates to certain reimbursements of car expenses which will be exempt from fringe benefits tax but, by virtue of proposed paragraph 26(eaa), will be included in the assessable income of the employee (see later notes on paragraph 26(eaa)).
Certain items of assessable income
The Bill will amend section 26 of the Income Tax Assessment Act 1936 which provides that the assessable income of a taxpayer is to include the items specified in the section.
Paragraph 26(e) requires the inclusion in a taxpayer's assessable income of the value to the taxpayer of allowances and benefits granted to the taxpayer in respect of his or her employment. Similarly, paragraph 26(ea) requires that the value to a member of the Defence Force of allowances and benefits granted in respect of service as such a member be included in his or her assessable income.
Both paragraphs 26(e) and (ea) are being amended so that they do not apply to those categories of employment-related fringe benefits to which the fringe benefits tax legislation applies.
The Bill will insert a new paragraph - paragraph 26(eaa) - in section 26 which will provide that the assessable income of an employee is to include an amount received, in respect of his or her employment, by way of reimbursement of car expenses where that amount is an exempt fringe benefit by virtue of section 22 of the proposed Fringe Benefits Tax Assessment Act 1986. For a car expense reimbursement to be exempt from the fringe benefits tax and consequently assessable to the employee, it is necessary that -
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- the reimbursement be paid in respect of car expenses incurred by the employee in relation to a car owned by, or leased to, the employee (i.e., the provision does not apply to any amount received by way of reimbursement of expenses (e.g., petrol) incurred by the employee in relation to a car owned by his or her employer); and
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- the reimbursement must be calculated by reference to the distance travelled by the car (in the typical case, on a cents per kilometre basis).
The effect of new paragraph 26(eaa) will be that car kilometre reimbursements received by an employee will be treated in a similar manner to car allowances. That is, the amount received will be included in the employee's assessable income and claims for deductions will be subject to the substantiation requirements of the income tax law. The proposed amendments to section 26 will, by virtue of sub-clause 4(1), apply in relation to assessments for the 1986/87 and later income years.
The Bill proposes to repeal two sections - sections 26AAAA and 26AAAB - of the Income Tax Assessment Act 1936 which specify rules for determining the assessable value to an employee of residential accommodation provided in respect of his or her employment. Such benefits will be within the scope of the fringe benefits tax and accordingly, sections 26AAAA and 26AAAB will be repealed with effect from 1 July 1986.
The proposed amendment of section 51 of the Income Tax Assessment Act 1936 - the general deduction provision - by the Bill to insert new sub-section 51(4) will mean that fringe benefits tax payable by an employer is not an allowable deduction for income tax purposes.
Deductions not allowable for entertainment expenses
Section 51AE of the Income Tax Assessment Act 1936 provides that, subject to a number of exceptions, entertainment expenses incurred after 19 September 1985 are not deductible for income tax purposes.
The Bill proposes to insert two new sub-sections - sub-sections (5A) and (5B) - into section 51AE to exclude from the general prohibition certain expenses incurred by employers in respect of meals provided to employees (and their families) under board or living-away-from-home arrangements.
New sub-section (5A) specifies the additional classes of losses and outgoings which it is proposed to exclude from the general prohibition.
By paragraph (5A)(a), losses or outgoings incurred in respect of the provision of meals which constitute board fringe benefits within the meaning of the proposed Fringe Benefits Tax Assessment Act 1986 will not be precluded from deduction. Instead, such meals will be valued under clause 36 of that Bill and, where appropriate, the employer will be required to pay fringe benefits tax on the value of the meals.
Paragraph (5A)(b) applies where an employee (or a member of his or her family) who is provided with meals under a board arrangement is also provided with incidental food or drink (not being a meal). In these circumstances, the provision of the food or drink will be exempt from fringe benefits tax (see notes on clause 54 of the Fringe Benefits Tax Assessment Bill) and the cost of providing the food or drink will not be subject to disallowance under section 51AE.
By virtue of paragraph (5A)(c) the cost of providing food or drink to an employee who is required to live away from his or her usual place of residence in order to perform the duties of his or her employment will be excluded from the disallowance under section 51AE. This paragraph applies where meals of an employee who is living away from home (as distinct from travelling in the course of his or her employment) are provided by way of fringe benefits other than the provision of board fringe benefits (e.g., where the employee is reimbursed for expenses incurred by the employee in respect of meals). As will be the case for board fringe benefits, living-away-from-home food benefits will attract fringe benefits tax (see notes on clause 63 of the Fringe Benefits Tax Assessment Bill) and the disallowance measure will not apply.
By new sub-section 51AE(5B), the exclusions from the general prohibition on deductions for entertainment expenses contained in proposed sub-section 51AE(5A) will apply with effect from 19 September 1985 (the commencement date of the prohibition).
Deductions not allowable where expenses incurred by employee are reimbursed
The Bill will insert new section 51AH in the Income Tax Assessment Act 1936 to deny a deduction for expenses incurred by an employee in circumstances where the expenses are, in effect, paid by the employer.
The section complements the provisions of the Fringe Benefits Tax Assessment Bill dealing with "expense payment benefits". Under those provisions, an expense payment benefit will arise where expenditure is incurred by an employee and the employer either -
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- makes a payment direct to the payee to discharge the employee's liability; or
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- in a case where the employee pays the account - reimburses the employee for the expenses paid.
Where an expense payment is made by the employer, the amount paid is treated as a fringe benefit under the fringe benefits tax legislation and correspondingly is not required to be included in the assessable income of the employee.
New section 51AH will ensure that any deduction to which the employee would otherwise be entitled in respect of losses or outgoings incurred by the employee is reduced by the amount of the payment or reimbursement made by the employer.
Deduction in respect of living-away-from-home allowances
Section 51A of the Income Tax Assessment Act authorises a deduction to an employee where a living-away-from-home allowance is included in the assessable income of the employee. As living-away-from-home allowances will be dealt with under the fringe benefits tax legislation and correspondingly exempt in the hands of employees, section 51A will no longer be relevant. Accordingly, the Bill proposes to repeal section 51A and remove a reference to that section in section 82KA with effect from 1 July 1986.
Rental property income to include taxable values of certain fringe benefits
The Bill will insert new section 82KZK in Subdivision G of Division 3 of Part III of the Income Tax Assessment Act 1936. The Subdivision limit deductions for interest on money borrowed to finance rental property investments made after 17 July 1985. Section 82KZK will ensure that, where an employer provides a fringe benefit to an employee in the form of a lease of property to which Subdivision G applies, the interest deduction limit will be increased by the amount of the taxable value of the fringe benefit.
Sub-section 82KZK(1) provides that, where the conditions set out in the paragraphs of the sub-section are satisfied, the taxable value of the relevant fringe benefit is treated as rental property income of the employer - for the purpose of calculating the interest deduction limit under section 82KZD.
Paragraph (a) requires that the employer has provided a housing fringe benefit (sub-paragraph (i)) or a residual fringe benefit (sub-paragraph (ii)) in relation to a year of tax ending in the year of income by leasing property to the employee. The fringe benefits and related taxable values referred to in the sub-section are dealt with in Divisions 6 and 12 respectively of the Fringe Benefits Tax Assessment Bill 1986 and explained in the notes on that Bill. The term "year of tax" is also explained in the notes on that Bill.
Paragraph (b) ensures that the section does not apply where the property is land that is not within Subdivision G because it is used to provide residential accommodation for employees at or adjacent to the site of mining operations or a timber-felling area.
Paragraph (c) mirrors the conditions set out in sub-paragraphs (a)(i) and (ii) of the definition of "rental property income" in sub-section 82KZC(1) for the inclusion of rent in rental property income.
Sub-section 82KZK(2) is a drafting measure which ascribes to terms used in section 82KZK the same meaning as those terms have in the Fringe Benefits Tax Assessment Bill 1986.
Section 170 of the Income Tax Assessment Act 1936 sets time limits on the power of the Commissioner of Taxation to amend an assessment. Those time limits, however, do not apply for the purpose of giving effect to the provisions specified in sub-section 170(10). The Bill will amend sub-section 170(10) to include proposed section 51AH in the list of specified provisions.
Section 215 of the Income Tax Assessment Act 1936 is being amended to include fringe benefits tax within the categories of taxes for which a liquidator or a receiver of a company must, out of assets available for the payment of ordinary debts, make provision.
Section 221A of the Income Tax Assessment Act 1936 defines a number of terms that are used throughout the provisions of the income tax law dealing with the collection by instalments of income tax payable by employees on salary and wage income. Consequential upon the proposal to deal with living-away-from-home allowances under the fringe benefits tax legislation, the definition of "salary or wages" in section 221A is being amended to exclude living-away-from-home allowances. Similarly, it is proposed to omit sub-section 221C(6) which sets out the amount of a living-away-from-home allowance that is to be taken into account for the purpose of calculating PAYE deductions.
Sub-sections 221C(4) and (5) provide that the PAYE provisions are to apply where an employee receives from his or her employer meals, sustenance or the use of premises or quarters in addition to salary and wages. As such benefits will be subject to the fringe benefits tax, it is proposed to omit sub-sections 221C(4) and (5).
PAYROLL TAX (TERRITORIES) ASSESSMENT ACT 1971
SALES TAX ASSESSMENT ACT (No. 1) 1930
The Bill will amend the abovementioned Acts to include fringe benefits tax within the categories of taxes for which a liquidator or a company must, out of assets available for the payment of ordinary debts, make provision.
TAXATION ADMINISTRATION ACT 1953
The Bill proposes two purely technical amendments to the Taxation Administration Act 1953 to extend the lists of provisions of various taxation laws contained in sub-sections 8J(2) and 8ZE(3) of that Act to include references to the corresponding provisions in the fringe benefits for legislation.
TAXATION (INTEREST OF OVERPAYMENTS) ACT 1983
This Act gives authority to the Commissioner to pay interest on certain refunds of tax.
The effect of the amendments proposed by the Bill will be to authorise the payment of interest on amounts of fringe benefits tax refunded by the Commissioner of Taxation.
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- Following a successful objection or appeal by an employer against a fringe benefits tax assessment; or
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- where the Commissioner decides of his own motion to amend a fringe benefits tax assessment to reduce an employer's liability.
TOBACCO CHARGES ASSESSMENT ACT 1955
WOOL TAX (ADMINISTRATION) ACT 1964
The Bill will also amend the above mentioned acts to include fringe benefits tax within the categories of taxes for which a liquidator or a receiver of a company must, out of assets available for the payment of ordinary debts, make provision.