Explanatory Memorandum
(Circulated by authority of the Minister for Primary Industries and Energy, the Honourable John Kerin MP).OUTLINE
This Bill proposes changes to both the Loan (Income Equalisation Deposits) Act 1976 and the Income Tax Assessment Act 1936 which will give effect to major changes to the provisions for the making of income equalization deposits (IEDs) by primary producers.
2. The Income Equalization Deposits Scheme provides a mechanism whereby primary producers can deposit money with the Government as cash reserves in good years for use in bad years, thereby reducing income fluctuations. The scheme has operated, in various forms, since 1976.
3. In the May 1988 Economic Statement the Government announced that it would introduce a tax-linked IED scheme for primary producers from 1 July 1989. The new scheme would be designed to overcome the drawbacks associated with the tax-linked scheme which operated until 1983.
4. The essential change to IEDs is that from 1 July 1989 deposits will be tax deductible in the year of deposit and assessable for income tax purposes in the year of withdrawal.
5. The basis of payment of interest on deposits will be altered to ensure that unwarranted tax benefits aren't available to depositors as a result of the tax deductibility of deposits. Interest will be paid on the "investment component" of a deposit rather than the deposit itself, to ensure that interest is not paid on that part of the deposit which would otherwise be paid as tax. Indeed, it is expected that part of the deposit will be paid in tax when the deposit is withdrawn.
6. The investment component of all deposits will be calculated by reducing the deposit by 39 per cent, which represents the typical marginal tax rate of depositors. Interest will be paid on the reduced "investment component" part of deposits at the short term Government bond rate.
7. The main taxation features of the new scheme are summarised below -
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- the extent to which a deposit will be tax deductible in an income year is to be limited to the taxable income from primary production of the depositor in that year;
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- the tax deductible deposits, including deposits converted from the previous tax-linked IED scheme, are not to exceed $250,000 at any one time;
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- withdrawals of deposits are to be included as assessable income of the year of income in which the request to withdraw is made to the extent they had previously been allowed a deduction;
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- deposits repayable in a year of income on the death or bankruptcy of the owner or, other than for deposits made under the previous tax-linked IED scheme, when the owner ceases to carry on a business of primary production are to be included as assessable income of that year;
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- when a tax deductible component of a deposit is withdrawn, an amount, representing an instalment of income tax, will be withheld. The standard rate of the withholding is to be prescribed (initially it will be 29 per cent) and the amount of the withholding will be a credit in the owner's assessment of income for the income year;
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- where a depositor anticipates a marginal tax rate of less than the standard rate of withholding, the taxpayer may apply to reduce the withholding rate;
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- provisional tax in respect of a year of income following a year in which an income equalization deposit is lodged or withdrawn will be notified as if there had been no deposit or withdrawal;
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- deposits under the previous tax-linked IED scheme are to be transferred to the new scheme as from 1 July 1989 and be subject to the withholding provisions when withdrawn.
8. Certain other changes to the IED scheme are also provided in this Bill, concerning eligibility for deposits (in particular, companies will not be able to make deposits) and limits on deposits. Provisions are also made to phase out the present and previous IED arrangements.