Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon. Paul Keating. M.P.)Main Features
The main features of this Bill are as follows:
Transfer of losses within company groups (Clause 13)
The Bill will allow groups of Australian companies with 100 per cent common ownership to offset losses incurred in 1984-85 and later income years by one resident company within the group against the taxable income of other resident companies in the group. The losses transferable by a company will be calculated on the same basis as losses eligible for carry-forward under the present income tax provisions.
The loss deduction will be transferable only where there is 100 per cent common ownership between the company which incurs the loss and the company to which the right to an allowable deduction for the loss is to be transferred, during the income year in which the loss is incurred, the year in which it is to be allowable as a deduction to the transferee company and in any intervening year.
Under the present income tax law a loss arises, broadly, where there is an excess of allowable deductions (other than carry-forward losses) over all income, including such items as net exempt income and income subject to the inter-company dividend rebate - the section 46 rebate. A loss incurred in a prior year is required to be first offset against any net exempt income derived in a later year before it is deductible from the assessable income of that year. There will be no change in these basic rules. In other words, a loss incurred by a company will be calculated exactly as it is now, and will be deductible in the hands of the transferee company as if it had itself incurred the loss in a prior year.
Where a company with undeducted prior year losses derives assessable income during a year of income, that company is to be required to offset those losses against its own income before any balance may be transferred in that year to another company. Moreover, the amount of loss which may be transferred will be limited to an amount sufficient to extinguish its own taxable income of the year.
It is also proposed that where the current year loss provisions - an anti-avoidance measure - apply for the purpose of determining the loss incurred in a year of income by a company, any loss incurred in that year will not be transferable in that year. Further, a loss incurred in a prior year will only be available for transfer in a year if the loss would otherwise have been deductible from the assessable income of the transferor company of the relevant year (that is, if it had derived sufficient assessable income in that year) following any application of the anti-avoidance prior year loss provisions. The transferee company will also be required to satisfy the normal criteria for deductions under the prior year loss provisions.
Subject to these basic rules, and to the further rule that losses be transferred in the order in which they are incurred, a loss deduction will be transferable to another company in the year in which it is incurred or, where it is a film loss or a loss incurred other than from carrying on a business of primary production, in any of the next seven years. Reflecting the provisions of the existing law, losses incurred in carrying on a business of primary production will be available for transfer in any future year.
Public officers of the respective companies will be required to give written notice to the Commissioner of Taxation specifying details of the loss or losses which are to be transferred.
Finally, a deduction will not be allowable for any payment made by the transferee company to the transferor as consideration for the benefit it obtains from the right to deduct a loss from its assessable income. In the normal course such payments will not be assessable as income in the hands of the transferor company either.
Deductions for capital expenditure on traveller accommodation and certain income-producing buildings (Clauses 17 and 18)
These clauses will increase the rate of write-off available in respect of short-term traveller accommodation and non-residential income-producing buildings. At present, the deduction allowable is 2 1/2 per cent per annum of the construction cost over a period of 40 years.
The proposed amendments will allow an annual deduction of 4 per cent of the construction cost of eligible buildings over a 25 year period and will apply to those buildings (including extensions, etc.) that commenced to be constructed after 21 August 1984.
Investment Allowance (Clause 14)
It is proposed to extend by one year the date by which eligible property ordered or constructed prior to 1 July 1985 is required to be first used, or installed ready for use, to qualify for the investment allowance deduction. In order to so qualify, eligible property that is acquired under a contract entered into before 1 July 1985, or which a taxpayer commences to construct before that date, will be required to be first used, or installed ready for use and held in reserve, before 1 July 1987.
Deductions for expenditure on mineral exploration and prospecting (Clauses 15 and 16)
The Bill will amend the deduction arrangements for expenditure incurred on exploration or prospecting on a mining tenement in Australia for minerals other than gold or petroleum. Under the existing law, such expenditure is only deductible where the taxpayer carries on a mining business, and the amount of the deduction allowable in a year of income cannot exceed the taxpayer's net assessable income from the mining business and associated activities.
The proposed amendments will permit expenditure on exploration or prospecting incurred after 21 August 1984 to be deducted from the taxpayer's net assessable income, regardless of the source of that income. However, deductions will only be allowable if the Commissioner is satisfied that the taxpayer carries on, or proposes to carry on, a business of mining for minerals other than gold or petroleum or that the expenditure was necessarily incurred in carrying on a business of exploration or prospecting in Australia in order to discover minerals.
Zone rebates (Clauses 4, 11 and 12)
The Bill will implement the Budget proposals to increase the basic zone and "overseas forces" rebates by 25 per cent from 1 November 1984, and to change, with effect from 1 July 1984, the special zone area boundaries to adopt, on a no detriment basis, 1981 census data.
The proposed amendments will increase the basic fixed component of the rebate available to eligible taxpayers in Zone A, Zone B and the special areas in Zone A and Zone B. For qualifying taxpayers, the rebate for Zone A will be increased by $54 to $270, for Zone B by $9 to $45 and for the special areas by $188 to $938. The full amount of the increased rebates will be available for the 1985-86 and subsequent years of income. Reflecting the 1 November 1984 commencement date announced in the Budget for these increases, the amounts of the basic rebates for the 1984-85 income year will be $252 for Zone A, $42 for Zone B and $875 for the special areas in Zones A and B.
In line with the increase in the basic component of the Zone A rebate described above, the Bill also provides for a similar increase in the basic component of the comparable rebates available to certain persons serving overseas with a United Nations armed force, and to Defence Force members serving in certain overseas localities.
The Bill will also implement the Budget proposal to extend, with effect from 1 July 1984, eligibility for the special basic zone rebate to taxpayers residing in or near (or spending the qualifying period in or near) urban centres in Zone A or Zone B the population of which, on the basis of 1981 census data, has fallen below 2,500 since 1976. At the same time it will ensure that taxpayers in or near urban centres where populations have increased marginally beyond 2,500 since 1976 are not denied that rebate if they are at present eligible for the rebate based on 1976 census data.
Under existing arrangements, a special basic rebate of $750 (to be increased by this Bill to $875 in 1984-85 and to $938 in subsequent years), in lieu of the ordinary basic rebate (now $216 for Zone A and $36 for Zone B), is available to taxpayers residing or spending the required period at especially isolated places in either zone which are in excess of 250 kilometres by the shortest practicable surface route from the nearest urban centre with a population of 2,500 or more. Under the present law, the population of an urban centre is based on 1976 census data.
Rebates for dependants (Clauses 19 to 22)
The Bill will implement the Budget proposal to extend, with effect from 1 July 1984, entitlement to the income tax rebate for a dependent spouse to taxpayers living in a de facto relationship. Entitlement to the rebate will be determined on the same basis as if the taxpayer and his or her de facto spouse were legally married, and will be subject to the separate net income test. For these purposes, the Bill proposes that a de facto relationship will be one where a man and a woman live together as husband and wife on a bona fide domestic basis although not legally married to each other.
In its practical effect, this change will not generally alter the overall situation of a taxpayer with a de facto spouse in respect of whom a housekeeper rebate is allowable under the present law, unless that de facto spouse has separate net income which will in future be taken into account for the purpose of determining entitlement to the spouse rebate. It will mean, however, that a taxpayer who is now not entitled to a housekeeper rebate in respect of a de facto spouse - because the taxpayer has no dependent children or student children under 16 years of age - will, again subject to the separate net income test, become entitled to a spouse rebate for his or her de facto spouse.
Recognition of de facto relationships in determining eligibility for concessional rebates is also to be reflected in the zone rebates available to residents of remote areas and taxpayers serving with a United Nations force or an Australian defence force in a designated overseas area.
As a consequence of the recognition of a de facto spouse for the purposes of determining a taxpayer's eligibility for the dependent spouse rebate, the Bill also proposes that a taxpayer who contributes to the maintenance of the parent of his or her de facto spouse is also to be eligible for the dependent parent rebate. In addition, and subject to the threshold of $2000 which applies, a taxpayer with a de facto spouse will be eligible for the general concessional expenditure rebate for medical, dental, optical etc. expenses, funeral expenses, life insurance premiums and education expenses (where the spouse is under 25 and a dependant) paid by the taxpayer in respect of that spouse.
These measures are to operate with effect from 1 July 1984.
Rebate in respect of certain pensions, etc. (Clause 23)
The Bill will give effect to the Budget proposal to increase the income level at which the existing rebate of tax of $250 for taxpayers in receipt of Australian social security or repatriation pensions that are taxable in Australia begins to shade-out. The increase - from $5,429 to $5,533 in 1984-85 and to $5,595 in subsequent years - reflects the effect of the proposed income tax rate scale that is to apply from 1 November 1984. The maximum rebate will continue to shade-out at the rate of 12.5 cents for each dollar of taxable income in excess of the abovementioned new income levels. No rebate will thus be available at taxable incomes in excess of $7,532 in 1984-85 and $7,594 in subsequent years.
A further Budget proposal to which the Bill will give effect is the introduction of rebates of tax for taxpayers in receipt of social security unemployment, sickness or special benefits. For married (including de facto married) taxpayers, the maximum rebate of $75 will shade-out at the rate of 12.5 cents for each dollar of taxable income in excess of $7,989. For single taxpayers, the maximum rebate of $50 will shade-out at the rate of 12.5 cents for each dollar of taxable income in excess of $4,783. No rebate will thus be available at taxable incomes in excess of $8,588 for married taxpayers and $5,182 for single taxpayers. The rebates will apply in respect of the 1984-85 and subsequent years of income.
Interpretation - Provisional tax (Clause 24)
At base, provisional tax for one income year is calculated by reference to a taxpayer's taxable income of the preceding income year. The amendments proposed by clause 24 will ensure that the benefit of a deduction allowed to a taxpayer for eligible capital subscriptions to licensed management and investment companies in an assessment in respect of a year of income will not be reflected in the calculation of provisional tax for the following year. In other words, the deduction allowable in one income year will not reduce the amount of provisional tax payable in the next year of income.
Provisional tax for 1984-85 year of income (Clause 25)
Provisional tax for the 1984-85 year of income is to be calculated, basically, by applying 1984-85 rates of tax and medicare levy to 1983-84 taxable incomes as increased by 10 per cent. Generally, to the extent that rebates and credits are allowed in 1983-84 income tax assessments, they will be taken into account in calculating the 1984-85 provisional tax.
Expenditure on fences for disease control (Clause 8)
The Bill will give effect to the Budget announcement that the provisions under which a primary producer may claim an outright deduction for certain expenditure on fences for the purpose of assisting in the control or eradication of bovine brucellosis or tuberculosis are to be extended for a further two years. Under the proposed amendments eligible expenditure incurred by a taxpayer before 1 July 1986 may now qualify for this deduction.
Gifts (Clause 9)
The Bill will extend the provisions of the income tax law which authorise deductions for gifts of the value of $2 or more made to specified funds, authorities or institutions in Australia. The amendments will give effect to proposals announced in the Budget.
The proposed amendments will authorise deductions for gifts made after 20 March 1984 to the Work Skill Australia Foundation Incorporated or made after 21 August 1984 to The Academy of the Social Sciences in Australia Incorporated.
Further amendments will remove, for two categories of gifts that are already deductible, the requirement that gifted property must have been purchased by the donor within the twelve months immediately preceding the making of the gift. These are -
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- certain gifts to National Trust bodies, where the property is listed in the Register of the National Estate kept pursuant to the Australian Heritage Commission Act 1975; and
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- gifts of trading stock to an eligible fund, authority or institution, where the value of the gift is included in the donor's assessable income.
The value of property gifted to National Trust bodies will be taken to be its value at the time the gift is made, unless the property was purchased either within the preceding twelve months or for the purpose of gifting to a National Trust body. In these cases, the value of the property will be the lesser of its cost to the donor or its value when the gift is made. The value of trading stock gifted to eligible bodies will be taken to be, in all cases, the amount included in the assessable income of the taxpayer by virtue of sub-section 36(1) of the Principal Act, i.e., the value at the time the gift is made.
Special concessions for Australian trading ships (Clause 7)
Section 57AM of the Principal Act, which authorises special depreciation allowances for eligible Australian ships, will be amended to modify the requirements imposed on the Secretary to the Department of Transport when determining the maximum complement of officers and crew that is allowable for an eligible ship.
The amendments will remove the requirement that the Secretary determine the various designations of officers and crew members in respect of each ship.
The amendments will also remove any unintended suggestion that industrial relations considerations are the dominant or overriding factor to be taken into account by the Secretary when determining the manning level for a ship. Industrial relations considerations, where relevant, are to be but one of the considerations to which the Secretary is to have regard when determining a manning level.
The amendments will apply to manning notices, or variations of manning notices, given on or after 2 July 1984.
Elimination of tax consequences of substitutions of existing semi-government and local government securities (Clause 6)
The amendments proposed by the clause will eliminate the unintended tax consequences which could arise from the substitution of new securities of a State central borrowing authority (CBA) for existing semi-government or local government securities.
Under the present law, the substitution would result in a realisation of the existing securities at their market price on the day of substitution, and an acquisition of the new securities at the same price on that day. Dealers in securities thus would be taxable on any gains and could deduct any losses on the realisation.
It is proposed to treat the new securities received as a consequence of substitution by a CBA as a continuation of the existing securities, and as having been purchased on the same day and at the same cost. The amendments will apply to substitutions occurring after 7 August 1984 - the date on which the decision to legislate in this way was announced - where the CBA securities are issued on a matched term basis, that is, where the new security has the same coupon rate, face value and maturity date as the security it replaces. Minor variations in respect of the interest payment date will not exclude the substitution from the scope of the amendments, provided the interest date for the new security is within 31 days of the date interest was payable on the existing security.
Secrecy Provisions (Clause 3)
The Bill will amend the secrecy provisions of the income tax law to extend the definition of "officer" to include a person who, although not employed by the Commonwealth, performs services for the Commonwealth. This will facilitate certain officer exchange arrangements.
A more detailed explanation of the provisions of the Bill is contained in the notes that follow.