House of Representatives

Explanatory Memorandum

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

NOTES ON CLAUSES

PART 1 - PRELIMINARY

Clause 1: Short title

This clause provides for the amending Act to be cited as the Taxation Laws Amendment Act (No.2) 1988.

Clause 2: Commencement

Subject to subclauses 2(2) to 2(6), the amending Act is, by subclause 2(1), to come into operation on the day on which it received the Royal Assent.

By subclause 2(2) the amendment proposed by subclause 14(2) to omit subsections 51(6) and (7) of the Income Tax Assessment Act 1936 is to commence on 1 July 1988.

By subclause 2(3), clause 15 of the amending Bill, which will amend the special depreciation concession for Australian trading ships (section 57AM), will be taken to have come into operation on 22 December 1986.

By subclause 2(4), the amendments of the tax agents' provisions by the amending Act will come into operation on a date to be proclaimed.

Under subclause 2(5) the amendments being made by Part VI to the Taxation Laws Amendment (Foreign Tax Credits) Act 1986 will be deemed to have commenced on 22 July 1986, the day on which that Act came into operation.

By subclause 2(6), the technical amendments being made by Part VII to the Taxation Laws Amendment (Fringe Benefits Tax and Substantiation) Act 1987 will be deemed to have commenced on 18 December 1987, the day on which that Act came into operation.

But for subclauses 2(2), 2(3), 2(4), 2(5) and 2(6), the Amending Act would, by reason of subsection 5(1A) of the Acts Interpretation Act 1901, come into operation on the twenty-eighth day after the date of Royal Assent.

PART II - AMENDMENT OF THE FRINGE BENEFITS TAX ASSESSMENT ACT 1986

Clause 3: Principal Act

This clause facilitates references to the Fringe Benefits Tax Assessment Act 1986 which, in Part II, is referred to as the "Principal Act".

Clause 4: Certificate of sources of information

For the purposes of the Principal Act, a registered tax agent is a company, partnership or individual registered as a tax agent under Part VIIA of the Income Tax Assessment Act 1936. Clause 4 will insert subsection (2A) in section 71 of the Principal Act as a consequence of the insertion of section 251KB in Part VIIA by clause 49. That section will permit sole practitioner tax agents to register employees as nominees. New subsection 71(2A) will deem the agent's certificate that must be completed by any person who directly or indirectly charges any fee for preparing or assisting to prepare a fringe benefits tax return to have been duly signed if it is signed by a sole practitioner tax agent personally (paragraph (a)) or by a registered nominee of the sole practitioner tax agent (paragraph (b)).

Clause 5: Preparation of returns etc. on behalf of registered tax agents

By virtue of section 121 of the Principal Act, the only persons who may prepare a fringe benefits tax return or objection or transact business relating to a fringe benefits tax matter on behalf of a registered tax agent are:

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an employee of the tax agent;

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another registered tax agent; or

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in the case of a partnership tax agent, a member of the partnership.

A partnership or company tax agent may not allow any person to prepare a fringe benefits tax return or objection or conduct business relating to a fringe benefits tax matter except under the supervision and control of a registered nominee of the partnership or company. By new subsection 121(2A), being inserted in the Principal Act by clause 5, a sole practitioner tax agent may not allow a person to prepare a fringe benefits tax return or transact fringe benefits tax business on behalf of the tax agent except under the supervision and control of the tax agent (paragraph (a)) or a registered nominee of the tax agent paragraph (b)). The maximum penalty on conviction for an offence against section 121 is a fine of $1,000.

A registered tax agent may, however, engage a solicitor or counsel who is not a registered tax agent to prepare an objection or act in litigation or proceedings before a board, court or the Administrative Appeals Tribunal. A solicitor or counsel may also act in an advisory capacity in the preparation of a fringe benefits tax return or in the conduct of business relating to a fringe benefits tax return, objection or other matter.

Clause 6: Advertising etc. by persons other than registered tax agents

Section 122 of the Principal Act prohibits a person who is not a registered tax agent from advertising that fringe benefits tax returns will be prepared, or other fringe benefits tax business will be conducted, by the person. The maximum penalty that a court may impose on conviction for an offence against section 122 is a fine of $1000. Clause 6 will amend section 122 to provide for an exception to this general rule.

Paragraph (a) of clause 6 will ensure that the prohibition imposed by section 122 is subject to the exception contained in new subsection 122(2). The exception being inserted by paragraph (b) will enable a solicitor or counsel who is not a registered tax agent to advertise in relation to acts or things that the solicitor or counsel is authorised to do by virtue of existing subsection 121(3), that is, acting in the course of his or her profession:

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in the preparation of an objection (paragraph (a));

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in litigation or proceedings before a board, the Administrative Appeals Tribunal or a court (paragraph (b)); or

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in an advisory capacity in connection with the preparation of a fringe benefits tax return or with any fringe benefits tax matter (paragraph (c) ) .

PART III - AMENDMENT OF THE INCOME TAX ASSESSMENT ACT 1936

Clause 7: Principal Act

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

Clause 8: Foreign income and foreign tax

Subsection 6AB(2) of the Principal Act specifies in general terms the foreign taxes in respect of which an Australian resident is entitled to credit against the Australian tax payable on the foreign income which has borne the foreign tax. The basic requirement is that the foreign tax is one imposed by a "law" of a foreign country and includes for example a tax imposed upon income, profits or gains (whether of an income or capital nature) but does not include a "unitary tax".

Paragraph (a) of clause 8 will amend subsection 6AB(2) to exclude from its scope, and therefore effectively deny credit for, a foreign tax that is a "credit absorption tax".

Paragraph (b) of clause 8 will amend subsection 6AB(6) by inserting in that subsection a definition of a "credit absorption tax".

A "credit absorption tax" basically means a tax, or that part thereof, imposed by a law of a foreign country which would not have been payable but for the entitlement of the taxpayer or some other taxpayer to a credit for that foreign tax against the Australian tax on the foreign income which bore the foreign tax. Liability to the foreign tax, or the relevant part of it, is in essence dependent upon the availability of a credit for the foreign tax against the Australian income tax liability in respect of relevant income.

To illustrate, consider the example where country A imposes a tax on the receipt of income from sources in that country by non-residents. The tax is 15% of the gross amount of such income unless the recipient is a resident of a country such as Australia, which allows a credit to its residents for taxes paid to other countries, in which case the tax is 20% of the gross amount of the income. That is, the 15% rate applies only to residents of countries which do not allow such a credit. Accordingly one quarter of the country A tax in this example i.e., 5 percentage points, is a non-creditable "credit absorption tax".

Clause 9: Officers to observe secrecy

Section 16 of the Principal Act prohibits taxation officers from disclosing information concerning the income tax affairs of other persons except in certain specified circumstances. Clause 9 will correct the reference in paragraph 16(4)(g) of the Principal Act to the Compensation (Australian Government Employees) Act 1971-73 to reflect the change in the title of that Act to the Compensation (Commonwealth Government Employees) Act 1971.

Clause 10: Exemptions

Clause 10 proposes a number of amendments of section 23 of the Principal Act, which exempts a range of income receipts from income tax.

Paragraph (a) of clause 10 will omit from section 23 of the Principal Act paragraphs 23(x) and (y). The effect of these paragraphs is to exempt from income tax the income of prescribed international organisations and the official salaries and emoluments of officials of prescribed international organisations. Paragraphs 23(x) and (y) are no longer necessary because regulations made in April 1986 under the International Organizations (Privileges and Immunities) Act 1963 now provide the mechanism for conferring those income tax exemptions.

By subclause 55(3) of the Bill the repeal of paragraphs 23(x) and (y) is to apply to income tax assessments for the year of income commencing on 1 July 1988 and for all subsequent years of income.

The remaining paragraphs of clause 10 will amend paragraphs 23(z) and 23(zaa) of the Principal Act.

Subject to certain exceptions, paragraph 23(z) of the Principal Act exempts from tax income from a scholarship, bursary or other educational assistance - apart from Commonwealth assistance for secondary education or for the education of isolated children - derived by a student receiving full-time education at a school, college or university. Payments for tertiary assistance (other than for a dependent child) under the Commonwealth's educational assistance scheme known as AUSTUDY are not exempt.

Paragraph 23(zaa) of the Principal Act exempts from tax, also with exceptions, income from Commonwealth assistance for secondary education or for the education of isolated children. AUSTUDY payments for secondary education, except to the extent that they are provided for a dependent child, are excluded from the exemption.

By paragraph (b) of clause 10, the references to "the person who received the benefit" in subparagraphs (z)(v), (z)(vi), (zaa)(i) and (zaa)(ii) of section 23 are to be replaced by references to "the student". The effect of the amendment will be to make it clear that the exemption from income tax for payments for dependent children under AUSTUDY is confined to payments for children dependent on the student entitled to AUSTUDY assistance.

This amendment will apply, by virtue of subclause 55(4) of the Bill, to amounts received on or after the date the Bill receives the Royal Assent. For amounts received before then, subclause 55(5) requires the amendment to be ignored when determining the meaning of the expression "the person who received the benefit".

Paragraphs (c) and (d) of clause 10 will amend paragraph 23(z) to insert new subparagraphs 23(z)(viii) and 23(z)(ix). The new subparagraphs will remove the exemption presently available for educational assistance provided under the Aboriginal Study Assistance Scheme (ABSTUDY) other than assistance for secondary education. Payments for a child wholly or substantially dependent on the student receiving assistance will, however, remain exempt from income tax.

Paragraphs (e), (f) and (g) of clause 10 will insert three new subparagraphs in paragraph 23(zaa). New subparagraph 23(zaa)(iv) will remove the present exemption for secondary educational assistance under the Aboriginal Secondary Assistance Scheme (ABSEC) where the income is derived by a student 16 years of age or over. By new subparagraphs 23(zaa)(v) and 23(zaa)(vi), the present exemption for secondary educational assistance under ABSTUDY will be removed, with the exception of payments for children wholly or substantially dependent on the student receiving ABSTUDY assistance.

Subclause 55(6) of the Bill provides that the removal of the exemptions for ABSTUDY and ABSEC assistance is to apply to income received for an assistance period commencing on or after 1 January 1988.

Clause 11: Income of certain persons serving with an armed force under the control of the United Nations

This clause proposes a minor, technical, amendment of section 23AB of the Principal Act, under which a number of income tax concessions are accorded to certain Australian civilians serving with a United Nations armed force overseas. The clause will correct a reference in paragraph 23AB(5)(a) to the Compensation (Australian Government Employees) Act 1971-73, the title of which Act has been changed to the Compensation (Commonwealth Government Employees) Act 1971.

Clause 12: Exemption of certain pensions

Section 23AD of the Principal Act specifies which pensions, benefits and allowances paid under social security, repatriation and other welfare legislation are subject to, or exempt from, income tax.

Paragraph (a) of clause 12 proposes the amendment of the definition of "carer's pension" in subsection 23AD(1) of the Principal Act. That definition presently describes the person cared for by the recipient of a social security carer's pension as a "relative" of the carer. The amendment proposed will change the description of that person to a "severely handicapped person", reflecting the extension of availability of the carer's pension from 1 February 1988 to non-relatives of the person cared for. The effect of the change will be to subject the carer's pension to tax where a non-relative below age pension age cares for a handicapped pensioner of age pension age, consistent with the current treatment of the pension where a relative below age pension age cares for a handicapped pensioner of age pension age.

By subclause 55(7) of the Bill, the proposed amendment will apply to payments of carer's pension made for a fortnightly period that commences on or after the date of commencement of that subclause - that is, on or after the day on which the Bill receives the Royal Assent.

Paragraph (b) of clause 12 will amend subsection 23AD(3) by inserting a new paragraph (aa). Subsection 23AD(3) lists pensions, benefits and allowances that are exempt from tax. New paragraph (aa) will ensure that the training and living-away-from-home allowances for disabled persons undertaking vocational training that were previously exempt from tax under paragraph 23AD(3)(d) continue to be exempt now that authority for the payment of the allowances has been transferred from the Social Security Act 1947 to the Disability Services Act 1986.

By subclause 55(8) of the Bill, the new exemption is to apply to income tax assessments for the year of income in which 5 June 1987 occurred and for all subsequent years of income. That date is the date on which the Disability Services Act came into operation.

Clause 13: Exemption of income earned in overseas employment

The amendments proposed by clause 13 will amend section 23AG of the Principal Act by inserting new subsections (6A) to (6J). Section 23AG authorises a full or partial exemption from Australian tax, depending on the term of the period of employment, for salary or wages earned overseas by an Australian resident individual that are subject to tax in the country of source. Where the foreign earnings are derived during a continuous period of foreign service of at least 12 months a full exemption is provided. A proportionate exemption applies where the continuous period of foreign service is between 3 and 12 months.

Under the current operation of section 23AG, a continuous period of foreign service ends when the person ceases, either temporarily or permanently, to be engaged in foreign service. As the basic test for determining whether the whole or a proportion of foreign earnings is to be exempt relates to a continuous period during which a person is engaged in foreign service, a temporary absence, either within a continuing period of foreign service or between two or more periods of foreign service, could affect a person's exemption entitlement.

Proposed new subsections (6A) to (6D) will, in certain circumstances, allow two successive continuous periods of foreign service to be taken to constitute one continuous period of foreign service. This will be so where the break between successive periods of foreign service does not exceed a specified number of days.

For each whole day that a person is engaged in foreign service he or she will accrue an "absentee credit" of 31/334 of a day. A person who has been engaged in a continuous period of foreign service of 334 days or more will have an absentee credit balance of 31 days (31 days is the maximum credit balance that a person can have at any time). Where a person breaks a continuous period of foreign service by, for example, returning to Australia for reasons not directly related to his or her continuing foreign service engagement or by changing jobs overseas, the credit balance will be taken into account. Provided the person is not absent from foreign service for a period in excess of his or her accrued absentee credit balance, the period of foreign service either side of the period of absence will together constitute a continuous period of foreign service.

Subsection (6A) effectively defines the term "absentee credit balance" as the maximum break that can be taken between successive periods of foreign service without being taken to disrupt the continuity of foreign service.

Subsection (6B) effectively authorises an "absentee credit" of 31/334 for each whole day of engagement in foreign service up to a maximum credit balance of 31 days.

Subsection (6C) on the other hand creates an offsetting "absentee debit" for each day of a period of absence from foreign service occurring between successive periods of foreign service, and sets the legislative framework for determining the period of absence and the resulting absentee debit.

Subsection (6D) sets out the circumstances in which two successive continuous periods of foreign service will be taken together to constitute a single continuous period of foreign service. In broad terms, this will be where the number of days in the break between the two periods does not exceed the accumulated absentee credit balance available at the commencement of the break.

Subsection (6E) enables a break of less than 24 hours between two successive continuous periods of foreign service to be disregarded.

Subsection (6F) addresses situations where the Commissioner of Taxation is required to have regard, for the purposes of making an assessment in relation to foreign earnings of a year of income, to the number of days during which the person will be engaged in foreign service for a continuous period but, at the time of making the assessment, the period of the foreign engagement has not been completed. This subsection will allow the Commissioner of Taxation to make an assessment in respect of foreign earnings derived by a person in a year of income on the basis of the continuous period for which, as at the end of the year of income, it is expected that the person would be engaged.

Subsection (6G) will permit the Commissioner of Taxation to amend an assessment in the making of which he has applied proposed new subsection (6F) on the basis that a circumstance would, in his opinion, exist at a future time, and the circumstances which eventuate prove to be different from those that the Commissioner had anticipated.

This subsection could be activated where a proportionate exemption has been allowed based on the anticipation that a person would continue to be engaged in foreign service for a particular period after the end of the year of income, but the person is in fact engaged for a significantly longer or shorter period.

Subsection (6H) prevents an anomaly which could otherwise arise in a year of income where a resident taxpayer earns both exempt foreign earnings and other income. Existing subsections 23AG(4) and (5) result in any exempt foreign earnings being taken into account in determining the Australian tax payable on other income so that the exemption of the foreign earnings will not also reduce the Australian tax payable on that other income. This approach is generally referred to as 'exemption with progression'. In limited circumstances such as where the exempt foreign earnings approximate the Australian tax-free threshold amount, or where the foreign tax rate is high, this could result in a taxpayer paying a greater amount of Australian tax than would be the case if both the exempt foreign earnings and the other income were included in assessable income and a tax credit for the foreign tax paid on the foreign earnings were allowed under the general foreign tax credit system.

Subsection (6H) effectively provides that where application of the general foreign tax credit system would result in a lesser amount of Australian tax payable than would be payable by virtue of the application of the exemption with progression formula in subsection 23AG(4), section 23AG will not apply in relation to the taxpayer. The effect will be that the foreign earnings will be taxed in accordance with the general foreign tax credit system.

Subsection (6J) defines a "whole day" for the purposes of subsections (6B) and (6C) which respectively provide for absentee credits or debits to arise at the end of each whole day of engagement in foreign service or absence from foreign service. A whole day is the period from midnight to midnight.

Clause 14: Losses and outgoings

Under section 160AFD of the Principal Act a foreign loss incurred by a taxpayer in a year of income in respect of a class of income derived from a "foreign source" can be offset only against future income of the same class derived from the same foreign source. In keeping with section 160AFD, subsection 51(6) of the Principal Act provides that where, in a year of income, the amount of a class of income derived by a taxpayer from a foreign source is exceeded by the sum of certain deductions allowable against that income, the excess is not deductible from other assessable income under subsection 51(1). That excess could, however, be so deductible to the extent to which it consists of amounts deductible under provisions of the Principal Act other than subsection 51(1).

Against that background, clause 14 will amend section 51 of the Principal Act in two respects.

Subclause (1) will effect a minor technical amendment. The reference to a "class of foreign income" in subsection 51(6) is to be changed to a "class of income", so as to correspond to the reference to that expression in subsection 51(7). Subsection 51(7) gives the term "class of income" the same meaning as it has in section 160AFD.

Subclause (2) will repeal subsections 51(6) and (7) of the Principal Act. By subclause 2(2) the repeal of these subsections will take effect from 1 July 1988 and, by subclause 55(3), the amendment will apply to assessments in respect of income of the year of income commencing on 1 July 1988 and of all subsequent years of income. Those subsections are to be replaced by new section 79D - see notes on clause 16.

The limitation on deductions allowable under subsection 51(1) effected by subsections 51(6) and (7) will be achieved in future by proposed new section 79D. The proposed new section will also have application for the 1988-89 and later years of income to other deduction provisions of the Principal Act such as sections 53 (repairs), 54 (depreciation) and 63 (bad debts).

Clause 15: Special depreciation on trading ships

This clause will amend section 57AM of the Principal Act, which sets out the special accelerated depreciation concession that is allowable for eligible Australian trading ships. The effect of the amendment will be to restrict the concession to ships which satisfy the existing eligibility criteria in the section (with some minor modifications, which are discussed below) as well as qualifying for a grant under the Ships (Capital Grants) Act 1987 (the Grants Act).

Introductory note

Under section 57AM, a ship which qualifies as an 'eligible Australian ship' will be depreciable on a prime cost basis at a rate of 20% over five years. The concession is more generous than the existing 5/3 depreciation concession as it provides a full 20% deduction in the first year of use, irrespective of when in that year the ship commenced to be used, or installed ready for use, for the purpose of producing assessable income. Additionally, where a ship qualifies as an eligible Australian ship within 90 days of its commissioning, the first year's deduction will be advanced to the year preceding the year in which the ship was commissioned (provided that in that year the taxpayer incurred an amount of expenditure on the construction of the ship equal to 20 of the cost of the ship; if less than that 20% cost was incurred, then the deduction in the pre-commissioning year will be reduced to the amount of the expenditure incurred and the balance of the 20% will be deductible in the sixth year).

Under the Grants Act, a grant is payable to the owner of an eligible trading ship, being either a new, second-hand or extensively modified ship. The amount of the grant is equal to 7% of the purchase or conversion price of the ship, as the case may be.

A grant is only payable to a shipowner if its construction or purchase was arranged on or after 22 December 1986 and it is delivered to the shipowner, and registered in Australia, on or after 1 July 1987 and before 1 July 1992 (in the case of new or extensively modified ships) or 1 July 1990 (for second-hand ships).

Notes on Clauses

Paragraph (a) of clause 15 will insert two new definitions into subsection 57AM(1), which is the general definition provision for the section:

"Grants Act ship" is a ship in respect of which a taxpayer is or was entitled to a capital grant under subsection 8(1) of the Grants Act. Under that subsection, a grant is payable if a shipowner purchases an eligible ship that has never been commissioned - in other words, a new ship. Unless a ship is a Grants Act ship, section 57AM will not apply from 22 December 1986 except if, on that day, the ship was the subject of either a current manning notice given under section 57AM or a current outstanding application for a manning notice.

"pre-December 1986 manning notice" is a manning notice given under subsection 57AM(22), or requested under subsection (20), before 22 December 1986. It also includes a variation (made at any time) of such a notice. Ships which are the subject of a pre-December 1986 manning notice will be eligible for the accelerated depreciation concession, subject to other conditions in section 57AM being met. Ships which are not the subject of a pre-December 1986 manning notice and in respect of which a capital grant is not payable will not be eligible for the concession.

Paragraph (b) of clause 15 will amend subsection 57AM(4), which sets out the criteria that must be satisfied in order for a ship to qualify as an eligible Australian ship, to exclude from eligibility a ship delivered to the taxpayer, or registered under the Shipping Registration Act 1981, after 30 June 1992.

Under subsection 57AM(4), two of the criteria that must be satisfied before a ship qualifies as an eligible Australian ship are:

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the ship, when manned, must be manned by persons each of whom is an Australian resident or a non-resident whose temporary employment on the ship has been approved by the Secretary to the Department of Transport and Communications pursuant to subsection 57AM(26) (paragraph 57AM(4)(d)); and

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the ship must be used, or held in reserve for use, in operations of a kind specified in a manning notice in force in relation to the ship and must not, when manned, be manned at a level that exceeds the level specified in the notice for operations of that kind (paragraph 57AM(4)(h)).

As there are similar, more comprehensive conditions contained in the Grants Act, the two criteria are to be amended, by paragraphs (c) and (d) of this clause, so that they do not relate to Grants Act ships.

Paragraph (c) of clause 15 will amend paragraph 57AM(4)(d) to exclude Grants Act ships from the requirements contained in that subsection relating to the residency of the crew members.

Paragraph (d) of clause 15 will substitute new paragraph (4)(h) which will insert two new, but alternative, eligibility criteria in place of the existing criteria requiring compliance with a manning notice. Under these new criteria, a ship must either be:

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a Grants Act Ship (new subparagraph (4)(h)(i)), in which case there is no need for the ship to satisfy manning requirements contained in section 57AM as such requirements are contained in the eligibility criteria for the payment of a grant under the Grants Act; or

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a ship that is used or held in reserve for use in operations of a kind specified in a pre-December 1986 manning notice issued under subsection 57AM(22) and that is not manned at a level that exceeds the level specified for such operations in the notice (new subparagraph (4)(h)(ii)). This is the same criterion contained in old paragraph (4)(h), with the exception that the manning notice must be obtained or requested before 22 December 1986. It is this subparagraph which closes off section 57AM, from that date, to ships that are not Grants Act ships.

Paragraph (e) of clause 15 will insert new subsection (4A) which will apply where a Grants Act ship is being depreciated under section 57AM and the grant becomes repayable under the Grants Act. At present, where a ship ceases to be an eligible Australian ship depreciation ascertained under section 57AM will generally not be allowable in the year in which the ship ceased to be eligible or in subsequent years (subsection 57AM(8)). However, where a ship ceases to be an eligible Australian ship within the first 12 months after becoming such a ship, section 57AM is taken never to have applied to the ship. Consequently, all depreciation allowed under section 57AM becomes repayable (except to the extent that depreciation may be allowable under other provisions of the Principal Act).

Under subsection 26(1) of the Grants Act, a grant may become repayable (in whole or in part) within five years after being paid if certain events occur. Where a grant becomes repayable under this provision, new subsection (4A) will provide that the ship will cease to be an eligible Australian ship on the same basis that would apply if any of the other eligibility criteria in subsection 57AM(4) ceased to be satisfied - that is, as outlined in the preceding two paragraphs.

Under subsection 26(2), a grant may become repayable at any time if certain other circumstances occur. Where a grant becomes repayable under this provision, new subsection (4A) will provide that the ship is to be treated as if it had ceased to be an eligible Australian ship within 12 months of so becoming one, so that section 57AM depreciation will be taken never to have been allowable.

Paragraphs (f) and (g) of clause 15 will insert new paragraph 33(ha). One of the criteria that must be presently satisfied in order for a ship to qualify as an eligible Australian ship is that it is acquired new by the taxpayer. Subsection 33 sets out the single situation in which a taxpayer may be eligible for the concession without having acquired the ship new. That is where a ship is acquired new by a person who subsequently, after not more that six months, sells the ship to a taxpayer who in turn leases the ship back to its original owner. Subsection (33) treats the second owner as having acquired the ship new and the commissioning date of the ship as the date on which the taxpayer acquired the ship from the original owner.

In this case, however, it is the first owner who is eligible for the grant under the Grants Act, not the taxpayer claiming depreciation under section 57AM. Consequently, several references to 'taxpayer' in the amendments being made by this clause have to be taken to mean, in these cases, the lessee rather than the taxpayer.

For this purpose, new paragraph 33(ha) will deal with two such situations. They are:

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references to Grants Act ships of a taxpayer (i.e., a ship in respect of which the taxpayer has been paid a grant) will be taken to include a situation where the lessee in the sale and lease back arrangement has received the grant (subparagraphs 33(ha)(i) and (iii));

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new paragraph 57AM(4)(ba) will require a Grants Act ship to have been delivered to a taxpayer before 1 July 1992 in order for the concession to apply. In the sale and leaseback situation, that date will be taken to be the date on which the ship is delivered to the lessee/original owner. Consequently, even though the ship may be delivered to the taxpayer/lessor after that date, the taxpayer will still be entitled to section 57AM depreciation provided other conditions are satisfied (subparagraph 33(ha)(ii)).

Clause 16: Limitation on deductions from foreign income

Clause 16 will insert in the Principal Act proposed new section 79D which will in effect ensure that a current year foreign loss can only be carried forward in terms of section 160AFD of the Principal Act for offset against future foreign income of the same class from the same foreign source.

Subsection 79D(1) specifies that where the amount of a "class of income" derived by a taxpayer in a year of income from a "foreign source" is exceeded by the sum of certain deductions, the respective deductions are to be reduced by amounts proportionate to those deductions and equal in total to the amount of the excess. In practical terms this means that each deduction will be reduced by a proportionate amount of the excess.

The deductions referred to are:

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any deductions allowed or allowable from the assessable income of the taxpayer of the year of income that relate exclusively to income of that class derived from that source (paragraph (1)(a)); and

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so much of any other deductions allowed or allowable from that assessable income (other than apportionable deductions) as, in the opinion of the Commissioner, may appropriately be related to income of that class derived from that source (paragraph (1)(b)).

To illustrate the operation of new section 79D, consider a situation where the amount of a class of income derived by a taxpayer in a year of income from a foreign source is $1000. The deductions allowable under the Principal Act against that income are $200, $400 and $600 under subsections 51(1), 53(1) and 54(1) respectively. The aggregate deductions allowable exceed the amount of income by $200 so that the respective deductions are to be reduced by a proportionate amount of the excess. This means that the deductions allowable in the year of income under subsections 51(1), 53(1) and 54(1) will be reduced respectively by

((200)/(1200)) * 200


i.e., $33,

((400)/(1200)) * 200


i.e., $67 and

((600)/(1200)) * 200


i.e. $100. The reductions equal in total $200, being the amount of the excess.

Subsection 79D(2) is a drafting measure that will give the terms "class of income" and "foreign source" as used in proposed new subsection 79D(1) the same meanings as they have in section 160AFD of the Principal Act.

Clause 17: Domestic losses of previous years

Section 80 of the Principal Act defines a loss incurred by a taxpayer in a year of income, and deals with the manner in which, and the extent to which, the taxpayer can deduct from his or her income of any year of income any losses incurred in previous years. Subsection 80(8) is designed to ensure that the provisions of section 80 are limited in their application to losses incurred in deriving income from sources in Australia. It does this by providing, basically, that in calculating the amount of a loss for a year of income under subsection 80(1), the amount of any foreign loss is to be disregarded.

Section 160AFD of the Principal Act deals with the offset of foreign losses. Subsections 160AFD(6) and (7) give meaning to the expressions "class of income" and "foreign source" for the purposes of the application of section 160AFD in respect of foreign losses. Subsection 80(9) in turn gives the expressions for the purposes of subsection 80(8), the meanings they have in subsections 160AFD(6) and (7) except that subsection 80(8) currently refers to a "class of foreign income".

Clause 17 will therefore effect a minor technical amendment to change the reference to a "class of foreign income" in subsection 80(8) to "a class of income".

Clause 18: Interpretation

Section 102M of the Principal Act defines certain terms used in Division 6C of Part III of the Act which deals with the taxing of income of certain public trading trusts.

Paragraph (a) of clause 18 will omit reference to paragraph 23(x) of the Principal Act from the definition of 'exempt entity' in section 102M. This amendment is a consequence of the deletion from the Principal Act of paragraph 23(x) by paragraph 10(a) of this Bill - see notes on that paragraph.

Paragraph (b) of clause 18 will insert an additional paragraph (paragraph (ba)) in the definition of 'exempt entity' to take into account that the exemption from income tax previously accorded the income of prescribed international organisations by paragraph 23(x) of the Principal Act is now conferred by regulations made under the International Organizations (Privileges and Immunities) Act 1963.

The effect of the amendments being made by paragraphs (a) and (b) of clause 18 is to substitute a reference to the regulations made under the International Organizations (Privileges and Immunities) Act 1963 for the reference to paragraph 23(x) which is being omitted.

By subclause 55(9) of the Bill the amendments made by clause 18 are to apply to income tax assessments for the year of income commencing on 1 July 1988 and for all subsequent years of income.

Clause 19: Interpretation

Section 121F of the Principal Act defines certain terms used in Division 9C of Part III of that Act. Division 9C nullifies certain tax avoidance schemes which sought to exploit the tax-exempt status of various bodies, organisations, associations and funds by diverting taxable income to them from individuals and companies who would otherwise have borne tax on the income.

Paragraph (a) of clause 19 will omit paragraph 23(x) of the Principal Act from the definition of 'relevant exempting provision' because that paragraph is being omitted from the Principal Act by paragraph 10(a) of this Bill - see notes on that paragraph.

Paragraphs (b), (c) and (d) of clause 19 will insert two additional paragraphs (paragraphs (baa) and (cb)) in the definition of 'relevant exempting provision' in subsection 121F(1). The additional paragraphs are a consequence of the exemption from income tax previously accorded by paragraph 23(x) now being conferred by regulations made under the International Organizations (privileges and Immunities) Act 1963. The new paragraphs take into account the time from which the deletion from the Principal Act of paragraph 23(x) will have effect.

By subclause 55(9) of the Bill the amendments made by clause 19 are to apply to income tax assessments for the year of income commencing on 1 July 1988 and for all subsequent years of income.

Clause 20: Allowable Capital Expenditure

Clauses 20 and 21 will amend Division 10AA of the Principal Act - the petroleum mining provisions - to extend the income tax deductibility presently available under that Division for certain cash bids paid by a taxpayer for the grant of a petroleum exploration permit to include cash bids paid under all Commonwealth, State and Northern Territory cash bidding systems for the grant of offshore exploration permits and production licences. The effect of the amendment proposed by clause 20 will be to include in the allowable capital expenditure of a taxpayer for Division 10AA purposes the amount of any cash bid paid under any of the above cash bidding systems.

Division 10AA provides income tax deductibility for allowable capital expenditure incurred by a taxpayer in carrying on petroleum mining operations in Australia. Where expenditure is incurred after 19 July 1982, it is deductible on a straight line basis over 10 years or the life of the producing field to which the expenditure relates, whichever is the lesser. Section 124AA defines "allowable capital expenditure" for the purposes of Division 10AA to include a number of classes of capital expenditure that might not otherwise be regarded as expenditure incurred in the carrying on of prescribed petroleum operations. One of these classes of expenditure is cash bids paid under the Commonwealth's 'new' cash bidding system.

Under the Petroleum (Submerged Lands) Act 1967, there are 'new' and 'old' systems of cash bidding, and both systems continue to apply. The 'old' cash bidding system provides for cash bids to be made for exploration permits or production licences in respect of blocks that have already been the subject of either a permit or a production licence which has been effectively discontinued. Each of the States and the Northern Territory has an equivalent 'old system' for cash bidding under their corresponding Petroleum (Submerged Lands) Acts. The 'new' system, which was introduced in 1985, provides a cash bidding system for the grant of petroleum exploration permits only. New South Wales also has a system of cash bidding complementary to the Commonwealth's 'new' system, and it is expected that other States will also introduce complementary systems.

Clause 20 will amend paragraph 124AA(2)(ba), which includes as allowable capital expenditure the amount of any successful cash bid under the Commonwealth 'new' cash bidding system (provided a production licence is subsequently issued), to include similar bids made under the Commonwealth 'old' cash bidding system, as well as the State and Northern Territory equivalent 'old' and 'new' systems.

Clause 21: Allowable capital expenditure in respect of cash bidding payments for exploration permits and production licences

As mentioned in the preceding clause, clauses 20 and 21 will amend Division 10AA of the Principal Act to extend income tax deductibility to capital expenditure by way of cash bids for the grant of an offshore petroleum exploration permit or production licence under any of the Commonwealth, State and Northern Territory 'old' and 'new' cash bidding systems. A discussion of these systems is contained in the notes on clause 20.

This clause will amend section 124ABA of the Principal Act, which identifies the kinds of cash bidding payments, as well as the quantum of those payments, that are to be included as allowable capital expenditure of the taxpayer for purposes of Division 10AA (see notes on clause 20).

The effect of existing section 124ABA is that, where a taxpayer has an entitlement to an 'eligible cash bidding amount' in respect of the grant of an exploration permit, that amount is taken to be capital expenditure incurred by the taxpayer in the year of income in which a production licence is granted in respect of any part of the area covered by the exploration permit.

A taxpayer has an entitlement to an 'eligible cash bidding amount' if the taxpayer is the original successful bidder for the exploration permit, or if the taxpayer is a successor to the original bidder. Subsection 124ABA(2) allows a person (''the vendor") who has an entitlement to an eligible cash bidding amount to transfer all or part of that entitlement to another person ("the purchaser") who purchases a qualifying interest in the exploration permit. In order for the purchaser's expenditure to be deductible the vendor and purchaser must give notice to the Commissioner of Taxation that they have agreed to the transfer to the purchaser of so much of the vendor's entitlement to the eligible cash bidding amount as is specified in the notice. As a consequence, the purchaser will obtain a deduction for the amount specified in the notice (deductible from the time when the relevant production licence is granted) and the amount of the vendor's deduction is correspondingly reduced.

The existing provisions in section 124ABA of the Principal Act relating to the determination of deductibility for cash bids in the event of the original bidder selling all or part of the interest in a permit acquired under the bid prior to the grant of a production licence will also apply, without the need for any amendment, in the case of a transfer of an interest in a permit acquired under the cash bidding arrangements covered by these amendments. It should be noted, however, that in the case of a transfer of an interest in a permit after the issue of a production licence or the transfer of an interest in a production licence, the determination of deductibility of the relevant cash bid will be governed by existing section 124AB. The latter effectively enables the owner of petroleum prospecting or mining rights to transfer to a purchaser of those rights the benefit of deductions for certain undeducted capital expenditure incurred prior to the transaction. As in the case of a transfer under section 124ABA, there will be a corresponding reduction in the relevant capital expenditure available for deduction to the vendor.

Consistent with the existing income tax law, it will not be necessary for a purchaser who acquires an interest in an exploration permit pursuant to subsections 124ABA(2) and (3) or a petroleum prospecting or mining right under section 124AB to obtain a production licence or commence petroleum operations in order to be eligible to deduct the cash bid included in the amount specified in the relevant notice lodged with the Commissioner of Taxation. In such circumstances, the amount of the cash bid will be deductible to the purchaser so long as it would have been deductible in the hands of the vendor.

The effect of the amendments proposed by clause 22 will be to amend section 124ABA so that - in addition to cash bids paid under the Commonwealth's 'new' system of cash bidding - the following amounts paid as cash bids for offshore petroleum exploration permits or production licences will be taken to be expenditure of a capital nature incurred by a taxpayer for the purposes of determining allowable capital expenditure under Division 10AA :

•

amounts paid as cash bids under the Commonwealth's 'old' system of cash bidding; and

•

amounts paid as cash bids under State and Northern Territory cash bidding systems which are complementary to either the Commonwealth's 'new' system or 'old' system of cash bidding.

Under the 'old' system, a cash bidding application must be accompanied by a fee of $3000 together with a deposit of 10 per cent of the specified bid; for an unsuccessful applicant, the full amount of the deposit, as well as 90 per cent of the application fee, is refunded. In the case of a cash bid for an exploration permit, the bid must be of a fixed amount. However, in relation to a cash bid for a production licence, the bid may, at the direction of the Designated Authority constituted under the Petroleum (Submerged Lands) Act - referred to as the "Petroleum Act", comprise any of the following:

•

a bid of a fixed amount;

•

a rate of royalty in respect of petroleum recovered under the licence; or

•

both a rate of royalty and a fixed amount that the applicant must pay if the licence is granted.

If the taxpayer's bid is successful the balance of the cash bid is either payable in full prior to the grant of the exploration permit or production licence, or the bidder can enter into an agreement under section 109 of the Petroleum Act to repay the balance of the cash bid over a period not exceeding 21 years. Interest is payable on the unpaid balance, and is deductible under subsection 51(1) of the Principal Act. The successful bidder may also be required to pay a security on grant of the permit or licence, but neither that amount nor the application fee will be deductible for income tax purposes. The rate of royalty on petroleum recovered is not a cash bid and is deductible when incurred under subsection 51(1) of the Principal Act. However, any amount paid by the applicant in addition to the royalty will be treated as a cash bid for income tax purposes.

In the case of a deposit paid by a successful bidder, if the bidder fails to request the grant of the exploration permit or production licence, the deposit is forfeited but would be treated as a loss for capital gains tax purposes. This is based on the deposit being treated as an option and consequently an asset for capital gains tax purposes.

Paragraph (a) of clause 21 will insert new subsections 124ABA(1A) and 124ABA(1B). Under existing subsection 124ABA(1), a cash bidding payment for the grant of an exploration permit under the Commonwealth's 'new' system is not taken to be incurred by the taxpayer, and hence does not commence to be deductible under Division 10AA, until the year in which a production licence is subsequently granted in respect of any part of the area covered by the permit. However, under the Commonwealth's 'old' system to which Division 10AA is now to apply (and its State and Northern Territory equivalents), the cash bid for an exploration permit may be paid in instalments over a period of 21 years - so that instalments may be paid after the grant of the production licence. In these cases, new subsection 124ABA(1A) will provide that such an instalment shall be taken to be capital expenditure incurred on the date on which it is paid.

Under proposed subsection 124ABA(1B), where a taxpayer makes a cash bid for a petroleum production licence under the Commonwealth, State or Northern Territory 'old' systems, the taxpayer will be taken to have incurred that expenditure for Division 10AA purposes:

•

at the time when the licence is granted, if the payment is made before the grant of the production licence;

•

at the time when the payment is made, in any other case.

Paragraph (b) of clause 21 will amend subsection 124ABA(4), which determines the quantum of an eligible cash bidding amount (i.e., the amount of a taxpayer's deductible cash bidding expenditure). In calculating that amount, the amount of the cash bids paid under the Commonwealth 'new' scheme is taken into account. The effect of the proposed amendment will be that, in future, subsection (4) will also take into account cash bids paid, under the extended range of cash bidding systems to which Division 10AA is proposed to apply, where the payments are in respect of an exploration permit and are paid prior to the grant of a production licence.

Paragraph (c) of clause 21 will insert new subsection 124ABA(4A), which will provide that a reference to the Petroleum Act (including relevant provisions of that Act) for the purpose of section 124ABA will include a reference to the corresponding law (including relevant provisions of that law) of a State or the Northern Territory - that is, the Petroleum (Submerged Lands) Acts of the States and the Northern Territory. It is relevant that subsection 6A(6) of the Petroleum Act also refers to such laws as "corresponding". Each of the States and the Northern Territory has legislation complementary to the Commonwealth legislation in respect of the 'old' system of cash bidding. In addition, New South Wales has complementary legislation in respect of the Commonwealth's 'new' system of cash bidding and the other States and the Northern Territory may introduce similar systems in the future. Subsection 124ABA(4A) covers not only existing legislation, but will also apply if a State - other than New South Wales - or the Northern Territory introduces a system of cash bidding that is complementary to the Commonwealth's 'new' system.

Paragraph (d) of clause 21 will make a technical drafting amendment to subsection 124ABA(6) to replace a reference to the "Petroleum (Submerged Lands) Act 1967" by "Petroleum Act" in certain definitions in that subsection. For the sake of simplicity, "Petroleum Act" will be defined in the subsection to mean the "Petroleum (Submerged Lands) Act 1967".

Paragraph (e) of clause 21 will make a technical drafting amendment to subsection 124ABA(6) to vary the definition of "cash bidding exploration permit" to take account of the proposed amendment to subparagraph 124ABA(4)(b)(i) referred to in the note on paragraph (b) above.

Paragraph (f) of clause 21 will make a technical drafting amendment to subsection 124ABA(6) to omit the definition of "qualifying cash bidding payment". That definition related to a cash bid paid under the Commonwealth 'new' system. Such a bid is now included in the definition of a "permit cash bidding payment" (see below).

Paragraph (g) of clause 21 will amend subsection 124ABA(6) to include two definitions in order to identify the cash bids paid under the Petroleum Act for production licences and exploration permits for the purposes of section 124ABA.

"licence cash bidding payment" is defined as meaning:

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the following amounts paid on or after 15 January 1986 in respect of the grant of a production licence:

• .

a deposit equal to 10 per cent of the amount of the cash bid - referred to in paragraph 48(1)(b) of the Petroleum Act;

• .

the balance of the cash bid, paid in full prior to the grant of the production licence - referred to in paragraph 50(b) of the Petroleum Act;

• .

an amount paid as an instalment either under an agreement entered into under section 109 of the Petroleum Act or by the registered holder of the licence, where the payment of an instalment under such an agreement is in default, by virtue of the obligation to pay imposed under subsection 109(4); or

•

a deposit equal to 10 per cent of the amount of a cash bid under the Commonwealth's 'old' system - referred to in paragraph 48(1)(b) of the Petroleum Act - where the deposit was paid before 15 January 1986 and none of the balance of the cash bid was paid before that date.

"permit cash bidding payment" is defined as meaning:

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the following amounts paid on or after 15 January 1986 in respect of the grant of an exploration permit:

• .

an amount of a cash bid paid in full prior to the grant of the exploration permit, under the Commonwealth's 'new' system of cash bidding - referred to in paragraph 22B(5)(b) of the Petroleum Act;

• .

a deposit equal to 10 per cent of the amount of a cash bid paid under the Commonwealth's 'old' system - referred to in paragraph 24(1)(b) of the Petroleum Act;

• .

an amount equal to the balance of that cash bid which is paid in full prior to the grant of the production licence - referred in paragraph 27(b) of the Petroleum Act;

• .

an amount paid as an instalment under an agreement entered into under section 109 of the Petroleum Act or by the registered holder of the licence, where the payment of an instalment under such an agreement is in default, by virtue of the obligation imposed under subsection 109(4); or

•

a deposit equal to 10 per cent of the amount of a cash bid under the Commonwealth 'old' system - referred to in paragraph 24(1)(b) of the Petroleum Act - where the deposit was paid before 15 January 1986 and none of the balance of the cash bid was paid before that date.

These two definitions not only cover all amounts payable as cash bids under the Petroleum Act - that is, amounts paid as cash bids under both the Commonwealth 'old' and 'new' systems of cash bidding - but by virtue of proposed new subsection (4A) (see notes on paragraph (c) above) will extend also to amounts payable under the equivalent State and Northern Territory systems.

"Petroleum Act" is defined in subsection 124ABA(6) as meaning the Petroleum (Submerged Lands) Act 1967. However, by virtue of proposed new subsection 124ABA(4A) (see notes on paragraph (c) above) it also extends to the corresponding State and Northern Territory Acts.

Clause 22: Liability to withholding tax

Section 128B of the Principal Act sets out the circumstances in which withholding tax is payable in respect of dividend and interest income derived by non-residents on and after 1 January 1968 and also authorises specific exemptions from withholding tax.

This clause will omit from paragraph 128B(3)(b) the reference to paragraph 23(x) of the Principal Act, as a consequence of the deletion from the Principal Act of paragraph 23(x) by paragraph 10(a) of this Bill - see notes on paragraph 10(a). The amendment to be effected by this clause is appropriate because the taxation exemptions now conferred in respect of income of prescribed international organisations by regulations made under the International Organizations (Privileges and Immunities) Act 1963 extend to withholding tax.

Clauses 23 to 27 : Thin Capitalisation

Introductory Note

Clauses 23 to 27 will amend Division 16F of Part III of the Principal Act which applies thin capitalisation rules to foreign investors who have an interest of at least 15% in an Australian business or investment. Deductions for interest on debt to the foreign investors or their non-resident associates are only allowable to the extent that the debt does not exceed a permitted ratio of foreign debt to foreign equity.

Clause 25 will amend section 159GZF to remove an avenue for avoidance where foreign investors may have provided loan funds to a partnership or trust in which they were not themselves partners or beneficiaries. Clause 26 will repeal existing subsection 159GZG(6) and recast the anti-avoidance provision to give it a generally much narrower scope of application. The new anti-avoidance measures in subsections 159GZG(6) to (11) deal with the retention of equity in the Australian investment and are designed to ensure that any equity injected into an Australian enterprise to comply with the debt/equity rules is not withdrawn within a period (the 'clawback period') of two years after the year of its introduction. Where that equity is prematurely removed a 'clawback' requirement operates to disregard any equity withdrawn within the defined period. Clause 27 will effect a consequential amendment to subsection 159GZR(2).

Clause 26 will also amend section 159GZG to clarify the operation of subsection (1) to ensure that it cannot be interpreted in a way that double counts company losses to the disadvantage of taxpayers. Clauses 23 and 24 will amend sections 159GZC and 159GZD to clarify and simplify the operation of those provisions.

Clause 23: Associates

The definition of "associate" in section 159GZC of Division 16F of the Principal Act is in similar terms to the definition of associate in other parts of the Act. By this clause sub-subparagraphs (1)(a)(v)(B), (1)(b)(iv)(B) and (1)(b)(v)(B) will be amended to change the words 'more than', wherever appearing, to 'at least'. This will make the 15% test for voting power consistent with the 15% test for rights to dividends in those paragraphs and also with the 15% voting power test in section 159GZJ.

Clause 24: Australian-owned non-resident company

Existing section 159GZD of the Principal Act defines an "Australian-owned non-resident" company for the purpose of excluding such a company from being a "foreign controller" as defined in section 159GZE. To ensure that an Australian-owned non-resident company cannot also be an associate of a foreign controller, paragraph (b) of clause 24 will make the tests for an Australian-owned non-resident company cumulative. In addition, paragraph (a) will change the words 'not less than' to 'more than' in reference to the 85% ownership test.

Although the present thin capitalisation rules operate to give the intended result of subjecting investments of foreign controllers through an Australian-owned non-resident company to the thin capitalisation controls, the amendment will allow the rules to operate in a more direct manner by removing an overlap between the definitions of associate and Australian-owned non-resident.

Clause 25: Foreign debt

This clause will amend section 159GZF of the Principal Act to alter the definition of "foreign debt" in respect of partnerships and trusts to make that definition consistent with the definition of "foreign debt" in relation to companies. References to 'assessable (non-resident partner) income' and 'assessable (non-resident beneficiary) income', in paragraphs (2)(b) and (3)(b) of section 159GZF are being altered to references to 'assessable income of the partnership' and 'assessable income of the trust estate' respectively.

Clause 26: Foreign equity

Subsection 159GZG(1) of the Principal Act is to be amended by paragraphs (a) to (d) of clause 26 to clarify its operation in determining the foreign equity of resident companies in situations where such companies have accumulated losses. Paragraphs (b) and (d) of clause 26 insert subparagraph 159GZG(1)(b)(ia) and sub-subparagraph (c)(ii)(AA) respectively. This amendment will ensure that, in calculating the share premium and asset revaluation reserve components of foreign equity under paragraphs (b) and (c) respectively, any accumulated losses that would be taken into account under paragraph (f) are disregarded so as to avoid an unintended double counting of the losses.

Paragraph (e) of clause 26 will omit existing subsection 159GZG(6) of the Principal Act with effect from 1 July 1987. The equity maintainence rule contained in that provision will be replaced by new anti-avoidance provisions to be inserted by paragraph (f) with effect from the year of income commencing on 1 July 1988.

New subsection 159GZG(6) requires a clawback of the equity of resident companies in circumstances where certain equity in the form of a share or an additional share (defined as an 'eligible share') is counted as foreign equity in a given year of income and the eligible share ceases to be held during the subsequent two year period. The subsection also provides the formulae for calculating the amount to be 'clawed back' : that is, the reduction in foreign equity to be taken into consideration for the purposes of applying the debt/equity ratio.

Paragraph (a) sets out three situations which bring shares within these provisions. The paragraph effectively categorises persons as 'insiders' (these are foreign controllers and their non-resident associates) or as 'outsiders' (all other persons except the company itself). These terms are defined in subsection (8). The three situations covered by paragraph (a) are:

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under subparagraph (i), where the beneficial owner of a share (referred to as an "eligible share") became the beneficial owner of the share during the year of income other than by acquisition from a person who, immediately before the acquisition, was an insider in relation to the company. The subparagraph applies, for example, where the share was acquired from a resident or was issued by the company during the year of income;

•

under subparagraph (ii), where the beneficial ownership of a share was held by an outsider at any time during the year of income or was held by an insider who became the beneficial owner during the year other than by acquiring the share from another insider; and

•

under subparagraph (iii), which only applies to situations where neither subparagraphs (i) or (ii) apply, where the share had at any time during the year a paid-up value less than its paid value at the end of the year of income. This could occur where, for example, a call was paid on a share during the year of income.

Paragraph (b) sets out the events that, if occurring within the "clawback period", will trigger the operation of the clawback requirement in respect of an eligible share. The clawback period will generally end two years after the end of the current year.

Under subparagraph (b)(i) the clawback will be invoked, unless sub-subparagraph (D) applies, where the beneficial owner of an eligible share was an insider and ceases to be the beneficial owner otherwise than by death or by disposal to another insider. Sub-subparagraph (D) stays the operation of subparagraph (b)(i) where, as a result of ceasing to be the beneficial owner of the eligible share, a person becomes entitled to receive a distribution within the terms of subparagraph (b)(iii).

clawback will be invoked by subparagraph (ii) where an amount in relation to an eligible share is distributed out of a share premium account.

Similarly, under subparagraph (iii) the clawback will apply to certain distributions by way of repayment of paid-up capital. The subparagraph will apply whether the repayment is distributed upon a reduction of share capital, the cancellation or redemption of a share or otherwise.

Paragraphs (c) to (f) detail how the amount to be clawed-back under the section is to be ascertained.

Where a person became the beneficial owner of an eligible share during a year of income and during the clawback period ceases to be the beneficial owner in the circumstances referred to in subparagraph (b)(i), the amount by which the equity of the company is to be reduced is calculated in accordance with paragraph (c). The clawback amount is the paid-up value of the eligible share, together with any share premium applicable to that share.

If the paid-up value of an eligible share increases during the year of income within the terms of paragraph (a)(iii), e.g., by payment of a call, and a person ceases to be the beneficial owner within the meaning of subparagraph (b)(i), then the amount to which the clawback is to apply is calculated in accordance with paragraph (d). The clawback amount is the difference between the lowest paid-up value of the share during the year of income and the paid-up value of the share at the end of the year of income, e.g., the amount that was paid up on calls during the year.

Paragraph (e) provides for situations where an amount of share premium is distributed or an amount is distributed by way of capital reduction, redemption, cancellation or otherwise, during the clawback period. In these circumstances, the amount of the distribution that is attributable to eligible shares is to be clawed back.

Paragraph (f) caters for situations where an amount is distributed by way of capital reduction, redemption, cancellation or otherwise in relation to a call made during the year of income on a partly-paid share. The amount clawed back will be the lesser of the amount distributed or the difference between the lowest paid-up value of the share during the year of income and its paid-up value at the end of the year.

Subsection 159GZG(7) applies where there are successive applications of subsection (6). It ensures that the amount of equity to be clawed back is not more than the sum of amounts that were taken into account as paid-up value of eligible shares and related share premiums in calculating foreign equity in accordance with subsection (1). Subsection (7) will ensure that the resulting equity reduction requirements are not excessive where there are applications of both subparagraphs (6)(b)(i) and (iii) or there are multiple applications of subparagraph (6)(b)(i).

Paragraph (a) imposes general limitations on the application of subsection (6).

Where subparagraph (6)(a)(iii) applies to an increase in the paid-up value of a share during the year of income, then by virtue of subparagraph (7)(a)(i) the operation of subsection (6) will be limited to the difference referred to in paragraph (6)(d). This is the difference between the paid-up value of the share at the end of the year of income and the lowest paid-up value of the share during the year of income.

In all other cases, subparagraph (7)(a)(ii) will limit the general operation of subsection (6) to the sum of the amounts that were respectively taken into account under paragraphs (1)(a) and (b) as being attributable to the paid-up value of the share and to that part of the share premium account relating to the share.

Paragraphs (7)(b) and (c) impose specific limitations on the applications of paragraphs (6)(d) and (6)(f). As with subparagraph (7)(a)(i), the limitation in each paragraph will be the difference between the paid-up value of the share at the end of the year of income and the lowest paid-up value of the share during that year.

Subsection 159GZG(8) contains definitions and deeming provisions necessary for the operation of subsections (6) and (7). Paragraph (8)(a) extends any reference to the term 'distribution of an amount' to include the crediting of an amount or the distribution of property.

Paragraph (b) defines "clawback period", the meaning of which has already been explained in the notes on proposed new subsection 159GZG(6).

A reference to a share is deemed by paragraph (c) to include a reference to an interest in a share. This would, for example, include the interest held by a joint owner of a share.

Paragraph (d) defines "insider", a shorthand term for foreign controllers and their non-resident associates and paragraph (e) defines "outsider" as effectively being anyone who is not an insider. Companies are specifically excluded from being outsiders in relation to themselves.

Subsection 159GZG(9) is a clawback provision relating to the foreign equity of partnerships, trusts and foreign investors. The potential application of the subsection is limited to years of income in which, apart from this subsection, the level of foreign equity would be greater than in the immediately preceeding year of income. In such circumstances, the increased amount of equity will be "clawed back" in the calculation of foreign equity to the extent that the level of equity is not maintained during the succeeding clawback period.

Paragraphs (a) to (d) set out the steps that bring the clawback into operation.

Under paragraph (a) there must be a 'current equity amount' i.e., an amount that would otherwise be the foreign equity of a partnership, trust or foreign investor of a year of income.

Paragraph (b) applies if either of the following circumstances apply in relation to the immediately preceeding year of income:

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there was no amount of foreign equity whether because the partnership, trust or foreign investor was not in existence or for any other reason (subparagraph (b)(i)). Examples of such reasons include where there were no foreign controllers during the year, where the foreign controllers and their non-resident associates held no foreign equity in respect of the partnership or trust for the year and where the foreign investor had yet to commence deriving any assessable income;

•

there was an amount of foreign equity ("previous equity amount") that is less than the current equity amount (subparagraph (b)(ii)). In other words, the level of equity for the current year of income had increased since the immediately preceeding year of income.

A further requirement - paragraph (c) - to bring the clawback rule into operation is that the current equity amount must exceed the 'clawback period equity amount'. The latter expression is a term defined in subsection (10).

In general terms paragraph (9)(d) operates to exclude from the clawback provisions those entities that cease to derive certain kinds of assessable income. Where the cessation is only of a temporary nature it will be disregarded for the purpose of this paragraph. It also excludes cases where a person ceases to be a foreign investor during the relevant year.

Subparagraphs (i) and (ii) refer to partnerships and trusts ceasing to derive assessable (non-resident partner) income and assessable (non-resident beneficiary) income in accordance with paragraphs 3(a) and 4(a) respectively.

Subparagraph (9)(d)(iii) refers to a foreign investor ceasing to be a foreign investor.

Where all of paragraphs (a) to (d) are satisfied, paragraphs (e) and (f) provide for a lower amount to be substituted for the current equity amount in the calculation of the foreign equity of the partnership, trust or foreign investor. The substituted amount will be the clawback period equity amount, unless there is a previous equity amount within the meaning of subparagraph (b)(ii). If the previous equity amount is greater than the clawback period equity amount, then the previous equity amount will be taken to be the foreign equity of the partnership, trust or foreign investor.

Subsections 159GZG(10) and (11) contain definitions of "clawback period equity amount" and "clawback period" respectively in relation to partnerships, trusts and foreign investors.

Foreign equity of partnerships, trusts and foreign investors is usually required to be calculated at the end of the year of income. There may however, be additional points of calculation for a particular year, i.e., where a part year application of the Division is required by section 159GZR. In determining the clawback period equity amount under subsection (10), regard is to be had to all points of equity calculation required by the Division and the clawback period equity amount is defined as the lowest of these amounts.

In subsection (11) the "clawback period", as defined, will generally run for the two years after the end of the current year of income. The period will terminate earlier if:

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there cease to be any foreign controllers of the partnership or trust estate;

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the partnership or trustee of the trust estate ceases (other than temporarily) to derive assessable (non-resident partner) income or assessable (non-resident beneficiary) income; or

•

the foreign investor ceases, other than temporarily, to be a foreign investor.

Subparagraph (a)(i) applies where section 159GZR requires a part year calculation to be made. The end of the year of income which is deemed by that section to have occurred may not correspond with the end of the actual year of income. In these circumstances the clawback period ends two years after the end of the actual year of income rather than two years after the end of the deemed year of income created by section 159GZR.

Clause 27: Part year application of Division in certain circumstances

As a consequence of the new anti-avoidance provisions inserted by paragraph (f) of clause 26, it is necessary to amend the cross-reference to subsection 159GZG(6) contained in subsection 159GZR(2). Paragraph (a) of clause 27 repeals this subsection with effect from 1 July 1987. Paragraph (b) of clause 27 inserts new subsection 159GZR(2), which provides that the new equity clawback provisions i.e., subsections 159GZG(6) to (11), are not to operate where subsection 159GZR(1) applies a part year calculation by virtue of there ceasing to be any foreign controllers in respect of a resident company, partnership or trust. This new subsection will have effect for years of income commencing on 1 July 1988 and for all subsequent years of income.

Clause 28: Rebates for dependants

This clause will amend the definition of "separate net income" in subsection 159J(6) of the Principal Act. Subject to specified conditions, including a separate net income test, section 159J authorises a rebate of tax for a taxpayer who contributes to the maintenance of certain dependants.

The present definition of "separate net income" expressly excludes from the meaning of the term family income supplement and handicapped child's allowance paid under the Social Security Act 1947 (paragraph (a) of the definition), including where those allowances are paid in connection with the education of a dependent child or student (subparagraph (b)(i)) of the definition). Family income supplement and handicapped child's allowance have, however, as of 17 December 1987 and 15 November 1987, been replaced in the Social Security Act by family allowance supplement and child disability allowance respectively.

Consequent on the change to the social security law, paragraph (a) of clause 28 will amend paragraph (a) and subparagraph (b)(i) of the definition of "separate net income" to replace the reference to "family income supplement" in each of those provisions with a reference to "family allowance supplement". Paragraph (b) of the clause will substitute the reference to "handicapped child's allowance" in paragraph (a) and subparagraph (b)(i) of the definition with a reference to "child disability allowance".

Subclause 55(10) provides that the amendments to be made by paragraph (a) of clause 28 are to apply to payments under the Social Security Act that fell or fall due on or after 17 December 1987 - the day on which family allowance supplement replaced family income supplement. The amendment to be made by paragraph (b) of clause 68 is to apply, by virtue of subclause 55(11) of the Bill, to payments that fell or fall due on or after 15 November 1987 - the day on which handicapped child's allowance was replaced by child disability allowance.

Clause 29: Rebate in respect of certain pensions

Section 160AAA of the Principal Act authorises a rebate of income tax where a taxpayer's assessable income includes:

•

a social security or repatriation pension, benefit or allowance (pensioner rebate - subsection 160AAA(1)); or

•

a social security unemployment, sickness or special benefit, or educational assistance under the Commonwealth's AUSTUDY scheme, Assistance for Isolated Children Scheme or Veterans' Children Education Scheme (beneficiary rebates - subsection 160AAA(2)).

Clause 29 proposes a number of amendments of subsection 160AAA(2). Paragraphs (a), (b) and (d) of the clause will effect minor, stylistic changes to the wording of the subsection to make it easier to read and understand.

New paragraph 160AAA(2)(ab) will be inserted by paragraph (c) of clause 29 to extend the availability of the beneficiary rebates to taxpayers whose assessable income includes amounts received under the Aboriginal Secondary Assistance Scheme (ABSEC) or the Aboriginal Study Assistance Scheme (ABSTUDY). As explained in the notes on clause 10 of this Bill, income from ABSEC for students aged 16 years or more or from ABSTUDY is to be included in the student's assessable income when paid for a period commencing on or after 1 January 1988.

By subclause 55(12) of the Bill, the beneficiary rebates will be available to students receiving ABSEC or ABSTUDY assistance for assessments for the 1988-89 year of income and all subsequent years of income.

Paragraph (c) of clause 29 also proposes the insertion of a new paragraph (ac) in subsection 160AAA(2) that will make the beneficiary rebates available to taxpayers who receive the Formal Training Allowance. By subclause 55(13) of the Bill, the rebates are to be available to Formal Training Allowance recipients in assessments for the year of income that commenced on 1 July 1987 and all subsequent years of income.

Clause 30: Credits in respect of foreign tax

Section 160AF of the Principal Act entitles an Australian resident to a credit in respect of foreign tax paid on foreign income included in the resident's assessable income of a year of income and establishes the procedure for ascertaining the amount of the credit that is to be allowed against the Australian tax payable in respect of that income.

Subsection 160AF(6) is designed to ensure that where only a part of any income earned in overseas employment is exempt in terms of section 23AG (see notes on clause 13 for an outline of the operation of section 23AG), and the remaining part of that income is included in the taxpayer's assessable income, credit will be allowed for only a proportion of the foreign tax paid in respect of those earnings. However, subsection 160AF(6) may be capable of being construed as extending to foreign tax paid in respect of foreign income other than foreign employment income, so as to also reduce the foreign tax credit allowable in relation to that foreign income.

Clause 30 will accordingly amend subsection 160AF(6) to correct that technical deficiency in the subsection. It will insert additional words to limit the scope of the subsection consistent with the intent explained above.

Clause 31: Certain dividends deemed to be interest income

Subsection 160AF(7) of the Principal Act operates to quarantine foreign interest income of the type described in subsection 160AE(3) of the Principal Act from other foreign income for the purpose of allowing foreign tax credits. Interest income subject to this quarantining measure is assessed separately with a separate foreign tax credit limit applying to it.

Section 160AFA of the Principal Act is an associated measure which deems certain foreign dividends to be interest income subject to the separate foreign tax credit limitation. It is intended to ensure that the interest quarantining measure is not circumvented by remitting what is effectively foreign interest income to Australia in the form of dividends.

Subsection 160AFA(3) is the operative provision which specifies that so much of a dividend paid by a foreign company to a taxpayer in the year of income commencing on 1 July 1987 or in any subsequent year of income as does not exceed the amount standing in the interest pool of the company at the time the dividend was paid is to be deemed to be interest income derived by the taxpayer in that year of income and not a dividend.

Subsections 160AFA(1) and (2) are designed to identify the point of time from which a foreign company will be deemed to have an on-going interest pool. Subsection 160AFA(2) also provides the basis for determining the amount of the pool and its balance.

Clause 31 will amend subsections 160AFA(1) and (2) to clarify the operation of section 160AFA consistent with the intent of the existing legislation.

Paragraph (a) of clause 31 will omit existing subsection 160AFA(1) and substitute proposed new subsections (1) and (1A). Proposed new subsection (1) will define an accounting period of a foreign company so as to limit that reference in section 160AFA to the first accounting period that ends after 30 June 1987 and subsequent accounting periods. Proposed new subsection 160AFA(1A) will define the term 'relevant period' for the purposes of section 160AFA. The relevant period in relation to a foreign company will be the first accounting period during which the company derives net interest income amounting to at least 10% of its total profits derived during that accounting period.

Paragraph (b) will amend subsection 160AFA(2) to make it clear that the interest pool of a foreign company consists of the sum of the net interest income derived during the relevant period and any subsequent accounting period in which the company derives net interest income amounting to at least 10% of its total profits, reduced by any dividends deemed to be interest income by subsection 16OAFA(3).

Clause 32: Foreign underlying tax

Section 160AFC of the Principal Act broadly provides that where an Australian resident company receives dividends from a related foreign company (as determined in accordance with section 160AFB of the Principal Act), credit will be allowed for the 'underlying' foreign company tax paid on that portion of the foreign company profits from which the dividend was paid.

To ascertain the creditable foreign underlying tax, subsection 160AFC(6) specifies the order in which the profits of a related foreign company are to be treated as distributed as dividends.

Dividends received by an Australian company from a related foreign company are treated as paid firstly out of a pool of the related foreign company's profits for its first accounting period commencing after 30 June 1987, and subsequent accounting periods. The foreign underlying tax attributable to a dividend paid out of the pooled profits is the average rate of foreign tax imposed on those profits over the period during which they are accumulated.

Dividends in excess of the pool of accumulated profits are treated as paid out of the profits of earlier accounting periods of a related foreign company on a last-in-first- out basis, and the foreign underlying tax attributable to such dividends is calculated accordingly.

Subsection 16OAFC(10) defines an "accounting period" in relation to a foreign company for those purposes. It is defined as the accounting period used by the company for the purposes of the law imposing underlying tax on the company in a foreign country, being a foreign country in which the company is treated as a resident company for taxation purposes.

Paragraphs (a) and (b) of clause 32 will amend the definition of accounting period in subsection 160AFC(10) and provide for the situation where underlying tax is imposed under a law of a foreign country not only by reason that the company is treated as a resident of that country but also where the company is treated as domiciled in that country or as having its management and control located in that country for the purposes of that law.

Paragraph (c) of clause 32 will add proposed new subsection 160AFC(11) to provide that a reference in subsection (10) to a foreign country includes a reference to any part of, or place in, that country. In extending the meaning of a foreign country in this way, it recognises that a law of a foreign country imposing underlying tax on a company can be a law imposed by a national government, a state or province.

Clause 33: Losses of previous years

Broadly, section 160AFD of the Principal Act provides that in relation to a year of income an 'overall foreign loss' incurred by a taxpayer in any of the preceding seven years of income in respect of a "class of income" derived from a "foreign source" can be offset only against income of the same class derived from the same source. A "foreign source" is defined in subsection 160AFD(7) to mean in relation to a taxpayer a business carried on by the taxpayer at or through a permanent establishment in a foreign country or any other business, commercial or investment activity carried on by the taxpayer in a foreign country.

Subsection 16OAFD(5) provides in effect that a previous year overall foreign loss is to be calculated as the excess of allowable deductions over the amount of the taxpayer's income of a class of income derived from a foreign source.

The present formula prescribed in subsection 160AFD(5) for determining the amount of an overall foreign loss is deficient, however, in that allowable deductions and assessable income referred to in that subsection do not, under the existing law, capture all relevant deductions or income.

Firstly, allowable deductions will not include deductions to the extent to which they are denied allowable deduction status by operation of former paragraph 23(q) - see notes below - and subsections 51(6) and (7) of the Principal Act and proposed new section 79D - see notes on clauses 14 and 16 respectively.

The second deficiency arises in respect of assessable income. Subject to the seven year limit in subsection 160AFD(1), foreign losses incurred prior to the commencement of the foreign tax credit system, can reduce the amount of foreign income of the same class derived from the same source that would otherwise be subject to Australian tax. However, in that respect the reference to assessable income fails to take into account the fact that foreign income derived by an Australian resident taxpayer in the pre-foreign tax credit years would in many cases have been exempt from Australian tax under former paragraph 23(q) of the Principal Act and would not therefore have been included in assessable income.

To correct these deficiencies, paragraph (a) of clause 33 will insert in section 160AFD of the Principal Act a proposed new subsection (6A) which will have the effect that for the purposes of determining the amount of an 'overall foreign loss' in terms of subsection 160AFD(5) references to assessable income will be read as including income that was exempt under former paragraph 23(q) of the Principal Act. In addition, references to allowable deductions will be read as including amounts denied allowable deduction status because of the operation of former paragraph 23(q), subsections 51(6) and (7) or proposed new section 79D.

Paragraph (b) of clause 33 will amend paragraph (a) of the definition of "foreign source" contained in subsection 160AFD(7) of the Principal Act by substituting 'one or more permanent establishments' in place of 'a permanent establishment'. The practical effect of this amendment will be to make clear that if a business is carried on by the taxpayer at or through two or more permanent establishments in a foreign country, the business will be treated as constituting one foreign source. For example, where a banking business is carried on by an Australian enterprise at or through several permanent establishments in the one foreign country, that business will constitute a single foreign source in terms of the amended definition in subsection 160AFD(7).

Clause 34: Transfer of excess credit within company group

Section 160AFE of the Principal Act allows a resident company which has an excess credit in relation to a class of income for a year of income to transfer the excess credit to another resident company for the same year of income where, throughout that year of income, one of the companies was a subsidiary of the other company or each of the companies was a subsidiary of the same parent company. Subsection 160AFE(10) specifies that for the purposes of section 160AFE company means an "Australian company", an expression defined in subsection 160AE(1) of the Principal Act to mean a company that is a resident of Australia. This has the effect that excess credits cannot be transferred between two Australian companies which are owned by a common foreign parent company.

The amendments proposed to section 16OAFE by clause 34 will remove this limitation on the transfer of excess foreign tax credits between resident companies in the same company group. The amendment of subsection 160AFE(1) proposed by paragraph (a) of clause 34 will ensure that only the companies transferring and receiving the credit need be Australian companies, while paragraph (b) of the clause will omit subsection 160AFE(10).

Clause 35: Amendment of determinations

Division 19 of Part III of the Principal Act contains a number of machinery provisions governing the procedure for determination by the Commissioner of Taxation of claims made by persons for credits such as foreign tax credits allowable under the foreign tax credit system or credits allowable under the various double taxation agreements contained in the Schedules to the Income Tax (International Agreements) Act 1953.

Section 160AK of Division 19 lays down the conditions under which a determination made by the Commissioner as to whether a credit is allowable and the amount of that credit, may be amended. Subsection 160AK(1) permits a determination to be amended by the Commissioner at any time, subject to subsections 160AK(2) and (3).

Where a person has made a full and true disclosure of all the facts material to the making of a determination, subsection 160AK(2) precludes the Commissioner from decreasing the amount of a credit except for the purpose of correcting an error in calculation or a mistake of fact, or in consequence of a variation in, or a credit or refund of, Australian or foreign tax. If a taxpayer has made a full and true disclosure of all material facts, the Commissioner is not permitted to decrease the amount of a credit because of an error of law made in the original determination.

Under subsection 160AK(3) an amendment of a determination increasing the amount of a credit is permitted at any time if the amendment is for the purpose of correcting an error in calculation or a mistake of fact or in consequence of an alteration, credit or refund of Australian or foreign tax. The provision corresponds in principle with subsection 160AK(2) relating to amendments decreasing the amount of credits. The Commissioner is not permitted to increase the amount of a credit because of an error of law made in the original determination.

Paragraph (a) of clause 35 will amend subsections 16OAK(2) and (3) so as to render the limitations they contain against amendments of credit determinations effective only after 3 years have expired since the original determination was made. When read with subsection 160AK(1) the effect will be to authorise the Commissioner to amend determinations to decrease (where a full and true disclosure has been made) or increase credits, within 3 years of the date on which the original determination was made, for any reason, including to correct an error of law. This amendment is consistent with the amendments made by the Taxation Laws Amendment Act 1986 to section 170 of the Principal Act relating to amendments of assessments, to give effect to the self-assessment system.

Paragraph (b) of clause 35 will amend section 160AK by inserting a proposed new subsection 160AK(6) which will define the meaning of "original determination date". Paragraph (b) of proposed new subsection 160AK(6) ensures that where there is an amendment of an amended determination to correct an error of law the later amendment must be made within three years of the date on which the original determination was made.

Clause 36: Other interpretative provisions

Section 160K of the Principal Act contains a number of interpretative provisions which are relevant to Part IIIA of that ACT, which deals with capital gains and losses.

Paragraph (a) of clause 36 will omit paragraph 23(x) of the Principal Act from the definition of 'relevant exempting provision' in subsection 160K(1) as paragraph 23(x) is being repealed by paragraph 10(a) of this Bill - see notes on that paragraph.

Paragraphs (b) and (c) of clause 36 will insert two additional provisions (paragraphs (baa) and (bc)) in the definition of 'relevant exempting provision' in subsection 160K(1). These paragraphs take into account the exemption from income tax now accorded the income of prescribed international organisations by regulations made under the International Organizations (Privileges and Immunities) Act 1963 and the date of effect of the deletion from the Principal Act of paragraph 23(x) by paragraph 10(a) of this Bill.

By subclause 55(9) of the Bill the amendments made by clause 36 are to apply to income tax assessments for the year of income commencing on 1 July 1988 and for all subsequent years of income.

Clause 37: Certificate of sources of information

Clause 37 will insert subsection (1B) in section 165 of the Principal Act as a consequence of the insertion of section 251KB in Part VIIA of the Act by clause 49. Part VIIA makes provision for the constitution of a Tax Agents' Board in each State and for the registration of tax agents and the renewal, cancellation and suspension of registration. Section 251KB will permit sole practitioner tax agents to register employees as nominees. New subsection 165(1B) will deem the agent's certificate that must be completed by any person who directly or indirectly charges any fee for preparing or assisting to prepare an income tax return to have been duly signed if, and only if, it is signed by a sole practitioner tax agent personally (paragraph (a)) or by a registered nominee of the sole practitioner tax agent (paragraph (b)).

Clause 38: Interpretation

As part of the pay-as-you-earn (PAYE) system for collecting income tax by instalments from employees, section 221C of the Principal Act requires employers to deduct tax from "salary or wages". The term "salary or wages", as used in section 221C, is defined in subsection 221A(1).

Paragraphs (a) and (b) of clause 38 will amend the definition of "salary or wages" in subsection 221A(1) by inserting two new paragraphs in that definition. New paragraph (na) will add to the meaning of "salary or wages" payments under the Aboriginal Secondary Assistance Scheme (ABSEC) for students 16 years of age and over, while new paragraph (nb) will add payments under the Aboriginal Study Assistance Scheme (ABSTUDY).

By subclause 2(1) of the Bill, ABSEC and ABSTUDY payments are to be included in the definition of "salary or wages" for the purposes of the PAYE provisions of the Principal Act from the day on which this Bill receives the Royal Assent.

For the purposes of the taxing arrangements for the unearned income of children set out in Division 6AA of Part III of the Principal Act, the expanded definition of "salary or wages" is, by subclause 55(14), to apply to ABSEC and ABSTUDY payments made for a period commencing on or after 1 January 1988. By paragraphs (c) to (g) of clause 10 and subclause 55(6), ABSEC payments for students 16 years of age and over and ABSTUDY payments are to be included in assessable income where the payments are for periods commencing on or after 1 January 1988. The effect of subclause 55(14), therefore, will be to treat ABSEC and ABSTUDY payments as excluded from the application of Division 6AA, and not subject to the penalty rate of tax that applies to Division 6AA income, from the time the payments first become assessable income.

Clause 39: Insertion of heading

Clause 39 will insert the heading "Division 1 - Interpretation" in Part VIIA of the Principal Act which contains provisions relating to the registration of tax agents. Division 1 will comprise the following sections:

Clause 40: Interpretation

This clause will amend section 251A of the Principal Act which contains definitions that apply for the purposes of Part VIIA of the Principal Act. Clause 40 will insert the following definitions in section 251A:

"approved form" is defined to mean a form approved in writing by the relevant State Board for the purposes of the relevant provision. The term is used in subsections 251J(3), 251JB(3) and 251KB(3), which specify that applications for registration or re-registration as a tax agent or as a nominee of a registered tax agent are to be in the approved form, and in subsection 251JE(3) which requires applications for registration of successor tax agents to be in the approved form.

"authorised trustee company" is defined to mean a company that is authorised by or under a law of the Commonwealth, a State or a Territory to act as an executor, administrator and trustee. Such a company is not to be taken to be a "non-exempt company" (see notes on new section 251BB) and therefore will not be required to satisfy the criterion in new section 251BA that qualified directors have a substantial interest for the purposes of original registration (new subparagraph 251JA(1)(c)(iii)), re-registration (new subparagraph 251JC(1)(c)(iii)) or cancellation of registration (new subsection 251K(3D)).

"conviction" is defined to include the making of an order under section 19B of the Crimes Act 1914 - that is, broadly, an order of a court to the effect that it is satisfied that a charge is proved but that, due to the circumstances, it does not see fit to convict. Other grammatical forms of the word "conviction" will have a corresponding meaning by virtue of section 18A of the Acts Interpretation Act 1901. The definition is in the same terms as the definition of "conviction" in existing subsection 251K(10). Subsection 251K(10) is to be omitted from the Principal Act by clause 48.

"executive officer" is defined, in relation to a company, to mean a director of the company (paragraph (a)), a secretary of the company (paragraph (b)) or a person who is concerned in, or takes part in, the management of the company (paragraph (c)). A company may not be registered, or re - registered, as a tax agent unless every executive officer of the company is at least 18 years of age and is of good fame, integrity and character.

"serious taxation offence" is defined to mean:

•

an offence against section 29D (defrauding the Commonwealth) or section 86A (conspiracy to defraud the Commonwealth) of the Crimes Act 1914 where the offence relates to a tax liability within the meaning of the Taxation Administration Act 1953 - that is, a liability arising under an Act administered by the Commissioner of Taxation (paragraph (a));

•

an offence against:

• .

section 6 (accessory after the fact), 7 (attempt) or 7A (inciting to or urging the commission of an offence) of the Crimes Act 1914 (subparagraph (b)(i)); or

• .

paragraph 86(1)(a) (conspiracy) of the Crimes Act 1914 (subparagraph (b)(ii)), that relates to an offence of the kind referred to in paragraph (a); or

•

a taxation offence within the meaning of Part III of the Taxation Administration Act 1953 (broadly, an offence against a taxation law) (subparagraph (c)(i)) that is punishable on conviction by a fine exceeding $2000 or imprisonment or both (subparagraph (c)(ii)).

Clause 41: Insertion of new sections

Clause 41 will insert three interpretive provisions - sections 251BA, 251BB and 251BC - in Division 1 of Part VIIA.

Section 251BA : Companies in which qualified directors have a substantial interest

Under the existing law, the criteria to be satisfied by a company applying for registration as a tax agent are:

•

that an employee of the company is a fit and proper person to prepare income tax returns and transact business on behalf of taxpayers in income tax matters; and

•

that every director, and every manager or other administrative officer of the company, is over the age of 21 years and is of good fame, integrity and character.

New subparagraph 251JA(1)(c)(iii), being inserted in the Principal Act by clause 47, specifies a further criterion to be satisfied by company applicants - that is, that the company is a company in which qualified directors have a substantial interest (see notes on clause 47).

By new subsection 251BA(1), a company will be a company in which qualified directors have a substantial interest if:

•

a director (or directors) who meets (or meet) the tests for registration as an individual tax agent beneficially owns shares in the company carrying between them at least 25 per cent of the voting power in the company (paragraph (a)); and

•

the voting power attached to the shares owned by those directors is not controlled, or capable of being controlled, by another person (paragraph (b)).

By subsection 251BA(2), a person will have control of the voting power in a company if the person has either direct or indirect control including control that may be exercised as a result of or by means of arrangements or practices whether or not those arrangements or practices have legal or equitable force (paragraph (a)) or are based on legal or equitable rights (paragraph (b)).

Section 251BB : Non-exempt companies

The criterion that qualified directors have a substantial interest is to have a continuing application to "non-exempt companies". Where a non-exempt company tax agent fails to satisfy this criterion, a Board must refuse to re-register the tax agent (new subparagraph 251JC(1)(c)(iii)) or cancel the registration of the tax agent (new subsection 251K(3D)).

Section 251BB provides that a company will be a non- exempt company at a particular time (and therefore subject to the continuing application of the qualified directors test) unless all the conditions specified in paragraph (a) are satisfied. Those conditions are that the company:

•

was registered as a tax agent immediately before the date proclaimed for the purposes of subclause 2(4) (subparagraph (a)(i));

•

remained registered as a tax agent until the particular time (subparagraph (a)(ii)); and

•

at all times from the date of Proclamation to the particular time, satisfied the test specified in subparagraph (a)(iii).

The test in subparagraph (a)(iii) is that shares in the company carrying between them:

•

the right to exercise at least one-half of the voting power in the company (sub-subparagraph (iii)(A));

•

the right to receive more than one-half of any dividends that may be paid by the company (sub-subparagraph (iii)(B)); and

•

the right to receive more than one-half of any distribution of capital of the company (sub-subparagraph (iii)(C)),

were beneficially owned by persons who beneficially owned shares in the company carrying similar rights immediately before the date of Proclamation.

Subject to compliance with the continuing ownership test in subparagraph 251BB(a)(iii), a company registered as a tax agent before the date of Proclamation (or a company that had applied for registration before that date - see notes on subclause 55(21)) will not therefore be required to satisfy the criterion that qualified directors have a substantial interest in the company.

The criterion is also not applicable to authorised trustee companies (a defined term - see notes above) (paragraph (b)).

By virtue of new subsection 251K(6) (see notes on clause 48), a suspended tax agent will be taken to be registered for the purposes of section 251BB.

Section 251BC : Fit and proper persons to prepare income tax returns

In order to be registered, or remain registered, as a tax agent or as a nominee of a registered tax agent a person must be a fit and proper person to prepare income tax returns and transact business on behalf of taxpayers in income tax matters. This criterion also applies for the purposes of the existing law and each State Board has developed guidelines based on experience and qualifications for the purposes of determining whether a person satisfies the criterion.

Under the new provisions, each Board will still be required to decide whether a person is a fit and proper person to prepare income tax returns and transact business on behalf of taxpayers in income tax matters. However, a Board will not, by reason of section 251BC, have a discretion to accept a person as satisfying this criterion unless the person:

•

is a natural person (paragraph (a)) ("person" is defined for the purposes of the Principal Act to include a company);

•

holds such qualifications (whether academic, by way of experience or otherwise) as are prescribed (see following notes) (subparagraph (b)(ii)) or was registered (or had applied for registration - see notes on subclauses 55(21) and (22)) as a tax agent or as a nominee, before the date of commencement of the amendments (subparagraph(b)(i));

•

is 18 years of age or more (paragraph (c));

•

is of good fame, integrity and character (paragraph (d));

•

has not been convicted of a serious taxation offence (a defined term - see notes on clause 40) during the previous 5 years (paragraph (e)); and

•

is not under a sentence of imprisonment for a serious taxation offence (paragraph (f)) - see notes on subsections 251BC(4) and (5).

The qualifications that are to be prescribed for the purposes of subparagraph (b)(ii) will generally seek to achieve a balance between academic qualifications and experience. The minimum academic qualifications will be successful completion of examinations, at standards acceptable to the Board, in Australian income tax law and accounting principles.

Subsection (2) stipulates that nothing in paragraph (1)(e) or (f) is to limit the generality of paragraph (1)(d). Thus, for example, a Board may conclude that a person who has completed a sentence of imprisonment for a serious taxation offence is not of good fame, integrity and character notwithstanding that the person was convicted of the offence more than 5 years previously.

Subsection (3) will authorise a Board to disregard a conviction of a person (subparagraph (c)(i)) or an act or thing done (subparagraph (c)(ii)) or omitted to be done (subparagraph (c)(iii)) by the person for the purposes of determining whether the person is a fit and proper person to prepare income tax returns and transact business on behalf of taxpayers in income tax matters. A Board may disregard a conviction, act or omission where:

•

the Board is considering an application for re- registration as a tax agent (subparagraph (a)(i)) or as a nominee of a tax agent (subparagraph (a)(ii));

•

the person is not under sentence of imprisonment for a serious taxation offence (paragraph (b)); and

•

the Board is satisfied that, because of special circumstances, the conviction, act or omission should be disregarded (paragraph (c)).

Special circumstances for the purposes of paragraph (c) may include a previous consideration by the Board of the conviction, act or omission of a tax agent in determining whether the Board should exercise the discretion under section 251K to suspend or cancel the tax agent's registration.

The effect of subsection (4) is that a person will be taken to be under a sentence of imprisonment for the purposes of paragraph (1)(f) if the person is, in broad terms, on parole (paragraph (a)) or subject to a good behaviour bond (paragraph (b)).

Subsection (5) is an interpretive provision which makes it clear that the reference in paragraph (4)(a) to a good behaviour security given by a person is a reference to a security that the person will comply with conditions relating to his or her behaviour whether or not the security is given with or without sureties, by recognizance or otherwise.

By new subsection 251K(6) (see notes on clause 48), a suspended tax agent will be taken to be registered for the purposes of section 251BC.

Clause 41 will also insert the heading "Division 2 - Tax Agents' Boards" after section 251BC. Division 2 will comprise the following sections:

Clause 42: Constitution of Boards

Subsection 251D(1) of the Principal Act provides that each State Board shall consist of the following 3 members:

•

the officer in charge of the Commonwealth Department of Finance in the State (Chairman);

•

the officer in charge of the Australian Audit Office in the State; and

•

a person appointed by the Governor-General.

Paragraph (a) of clause 42 will amend subsection 251D(1) with the effect that each Board will be reconstituted to consist of an officer of the Australian Taxation Office appointed by the Minister responsible for the Principal Act (paragraph (a)) and 2 other persons appointed by the Minister (paragraph (b)). It is proposed that the 2 other persons will represent each of the accounting and legal professions.

Subclause 55(15) provides that the persons holding office as members of a Tax Agents' Board immediately before the commencement of the amendments will cease to hold office on the commencement of the amendments.

Paragraph (b) of clause 42 will insert new subsection (1A) in section 251D to provide for the member of each Board who is an officer of the Australian Taxation Office to be Chairperson of the Board.

Existing subsection 251D(3), which provides that a member of a Board who is not a Commonwealth or State public servant shall be paid such fees and expenses as the Governor-General directs, will be omitted by paragraph (c) of clause 42. The remuneration and allowances to be paid to members of the reconstituted Boards will be determined in accordance with section 251DA, being inserted by clause 43. New subsection 251D(3) makes it clear that members of a Board hold office on a part-time basis. This will ensure that subsection 7(11) of the Remuneration Tribunals Act 1973 operates to deny the payment of remuneration to Board members who are full-time public servants.

Clause 43: Remuneration and allowances

New section 251DA - to be inserted by clause 43 - is a standard provision where payments are to be made pursuant to the Remuneration Tribunal Act 1973 and will provide for the payment of remuneration to those members of the Board who are not full-time public servants and the payment of allowances to those members. Board members are to be paid such remuneration as is determined by the Remuneration Tribunal (subsection 251DA(1)) and such allowances as are prescribed (subsection 251DA(2)). Subsection 251DA(3) provides that section 251DA has effect subject to the provisions of the Remuneration Tribunals Act 1973.

Clause 44: Conduct of business of Board

The amendments of section 251E of the Principal Act that are being made by clause 44 are consequential on the proposed reconstitution of the Boards by clause 42. As under the existing law, any 2 members will form a quorum at a meeting of a Board. Existing paragraph 251E(c), which provides for the Australian Audit Office member to act as Chairman in the absence of the Department of Finance member, will be substituted by new paragraph 251E(c) which provides for the election of a member to preside over a meeting in the absence of the Chairperson. New paragraph 251E(d), which is to the same effect as the existing provision, makes it clear that the vote of the Chairperson, or member presiding, carries the same weight as the vote of the other members.

Clause 45: Insertion of headings

Clause 45 will insert the headings:

"Division 3 - Registration of Tax Agents

Subdivision A - Original Registration of Tax Agents".

Subdivision A will comprise the following sections:

Clause 46: Applications for original registration of tax agents

This clause will amend section 251J of the Principal Act which specifies the conditions to be met by an applicant for registration as a tax agent or as a nominee. The amendment being made by paragraph (a) of clause 46 will amend subsection 251J(2) of the Principal Act to increase the fee payable on lodgment of an application for registration from $2 to $80, or such higher fee as is prescribed. The fee of $80 will apply to applications lodged on or after the date proclaimed for the purposes of subclause 2(4).

Paragraph (b) of clause 46 will amend section 251J of the Principal Act to remove the existing rules that apply to the original registration of tax agents and nominees. The new rules to apply to the registration of tax agents are contained in new section 251JA, being inserted in the Principal Act by clause 47. The new rules applicable to the registration of nominees are contained in Division 4, being inserted by clause 49.

New subsection 251J(3) requires an application for registration as a tax agent to be in the approved form (a defined term - see notes on clause 40) and to be accompanied by such information as is required by the form to be provided.

Clause 47: Original registration and re-registration of tax agents

Clause 47 will repeal section 251JA of the Principal Act which requires tax agents to notify the Tax Agents' Board by 7 April each year that they desire to remain registered as a tax agent. No fee applies to the annual notification. The clause will substitute new section 251JA and new Subdivisions B, C, D, E, F, G and H which comprise the following sections:

Section 251JA : Original registration of tax agents

A Tax Agents' Board must register an applicant as a tax agent if the Board is satisfied that the applicant meets the criteria specified in the relevant paragraph of subsection 251JA(1). In the case of an applicant who is a natural person, the criteria, specified in paragraph (a), are that the applicant is a fit and proper person to prepare income tax returns and transact business on behalf of taxpayers in income tax matters (subparagraph (a)(i)) and is not an undischarged bankrupt (subparagraph (a)(ii)).

Paragraph (b) specifies the criteria to be met by a partnership applicant. An application by a partnership is required to specify, as the original nominee of the partnership, a partner who must be a fit and proper person to prepare income tax returns and transact business on behalf of taxpayers in income tax matters (subparagraph (b)(i)). That partner, and any other partner who is a natural person, must, by virtue of subparagraph (b)(ii), be at least 18 years of age (sub-subparagraph (ii)(A)) and be of good fame, integrity and character (sub-subparagraph (ii)(B)) and, by virtue of subparagraph (b)(iv), not be an undischarged bankrupt. Where a member of a partnership applicant is a company, subparagraph (b)(iii) requires that each executive officer (a defined term - see notes on clause 40) of the company be at least 18 years of age (sub-subparagraph (iii)(A)) and be of good fame, integrity and character (sub-subparagraph (iii)(B)).

An application by a company is required to specify, as the original nominee of the company, an employee who must be a fit and proper person to prepare income tax returns and transact business on behalf of taxpayers in income tax matters (subparagraph (c)(i)). Subparagraph (c)(ii) requires that each executive officer of the company be at least 18 years of age (sub-subparagraph (ii)(A)) and be of good fame, integrity and character (sub-subparagraph (ii)(B)). By subparagraph (c)(iii), other than where the company is an "authorised trustee company" (a defined term - see notes on clause 40), the company must be a company in which qualified directors have a substantial interest within the meaning of that expression in section 251BA - see notes on clause 41. A company that has gone into liquidation may not be registered as a tax agent (subparagraph (c)(iv)).

An applicant, or an original nominee of a partnership or company applicant, will not be a fit and proper person to prepare income tax returns and transact business on behalf of taxpayers in income tax matters unless the applicant or original nominee satisfies each of the six criteria specified in subsection 251BC(1) - see notes on clause 41.

By subsection 251JA(2), a Board must refuse to register an applicant for registration in a case where the requirements of subsection 251JA(1) are not met - that is, a Board does not have a discretion to ignore a failure to satisfy one of the requirements of subsection 251JA(1). Paragraph 251QA(a) (see notes on clause 53) provides for a right of review by the Administrative Appeals Tribunal against a decision by a Board to refuse to register an applicant as a tax agent. By virtue of subclause 55(24), the right of review is available only in respect of a decision made after the date proclaimed for the purposes of subclause 2(4).

By subsection 251JA(3), a decision by a Board to refuse to register an applicant must be served on the applicant by notice in writing. The notice must include the reasons for the decision and, by virtue of subsection 251QB(1) (see notes on clause 53) a statement advising that a person whose interests are affected may apply to the Administrative Appeals Tribunal for a review of the decision.

Subdivision B - Re-registration of Tax Agents

Section 251JB : Applications for re-registration of tax agents

New section 251JB will replace the existing annual notification requirement with a requirement that tax agents apply for re-registration each 3 years. A lodgment fee of $40, or such higher fee as may be prescribed, will apply.

Subsection 251JB(1) provides that a registered tax agent may apply to the Board by which the tax agent was registered for re-registration. Such an application must be accompanied by a lodgment fee of $40, or such higher fee as may be prescribed, to be paid by the Board to the Commissioner of Taxation (subsection 251JB(2)). An application for re-registration must be in the approved form (a defined term - see notes on clause 40) and be accompanied by such information as is required by the form to be provided (subsection 251JB(3)).

Subsection 251JB(4) specifies the time in which an application for re-registration may be made. The application is to be made during the period specified in paragraph (4)(a) - that is, no earlier than 60 days before the date on which the existing registration ceases to be in force (broadly, 3 years after the original registration or previous re-registration - see notes on section 251JG) and no later than 30 days before that date. Thus, for example, a person who is registered as a tax agent on 1 May 1989 must lodge an application for re-registration during the period commencing on 2 March 1992 and ending on 1 April 1992. In practice, registered tax agents will be sent reminder notices with copies of the approved form for re-registration purposes before the beginning of the period during which an application for re-registration is to be made.

Paragraph (4)(b) authorises a Board to allow an application for re-registration to be lodged later than 30 days before the date on which an existing registration ceases to be in force. A Board cannot, however, allow an extension of time beyond the date on which the existing registration ceases to be in force. An application for an extension of time must be in writing. By virtue of paragraph 251QA(c) (see notes on clause 53), a decision by a Board refusing to allow a later time for lodgment of an application for re-registration is subject to a right of review by the Administrative Appeals Tribunal.

By subsection 251JB(5), a decision by a Board to refuse to allow a later time for lodgment must be served on the applicant by notice in writing. The notice must include the reasons for the decision and, by virtue of subsection 251QB(1) (see notes on clause 53), a statement advising that a person whose interests are affected may apply to the Administrative Appeals Tribunal for a review of the decision.

Section 251JC : Re-registration of tax agents

Subsection 251JC(1) requires a Board to re-register an applicant as a tax agent if the applicant satisfies the criteria specified in paragraph (a) (where the applicant is a natural person), paragraph (b) (where the applicant is a partnership), paragraph (c) (where the applicant is a company) and paragraph (d), which applies to all applicants. Paragraphs 251JC(1)(a), (b) and (c) generally mirror paragraphs 251JA(1)(a), (b) and (c) (see notes on clause 47), which specify the criteria to be satisfied by applicants for original registration, with the effect that a Board may not renew the registration of an applicant if, on the basis of the circumstances applicable to the applicant at the time of re-registration, the applicant would not have been registered as a tax agent on an original application.

For the purposes of re-registration, however, a tax agent or an original nominee who was registered or had applied for registration before the date on which the amendments come into operation will not, by virtue of subparagraph 251BC(1)(b)(i) (see notes on clause 41 and subclause 55(21)) be required to hold such qualifications as are to be prescribed in respect of tax agents applying for registration on or after that date. Thus, the qualifications on which the tax agent or original nominee gained registration will be sufficient to enable the tax agent or original nominee to be re-registered.

The criterion, specified in subparagraph 251JC(1)(c)(iii), that a company tax agent be a company in which qualified directors have a substantial interest, will not, by virtue of subclause 55(21), operate to prevent the re-registration of a company that had applied for registration as a tax agent before the date on which the amendments come into operation (subject to certain continuing ownership tests).

The criterion specified by paragraph 251JC(1)(d) - which applies to all applicants for re-registration - is that the applicant not have permanently ceased to carry on business as a tax agent. Whether a person has permanently ceased to carry on business as a tax agent is a question of fact that must be answered by reference to the circumstances of each individual case.

By subsection 251JC(2), a Board must refuse to re-register an applicant for re-registration in a case where the requirements of subsection 251JC(1) are not met - that is, a Board does not have a discretion to ignore a failure to satisfy one of the requirements of subsection 251JC(1). Paragraph 251QA(b) (see notes on clause 53) provides for a right of review by the Administrative Appeals Tribunal against a decision by a Board to refuse to re-register an applicant as a tax agent.

By subsection 251JC(3), a decision by a Board to refuse to re-register an applicant must be served on the applicant by notice in writing. The notice must include the reasons for the decision and, by virtue of subsection 251QB(1) (see notes on clause 53), a statement advising that a person whose interests are affected may apply to the Administrative Appeals Tribunal for a review of the decision.

Subsection 251JC(4) provides that a tax agent who is served notice of a Board's decision to refuse to re-register the tax agent at a time (the "notice time") subsequent to the time (the "expiry time") when an existing registration ceased to be in force will be taken to have been registered during the intervening period.

This extension of a tax agent's registration will apply in those cases where:

•

a Board makes a decision refusing to re-register a tax agent (paragraph (a)); and

•

notice of that decision was served on the tax agent after the expiry time (paragraph (b)).

The combined operation of subsection 251JC(4) and paragraph 251JG(1)(b) will ensure that a tax agent whose application for re-registration had not been processed at the expiry time will remain registered until such time as the Board either re-registers the tax agent or serves notice of its decision to refuse to re-register the tax agent.

Subdivision C - Effect of Changes in Constitution of Partnerships

Section 251JD : Registration of a partnership terminated if constitution changes

By section 251JD, the registration of a partnership tax agent will be taken to be terminated when there is a change in the constitution of the partnership. Thus, the registration of a partnership tax agent will be taken to be terminated at the time when a partner dies, resigns from the partnership or a new partner is admitted to the partnership.

Subdivision D - Changes in Constitution of Partnerships - Registration of Successor Tax Agents

Subdivision D will ensure that, following a change in the constitution of a partnership tax agent, a natural person or partnership may continue to carry on the business of the tax agent as if there had been no change provided, inter alia, the person, or a member of the new partnership, was a member and a nominee of the previous partnership.

Section 251JE : Applications for registration of successor tax agents

Subsection 251JE(1) specifies the circumstances in which a natural person may apply for registration as a tax agent following a change in constitution of a partnership tax agent. An application may be made by a person who was a partner and a registered nominee (subparagraph (c)(i)) of a partnership at the time the partnership's registration was terminated by the operation of section 251JD (paragraph (a)) - that is, at the time the partnership was reconstituted. Other conditions are that:

•

the partnership's registration was not under suspension at the time of reconstitution (paragraph (b)); and

•

the applicant is not an undischarged bankrupt (subparagraph (c)(ii)).

A partnership may, by virtue of subsection (2), apply for registration as a tax agent following a change in constitution of a partnership tax agent (the "original partnership") (paragraph (a)) if:

•

the original partnership's registration was not under suspension at the time of reconstitution (paragraph (b));

•

a partner of the applicant (the "new partnership") was both a partner and a registered nominee of the original partnership at the time of reconstitution (subparagraph (c)(i)); and

•

no member of the new partnership is an undischarged bankrupt (subparagraph (c)(ii)).

An application under subsection (1) or (2) must be in the approved form (a defined term - see notes on clause 40) and be accompanied by such information as is required by the form to be provided (subsection (3)).

By subsection (4), an application must be made within 30 days after the termination of the registration of the original partnership - that is, within 30 days of the date of reconstitution. Except as provided by subsection (9), a Board does not have a discretion to accept an application made outside that period. A natural person or new partnership who fails to apply within 30 days after the termination of the registration of the original partnership and who wishes to be registered as a tax agent will be required to apply for original registration in accordance with section 251JA.

Subsection (5) provides that an application by a natural person under subsection (1) may specify one or more persons as an original nominee of the applicant with the effect that each of the specified persons will be registered, without fee, as nominees of the natural person by the operation of subsection 251KA(3) - see notes on clause 49. Each of the specified persons must:

•

have been a registered nominee (either as an employee or a partner) of the original partnership at the time of reconstitution (paragraph (a)); and

•

be an employee of the applicant (paragraph (b)).

An application by a partnership under subsection (2) must specify, as an original nominee of the partnership, a person who was both a partner and a registered nominee of the original partnership (subsection (6)) and may, by virtue of subsection (7), specify, as additional original nominees, one or more persons each of whom:

•

was a registered nominee (either as an employee or a partner) of the original partnership at the time of reconstitution (paragraph (a)); and

•

is an employee, or a partner, of the new partnership (paragraph (b)).

A person specified as an original nominee under subsection (6) or (7) will be registered, without fee, as a nominee of the new partnership by the operation of subsection 251KA(3) - see notes on clause 49.

Where a Board is of the opinion that a document purporting to be an application under section 251JE does not comply with the requirements of the section, subsection 251JE(8) requires the Board to notify the person who lodged the document of that opinion. Subsection 251JE(9) recognises that the notification by the Board may not give the person sufficient time to make a fresh application within the 30 day period provided by subsection (4). Accordingly, if the notice under subsection (8) was served after 21 days of the change in constitution, the person may make an application for registration as a successor tax agent within 7 days of the date of service of the notice.

Section 251JF : Registration of successor

By section 251JF, a Board must register a natural person or a partnership as a tax agent within 60 days after receiving an application made in accordance with section 251JE. Paragraph 251JG(1)(c) deems a registration under section 251JF to have come into force immediately after the change in constitution of the original partnership or, in the case of a partnership formed after the change, immediately after the time of formation of the new partnership. Where the successor tax agent does not meet the criteria for registration as a tax agent, the Board may cancel the registration of the tax agent in accordance with subsection 251K(2).

Subdivision E - Duration of Registration of Tax Agents

Section 251JG : Registration of tax agents to be in force for 3 years

Section 251JG specifies the date on which a tax agent's registration comes into force and the period during which it remains in force. In the case of an original registration - that is, a registration under section 251JA - the registration comes into force on the day on which it was granted (paragraph (1)(a)). In the case of a re-registration under section 251JC, the registration comes into force, or is deemed to have come into force, immediately after the existing registration ceases or ceased to be in force (paragraph (1)(b)). A tax agent whose re-registration is in fact granted after the date on which a previous registration ceased to be in force will therefore be deemed to have been registered during the intervening period.

Paragraph (1)(c) deems a registration of a natural person or a partnership granted under section 251JF in consequence of a change in constitution of a partnership to generally have come into force immediately after the change in constitution of the partnership. However, where the new partnership is formed at a time later than the time when the original partnership was reconstituted, sub-subparagraph (ii)(B) deems the registration to have come into force immediately after the time of formation of the new partnership.

Subsection (2) provides that an original registration under section 251JA or a re-registration under section 251JC continues in force for a period of 3 years unless the registration is terminated, cancelled or surrendered under another provision of Part VIIA.

By subsection (3), the registration of a natural person or a partnership registered under section 251JF will continue in force (unless terminated, cancelled or surrendered) until the end of the period during which the registration of the original partnership would have continued in force by the operation of subsection (2) or a previous operation of subsection (3) if it had not been terminated, by section 251JD, as a consequence of the change in constitution.

Subclause 55(18) provides that, notwithstanding section 251JG, the registration of a tax agent who was registered before the date on which the amendments come into operation will cease to be in force on 1 April 1989. Existing tax agents will therefore be required to re-register on 1 April 1989 and each 3 years from that date.

Subdivision F - Surrender of Registration of Tax Agents

Section 251JH : Surrender of registration

Section 251JH will enable a tax agent to surrender a registration by notice in writing to the Board by which the tax agent was registered.

Subdivision G - Termination of Registration of Tax Agents other than Partnerships

Section 251JK : Death of natural person

Section 251JK provides that the registration of a natural person tax agent terminates on the death of the natural person.

Section 251JM : Companies ceasing to exist

Section 251JM provides that the registration of a company tax agent terminates upon the company ceasing to exist.

Clause 48: Cancellation or suspension of registration of tax agents

Clause 48 will amend section 251K of the Principal Act which specifies the circumstances in which a Board may (or, in some cases, must) suspend or cancel the registration of a tax agent.

Subsection 251K(1), which provides that the registration of a tax agent remains in force until cancelled in accordance with the Principal Act, is being omitted by paragraph (a) of clause 48 as a consequence of the insertion of section 251JG in the Principal Act by clause 47.

New subsection 251K(1), being substituted for existing subsection 251K(1A) by paragraph (a) of clause 48, re-enacts the requirement that is imposed on Boards by subsection 251K(1A) to suspend or cancel the registration of a tax agent if the Board is satisfied that the tax agent, or a nominee of the tax agent, has been convicted of:

•

an offence against section 8P (knowingly making false or misleading statements), 8T (incorrectly keeping records with intention of deceiving or misleading, etc.) or 8U (falsifying or concealing identity with intention of deceiving or misleading, etc.) of the Taxation Administration Act 1953 (paragraph (a)); or

•

an offence against:

• .

section 6 (accessory after the fact), 7 (attempt) or 7A (inciting or urging the commission of an offence) of the Crimes Act 1914 (subparagraph (b)(i)); or

• .

paragraph 86(1)(a) (conspiracy) of the Crimes Act 1914 (subparagraph (b)(ii)),

that relates to an offence against section 8P, 8T or 8U of the Taxation Administration Act 1953.

Subclause 55(19) deems any suspension of a tax agent's registration under existing subsection 251K(1A) that was in effect at the date of Proclamation to have continued in effect after that date under new subsection 251K(1).

Paragraph (b) of clause 48 will amend subsection 251K(1B) of the Principal Act as a consequence of the substitution of existing subsection 251K(1A) by new subsection 251K(1).

Existing subsection 251K(2) of the Principal Act authorises a Board to cancel the registration of a tax agent if the Board is satisfied that:

•

any return prepared by or on behalf of the tax agent is false in any material particular, unless the Board is satisfied that the tax agent did not know of the falsity or the falsity was due to the tax agent's inadvertence (paragraph (a));

•

the tax agent:

• .

has neglected the business of a principal (subparagraph (b)(i));

• .

has been guilty of misconduct as a tax agent (subparagraph (b)(ii)):

• .

is not a fit and proper person to remain registered (subparagraph (b)(iii)); or

•

a nominee of a partnership or company tax agent is not a fit and proper person to be a nominee, or a member of a partnership tax agent, or director, manager or other administrative officer of a company tax agent, is under the age of 21 years or is not of good fame, integrity and character (paragraph (c)).

Under the existing law, a Board in effect cannot impose any disciplinary measure in a case where the conduct of the tax agent does not warrant cancellation. Paragraph (c) of clause 48 will amend subsection 251K(2) to give the Boards a power of suspension to complement the existing power of cancellation.

Subparagraph (2)(b)(iii) and paragraph (2)(c), which are explained in the above notes, will be omitted by paragraphs (e) and (f) of clause 48 and substantively re-enacted in new paragraphs (2)(c), (d), (e) and (f) which will authorise a Board to suspend or cancel the registration of a tax agent if the Board is satisfied that:

•

a registered nominee of the tax agent is not a fit and proper person to prepare income tax returns and transact business on behalf of taxpayers in income tax matters (paragraph (c));

•

the tax agent is a natural person who is not a fit and proper person to prepare income tax returns and transact business on behalf of taxpayers in income tax matters (paragraph (d));

•

in the case of a partnership tax agent:

• .

a partner who is a natural person is less than 18 years of age (subsubparaqraph (e)(i)(A)) or is not of good fame, integrity and character (sub-subparagraph (e)(i)(B)); or

• .

a partner that is a company has an executive officer (a defined term - see notes on clause 40) who is less than 18 years of age (sub-subparagraph (e)(ii)(A)) or is not of good fame, integrity and character (sub-subparagraph (e)(ii)(B)); or

•

in the case of a company tax agent - an executive officer of the company is less than 18 years of age (subparagraph (f)(i)) or is not of good fame, integrity and character (subparagraph (f)(ii)).

Paragraph (g) of clause 48 will substitute new subsections (3), (3A), (3B), (3C) and (3D) for subsections 251K(2A) and (3). Existing subsection 251K(2A) provides that a Board shall cancel the registration of a tax agent who fails to give notice (in accordance with existing section 251JA) that the tax agent desires to continue to be registered (see notes on clause 47). Existing subsection 251K(3) requires a Board to cancel the registration of an individual tax agent who dies, becomes bankrupt or permanently ceases to carry on business as a tax agent.

New subsection (3) provides that the suspension of registration of a tax agent not already under a period of suspension shall be for such period as the Board thinks fit.

If the tax agent is already suspended, the period of suspension, also for such period as the Board thinks fit, will, by virtue of subsection (3A), apply from the date the previous suspension ends - that is, suspensions may not operate concurrently.

Subsection (3B) provides for a minimum period of suspension of 3 months for a tax agent suspended by virtue of subsection 251K(1).

Subsection (3C) requires a Board to cancel the registration of a tax agent who is a natural person if the tax agent:

•

becomes an undischarged bankrupt (paragraph (a)); or

•

permanently ceases to carry on business as a tax agent (paragraph (b)).

Subsection (3D) requires a Board to cancel the registration of a non-exempt company (broadly, a company registered as a tax agent after the date proclaimed for the purposes of subclause 2(4) - see notes on section 251BB) if the company ceases to be a company in which qualified directors have a substantial interest (see notes on section 251BA). Subsection 251KK(2) imposes notification requirements on non-exempt companies that cease to be companies in which qualified directors have a substantial interest.

Existing subsection 251K(4) of the Principal Act requires a Board to cancel the registration of a partnership or company tax agent if:

•

there is no nominee registered in respect of the tax agent (paragraph (a));

•

a company tax agent goes into liquidation or a partner of a partnership tax agent becomes bankrupt (paragraph (b)); or

•

the company or partnership permanently ceases to carry on business as a tax agent (paragraph (c)).

The substitution of paragraphs (4)(a) and (b) by paragraph (h) of clause 48 reflects a change in drafting style and does not change the substantive effect of the paragraphs.

Paragraph (j) of clause 48 makes a minor drafting amendment of paragraph 251K(4)(c) of the Principal Act.

Paragraph (k) will omit subsections 251K(5) to (10) (inclusive) and substitute new subsections (5), (6) and (7). Existing subsection (5) provides for a right of appeal against a decision to suspend or cancel the registration of a tax agent and is being omitted in consequence of the consolidation of the appeal provisions in section 251QA. Subsection (6) was omitted by a previous amending Act. Subsections (7) and (8) contain notification requirements that are being re-enacted in sections 251KG and 251KH respectively. Subsection (9) is to the same effect as new subsection (6). The definition of "conviction" by subsection (10) is being re-enacted in section 251A.

By subsection (5), a decision by a Board to suspend or cancel the registration of a tax agent must be served on the tax agent by notice in writing. The notice must include the reasons for the decision. Paragraph 251QA(d) (see notes on clause 53) provides for a right of review by the Administrative Appeals Tribunal against a decision by a Board to suspend or cancel the registration of a tax agent.

Subsection (6) deems a suspended tax agent not to be registered except for the purposes of:

•

determining whether a company was registered as a tax agent during the periods specified in paragraphs 251BB(a) and (b);

•

determining whether a person was registered as a tax agent at the time specified in subparagraph 251BC(1)(b)(i);

•

Division 3, with the effect, inter alia, that:

• .

a suspended tax agent may be re-registered; and

• .

a Board may cancel, or further suspend, the registration of a suspended tax agent;

•

Division 4, with the effect, inter alia, that:

• .

a suspended tax agent may apply for registration, or re- registration, of nominees; and

• .

a Board may cancel the registration of a nominee of a suspended tax agent;

•

the notification obligations that are placed on tax agents by Division 6; and

•

section 251Q, which deems the Board in the State to which a tax agent's business is removed to be the Board by which the tax agent was registered.

Subsection (7) ensures that, notwithstanding that a suspended tax agent is re-registered, the suspension continues in force.

Clause 49: Insertion of headings and new sections

Clause 49 will insert the following Divisions and new sections after section 251K:

Division 4 - Registration of Nominees of Tax Agents

Division 4 contains the rules that apply to the registration or re-registration of nominees of registered tax agents.

Section 251KA : Original nominee to be registered as a nominee

As explained earlier in these notes, an application for registration or re-registration as a tax agent by a company or partnership must specify as the original nominee of the company or partnership an employee of the company or member of the partnership who is a fit and proper person to prepare income tax returns and transact business on behalf of taxpayers in income tax matters. Where the company or partnership is registered or re-registered, the original nominee will, by virtue of subsection 251KA(1), be automatically registered as a nominee of the company or partnership. Thus, a separate application for registration as a nominee will not be necessary in respect of an original nominee.

Subsection (2) complements subsection 251JC(4), which deems a tax agent to be registered from the date on which a registration ceases to be in force until the time when the tax agent is served notice of a Board's decision to refuse to re-register the tax agent. Subsection (2) will ensure that the person specified in the application for re-registration as the original nominee of a partnership or company tax agent is also deemed to be registered during that period whether or not that person was previously registered as a nominee of the tax agent.

An application for registration under section 251JE following a change in constitution of a partnership tax agent may specify, as the original nominee or nominees of the applicant, persons who were registered nominees of the original partnership. Where the applicant is subsequently registered under section 251JF, the persons specified as original nominees will be registered, under subsection (3), as original nominees of the applicant.

Section 251KB : Applications for registration or re-registration of nominees

By subsection 251KB(1), a registered tax agent, or a person applying for registration as a tax agent, may make an application for registration or re-registration of a person as a nominee of the tax agent. Persons who may be registered as nominees are:

•

partners or employees of partnership tax agents (paragraph (a)); and

•

employees of individual and company tax agents (paragraph (b)).

Subsection 251KB(2) provides for the payment of a fee on lodgment of an application for registration or re-registration as a nominee. The fee payable in respect of a person who is not already registered as a nominee of the tax agent is $80, or such higher fee as may be prescribed (paragraph (a)). In respect of a re-registration of an existing nominee, the fee is $5, or such higher fee as may be prescribed (paragraph (b)). The lodgment fees applicable to nominees are not payable in respect of the original nominee of a partnership or company tax agent.

Subsection 251KB(3) requires the application for registration or re-registration of a nominee to be in the approved form (a defined term - see notes on clause 40) and to be accompanied by such information as is required by the form to be provided.

Subsection 251KB(4) specifies the time in which an application for re-registration as a nominee may be made. The application is to be made during the period specified in paragraph (4)(a) - that is, no earlier than 60 days before the date on which the existing registration ceases to be in force and no later than 30 days before that date. The date on which the registration of a nominee of a tax agent ceases to be in force will generally be the date on which the registration of the tax agent ceases to be in force (see following notes on paragraph 251KD(2)(g)). In practical terms, the application for re-registration of a tax agent and of all registered nominees of that tax agent will be due at the same time. Paragraph (4)(b) authorises a Board to allow an application for re-registration to be lodged later than 30 days before the date on which an existing registration ceases to be in force. A Board cannot, however, allow an extension of time beyond the date on which the existing registration ceases to be in force. An application for an extension of time must be in writing. By virtue of paragraph 251QA(g) (see notes on clause 53), a decision by a Board refusing to allow a later time for lodgment is subject to a right of review by the Administrative Appeals Tribunal.

By subsection 251KB(5), a decision by a Board to refuse to allow a later time for lodgment must be served on the applicant - that is, the tax agent - and on the proposed nominee by notice in writing. The notice must include the reasons for the decision and, by virtue of subsection 251QB(1) (see notes on clause 53), a statement advising that a person whose interests are affected may apply to the Administrative Appeals Tribunal for a review of the decision.

Section 251KC : Registration and re-registration of nominees of tax agents

Subsection 251KC(1) requires a Board to register or re- register a person as a nominee of a registered tax agent if the Board is satisfied that the person is a fit and proper person to prepare income tax returns and transact business on behalf of taxpayers in income tax matters. A proposed nominee will therefore be required to meet each of the eligibility criteria specified in subsection 251BC(1).

By subsection 251KC(2), a Board must refuse to register or re-register a person as a nominee if the person is not a fit and proper person to prepare income tax returns and transact business on behalf of taxpayers in income tax matters as required by subsection 251KC(1). A decision by a Board to refuse to register or re-register an applicant as a nominee is subject to a right of review by the Administrative Appeals Tribunal (paragraphs 251QA(e) and (f) - see notes on clause 53).

By subsection 251KC(3), a decision by a Board to refuse to register or re-register a person as a nominee must be served on the applicant and on the proposed nominee by notice in writing. The notice must include the reasons for the decision and, by virtue of subsection 251QB(1) (see notes on clause 53), a statement advising that a person whose interests are affected may apply to the Administrative Appeals Tribunal for a review of the decision.

Subsection 251KC(4) provides that a proposed nominee of a tax agent who is served notice of a Board's decision to refuse to re-register the proposed nominee at a time (the "notice time") subsequent to the time (the "expiry time") when an existing registration ceased to be in force will be taken to have been registered during such part of the intervening period as the registration of the tax agent was in force (the "post-expiry period'').

This extension of a nominee's registration will apply in those cases where:

•

a Board makes a decision refusing to re-register a proposed nominee (paragraph (a));

•

notice of that decision was served on the proposed nominee after the expiry time (paragraph (b)); and

•

the tax agent was registered during all or a part of the intervening period (paragraph (c)).

The combined operation of subsection 251KC(4) and paragraph 251KD(1)(a) will ensure that a registered nominee whose application for re-registration had not been processed at the expiry time may continue to perform the duties of a nominee until such time as the Board re-registers the nominee or serves notice of its decision to refuse to re-register the nominee.

Section 251KD : Duration of registration of nominees

Subsection 251KD(1) specifies the date on which a nominee's registration comes into force. In the case of a re- registration, the registration comes into force, or is deemed to have come into force, immediately after the existing registration ceases or ceased to be in force (paragraph (a)). A nominee whose re-registration is in fact granted after the date on which a previous registration ceased to be in force will therefore be deemed to have been registered during the intervening period. A person specified in an application for re-registration as the original nominee of a partnership or company tax agent, and who is registered as an original nominee by the operation of subsection 251KA(2), will be deemed, by paragraph (b), to have been registered when the registration of the partnership or company tax agent came into force - that is, at the time when the tax agent's previous registration ceased to be in force. In any other case, the registration comes into force on the day on which it was granted (paragraph (c)).

A person's registration as a nominee of a registered tax agent will cease on the occurrence of one of the events specified in subsection 251KD(2). A nominee's registration will cease if:

•

the nominee ceases to be an employee of an individual or company tax agent (paragraphs (a) and (c));

•

the nominee is no longer either a member or employee of a partnership tax agent (paragraph (b));

•

the tax agent no longer desires the person to be a registered nominee and notifies the Board accordingly (paragraph (d));

•

the nominee's registration is cancelled (see notes on section 251KE) (paragraph (e));

•

the nominee dies (paragraph (f)); or

•

the registration of the tax agent is terminated, cancelled, surrendered or otherwise ceases to be in force (paragraph (g)).

By virtue of section 251JG, the registration of a tax agent ceases 3 years after the date on which it was granted or previously ceased to be in force. Paragraph (g) will have the effect that the registration of all nominees of the tax agent will cease on the same date.

Section 251KE : Cancellation of registration of nominees

Under the existing law, a person will cease to be a nominee of a tax agent if the Board serves on the tax agent a notice that, in its opinion, the person is no longer a fit and proper person to be a nominee of the tax agent. There is no right of appeal against a decision by a Board to serve such a notice.

Subsection 251KE(1) will provide the Boards with an explicit power to cancel the registration of a nominee. That power may be exercised if the Board is satisfied that the nominee is not a fit and proper person to prepare income tax returns and transact business on behalf of taxpayers in income tax matters. Paragraph 251QA(h) (see notes on clause 53) provides for a right of review by the Administrative Appeals Tribunal against a decision by a Board to cancel the registration of a nominee of a tax agent. By virtue of subclause 55(24), the right of review is available only in respect of a decision made after the date proclaimed for the purposes of subclause 2(4).

By subsection 251KE(2), a decision by a Board to cancel the registration of a nominee of a tax agent must be served on both the tax agent and the nominee by notice in writing. The notice must include the reasons for the decision and, by virtue of subsection 251QB(1) (see notes on clause 53), a statement advising that a person whose interests are affected may apply to the Administrative Appeals Tribunal for a review of the decision.

Division 5 - Refund of Lodgment Fees

Section 251KF : Refund of lodgment fees if application withdrawn

An application under section 251J (original registration of a tax agent), 251JB (re-registration of a tax agent) or 251KB (original registration or re-registration of a nominee) must be accompanied by the relevant lodgment fee which is paid by the Board to the Commissioner. Section 251KF requires the Commissioner to refund the lodgment fee if an application is withdrawn (paragraph (a)) before being processed by the Board (paragraph (b)).

Division 6 - Notification Obligations of Tax Agents etc.

Those provisions of Part VIIA that impose notification obligations on tax agents will be consolidated in Division 6. Notification of the events specified in Division 6 must be made "forthwith", that is, at once having regard to the circumstances of each case. Forthwith is a stronger expression than "within a reasonable time" and implies prompt, vigorous action, without any delay. Whether or not there has been such action is a question of fact having regard to the circumstances of the particular case.

Notification is to be made to the Board by which the tax agent was registered. Where a tax agent removes his or her principal place of business to another State, the Board in that State is deemed, by section 251Q of the Principal Act, to be the Board by which the tax agent was registered.

The maximum penalty that a court may impose on conviction for a failure to comply with one of the notification requirements of Division 6 is a fine of $500.

Section 251KG : Tax agents who are natural persons

Section 251KG imposes an obligation on tax agents who are natural persons to forthwith notify the Board by which the tax agent was registered if the tax agent becomes a bankrupt (paragraph (a)) or permanently ceases to carry on business as a tax agent (paragraph (b)) or if a registered nominee ceases to be employed by the tax agent (paragraph (c)).

Section 251KH : Tax agents that are partnerships

A partnership tax agent is required by section 251KH to forthwith notify the Board by which it was registered if:

•

a partner becomes a bankrupt (paragraph (a));

•

a person becomes an executive officer (a defined term - see notes on clause 40) of a partner that is a company (paragraph (b));

•

a nominee who was not a member of the partnership when last registered as a nominee ceases to be employed by the partnership (paragraph (c)); or

•

the partnership permanently ceases to carry on business as a tax agent (paragraph (d)).

Section 251KJ : Changes in the constitution of partnerships

Subsection 251KJ(1) places an obligation on every person who was a partner in a partnership tax agent immediately prior to a change in constitution of the partnership to forthwith notify the Board by which the partnership was registered of the change.

However, if one person who was a partner immediately prior to the change notifies the Board of the change in accordance with subsection (1), subsection (2) effectively removes the obligation placed on any other partners by subsection (1).

Section 251KK : Tax agents that are companies

The notification requirements imposed on a company tax agent by subsection 251KK(1) are that the company forthwith notify the Board by which it was registered if:

•

the company goes into liquidation (paragraph (a));

•

a nominee of the company ceases to be employed by the company (paragraph (b));

•

a person becomes an executive officer (a defined term - see notes on clause 40) of the company (paragraph (c)); or

•

the company permanently ceases to carry on business as a tax agent (paragraph (d)).

Subsection (2) requires a non-exempt company (broadly, a company that had not applied for registration at the date proclaimed under subclause 2(4) - see notes on new section 251BB) to forthwith notify the Board if it has reasonable grounds to believe that the company has ceased to be a company in which qualified directors have a substantial interest (see notes on new section 251BA).

Clause 49 will also insert the heading "Division 7 - Privileges and Duties of Registered Tax Agents" after section 251KK. Division 7 will comprise the following sections:

Clause 50: Preparation of returns etc. on behalf of registered tax agents

By virtue of section 251N of the Principal Act, the only persons who may prepare an income tax return or objection or transact business relating to an income tax matter on behalf of a registered tax agent are:

•

an employee of the tax agent;

•

another registered tax agent; or

•

in the case of a partnership tax agent, a member of the partnership.

A partnership or company tax agent may not allow any person to prepare an income tax return or objection or conduct business relating to an income tax matter except under the supervision and control of a registered nominee of the partnership or company.

A registered tax agent may, however, employ a solicitor or counsel who is not a registered tax agent to prepare an objection or act in litigation or proceedings before a board, court or the Administrative Appeals Tribunal. A solicitor or counsel may also act in an advisory capacity in the preparation of an income tax return or in the conduct of business relating to an income tax return, objection or other matter.

Paragraph (a) of clause 50 will make a minor technical amendment of subsection 251N(2). By new subsection 251N(2A), being inserted in the Principal Act by paragraph (b) of clause 50, a sole practitioner tax agent may not allow a person to prepare an income tax return or transact income tax business on behalf of the tax agent except under the supervision and control of the tax agent (paragraph (a)) or a registered nominee of the tax agent (paragraph (b)). The maximum penalty that may be imposed by a court on conviction for an offence against section 251N is a fine of $1000.

Clause 51: Advertising etc. by persons other than registered tax agents

Section 251O of the Principal Act prohibits a person who is not a registered tax agent from representing himself or herself as a tax agent or advertising that income tax returns will be prepared, or other income tax business will be conducted, by the person. The maximum penalty that a court may impose on conviction for an offence against section 251O is a fine of $1000. Clause 51 will amend section 251O to provide for two exceptions to this general rule.

Paragraph (a) of clause 51 will ensure that the prohibition imposed by section 251O is subject to the exceptions contained in new subsection 251O(2), being inserted by paragraph (b). Paragraph 251O(2)(a) will enable a solicitor or counsel who is not a registered tax agent to advertise in relation to acts or things that the solicitor or counsel is authorised to do by virtue of existing subsection 251L(4), that is, acting in the course of his or her profession:

•

in the preparation of an objection (subparagraph (i));

•

in litigation or proceedings before a board, the Administrative Appeals Tribunal or a court (subparagraph (ii)); or

•

in an advisory capacity in connection with the preparation of an income tax return or with any income tax matter (subparagraph (iii)).

Paragraph 251O(2)(b) will permit advertising by a person providing services on a voluntary basis under a scheme approved by the Commissioner of Taxation by notice published in the Gazette.

Clause 52: Insertion of heading

Clause 52 will insert the heading "Division 8 - Miscellaneous" after section 251O of the Principal Act. Division 8 will comprise:

Clause 53: Insertion of sections

Clause 53 will insert new sections 251QA and 251QB in the Principal Act.

Section 251QA : Review of decisions

Section 251QA specifies the decisions of a Board in respect of which a right of review by the Administrative Appeals Tribunal is to be available. An application may be made for review of a decision to:

•

refuse to register a person (that is, an individual or a company) or a partnership as a tax agent (paragraph (a)) other than a decision to refuse to register a person as a successor tax agent under section 251JF. (Such a decision may be reviewed by a court.);

•

refuse to re-register a tax agent (paragraph (b));

•

refuse to allow a later time for the making of an application for re-registration as a tax agent (paragraph (c));

•

suspend or cancel the registration of a tax agent (paragraph (d));

•

refuse to register a person as a nominee of a tax agent (paragraph (e));

•

refuse to re-register a person as a nominee of a tax agent (paragraph (f));

•

refuse to allow a later time for the making of an application for re-registration as a nominee of a tax agent (paragraph (g)); or

•

cancel the registration of a nominee of a tax agent (paragraph (h)).

Section 251QB : Statements to accompany notification of decisions

Where a Board makes a decision of a kind referred to in section 251QA, the Board is required to serve on the tax agent, nominee or both, as the case may be, notice in writing setting out the decision and giving the reasons for the decision. By subsection 251QB(1), the notice must include a statement advising that a person whose interests are affected by the decision may, subject to the Administrative Appeals Tribunal Act 1975, if dissatisfied with the decision, apply to the Administrative Appeals Tribunal for a review of the decision.

However, by virtue of subsection 251QB(2), a failure to include a statement as required by subsection (1) will not affect the validity of the Board's decision.

Clause 54: Amendments consequential on renumbering of the Social Security Act 1947

Clause 54 proposes the various amendments of the Principal Act specified in the Schedule to this Bill. The amendments alter references in the Principal Act to provisions of the Social Security Act 1947 following the renumbering and re-lettering of the provisions of the latter Act by the Social Security Amendment Act 1987.

Clause 55: Application of amendments

This clause, which will not amend the Principal Act, contains provisions that specify the date on which, or the year of income for which, certain of the amendments proposed in Part III of the Bill will apply.

By subclause 55(1) the term "amended Act", as used in the clause, means the Income Tax Assessment Act 1936 as proposed to be amended by this Bill.

By subclause 55(2) the amendments proposed by:

•

subclause 14(1) and clauses 13, 17, 30, 31, 32, 33 and 34 of this Bill to the foreign tax credit system provisions of the Principal Act; and

•

paragraphs 26(e) and 27(a) to repeal subsections 159GZG(6) and 159GZR(2) of the Principal Act,

will apply to assessments in respect of income of the year of income commencing on 1 July 1987 and of all subsequent years of income.

By subclause 55(3) the amendments proposed by:

•

paragraph 10(a) of the Bill to omit paragraphs 23(x) and (y) of the Principal Act;

•

subclause 14(2) and clauses 8, 16 and 35 of this Bill to the foreign tax credit system provisions of the Principal Act; and

•

clauses 23 to 27 to the thin capitalisation provisions,

will apply to assessments in respect of income of the year of income commencing on 1 July 1988 and of all subsequent years of income.

Subclause 55(4) specifies that the amendments proposed by paragraph (b) of clause 10 of the Bill - which are intended to make clear that the exemption from income tax for payments for dependent children made under the AUSTUDY educational assistance scheme is limited to payments for children dependent on the student being assisted - are to apply to amounts received on or after the date subclause (4) commences, that is, the date on which this Bill receives the Royal Assent.

The effect of subclause 55(5) is to require the amendments proposed by paragraph (b) of clause 10 (described above) to be disregarded when determining whether some or all of an AUSTUDY payment received before the day on which this Bill receives the Royal Assent is or is not exempt from income tax.

By subclause 55(6), the amendments made by paragraphs (c) to (g) of clause 10 to remove the income tax exemption for payments for students aged 16 or more under the Aboriginal Secondary Assistance Scheme and for payments under the Aboriginal Study Assistance Scheme will apply to income received for a period commencing on or after 1 January 1988.

Subclause 55(7) specifies that the amendment proposed by paragraph (a) of clause 12 to remove the income tax exemption for a carer's pension paid to a person below age pension age caring for a non-relative handicapped pensioner of age pension age is to apply to payments of carer's pension paid for a fortnightly period that commences on or after the date on which the subclause commences. That date is, by virtue of subclause 2(1) of the Bill, the day on which the Bill receives the Royal Assent.

Subclause 55(8) provides that the amendment to be made by clause 12 of the Bill to exempt from income tax training and living-away-from-home allowances paid under Part III of the Disability Services Act 1986 will apply to assessments for the year of income in which 5 June 1987 occurred - the date on which the Disability Services Act came into operation - and for all later years of income.

Subclause 55(9) specifies that the amendments proposed by clauses 18, 19 and 36 of the Bill to sections 102M and subsections 121F(1) and 160K(1) respectively of the Principal Act as a consequence of the deletion from that Act of paragraphs 23(x) and (y) will apply to assessments in respect of income of the year of income commencing on 1 July 1988 and of all subsequent years of income.

By subclause 55(10), the amendment to be made by paragraph (a) of clause 28 to exclude family allowance supplement in calculating "separate net income" for dependant rebate purposes will apply to payments of the supplement that fell or fall due on or after 17 December 1987 - the date on which family allowance supplement replaced family income supplement.

The amendment proposed by paragraph (b) of clause 28 to exclude child disability allowance from the definition of "separate net income" for dependant rebate purposes will, by virtue of subclause 55(11), apply to a payment under the Social Security Act 1947 that fell or falls due on or after 15 November 1987 - the date child disability allowance replaced handicapped child's allowance.

Subclause 55(12) specifies that proposed new paragraph 160AAA(2)(ab) of the Principal Act, which extends the availability of the beneficiary rebates to taxpayers with assessable income from the Aboriginal Secondary Assistance Scheme or the Aboriginal Study Assistance Scheme (see the earlier notes on paragraph (c) of clause 29), is to apply to assessments for the 1988-89 income year and all subsequent income years.

Proposed new paragraph 160AAA(2)(ac), which adds Formal Training Allowance to the list of assessable receipts that entitle a taxpayer to the beneficiary rebates (see the earlier notes on paragraph (c) of clause 29), will by subclause (13) apply to assessments for the 1987-88 income year and all subsequent income years.

Certain income receipts, including "salary or wages" as defined in subsection 221A(1) of the Principal Act, are excluded from the operation of Division 6AA of Part III of the Principal Act. Division 6AA generally subjects the unearned income of children to a higher-than-normal rate of tax. Subclause (14) ensures that payments made under the Aboriginal Secondary Assistance Scheme for students 16 years of age and over and under the Aboriginal Study Assistance Scheme, which are to be included in the definition of "salary or wages" in subsection 221A(1) by clause 38 of this Bill, are excluded from the operation of Division 6AA if the payments are for a period commencing on or after 1 January 1988. Payments for a period commencing on or after that date are to be included in assessable income by paragraphs (c) to (g) of clause 10 and would be subject to Division 6AA but for this subclause.

By subclause 55(15), the persons holding office as members of each of the 6 State Tax Agents' Boards will cease to hold office on the day proclaimed for the purposes of subclause 2(4).

Subclause 55(16) will ensure that a tax agent registered under Part VIIA prior to the amendments made by this Bill will continue to remain registered after the date proclaimed for the purposes of subclause 2(4). Such tax agents, including tax agents whose registration is under suspension at the date of Proclamation, will be deemed to have been registered under new section 251JA immediately after the amendments come into force. Any suspensions that are in force at that date will nevertheless continue in force by virtue of subsection 251K(7).

By subclause 55(17), the operation of existing section 251JA and subsection 251K(2A) continues after the date of Proclamation in relation to a tax agent whose registration was in force (including a suspended registration) on 1 April 1988. Section 251JA requires a tax agent who is registered as at 1 April in any year to notify the Board within 7 days, or such further period as the Board allows, that the tax agent desires to be registered and to furnish such particulars as are specified in the relevant form. Subsection 251K(2A) requires a Board to cancel the registration of a tax agent who has failed to comply with the requirements of section 251JA. Subclause 55(17) will ensure that the proclamation of a date for the purposes of subclause 2(4) will not operate to prevent a Board from cancelling the registration of a tax agent who has failed to comply with existing section 251JA.

Subclause 55(18) means that, notwithstanding new section 251JG (which, broadly, provides for the registration of a tax agent to be in force for 3 years), a registration that is in force on the date proclaimed for the purposes of subclause 2(4) will cease to be in force on 1 April 1989. The effect of subclause 55(18) is that a tax agent who is registered as at the date of Proclamation will be required to apply for re-registration during the period 31 January 1989 to 1 March 1989 (inclusive) or within such further time as the Board may allow under paragraph 251JB(4)(b).

Existing subsection 251K(1A) requires a Board to cancel or suspend, for a minimum period of 3 months, the registration of a tax agent who is convicted of certain taxation offences. Subsection 251K(1A) has been substantively re-enacted as new subsection 251K(1). Subclause 55(19) deems a suspension that is in effect under section 251K(1A) at the date of Proclamation to continue in effect under new subsection 251K(1).

Subclause 55(20) will ensure that a nominee registered under Part VIIA prior to the date proclaimed for the purposes of subclause 2(4) will continue to remain registered after the date of Proclamation. Such nominees will be deemed to have been registered under new subsection 251KC(1) immediately after the amendments come into force.

Subclause 55(21) sets out transitional arrangements for tax agent registration applications that had been made (paragraph (a)) but had not been processed (paragraph (b)) by the Board as at the date proclaimed for the purposes of subclause 2(4). Paragraph (c) allows existing subsections 251J(1), (2), (3) and (4) to continue to apply in respect of such applications. Those provisions, broadly:

•

permit a person or partnership to apply to a Board for registration as a tax agent (subsection 251J(1));

•

require each application to be accompanied by a lodgment fee of $2 (subsection 251J(2));

•

require a Board to register an applicant if it is satisfied that the specified criteria are met (subsection 251J(3)); and

•

require the Board to register as a nominee of a partnership or company applicant the person specified in the application (subsection 251J(4)).

The effect of paragraph (c) is that applicants for registration whose applications had not been processed at the date of Proclamation will not be required to pay the higher fee that is being introduced and will be subject to the criteria for registration that applied before the amendments.

Paragraph (d) specifies that the provisions of Part VIIA of the amended Act will apply to any registration of a tax agent granted under existing subsection 251J(3) by the operation of paragraph (c) of subclause 55(21) in respect of an application lodged, but unprocessed, prior to the Proclamation date as if that application had been granted under new section 251JA.

New paragraph 251BB(a) treats a company as a non-exempt company at a particular time (and therefore subject to the continuing application of the qualified directors test in section 251BA - see notes on clause 41) unless the company was registered as a tax agent immediately before the date proclaimed for the purposes of subclause 2(4). Similarly, by virtue of subsection 251BC(1) - see notes on clause 41 - a natural person will not be considered a fit and proper person to prepare income tax returns and transact business on behalf of taxpayers in income tax matters if that person does not hold such qualifications as are prescribed (subparagraph (b)(ii)) unless the person was registered as a tax agent, or as a nominee, before the date of commencement of the amendments (subparagraph (b)(i)). Paragraph (e) specifies that section 251BB and subparagraph 251BC(1)(b)(i) will apply in respect of any registration of a tax agent granted in accordance with an application lodged but unprocessed prior to the date of the commencement of the amendments as if a reference in that section or subparagraph to the commencement of the amendments is a reference to the time immediately after the registration came into force. The effect of paragraph (e) is that a company tax agent registered under existing subsection 251J(3) by the operation of paragraph (c) of subclause 55(21) after the date of commencement and whose application for registration had been lodged with a Board prior to that date, will not be subject to the continuing application of the qualified directors test in section 251BA, and a natural person tax agent registered in similar circumstances will not be subject to the qualification requirements in subparagraph 251BC(1)(b)(ii).

By paragraph (f), the provisions of Part VIIA of the amended Act will apply to any registration of a nominee granted under existing subsection 251J(4) by the operation of paragraph (c) of subclause 55(21) in respect of an application lodged, but unprocessed, prior to the date of commencement of the amendments as if that application had been granted under new subsection 251KA(1).

The effect of paragraph (g) is that a nominee registered under existing subsection 251J(4) by the operation of paragraph (c) of subclause 55(21) after the date of commencement of the amendments will not be subject to the qualification requirements in subparagraph 251BC(1)(b)(ii).

Subclause 55(22) contains transitional arrangements for nominee registration applications that had been made (paragraph (a)) but had not been processed (paragraph (b)) at the date of Proclamation. Paragraph (c) allows existing subsections 251J(5) and (6) to continue to apply in respect of such applications. Those respective provisions, broadly:

•

permit a partnership or company to apply for registration of additional or substituted nominees, subject to a lodgment fee of $2; and

•

permit a Board to register a person as an additional or substituted nominee if the Board is satisfied that the person is a fit and proper person to prepare income tax returns and transact business on behalf of taxpayers in income tax matters.

The effect of paragraph (c) is that a person proposed as a nominee before the date of Proclamation will not be required to pay the higher fee that is being introduced and will be subject to the criteria for registration that applied before the amendments.

Paragraph (d) allows the provisions of Part VIIA of the amended Act to apply to any registration of additional or substitute nominees granted under existing subsection 251J(5) by the operation of paragraph (c) in respect of an application lodged, but unprocessed, prior to the date of commencement of the amendments as if that application had been granted under new subsection 251KC(1).

The effect of paragraph (e) is that an additional or substitute nominee registered under existing subsection 251J(5) by the operation of paragraph (c) after the date of commencement of the amendments will not be subject to the qualification requirements in subparagraph 251BC(1)(b)(ii).

The right of appeal that is available under subsection 251K(5) of the existing law against a decision by a Board to suspend or cancel the registration of a tax agent is being re-enacted in paragraph 251QA(d). Subclause 55(23) will ensure that the repeal of subsection 251K(5) by paragraph (k) of clause 48 will not affect any application made to the Tribunal before the date of Proclamation, or any matter or thing arising out of, or any proceeding incidental to or connected with, such an application.

Section 251QA specifies those decisions against which an application may be made to the Administrative Appeals Tribunal for a review. A right of review is not available under the existing law in respect of those decisions specified in paragraphs 251QA(a), (e) and (h). (Under the existing law, a Board is not required to make a decision of the kind specified in paragraphs (b), (c) and (g)). Subclause 55(24) makes it clear that an application under any of those paragraphs may only be made in respect of a decision made after the date of Proclamation.

A right of review is, however, available under the existing law in respect of a decision to suspend or cancel the registration of a tax agent. Subclause 55(25) will ensure that the corresponding right under new paragraph 251QA(d) will be available irrespective of the date on which the Board's decision was made.

Clause 56: Amendment of assessment

Clause 56 will give the Commissioner of Taxation authority to re-open an income tax assessment made before the Bill becomes law should this be necessary for the purposes of giving effect to the amendments proposed by the Bill.

PART IV - AMENDMENT OF THE INCOME TAX RATES ACT 1986

Clause 57: Principal Act

This clause facilitates references to the Income Tax Rates Act 1986 which, in Part IV of the Bill, is referred to as the "Principal Act".

Clause 58: Interpretation

Section 16 of the Principal Act is the interpretative provision for the part of the Principal Act that allows the tax-free threshold on a pro-rata basis only for certain taxpayers.

Consequent on the renumbering of the Social Security Act 1947 by the Social Security Amendment Act 1987, clause 58 proposes the omission of the reference to Part VII of the Social Security Act in paragraph (c) of the definition of "eligible pensioner" in subsection 16(1) of the Principal Act and its replacement with a reference to Part XIII of the Social Security Act.

PART V - AMENDMENT OF THE SALES TAX (EXEMPTIONS AND CLASSIFICATIONS) ACT 1935

Clause 59: Principal Act

This clause facilitates references to the Sales Tax (Exemptions and Classifications) Act 1935 in Part IVA of the Bill as the "Principal Act".

Clause 60: First Schedule

By this clause items 74F, 74H, 74HA and 74HB are omitted from the First Schedule to the Principal Act.

PART VI - AMENDMENT OF THE TAXATION LAWS AMENDMENT (FOREIGN TAX CREDITS) ACT 1986

Introductory note

The Taxation Laws Amendment (Foreign Tax Credits) Act 1986 amended the Income Tax Assessment Act 1936 to replace, with effect from the commencement of the 1987-88 income year, the various double taxation relief provisions of the income tax law with a general world-wide foreign tax credit system under which foreign source income (apart from certain salary and wages) derived by Australian resident individuals and companies is subject to Australian income tax. Credit for foreign income tax paid by the Australian resident on the foreign income is allowed against, and up to the amount of, the Australian tax payable on that income.

This Part of the Bill effects amendments to the Taxation Laws (Foreign Tax Credits) Act 1986 which will not alter the intended operation of the foreign tax credit system.

Clause 61: Principal Act

This clause facilitates references to the Taxation Laws Amendment (Foreign Tax Credits) Act 1986 which, in Part VI of the Bill, is referred to as the "Principal Act".

Clause 62: Transitional provisions - depreciation

Section 34 of the Principal Act operates to ascertain the amount to be treated as the cost of a unit of property for the purposes of allowing a deduction for depreciation under section 54 of the Income Tax Assessment Act 1936 against income of a foreign business of a taxpayer first liable to Australian tax for the year of income commencing on 1 July 1987. This follows from the introduction with effect from the commencement of that year of income of the foreign tax credit system.

Subsection 34(1) specifies that the section applies to property in respect of which depreciation is allowable under section 54 of the Income Tax Assessment Act 1936, being property which was owned by the taxpayer on 1 July 1987, and used, or installed ready for use, by the taxpayer for the purposes of producing income which would have been exempt income but for the repeal of paragraph 23(q) of the Income Tax Assessment Act 1936.

Subsection 34(2) provides that, for the purposes of calculating depreciation allowable under the Income Tax Assessment Act 1936, the cost of a unit of property would be an amount which would have been the depreciated value, ascertained under section 62 of that Act, of that unit on 1 July 1987. The depreciated value is ascertained as if the unit had been used by the taxpayer during the whole of the period from the time of its acquisition by the taxpayer to 1 July 1987 wholly for the purpose of producing assessable income, and depreciation had been allowed to the taxpayer during that period by way of a percentage of the depreciated value of the unit at the beginning of each year of income.

Clause 62 will amend subsections 34(1) and (2) to replace the reference to 1 July 1987 in those subsections with 'the first day of the year of income commencing on 1 July 1987'. This reflects the fact that where a taxpayer has adopted, with leave of the Commissioner, an accounting period being 12 months ending on some date other than 30 June, the accounting period which substitutes for the normal 1987-88 year of income would commence on a day other than 1 July 1987.

Clause 63: Transitional provisions - losses

Section 35 of the Principal Act provides for the ascertainment of the amount of any overall foreign losses in respect of a class of income derived from a foreign source which can be taken into account for the purposes of section 160AFD of the Income Tax Assessment Act for the year of income beginning on 1 July 1987 (referred to as the first taxable year). The provisions of the section have regard to assessable income and allowable deductions for pre-foreign tax credit system income years in computing the overall foreign losses or profits of those years. However, as most foreign income derived in those years would have been exempt from Australian tax under former paragraph 23(q) of the Income Tax Assessment Act 1936, assessable income and allowable deductions status would generally be denied to that income and related deductions.

Clause 63 will amend section 35 by inserting an additional subsection (2A). The new subsection, by providing for paragraph 23(q) to be disregarded for the purposes of section 35, will enable income previously exempt under former paragraph 23(q) and deductions related to derivation of that income to be taken into account in determining the amount of the eligible carry-forward foreign losses.

PART VII - AMENDMENT OF THE TAXATION LAWS AMENDMENT (FRINGE BENEFITS AND SUBSTANTIATION) ACT 1987

Clause 64: Principal Act

This clause facilitates references to the Taxation Laws Amendment (Fringe Benefits and Substantiation) Act 1987) which, in Part VI of the Bill, is referred to as the ''Principal Act".

Clause 65: Taxable value of car fringe benefits - cost basis

The amendments to section 6 of the Principal Act being made by this clause effect some drafting corrections. They make clear that the substitution of the expression "year of tax" for "holding period" by paragraph 6(e) of the Principal Act applied whenever the firstmentioned expression appeared in subparagraphs 10(3)(a)(iii), (iv) and (v) of the Fringe Benefits Tax Assessment Act 1986.

By subclause 2(6) of the Bill the amendments will come into operation on 18 December 1987, the day on which the Principal Act came into operation.

SCHEDULE

Amendments of the Income Tax Assessment Act 1936 consequential on the renumbering of the Social Security Act 1947

The Social Security Amendment Act 1987 renumbered and re-lettered the provisions of the Social Security Act 1947 with effect from 2 July 1987. The effect of provisions in Commonwealth laws that refer to provisions of the Social Security Act before the renumbering and re-lettering were, however, preserved by the Social Security Amendment Act.

To remove the need to refer to a comparative renumbering table, this Schedule lists the various amendments of the Income Tax Assessment Act 1936 to be made in order to update references to Social Security Act provisions. The amendments are formally proposed by clause 54 of the Bill.