House of Representatives

Explanatory Memorandum

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

MAIN FEATURES

The main features of the Bill are as follows:

Amendment of the Income Tax Assessment Act 1936 (Part III)

Rollover relief for capital gains tax purposes (Clauses 32 to 51)

Interposition of a company into an existing business structure (Clause 50)

Clause 50 will give effect to the proposal announced on 28 January 1988 to extend rollover relief where a resident company (not acting in the capacity of a trustee of a trust estate) is interposed between shareholders and an existing resident company, and the shareholders dispose of their shares in the existing company to the interposed company solely in exchange for shares in the interposed company.

Such a reorganisation may be carried out either by a direct exchange of shares in the existing company for shares in the interposed company or by the redemption or cancellation of shares in the existing company and an issue of shares in the interposed company.

The main requirements for allowance of rollover relief where there is a disposal of shares in an existing resident company for shares in an interposed resident company will be:

•

the reorganisation commenced after 28 January 1988 (the date on which the proposal was announced);

•

the consideration for the disposal consists solely of non-redeemable shares in the interposed company;

•

immediately after the reorganisation the former shareholders in the existing company hold all the shares in the interposed company in the same proportion, and as to the same value, as shares were held immediately before the exchange, redemption or cancellation;

•

immediately after the reorganisation, the interposed company is the sole shareholder in the existing company; and

•

the interposed company elects for rollover relief to apply in respect of the reorganisation.

A shareholder in the interposed company will be able to elect for rollover relief where the required conditions have been satisfied, and the election must cover all the shareholder's shares in the existing company. Following an election by a shareholder for relief there will be no capital gains tax liability on the disposal to the interposed company of shares in the existing company that were acquired after 19 September 1985. Also, where the shareholder in the existing company acquired all the shares in that company before 20 September 1985, the shares in the interposed company received as a result of the reorganisation will also be taken to have been acquired before that date so as not to be subject to capital gains tax. If some only of a shareholder's shares in the existing company were acquired before 20 September 1985, an equivalent proportion of the shares received in the interposed company will be taken to have been acquired before that date. For shares in the interposed company taken to have been acquired on or after 20 September 1985, the consideration for the acquisition of the shares for capital gains tax purposes will be determined by reference to the cost bases of the corresponding shares previously held in the existing company.

Where the interposed company elects for rollover relief a proportion of the shares in the existing company, determined by reference to the net value of assets of the existing company that were acquired before 20 September 1985, may be taken to have been acquired before 20 September 1985. In respect of shares in the existing company that are taken to have been acquired on or after 20 September 1985, the amount of a capital gain or a capital loss on a subsequent disposal will be determined by taking into account the relevant cost bases of assets of the existing company that were acquired on or after 20 September 1985 as reduced by any liabilities of the existing company attributable to those assets.

Crown Leases (Clauses 37 and 51)

Under the capital gains tax provisions, the surrender or expiry of a lease of land is treated as the disposal of an asset, and the renewal of a lease is treated as the acquisition of a new asset. If a lease was acquired before 20 September 1985, no capital gains tax consequence arises when it is renewed but the new lease is subject to the capital gains and capital losses provisions at the time of a later disposal. If a lease was acquired after 19 September 1985, a capital gains tax liability may arise on its surrender or expiry.

By clause 37 of the Bill rollover relief will be allowed, with effect from 20 September 1985, when a Crown lease is converted to a lease in perpetuity, or is renewed, extended in term, reduced or expanded in size, or subdivided or consolidated with another Crown lease held by the taxpayer. Rollover relief will be available without any requirement to make an election. The proposed amendment will ensure that the capital gains tax-exempt status of Crown leases granted before 20 September 1985 will be preserved. In the case of a lease acquired after 19 September 1985, the surrender or expiry of the lease will not be treated as a disposal for capital gains purposes where rollover relief is available. The cost base, indexed cost base or reduced cost base of the new lease will be based on that of the old lease. This will ensure that the capital gains provisions will not apply until a Crown lease is disposed of to a third party or is brought to an end in some other way.

Rollover relief will apply to a Crown lease of land, but not to any other lease. For this purpose, a Crown lease will be defined as a lease granted by the Crown under a statute of the Commonwealth, of a State or of a Territory or a similar lease granted under comparable legislation of a foreign country.

Clause 37 will also modify, with effect from 20 September 1985, the existing capital gains tax treatment on the conversion of a Crown leasehold interest in land to freehold tenure. The existing law deems the freehold interest to have been acquired when the leasehold interest was acquired, provided that the lease was granted in perpetuity or for a minimum term of 99 years.

Under the proposed amendment rollover relief will be available for the conversion of a Crown lease to freehold tenure irrespective of the term of the lease. For a Crown lease acquired before 20 September 1985, the freehold interest over the land to which the lease related will also be taken to have been acquired before that date. As a result, the capital gains and capital losses provisions will not apply. If the Crown lease was acquired after 19 September 1985, the cost bases of the lease will be transferred to the freehold interest.

The scope of the principal residence exemption will also be broadened with effect from 20 September 1985. At present, exemption is not available for a dwelling on Crown leasehold land unless the lease was granted in perpetuity or for not less than 99 years. The amendment proposed by clause 51 will extend the exemption to a dwelling on land held under a Crown lease regardless of the term of the lease.

Renewal of licences or authorities (Clause 50)

Clause 50 of the Bill will extend rollover relief, with effect from 20 September 1985, to the renewal or extension of a statutory licence, authority or permit by the issue of a fresh licence, authority or permit. These assets, taking as examples, taxi licences and radio and television broadcasting licences, share two characteristics. First, they are created by the application of statutory powers and, secondly, the rights attaching to the grant are commonly subject to periodical renewal or extension following expiry or surrender.

At present, the expiry or surrender of this type of asset is treated as a disposal of the asset. If a licence, authority or permit acquired before 20 September 1985 expires or is surrendered on or after that date, any new licence, authority or permit acquired is subject to the capital gains and capital losses provisions on a later disposal.

The proposed amendment will allow rollover relief for the renewal or extension of such assets. The rollover will apply automatically and will not be subject to the making of an election. Relief will be limited to an authority, licence or permit granted by or on behalf of a government or a government authority and created by the exercise of powers conferred by a statute of the Commonwealth, a State or Territory, or of another country, where the acquisition of the new asset by a taxpayer is wholly or principally attributable to the fact that the taxpayer owned the old asset.

The effect of the rollover will be that where a statutory licence, authority or permit acquired by a taxpayer before 20 September 1985 is renewed or extended by the issue of a fresh licence, authority or permit, the new licence, authority or permit will also be taken to have been acquired before that date. In other cases, a renewal or extension will not be a disposal for capital gains tax purposes and the cost base of the new asset will be that of the old asset increased by any consideration paid for the acquisition of the new asset.

Prospecting rights and mining rights (Clause 43)

Rollover relief is currently available in circumstances where a taxpayer acquires a mining right by reason of the discovery of minerals in the exercise of a prospecting right. The prospecting right and the mining rights are taken to have been merged and the merged asset is taken to have been acquired when the taxpayer acquired the prospecting right. The consideration deemed to have been paid for the acquisition of the merged asset is the sum of the amounts paid to acquire the prospecting right and the mining right.

Subject to certain requirements, rollover relief will now be extended to additional situations. They include:

•

renewals and extensions of existing prospecting rights and mining rights;

•

consolidations or splits of existing prospecting rights or mining rights; for example, where a number of existing prospecting or mining rights are consolidated into one or a reduced number of rights, or where one or more existing rights are surrendered on the issue of a larger number of rights;

•

conversions of mining rights to prospecting rights and prospecting rights to mining rights; and

•

the relinquishment of part of an existing prospecting or mining right on the issue of a new right.

Rollover relief will apply automatically and will not be subject to the making of an election. Relief will apply to prospecting and mining rights under a law of the Commonwealth, a State or a Territory and to rights under a corresponding law of another country.

Involuntary disposals (Clauses 44 and 45)

Rollover relief is now available for involuntary disposals of assets where a taxpayer has an asset compulsorily acquired by a government or government authority and purchases a replacement asset within a stipulated period or receives another asset as compensation. The application of the capital gains provisions is deferred until there is a disposal of the replacement asset.

Clauses 44 and 45, with effect from 20 September 1985, will modify the rollover relief for involuntary disposals in two respects. First, it will no longer be formally necessary for a government or government authority to acquire the asset by exercise of its power of compulsion. The other clarifies the rule that a replacement asset is not taken to be a pre-20 September 1985 asset if the consideration for the acquisition of that asset exceeds by more than 20 per cent the market value of the original asset immediately before its disposal.

Rollover relief will be extended to a situation in which a government or government authority has notified the taxpayer that it intends to acquire an asset but the taxpayer disposes of the asset to the government or government authority by voluntary agreement rather than under the compulsory acquisition processes.

The proposed amendment will also ensure that, provided the other requirements for rollover relief have been met, the replacement asset will be taken to have been acquired before 20 September 1985 if its acquisition cost does not exceed 120 per cent of the market value of the original asset immediately before its loss or destruction. This overcomes an ambiguity as to whether the market value is determinable before or after the point of loss or destruction.

Transfer of asset to wholly owned company (Clause 47)

Rollover relief is available where an individual, partnership or trustee transfers an asset to a company, receives only shares or securities of the company as consideration for the transfer and is the sole shareholder of the company after the transfer.

For partnerships it is a requirement that at least one of the partners is a natural person and that immediately after the reorganisation the partners beneficially own all the shares in the company. The latter requirement means that rollover relief is not available if any of the partners are trustees of a trust estate as a trustee owns the legal interest in the assets with beneficial ownership being held by the beneficiaries. The proposed amendment will allow rollover relief where one or more of the partners are trustees if, immediately after incorporation, the trustee/partners own shares in the company in the same proportions as their previous partnership interests and hold them on the same trust as they held them before the incorporation.

The amendment will also remove the requirement that one of the partners be a natural person. This means that a partnership of companies will be able to take advantage of the rollover relief.

The amendment will apply to transfers of assets after 28 January 1988 (the date of announcement).

Public trading unit trusts (Clause 50)

In 1985 changes were made to the taxation of public trading trusts. These changes, contained in Division 6C of Part III of the Income Tax Assessment Act 1936, have effect from the financial year commencing 1 July 1988 for trading trusts established before 20 September 1985. By clause 50 rollover relief will be extended to a type of reorganisation under which the trustee of such a unit trust makes a distribution in specie to pre-20 September 1985 unitholders of shares held by the trust in a company where the shares were acquired before 20 September 1985. The amendment to extend relief in this way will apply to transfers of shares after 28 January 1988 (the date of announcement) and before 1 July 1988 or the commencement date of a substituted accounting period, in lieu of the financial year commencing on 1 July 1988, that commences before 1 July 1988.

Relief will be available if the pre-20 September 1985 unitholder elects. Where all the units, in respect of which the in specie distribution is made, were acquired by the unitholder before 20 September 1985, the shares will also be taken to have been acquired before that date. Where some only of the units held by the unitholder, in respect of which the in specie distribution is made, were acquired before 20 September 1985, the number of shares taken to have been acquired before that date will be determined on a proportionate basis. Where all the units held by a unitholder were acquired after 19 September 1985 the shares will be taken to have been acquired by the unitholder after that date. The cost bases of such shares will be determined by their market value, while the cost bases of the units will be subject to the application of existing section 160ZM of the Income Tax Assessment Act 1936.

Marriage breakdown (Clauses 46 and 51)

The existing law provides for rollover relief on the transfer of assets between spouses if the transfer takes place pursuant to an order of, or maintenance agreement approved by, a court under the Family Law Act 1975 (or under a corresponding law of a foreign country). The amendment proposed by clause 46 will extend this relief to include assets transferred between a company or trustee of a trust estate and the spouse pursuant to such a court order or maintenance agreement. The extension of relief will apply to assets transferred after 28 January 1988 (the date of announcement).

The effect of the rollover relief will be that if the transferred asset was acquired by the company or trustee before 20 September 1985, the spouse receiving the asset will also be treated as if he or she had acquired the asset before that date. For assets acquired by the company or trustee after 19 September 1985, the cost base, indexed cost base or reduced cost base of the asset will be transferred to the spouse. Proportionate adjustments will also be made to the cost bases of any interests subject to the tax on capital gains that are held directly or indirectly in the company or trust, to reflect the reduction in value of the interests as a result of the transfer. In respect of assets transferred that were acquired after 19 September 1985, the adjustments will be based on the cost bases of the assets. For transferred assets acquired before 20 September 1985, market value will be used as a base for the adjustments.

Where a dwelling acquired by the company or trustee is transferred to the spouse and has been or becomes his or her sole or principal residence, clause 51 will provide that the principal residence exemption will be available only for the period after the transfer of the dwelling to the spouse. This is in accordance with the rule that the principal residence exemption is not available to a company or a trustee of a trust estate (other than a deceased estate).

Unit trusts (Clauses 38, 39, 41 and 49)

The Bill proposes amendments to extend the rollover relief now available for certain transactions by companies to comparable transactions by trustees of unit trusts.

The capital gains and capital losses provisions deal specifically with convertible notes and rights or options to acquire new shares or further options issued by a company for no consideration to shareholders or convertible noteholders (Divisions 10, 11 and 12 of Part IIIA of the Income Tax Assessment Act 1936). The exercise of a right or option or of an option contained in the convertible note is not treated as a disposal giving rise to a capital gains tax liability at that time; rather, any liability arises on the disposal of the shares obtained by the exercise.

The existing provisions have special rules which apply where the rights or options are deemed to have been acquired before 20 September 1985. This occurs where the shares which gave rise to the rights or options were acquired before that date. In general, shares acquired by the exercise after 19 September 1985 of the rights or options are taken to have been acquired at the time of exercise for a consideration equal to the sum of the market value of the rights or options at the time of exercise and the amount paid for the exercise.

In addition rollover relief is available (on election) for reorganisations of share capital in a company where a company redeems or cancels all of the shares of a particular class and issues other shares, with no other consideration, in substitution for the original shares. Such transactions are commonly referred to as share splits and share consolidations. The effect of the rollover is that new shares issued in substitution for original shares acquired before 20 September 1985 are treated as if they also had been acquired before 20 September 1985. In other cases, the rollover provides that the relevant cost bases of the original shares are transferred to the new shares.

The amendments proposed by clauses 38, 39, 41 and 49 will introduce corresponding provisions for rights or options to acquire new units or further options, convertible notes issued by trustees of unit trusts, and unit splits and consolidations. The amendments will apply to rights, options or convertible notes issued by a trustee of a unit trust after 28 January 1988 (the date of announcement) and to unit splits and consolidations carried out after that date.

Exchange of rights or options in the same company or unit trust (Clause 49)

Rollover relief is available for new shares issued in substitution for shares cancelled or redeemed as part of reorganisation. Relief is not available, however, for splits or consolidations of rights or options made consequent upon a share reorganisation. An example best illustrates this situation. A company has shares with a par value of 10 cents. It wishes to consolidate five shares into one share with a par value of 50 cents so that an option issued to acquire one 10 cent share needs to be consolidated to enable the conversion of five such options into an option to acquire one 50 cent share.

Amendments proposed by clause 49 will extend rollover relief to splits or conversions of company issued rights or options to acquire shares or similar rights or options issued by a unit trust. The rollover will be available for rights or options to acquire shares or units that have themselves been the subject of a split or consolidation.

The proposed amendments will apply to the disposal of assets after 28 January 1988 (the date of announcement).

Transfer of assets to non-resident companies (Clauses 35, 47 and 48)

The existing rollover provisions allow relief where a taxpayer (whether a resident or a non-resident) transfers a 'taxable Australian asset' (defined in section 160T of the Income Tax Assessment Act 1936) to a non-resident company. The rationale for allowing relief in these circumstances is that a taxable Australian asset is subject to the capital gains and capital losses provisions on a later disposal by the non-resident company.

A technical argument has been raised that in some situations such an asset may not be a taxable Australian asset in the hands of the non-resident transferee company. The amendments proposed by clause 47 and 48 will ensure that rollover relief will be available only where the transferred asset is a taxable Australian asset in the hands of the non-resident transferee company. The amendment will apply to assets disposed of after the date of introduction of the Bill.

Where a taxable Australian asset is transferred to a non-resident company after 28 January 1988 (the date of announcement) and on or before the date of introduction of this Bill, the amendment proposed by Clause 35 will ensure that the transferred asset is taken to be a taxable Australian asset in the hands of the non-resident transferee company. This amendment is in line with the announcement of 28 January 1988.

In addition, the amendment proposed by clause 35 will provide that where a taxable Australian asset is transferred by a non-resident to a non-resident company and rollover relief is available, any shares or securities received in exchange for the transfer of the asset will themselves be taxable Australian assets. This will mean that a later disposal of the shares or securities will be subject to the tax on capital gains in the same way that the asset would have been if it had been disposed of instead of the shares or securities. The amendment will apply to assets transferred after 28 January 1988 (the date of announcement).

Substantiation of overseas travel expenses claims (Clause 29)

Under the substantiation rules of the income tax law a taxpayer is not entitled to a deduction for a 'travel expense', as defined in subsection 82KT(1) of the Income Tax Assessment Act 1936, unless documentary evidence of the expense has been obtained and is retained by the taxpayer. A further condition of deduction is that a diary be kept of the business activities that took place during the course of the travel.

The substantiation requirements relating to travel expenses - i.e., the need to obtain and keep receipts and make entries in a travel diary - do not apply where the taxpayer is an employee whose employer has paid him or her a reasonable travel allowance to cover the costs of accommodation, meals and incidentals associated with travel by the employee within Australia. The Commissioner of Taxation determines whether or not an allowance is reasonable having regard to the amounts of expenditure that the taxpayer could reasonably have been expected to incur on accommodation, meals and incidentals.

The amendments proposed by these clauses are to extend the exclusion from the substantiation rules for reasonable domestic travel allowances, with effect from 1 July 1986, to reasonable overseas travel allowances. The Commissioner will be authorised to determine what constitutes a reasonable overseas travel allowance. The proposed amendments will apply to two categories of taxpayers.

(a)

International air crew

There will be no requirement to substantiate claims for overseas travel expenses when the following criteria are satisfied:

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the taxpayer is an employee who is travelling outside Australia as a member of the crew of an international airline flight;

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the taxpayer is in receipt of an allowance paid to cover food, drink and other expenses incidental to the overseas travel;

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the Commissioner of Taxation considers that the amount of the allowance is reasonable, having regard to the kind of expenditure that the employee is expected to meet from the allowance; and

•

the taxpayer's claimed deductions for expenses do not exceed the amount of the allowance.

Accommodation expenses must be substantiated by receipt or other documentary evidence but there will be no requirement to keep a travel diary. This easing of the rules takes into account the conditions of service and strictly regulated work patterns of international airline flight crews.

(b)

Overseas travel by other employees

A second exclusion from the overseas travel substantiation rules will benefit employees - other than flight crew - who travel overseas. There is to be no requirement to substantiate overseas travel expenses where the taxpayer is an employee in receipt of a reasonable allowance to cover the cost of food, drink and other expenses incidental to the overseas travel. Again, the taxpayer's claimed expenses must not exceed the amount of the allowance.

There will be no requirement that the travel allowance be paid under the terms of an industrial instrument. Employees will still be required, however, to substantiate accommodation expenses (by receipts or documentary evidence) and to maintain a travel diary of business activities on the overseas trip.

Hire cars (Clauses 24, 27 and 28)

The definition of 'car expense' in the present substantiation rules - in subsection 82KT(1) of the Income Tax Assessment Act 1936 - is very wide and, technically, could include car hire expenses. However, car hire expenses would ordinarily be classified more aptly as employment-related or travel expenses. The amendment will generally exclude car hire expenses from the car expense substantiation rules and, instead, require that from the start of the 1988-89 income year they be substantiated either as employment-related expenses or, if the car is used for overseas travel or extended travel within Australia, as travel expenses.

Motor vehicle fuel and oil expenses (Clauses 24, 25, 26, 29, 30 and 31)

The income tax substantiation rules were amended in 1987 to remove the need to keep receipts for petrol and oil expenses for cars. Those expenses may now be verified by a record of total kilometres travelled during the year instead of by actual receipt.

Because the amendment applied only to a 'car', as defined in subsection 82KT(1) of the Income Tax Assessment Act 1936, employees who use other kinds of motor vehicles (such as motor cycles) are still required to verify motor vehicle expenses, including petrol and oil expenses, by documentary evidence.

The amendment will bring the requirements for verifying fuel expenses for motor vehicles other than cars on the same basis as for cars. Accordingly, with effect from 1 July 1986, petrol and oil expenses of those vehicles will be verifiable by a record of total kilometres travelled rather than by actual receipts.

Fringe benefits tax reimbursements (Clause 22)

This Bill will amend the income tax law with effect from 1 July 1986 to make it clear that an amount of fringe benefits tax reimbursed to, paid on behalf of, or otherwise borne by a person other than the relevant employer, does not constitute assessable income of that employer. This amendment will facilitate commercial arrangements in which, for example, an arm's-length sales promotion organisation gives prizes to a firm's sales staff and bears the associated fringe benefits tax costs as part of the cost of a total sales promotion package it is providing to that firm.

Amendment of the Fringe Benefits Tax Assessment Act 1986 (Part II)

Overseas travel fringe benefits (Clause 5)

Consistent with the measures in this Bill to exclude from the substantiation rules claimed expenses up to the amount of a reasonable overseas travel allowance, this Bill proposes a complementary amendment of the Fringe Benefits Tax Assessment Act 1986. Where an employee's overseas travel expenses are provided by an employer as a fringe benefit, rather than via a travel allowance subject to the substantiation provisions, documentary evidence of the costs of meals and incidental expenses will not be required to support a reduction in the taxable value of the associated fringe benefit. Documentary evidence will still be required, however, for accommodation expenses.

Under the fringe benefits tax law, where an employer pays for or reimburses overseas travel expenses of an employee, paragraphs 24(1)(d) and (e) of the Fringe Benefits Tax Assessment Act 1986 require the employer to obtain two types of records from the employee: documentary evidence of the expenses and a completed travel diary. Obtaining these records is a prerequisite to the reduction of the taxable value of an expense payment fringe benefit by an appropriate business proportion. This reduction reflects a general concept of the Fringe Benefits Tax Assessment Act 1986 that the taxable value of an expense payment fringe benefit is reduced by the extent to which the expenditure incurred by the employee would have been deductible for income tax purposes had it not been paid or reimbursed by the employer.

The present requirement to obtain documentary evidence to warrant a reduced taxable value of particular fringe benefits does not apply, however, to reasonable costs of accommodation, meals or other incidentals of travel within Australia which would not require substantiation under the income tax law when met out of a reasonable travel allowance.

This Bill will amend the fringe benefits tax law to provide a similar exclusion where reasonable cost of meals and incidentals of travel overseas would not require substantiation under the income tax law when met out of a reasonable travel allowance. The Bill also removes the requirement for international airline flight crews to keep a travel diary and furnish it to their employer to support a reduction in the taxable value of a fringe benefit. Both amendments will apply from 1 July 1986.

Fringe benefits tax reimbursements (Clauses 16 and 19)

The Bill also makes it clear that any consideration received by an employer in reimbursement of a fringe benefits tax liability does not constitute an employee contribution capable of reducing the taxable value of a fringe benefit. This amendment is to apply from the date of introduction of the Bill. The fringe benefits tax law will thus distinguish such fringe benefits tax reimbursements from employee contributions toward the employer's cost of providing a fringe benefit. An example of the latter would be an employee's contribution of, say, $10 a week towards the employer's costs in recognition of the employee's private usage of a car provided by the employer. That contribution would reduce, by $10 a week, the taxable value of the fringe benefit provided by the employer.

Remote area holiday travel (Clauses 7, 8, 17 and 19)

With effect from 1 July 1986, the remote area holiday concession is to be extended by this Bill to apply where allowances (rather than reimbursements) are paid to employees' spouses and children. Under the present fringe benefits tax law, the taxable value of reimbursements by remote area employers of specified holiday costs for employees' spouses and children is reduced by half. The amendment proposed will ensure that this concessional treatment is available where holiday allowances are paid to employees' spouses and children.

Compassionate travel benefits (Clauses 6 and 23)

Exemption from the fringe benefits tax will be extended from 1 July 1986 to cases where an employee is living away from home, or travelling away from home in the course of employment, and a travel benefit is provided to enable the employee to visit his or her spouse, child or parent who is seriously ill or to attend that person's funeral. The concession will also apply to comparable situations where a family member visits a sick employee. As a safeguard against possible abuse of the exemption, the serious illness or funeral of a person in the specified category must be the sole reason for the travel.

Employer retention of fringe benefits tax information (Clauses 9 to 15, 18 and 19)

Employers are to be permitted to retain particular records rather than - as the present law requires - lodge them with the Commissioner of Taxation. The records are those of matters in relation to car fringe benefits that an employer is required to specify in fringe benefits tax returns. Employers need only maintain a written record of information relating to car usage, whether or not log books are kept. This amendment will ease the workload of employers in completing fringe benefits tax returns. It will apply from 1 July 1986 but because of the nature of the amendment employers who have already specified relevant matters in their returns will not be disadvantaged.

Foreign income loan fringe benefits (Clauses 4 and 5)

As a general rule, the taxation value of a loan fringe benefit or expense payment fringe benefit is reduced to the extent to which interest payable on the loan is, or would be, allowable as an income tax deduction of the employee. This rule is known as the 'otherwise deductible' rule.

The Bill will amend this rule to preclude its application to all expenses (including interest) incurred in deriving foreign income, where those expenses would otherwise be subject to the quarantining provisions of the income tax foreign tax credit system.

The proposed amendment will apply only in respect of expenses incurred on loans made after the date of introduction of this Bill.

Cents-per-kilometre car rates (Clauses 7 to 12, 15 and 18)

Under the present fringe benefits tax law, where a fringe benefit is a cents-per-kilometre reimbursement of an employee's car expenses, fringe benefits tax is payable, effectively, on the private use kilometres to which that reimbursement relates. Under the income tax law car expense deduction claims may also be calculated, in certain circumstances, on a cents-per-kilometre basis for business usage. The Commissioner of Taxation has adopted the same cents-per-kilometre rate for fringe benefits tax as is applied in the income tax year overlapping 9 months of that fringe benefits tax year. This practice, adopted to simplify the calculation of fringe benefits tax liability, is formalised by the Bill. Thus, for example, the cents-per-kilometre rate used for the income tax year ended 30 June 1988 is that used for the fringe benefits tax year ended 31 March 1988.

A more detailed explanation of the provisions of the Bill is contained in the following notes.