House of Representatives

Explanatory Memorandum

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

MAIN FEATURES

The main features of this Bill are as follows:

Expenditure on scientific research (Clause 6)

The Bill will give effect to the announcement in the May 1988 Economic Statement that the special write-off for expenditure on scientific research available under section 73A of the Assessment Act would be terminated for expenditure incurred after 30 June 1995.

Expenditure on research and development activities (Clauses 7, 8, 16 to 22, 33 and 34)

The Bill will give effect to the announcement on 8 May 1989 that the tax concession for research and development (R & D) expenditure available under section 73B of the Assessment Act would be extended. The concession, in the form of a 150 per cent deduction for expenditure on qualifying R & D activities, was to end on 30 June 1991. It will now be available for expenditure incurred before 1 July 1993, and a reduced deduction of 125 per cent of R & D expenditure will be available for expenditure incurred for a further two years until 30 June 1995.

The Bill will also implement a proposal announced on 20 November 1987. At present, receipt of a grant or recoupment from the Commonwealth, or a State or Territory Government, or from a Government authority, automatically prevents an eligible company from obtaining a deduction under section 73B of the Assessment Act in relation to R & D expenditure on that project. This is the case no matter how small the receipt etc. or for what purpose, and irrespective of the amount of R & D expenditure incurred on that project.

The proposed amendments will ensure that a claim for a deduction for R & D expenditure in a year will not be disallowed by reason of a grant or recoupment which relates to the project for which the expenditure was incurred. To produce some parity between grant-funded projects and projects funded only by the tax incentive, deductions otherwise allowable will be reduced through a process of clawback.

The main features of the proposed clawback arrangements (which apply on a project basis) are:

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only grants or recoupments relating to expenditure incurred on or after 21 November 1987 will trigger the clawback mechanism (expenditure incurred before that date in respect of which a grant or recoupment is received or receivable will continue to be non-deductible);

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generally, relevant expenditure to which clawback has been applied will be eligible for a deduction at a rate of 100 per cent;

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other relevant expenditure, to which clawback has not been applied or to which it will not apply, will be eligible for a deduction of up to 150 per cent when expended in the period ending on 30 June 1993 (or ending on 30 June 1995 in the case of qualifying plant expenditure) and for a deduction of up to 125 per cent when expended in the subsequent period ending on 30 June 1995 (or ending on 30 June 1997 in the case of qualifying plant expenditure);

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where R & D expenditure is incurred on a project both before and after 21 November 1987, the initial clawback amount is to be offset first against aggregate expenditure incurred between project commencement and 21 November 1987, and then successively against expenditure incurred year by year after that date;

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where R & D expenditure on a project is wholly incurred on or after 21 November 1987, clawback is to be applied successively to relevant expenditure incurred in the year or years of receipt of the grant(s) or recoupment(s), with any excess being carried back progressively through earlier years, and any remainder being carried forward to succeeding years;

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where two or more eligible companies are jointly registered in relation to an R & D project under the Industry Research and Development Act 1986, a grant or recoupment received by any one of those companies is to be treated in the same way as a grant or recoupment received by an eligible company operating independently;

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where eligible companies are in a partnership, a grant or recoupment to the partnership is to be treated as if it were to an eligible company.

In calculating the amount of deduction available to an eligible company when clawback has been applied -

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expenditure to which clawback has been applied will attract a deduction at a rate of 100 per cent;

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other relevant expenditure will attract the rate of deduction applicable to that expenditure.

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if the clawback amount relates to different kinds of expenditure, the Commissioner of Taxation is to apportion that clawback amount so as to minimise any reduction in the deduction allowable to the company; and

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when a grant or recoupment is not, and will not be, included in the assessable income of the company, the deduction otherwise allowable is to be reduced by an amount not exceeding the amount of the grant or recoupment.

Research and development buildings

The Bill will give effect to the May 1988 Economic Statement announcement that new buildings used for R & D activities will be eligible for the write-off available under Division 10D of the Assessment Act in the same way as income producing buildings. The write-off will apply to buildings (including extensions, alterations or improvements) construction of which started after 21 November 1987 and that are used for the purposes of carrying on R & D activities. Buildings that previously qualified for the write-off under Division 10D - i.e., as income producing buildings and that, after 21 November 1987, are used for R & D activities will continue to be eligible for that write-off. Generally, the term R & D activities will have the same meaning as in section 73B of the Assessment Act.

Consistent with arrangements in place in relation to section 73B claims, the Industry Research and Development Act 1986 will be amended by this Bill so that the Commissioner of Taxation will be able to seek determinations from the Industry Research and Development Board as to whether the activities of all classes of taxpayers (and not just companies) amount to R & D activities.

Shared use of plant

Qualifying expenditure on items of plant used for R & D purposes is presently deductible - generally at the special rate of 150 per cent - over three years, i.e., 50 per cent of the qualifying expenditure on the plant is deductible in each year, for three years. These provisions apply only if the plant is for use by or on behalf of the company exclusively for the purpose of carrying on R & D activities.

The Bill will permit an eligible company to allow another person to use its R & D plant without loss of its entitlement to the accelerated write-off allowances. The other person will not have to be an eligible company, but will be required to use the plant only for R & D purposes thought not necessarily the same activities as those of the owner.

If the owner is entitled to receive consideration (such as lease fees) for making the plant available, the owner's entitlement to the accelerated write-off allowances for the plant will be reduced by an amount equal to one-half of that consideration. Reflecting this mechanism, the owner will continue to be eligible for the accelerated write-off allowances available for R & D plant (but not other forms of depreciation) for the period of shared use.

Where plant ceases to be used by an owner exclusively for R & D purposes during the three year write-off period, there is normally no entitlement to the accelerated write-off allowances either in the year of cessation or in any later year. This will not apply in the case of shared use of plant as contemplated by the foregoing amendment. Nor will there be any minimum or maximum period of use by the other person.

Special rules apply where R & D plant is disposed of, lost or destroyed. The application of these special rules will not be affected by the fact that the plant was being used by another person when the disposal, loss or destruction occurred.

Extension of the concession to partnerships of companies

The Bill will ensure that partners in a partnership of otherwise eligible companies will not be denied the special deduction for expenditure on R & D activities. This will remove a doubt that has been expressed over the present law to the effect that such companies are not eligible for the deduction on the basis that it is the partnership, rather than the partner companies, which incurs the expenditure.

The concept of a 'partnership' for this purpose will not be limited to more common concepts of a partnership; the fact that the companies are not carrying on a business with a view to profit will not preclude acceptance that a partnership exists for the purposes of the amendment.

Extension of the concession to public trading trusts

The income tax law was changed in 1985 to tax as companies unit trusts that are 'public trading trusts' within the meaning of Division 6C of Part III of the Assessment Act.

The Bill will extend the special deduction for R & D expenditure to all public trading trusts in respect of such expenditure incurred by them on or after 1 July 1988.

Clarification of definitions of 'plant' and 'pilot plant'

The Bill will clarify the meaning of 'plant' in the R & D tax concession provisions by replacing the existing wording of the definition. It will also make a complementary technical adjustment to the definition of 'pilot plant'. The changes will make it clear that pilot plant is plant that qualifies for the three year write-off authorised by the R & D provisions.

Transitional imputation arrangements (Clauses 2 and 31)

This Bill will give effect to the modification of the imputation of company tax arrangements announced on 18 January 1989 for the calculation of franking credits arising from company tax assessments for the 1988-89 year of income that are served after 18 January 1989 and before 1 July 1989. This modification is a consequence of the reduction in the company tax rate from 49 per cent to 39 per cent first applicable for the 1989-90 year of tax in which tax is levied on company income derived in the 1988-89 year of income.

Under the existing law a franking credit that arises on the day an original tax assessment, or an amended assessment increasing its tax liability, is served on a company, is calculated by reference to the general company tax rate for the year of tax to which the year of income relates. Thus, the franking credit that arises on the issue of a company tax assessment for income of the 1988-89 year of income is calculated at the company tax rate for the 1989-90 year of tax which is 39 per cent. If a company that ceases operating before 30 June 1989 lodges its income tax return and receives its assessment for that year before 1 July 1989, the existing law requires the franking credits to be calculated at the 39 per cent rate. On the other hand, under the existing law, franking credits that arise during the company's 1988-89 franking year and which could be applied to pay franked dividends during the 1988-89 financial year of the recipient, would entitle individual shareholders to franking rebates calculated on the basis of the 49 per cent tax rate that still applies in that year to the assessment of company income of the 1987-88 income year.

To avoid this inappropriate outcome, the Bill specifies that the applicable general company tax rate to be used in calculating the franking credits or debits that arise from the service of original or amended company assessments for the 1988-89 year of income after 18 January 1989 and before 1 July 1989 will be 49 per cent. The arrangement is to apply to company tax assessments served after 18 January 1989, the date on which the arrangements were announced.

Exemption of pay and allowances of members of Defence Force personnel serving in Namibia (Clause 4)

An exemption from income tax is being provided for the pay and allowances earned by Defence Force personnel while allotted for duty in Namibia as part of the United Nations Transitional Assistance Group. The exemption will apply from 18 February 1989 when the Defence Force Group commenced to leave Australia.

Under the existing law an exemption from income tax is provided for the pay and allowances of Defence Force personnel during a period of special service. Special service is service given while allotted for duty in a special area outside Australia. A condition for the declaration of an area as a special area is the existence of a state of disturbance in or affecting that area. The amendment proposed will allow Namibia to be prescribed as a special area.

Long term leases (Clauses 15, 17 and 24)

This Bill will give effect to the proposal announced on 16 November 1988 to amend the capital gains provisions applicable to certain long term leases or subleases of land.

Under the existing capital gains provisions, the grant of a lease (or sublease) of property is taken to constitute the disposal of an asset, being the lease, for a consideration equal to the premium paid or payable for the grant of the lease. Only expenditure incurred by the grantor in respect of the grant of the lease is included in the cost base of the asset deemed to have been disposed of. The effect is to treat most of the premium as a capital gain.

The proposed amendment will allow a taxpayer who grants a long term lease or sublease of land after 16 November 1988, to elect to have the capital gains and capital losses provisions apply to the transaction on the basis that the grant of the lease or sublease is a disposal of the underlying asset held by the taxpayer, i.e., the freehold or leasehold interest in the area of land to which the lease or sublease relates.

The election will be available only where the lease or sublease of land is granted for more than 50 years on terms that are substantially the same as those applying to the owner of the underlying freehold or leasehold interest in the land.

Broadly, the effect of the election will be that where a taxpayer acquired the freehold or leasehold interest in the land before 20 September 1985, the grant of a long term lease or sublease will not result in a capital gain or a capital loss. An exception will be where a major capital improvement made after 19 September 1985 is treated as a separate asset for capital gains tax purposes. For a taxpayer who acquired the freehold or leasehold interest after 19 September 1985, a capital gain or capital loss may arise. However, the expenditure incurred in acquiring that interest will be taken into account in calculating the capital gain or capital loss.

Where by this amendment, the grant of a lease or sublease is treated as a disposal of the underlying freehold or leasehold interest in the land, then for the purposes of determining any capital gain or capital loss, the consideration for the disposal will be deemed to be the greater of the market value of the underlying interest or the premium received for the grant of the lease or sublease.

Where the lease or sublease includes a lease or sublease of buildings or other improvements of a capital nature (other than depreciable property) that are taken to be separate assets for capital gains tax purposes, those assets will be taken to be disposed of separately to the freehold or leasehold interest. Where the lessor or sublessor was entitled to deductions in respect of building depreciation allowances under Division 10C or Division 10D, entitlement to the deductions will be transferred to the lessee or sublessee during the subsistence of the lease or sublease.

While the amendment treats the grant of the lease or sublease for capital gains tax purposes as a disposal of the underlying freehold or leasehold interest in the land, the lessor or sublessor actually retains that interest. The lessor or sublessor may subsequently dispose of the interest, subject to the lease or sublease. To take account of this, the lessor or sublessor will be taken to have reacquired the freehold or leasehold interest immediately after the deemed disposal for no consideration.

Election Expenses (Clauses 9 and 10)

A deduction is being authorised for expenditure incurred in seeking election, whether successful or not, to the Legislative Assembly for the Australian Capital Territory. The deduction is to apply for expenses incurred in the 1988-89 and subsequent income years.

This Bill will also remove the deduction presently available for expenses of up to $1,000 in seeking election to the former Australian Capital Territory House of Assembly.

Under the existing law two sections of the Income Tax Assessment Act 1936 operate to allow a deduction from assessable income for candidates' election expenses. Section 74 is available for candidates to the Commonwealth or State Parliaments and the Legislative Assembly of the Northern Territory. Section 74A provides a deduction of up to $1,000 per election for expenses incurred in seeking election to a local government body or to the former Australian Capital Territory House of Assembly.

Management and Investment Companies (Clause 11)

The Bill will give effect to proposals announced in the 1988 May Economic Statement to withdraw the deduction for eligible capital subscriptions to certain licensed Management and Investment Companies, with effect from 1 July 1991.

Under the existing law, a deduction is available to the initial subscriber to shares for subscription monies - that is, application, allotment and call monies and any share premiums - generally where they are paid after 13 September 1983 and applied by the company to the paid-up value of the shares or the share premium account. The deduction is allowable in the year in which the subscription monies are paid provided the company currently holds a licence granted by the Management and Investment Companies Licensing Board. In addition, subscriptions made before the grant of a licence may be eligible for deduction if the Management and Investment Companies Licensing Board notifies the Commissioner of Taxation that, in its opinion, the subscriptions were made in anticipation of, or to ensure that the company would be eligible for, the grant of a licence.

Claw-back provisions in the present law reduce any deduction allowed or allowable where either the shares are sold or disposed of or the company's licence has been revoked or has expired within 4 years of the last payment of subscription monies.

The effect of the amendment will be to terminate deductions for subscription monies paid after 30 June 1991 for shares in licensed Management and Investment Companies. The amendment will also deny a deduction for any subscription monies paid on or before 30 June 1991 in anticipation of the granting of a licence where that licence is granted after 30 June 1991. The existing claw-back arrangements will continue to apply.

Transport allowance payments (Clauses 12 and 29)

Under the existing law, the income tax substantiation rules will not apply to claims within the limits of allowances paid to employees for fares, car expenses or other transport costs incurred in the course of performing their employment duties, provided the allowance is payable pursuant to an industrial award and the award has not increased since 29 October 1986. Broadly, if the award increases after that date or the amount of a claim is in excess of the allowance, then the employee must substantiate his or her entire claim for deductions against that allowance.

The amendment proposed in this Bill will modify these rules so that employees in receipt of a travel allowance (paid pursuant to an award in place on 29 October 1986), will no longer be required to substantiate a claim for deductions against that allowance even if the award has increased since 29 October 1986 provided the employee does not claim in excess of the allowance that would have been payable using the award as it stood on 29 October 1986.

Taxpayers wishing to claim a deduction in excess of the allowance payable as at 29 October 1986 will be required to substantiate their entire claim for deductions (not just the excess of any claim above the 29 October 1986 amount).

The proposed amendment is to apply to expenses incurred on or after 1 July 1988. The proposed amendment does not apply to 'car expense payment reimbursements'. These payments, which are broadly reimbursements of car expenses calculated by reference to the distance travelled in performing the duties of employment, will continue to be dealt with under the existing law.

Log book year of income (clauses 13 and 29)

The Taxation Laws Amendment Act (No.4) 1988 amended the existing law so that certain matters relating to claims for income tax deductions for car expenses could be specified in car records held by the taxpayer rather than needing to be lodged with the Commissioner of Taxation in completed income tax returns.

A reference to a specification in a taxpayer's income tax return that should have been amended so as to be a reference to a specification made in the taxpayer's car records was omitted from the amending legislation. A technical amendment in this Bill rectifies that matter.

Retention and production of documents (Clauses 14, 29 and 30)

The existing law requires taxpayers claiming income tax deductions for car expenses to specify certain matters (such as the period for which the log book was maintained, or details of replacement cars) in car records. The rules relating to car records were inserted by the Taxation Laws Amendment Act (No.4) 1988.

Amendments in this Bill will require taxpayers who specify matters in car records to retain those records for a specified period.

The proposed amendments will apply to the year of income commencing on 1 July 1989 and subsequent years. Taxpayers who have lost or destroyed their car records prior to the date of introduction of this Bill will not be disadvantaged, they will be able to use a copy of those records or a substitute record, as if it were the original car records.

Tax File Numbers (Clauses 26, 27 and 28)

This Bill will amend the tax file number provisions of the law to extend the period for which an employer is to retain a copy of an employment declaration by an employee. The retention period is to be the conclusion of the financial year next following the financial year during which an employment declaration ceases to have effect. The existing law requires retention until the close of the financial year during which the employment declaration ceases to have effect.

Amendments made by this Bill will also ensure that where a tax file number has been quoted in respect of eligible termination payments the file number is to be included on the group certificate or tax check sheet issued in respect of that payment.

Setting aside etc. of conviction or order on application of Commissioner (Clauses 38 and 39)

The prosecution provisions of the existing law are to be amended to enable the Commissioner of Taxation to apply to a court of summary jurisdiction to have a conviction or order set aside for a prescribed taxation offence. Broadly, a prescribed taxation offence is an offence against a taxation law that is punishable by a fine and not by imprisonment.

The power to apply to a court to have a conviction or order set aside and the matter reheard will be restricted to situations where the defendant was not present at the original proceedings before the court.

The Commissioner will be empowered to apply to a court for a rehearing at any time after the original conviction of the defendant.

The court will be provided with a wide discretion to cover the variety of circumstances that may make it desirable for a case to be reopened. This will include matters that may arise after the original conviction, e.g., financial hardship.

Shipping Containers (Clauses 35, 36 and 37)

The First Schedule of the Sales Tax (Exemptions and Classification) Act 1935 will be amended by this Bill to exempt shipping containers of a kind used in an international containerised cargo transport system, being containers that, first, are for repeated use on ships to transport cargo overseas, second, are designed to be loaded from one mode of transport to another without the contents being re-packed and, third, have a minimum capacity of 14 cubic metres. In the proposed exemption item the relevant containers are referred to as 'receptacles' so as to distinguish them from containers coming within within the existing definition of 'container' in the First Schedule.

A shipping container as described above that is manufactured in, or imported into, Australia will be exempt from tax provided it is to be used repeatedly on ships to transport cargo by sea. A shipping container of this kind that is purchased for use for another purpose, e.g., as a building site shed, in road transport or as refrigeration plant, will not be exempt from tax unless it has previously gone into use or consumption in Australia. (By virtue of the definition of 'goods' in the Sales Tax Assessment Act (No. 1) 1930 containers, including those being exempted by this amendment, are not deemed to have gone into use or consumption in Australia until the goods they contain have been removed.)

A shipping container that has not previously gone into use or consumption in Australia is imported and qualifies for exemption, but is found to be no longer suitable for use on ships because it has been damaged or is worn out, will not be subject to tax when it is disposed of.

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