Explanatory Memorandum
(Circulated by authority of the Acting Treasurer, the Hon. Chris Hurford, M.P.)NOTES ON CLAUSES
TAXATION LAWS AMENDMENT BILL 1986
This clause provides for the amending Act to be cited as the Taxation Laws Amendment Act 1986.
Under sub-clause 2(1), the amending Act, except as provided in sub-clauses 2(2) and 2(3), is to come into operation on the day on which it receives the Royal Assent.
By sub-clause 2(2), Part IV which will amend the Pay-roll Tax (Territories) Assessment Act 1971, will come into operation on the first day of the month following the month in which the amending Act receives the Royal Assent.
Sub-clause 2(3) provides that Part V of the Bill shall be deemed to have come into operation on 28 October 1985. Part V proposes a technical amendment of section 8J of the Taxation Administration Act 1953 in consequence of the insertion of Part IIIA in that Act by the Taxation Laws Amendment Act (No. 2) 1985 (see notes on clause 43). The deemed commencement date will ensure that the amendment being made by Part V applies from the date of commencement of Part IIIA of the Taxation Administration Act.
The amending Act would, but for clause 2, come into operation on the twenty-eighth day after Royal Assent, by virtue of sub-section 5(1A) of the Acts Interpretation Act 1901.
PART II - AMENDMENTS OF THE INCOME TAX ASSESSMENT ACT 1936
This clause facilitates references to the Income Tax Assessment Act 1936 which, in Part II, is referred to as "the Principal Act".
Clause 4: Officers to observe secrecy
The amendment proposed by this clause, which will not affect the operation of paragraph 16(4FB)(c)(i) of the Principal Act, is designed to correct a minor printing error in that paragraph that occurred when it was inserted in the Principal Act by the Taxation Laws Amendment Act (No. 3) 1985.
Clause 7: Rebate on dividends paid as part of dividend stripping operation
Clause 8: Rebate not allowable in certain circumstances
The omission of sub-section 44(2E), sub-section 46(5) and paragraph 46A(14)(a) and the substitution of sub-section 46B(9) by clauses 5, 6, 7 and 8 respectively is consequential upon amendments of section 170 of the Principal Act proposed by clause 20. The amendment proposed by clause 20 will empower the Commissioner of Taxation to amend an assessment within 3 years from the date tax became due and payable under the assessment. Powers contained in the specified provisions to allow the Commissioner to amend an assessment within a 3 year limit are therefore no longer necessary.
The substituted sub-section 46B(9) effectively restates existing paragraph 46B(9)(b) which authorises an amendment of an assessment at any time to disallow an inter-corporate dividend rebate that would otherwise be allowable under section 46 or 46A where conditions set out in section 46B (an anti-tax avoidance measure) apply and where, by sub-section 46B(4), an acquisition of shares or a beneficial interest in a trust estate by a person is deemed to have taken place before the end of the year of income to which the assessment relates.
Clause 9: Losses and outgoings
The amendment of section 51 of the Principal Act - the general deduction provision - by this clause to include new sub-section 51(5) will make clear that interest payable in respect of an underpayment of tax under proposed section 170AA (refer notes on clause 21) is not to be an allowable deduction for income tax purposes. The proposed amendment provides legislative support for the longstanding principle that an amount in the nature of interest payable in respect of under or late paid income tax is not tax deductible.
Clause 10: Gifts, pensions, & c.
This clause will amend the provisions of the Principal Act that authorise income tax deductions for gifts of the value of $2 or more of money - or of certain property other than money - made to the funds, authorities and institutions that are listed in the provisions. The amendment proposed by clause 10 will insert new sub-paragraph 78(1)(a)(1xxxiv) in the Principal Act to name the Australian Sports Aid Foundation as an organisation relevant gifts to which are to qualify for deduction.
By the operation of sub-clause 25(3), gifts made to the Foundation on or after 18 February 1986 - the date of incorporation of the Foundation - will qualify for deduction.
Clause 11: Limitation on deductions for interest on money borrowed to finance rental property investments
Clause 11 will insert new Subdivision G in Division 3 of Part III of the Principal Act. Subdivision G will impose a limit on the aggregate annual deduction for interest on money borrowed to finance rental investments made after 17 July 1985. By sub-clause 25(4), the Subdivision will apply to assessments in respect of income of the year of income in which 17 July 1985 occurred and of all subsequent years of income.
The broad plan of the provisions is to define exhaustively as "rental property loan interest" in section 82KZC those classes of (otherwise deductible) loan interest to which the Subdivision applies and to provide in section 82KZD a method of determining the total amount allowable as a deduction in respect of rental property loan interest incurred in the year of income. That deduction is the amount remaining after deducting from the sum of certain amounts of assessable income (defined exhaustively in section 82KZC as "rental property income") the deductions, other than building depreciation and loan interest, related to the derivation of that income. These other deductions are defined in section 82KZC as "eligible rental property deductions".
The classification of interest as "rental property loan interest" and income as "rental property income" in turn depends upon whether the interest is incurred or the income is derived in connection with an investment of a kind referred to in those definitions (such as the acquisition of an interest in land) and made after 17 July 1985. Those investments are themselves covered by various definitions in section 82KZC.
Any rental property loan interest not allowable as a deduction in a year of income as a result of the operation of section 82KZD is deemed to have been incurred by the taxpayer in the succeeding year of income (section 82KZE). In the case of partnerships, the individual partners are deemed to have incurred the excess rental property loan interest (section 82KZG). In the case of companies, section 82KZF provides that excess interest may be transferred within a company group.
Special rules apply to determine when an investment is to be deemed to have been made where there has been a partial change of beneficial ownership of rental property or where the property is acquired by reason of the death of the previous owner. These rules are contained in section 82KZJ.
Section 82KZC contains a number of definitions and interpretative provisions necessary for the operation of proposed new Subdivision G.
Sub-section (1) of section 82KZC defines the following terms which have a general use in the Subdivision. Each term is to have the given meaning unless the contrary intention appears.
- "commencement date" means 17 July 1985. The use of the expression in the definitions of "rental property income" and "rental property loan interest" ensures that the Subdivision applies only in respect of rental property investments made after that date.
- "company title interest" is defined to mean a right of occupancy of land or of a building where the right is attached to the holding of shares in a company that owns the land or building. The term is used in the definition of "interest" in relation to land. The role of the latter definition is explained in the notes on that definition, the inclusion of company title interest ensuring that the Subdivision applies where an interest of this kind is held for rent producing purposes.
- "eligible rental property deductions" are, broadly, deductions that relate to the derivation of assessable income from rental investments made after 17 July 1985. The term is used in section 82KZD, the central provision limiting deductions otherwise allowable under section 51 in a year of income in respect of rental property loan interest (also a defined term). The notes on section 82KZD explain the function of these deductions in calculating the interest deduction limit.
- Paragraph (a) of the definition includes deductions allowed or allowable to the taxpayer in the year of income that relate exclusively to the taxpayer's rental property income (a defined term). This category would include deductions for expenditure on such items as maintenance and rates on a property used solely for rent producing. It would also include depreciation on plant or articles where the depreciable items and a building housing them were leased as a single unit - for example, a furnished house.
- Paragraph (b) includes rental property partnership deductions (also a defined term) allowed or allowable to the taxpayer in the year of income. This class of deductions is explained in the notes on that definition.
- Paragraph (c) brings within the definition so much of any other deductions allowed or allowable to the taxpayer in the year of income as, in the opinion of the Commissioner of Taxation, may appropriately be related to rental property income of the taxpayer. Deductions to which this paragraph refer would include deductions for expenditure - such as on heating, lighting or rates - on a building used partly for rent producing purposes and partly for other income-producing purposes, such as the running of the taxpayer's business.
- Two classes of deduction that would otherwise be included in the definition are excluded by paragraphs (d) and (e). By paragraph (d) rental property loan interest is excluded. As mentioned already in the introductory note, deductions for such interest are limited by the operation of section 82KZD. Deductions for building depreciation allowed or allowable to the taxpayer in the year of income under Divisions 10C and 10D of the Principal Act (the latter Division as extended by this Bill to income-producing residential buildings that commenced to be constructed after 17 July 1985) are specifically excluded from the definition by paragraph (e). The effect of this exclusion is, generally, to raise the interest deduction limit by the amount of the taxpayer's deductions for building depreciation.
- "exempt residential land" encompasses three categories of residential accommodation, investments in which will be excluded from the operation of the Subdivision by virtue of sub-section 82KZC(4). Paragraph (a) of the definition refers to residential accommodation for employees that is provided by the taxpayer at or adjacent to the site of general mining operations. Paragraph (b) refers to such accommodation related to petroleum mining operations and paragraph (c) to employee accommodation provided by a timber-miller in or adjacent to a timber-felling area. The effect of the exemption is that the new Subdivision will not limit the deduction for interest on money borrowed to finance the cost of such accommodation. The Principal Act will continue to allow the write-off of the cost over, broadly, the period for which the building is used for the designated purpose or the relevant specified numbers of years.
- "improvement", in relation to land, is defined to include the construction or extension of, or the making of an alteration, improvement or addition to a building or other structure on the land. The term, as used in the Subdivision, also carries its ordinary meaning and would include, for example, an improvement in the form of landscaping. The making of an improvement would not necessarily require the expenditure of money. The term is used in the definition of "post commencement date improvement", the purpose of which is explained in the notes on that definition.
- "interest", in relation to borrowed money, is defined to include payments in the nature of interest. Together with the expanded definitions of "loan" and "borrowed" in this sub-section, this is intended to give the Subdivision an application in respect of payments in consideration for the provision of all forms of financial accommodation.
- "interest", in relation to land, is defined exhaustively to cover all those rights connected with land in respect of which a taxpayer has a capacity to receive income by way of rent (also a defined term). The term "interest in land" is used in the definitions of rental property income (paragraphs (a) and (b)) and rental property loan interest (paragraph (a)) to identify some of the income and interest to which the Subdivision applies. By paragraph (a) of the definition, any legal or equitable estate or interest in land, including a leasehold interest, is an interest in the land. Paragraph (b) makes a company title interest (see the notes explaining this term) an interest in land, and paragraph (c) includes in the definition a right to receive income from the land, such as the right of an assignee to receive rents payable under a lease.
- Generally excluded from the definition are beneficial interests of beneficiaries in trust interests in land (paragraph (d)) and interests of partners in partnership interests in land (paragraph (e)). This reflects the fact that the trustee or partnership may be subject to the Subdivision in respect of the interest in land in question and prevents a double application of the provision in respect of the same interest in land. It also reflects the fact that the Subdivision applies in respect of a beneficiary's or partner's acquisition after 17 July 1985 of an interest in a rental property trust estate or rental property partnership (see the notes on sub-section 82KZC(6)).
- The interests referred to in paragraphs (d) and (e) are, however, treated as interests in land for the purposes of the definitions of "majority underlying interests", "net value" and "underlying interest", sub-sections 82KZC(6) and (8) and sections 82KZH and 82KZJ. This is because those provisions (see the notes thereon) are concerned with testing whether a change has occurred in the beneficial ownership of property such as to bring the Subdivision into operation, or whether a company, trust or partnership has the status endowed by sub-section 82KZC(6) (see the notes on that provision) based on beneficial ownership of an interest in rent producing land.
- "interest in a partnership" is defined to include an interest in a partnership held otherwise than as a partner. The extended meaning would embrace a partnership interest held by an assignee of such an interest.
- "lease" includes a sub-lease and, where the relevant interest in land is a company title interest (see the notes on that definition), an agreement similar to a lease or sub-lease. In its ordinary meaning, the term applies to all leases, whether operative at law or in equity. The definition is relevant to the definition of "rent" (see below).
- "loan" includes the provision of credit or any other form of financial accommodation. The term is relevant to the definition of "security". The definition of "borrowed" corresponds to that of loan and is relevant to the definition of interest on borrowed money.
- "majority underlying interests" are defined for the purposes of the continuity of ownership test in section 82KZJ. Broadly, that test requires a majority continuing ownership of a rental property investment from 17 July 1985 if the Subdivision is not to apply. Paragraph (a) of the definition refers to beneficial interests in the property. Paragraph (b) refers to beneficial interests in income that may be derived from the property. Together these interests effectively constitute beneficial ownership. More than one-half of the interests constitutes majority ownership. If more than one-half of the interests described in each of the two paragraphs of the definition are held by certain natural persons (a defined term), those persons hold majority underlying interests in the property. Interests may be held directly or through interposed companies, partnerships or trusts. Beneficial interests would include the beneficial interest of a beneficiary of a trust and the interest of a partner in partnership income or property (see earlier notes on paragraphs (d) and (e) of the definition of "interest" in relation to land). They would also include beneficial interests in the property of a company that are held indirectly by a shareholder by virtue of the ownership of the shares. The reference to "property" in the definition includes all property, such as interests in land (as defined) and interests in rental property companies, partnerships and trusts (as defined) in respect of which the Subdivision is capable of applying.
- "natural person" has its ordinary meaning except that it excludes a natural person in the capacity of trustee. The definition is relevant for the purposes of the definitions of "majority underlying interests" and "underlying interest", having the effect that the beneficial ownership tests that those terms facilitate do not take account of interests in property held by trustees.
- "net rental value" of an interest in land used at the end of the year of income for rent producing purposes is defined as meaning so much of its net value (a defined term) as the Commissioner of Taxation considers appropriate having regard to the extent to which the land was so used at the end of the year of income. For example, if, at the end of the year of income, land with a net value of $10,000 was used to the extent of 50% for rent producing purposes and 50% for the purposes of the taxpayer's business, its net rental value would be
. The expression "net rental value" is used in sub-section 82KZC(6) in the "75% test" for determining whether a company, partnership or trust estate is a rental property company, partnership or trust estate in relation to a year of income.$10,000 * ((1)/(2)) = $5,000 - "net value", in relation to an interest in land, is defined for the purposes of the definition of "net rental value" (see the notes on that definition) as meaning the value of the interest less any related liabilities. As the taxpayer's interest in land may be held either directly or through interposed companies, trusts or partnerships, the related liabilities may include all or part of the liabilities of the taxpayer or of any such interposed entities. The Commissioner of Taxation is to determine the extent to which those liabilities are appropriately related to the interest in land.
- For example, if company A borrows $10 (still owing at the end of the year of income) to buy 90 $1 shares in company B (issued capital of 100 $1 shares at the end of the year of income, valued at $1 each) and company B borrows $20 to buy an interest in land valued at $100 at the end of the year of income (assume no other liabilities and that the $20 borrowed by B is still owing at the end of the year of income), the net value of the interest in land would be:
((Value of B's interest in land) - (B's land loan)) * ((A's proportion of B's issued capital)) * ((Value of A's shares in B) - (A's shares loan))/((Value of A's shares in B))= ($100 - $20) * (90)/(100) * ((90-10))/(90)= $64 - "net worth" in relation to a company, partnership or trust estate means the total value of its assets less total liabilities. The term is used in sub-section 82KZC(6) in the "75% test" for determining whether a company, partnership or trust estate is a rental property company, partnership or trust estate.
- "partner's portion" is defined for the purposes of section 82KZG, which deems partners to have incurred any excess of partnership rental property loan interest over the deduction allowed to the partnership for that interest as a result of the operation of this Subdivision. The excess interest is effectively distributed to the partners according to their respective partner's portions. A partner's portion is calculated in one of two ways. Where the partners have agreed as to the manner in which the excess interest is to be allocated, paragraph (a) of the definition defines the partner's portion in relation to a partner as being the agreed amount. Where the partners have not agreed as to the manner in which the excess interest is to be allocated to the partners, the formula in paragraph (b) of the definition allocates the amount in proportion to the individual interests of the partners in the net income or loss of the partnership of the year of income.
- "post commencement date improvement", in relation to land, is defined by listing in paragraphs (a), (b) and (c) the improvements (improvement being a defined term) which will not be brought within the scope of the definition and therefore not be subject to the Subdivision. The expression is used in sub-paragraphs (a)(ii) and (b)(ii) of the definition of "rental property income", in sub-paragraph (b)(i) of the definition of "rental property loan interest" and in paragraph 82KZC(2)(a). Paragraph (a) excludes improvements that commenced to be made on or before 17 July 1985, while paragraph (b) excludes those made pursuant to a contract entered into on or before that date - even though work on the improvement may have commenced after the date. Paragraph (c) excludes from the definition improvements that satisfy all of the conditions set down in sub-paragraphs (i) to (iii). The conditions describe, in effect, circumstances which the legislation treats as representing a sufficient connection between the taxpayer's pre - 18 July 1985 position in respect of the land and the proposed improvement to warrant excluding from the Subdivision's application an improvement that would otherwise be a post commencement date improvement.
- Sub-paragraph (c)(i) requires that construction be financed by borrowings and sub-paragraph (ii) requires all of those borrowings to have been raised pursuant to a contract or contracts entered into on or before 17 July 1985. Sub-paragraph (c)(iii) requires either of the conditions set out in sub-sub-paragraphs (A) and (B) to be met also. Sub-sub-paragraph (A) specifies that the taxpayer has to have held, immediately before 18 July 1985, an interest in the land to which the improvement is being made. Alternatively, such an interest may have been acquired by the taxpayer after 17 July 1985 but under a contract entered into on or before that date (sub-sub-paragraph (B)).
- See also the notes on the definition of the term "improvement" and on paragraph 82KZC(5)(c) which expands the meaning of references made in the Subdivision to the making of an improvement by a person.
- "rent" is defined in two stages. It means any payment made by a lessee under a lease (see the notes on this defined term). It also includes a payment in the nature of a payment made by a lessee under a lease. The inclusive part of the definition would cover the case where a person other than the lessee - whether for consideration or, for example, out of love and affection - makes a payment to the lessor which has the effect of relieving the lessee of the obligation to pay all or part of the rent payable under the lease. Rent may be included in "rental property income" by paragraph (a) of the definition of that expression. The term "rent" is also used in sub-section 82KZC(4) in describing the circumstances in which land is taken to be used for rent producing purposes, an expression used in paragraph (b) of the definition of rental property income and in paragraphs (a) and (b) of the definition of rental property loan interest.
- "rental property company equity investment" means a share held by the taxpayer at any time during the year of income in a rental property company. The definition is a drafting device to facilitate the inclusion as rental property income (under paragraph (c) of the definition of that term) of dividends paid in respect of such investments made after 17 July 1985. A rental property company is one that satisfies the tests laid down in sub-section 82KZC(6).
- "rental property company security investment" means a security held by the taxpayer at any time during the year of income in a rental property company. The definition is a drafting device to facilitate the inclusion as rental property income (under sub-paragraph (j)(i) of the definition of that term) of interest derived in respect of such investments made after 17 July 1985. The term "security" is also defined and is explained later in these notes. A "rental property company" is one that satisfies the tests laid down in sub-section 82KZC(6) .
- "rental property income" is defined exhaustively. The definition is central to the plan of the Subdivision. It lists all the kinds of assessable income taken into account in section 82KZD in ascertaining the taxpayer's rental property loan interest deduction limit. It is not necessary that money be borrowed to make the investment giving rise to the assessable income for that income to be included as rental property income.
- Each of paragraphs (a) to (j) of the definition describes a different category of investment income but all of those paragraphs require the relevant investment to be acquired after 17 July 1985 before the income is taken into account. Paragraphs (a), (b) and (d) to (f) of sub-section 82KZC(5) and section 82KZJ explain and modify the references to acquisitions after 17 July 1985. In the case of rental property trust estate equity investments (a defined term), acquisition would include the acquisition by the taxpayer of a beneficial interest i n a trust arising from the settling of property on trust by the taxpayer or by another person (see paragraph 82KZC(5)(e)). Paragraphs (k) to (n) of the definition include amounts of assessable income that have not been derived from rental investments but which represent the recovery of certain amounts treated as eligible rental property deductions in the calculation of an interest deduction limit in any year of income.
- Paragraph (a) of the definition refers to assessable income derived by way of rent in respect of land, other than exempt residential land (see the notes on that definition), where the taxpayer acquired an interest in the land after 17 July 1985 (sub-paragraph (i)) or where a post commencement date improvement was made by the taxpayer or another person (sub-paragraph (ii)). The terms "interest in land" and "post commencement date improvement" are both explained earlier in these notes. The reference to "another person" in sub-paragraph (ii) covers the case where the improvement is made by, say, a tenant or co-owner or where the owner makes an improvement to land but the taxpayer in question is an assignee of the rights to rents from the land, so that the improvement could not be said to be made by the taxpayer, notwithstanding the expanded scope given to that expression in paragraph 82KZC(5)(c).
- Paragraph (b) of the definition refers to assessable income arising from the sale of an interest in land where the circumstances referred to in sub-paragraph (a)(i) or (ii) exist and the land was used by the taxpayer at any time for rent producing purposes. Sub-paragraphs (b)(i) and (ii) mirror sub-paragraphs (a)(i) and (ii) - see the notes on those sub-paragraphs. The interest in land referred to in sub-paragraph (b)(i) and the interest in land sold need not be the same. The assessable income could arise because, for example, the interest sold was trading stock (so that sub-section 25(1) would apply) or because the interest was acquired for profit-making by sale (section 25A) or within the previous 12 months (section 26AAA).
- Paragraph (c) refers to dividends in respect of rental property company equity investments. The expression "rental property company equity investment" is a defined term.
- Paragraph (d) refers to any amount included in the assessable income of a taxpayer in respect of a rental property partnership equity investment (see the notes on that defined term).
- Paragraph (e) gives effect - as do paragraph (e) of the definition of "eligible rental property deductions" and paragraph (b) of the definition of "rental property partnership deduction" - to the principle that building depreciation deductions do not form part of the calculation of the deduction limit for rental property loan interest. This paragraph effectively adds back building depreciation to the extent that, by being deducted in arriving at the interest of a partner in the net income or loss of a rental property partnership (a defined term), it has caused an amount not to be included in rental property income. Sub-paragraph (i) stipulates that a building depreciation deduction must have been allowable to the partnership, sub-paragraph (ii) requires that the taxpayer be a partner, sub-paragraph (iii) that the partner became a partner after 17 July 1985 and sub-paragraph (iv) identifies the extent to which the deduction has caused the partner's assessable income not to include a share of partnership income.
- Paragraph (f) includes in the definition of rental property income any share of the net income of a trust estate that is included in the assessable income of a presently entitled beneficiary in respect of a rental property trust estate equity investment of the beneficiary (a defined term). The interest could be included in the assessable income of such a beneficiary who is not under any legal disability (by virtue of section 97 of the Principal Act), or of a beneficiary who is either presently entitled but under a legal disability or is deemed to be presently entitled because of a vested and indefeasible interest in the income and is a beneficiary in more than one trust estate or derives income from any other source (under section 100 of the Principal Act).
- Paragraph (g) covers unit trust dividends (see the notes on that term) in respect of a rental property trust estate equity investment (a defined term).
- Paragraph (h) is the counterpart of paragraph (b), including as rental property income assessable income arising from the sale of a share in a rental property company (sub-paragraph (i)), an interest in a rental property partnership (sub-paragraph (ii)) or an interest in a rental property trust estate (sub-paragraph (iii)). Sub-sub-paragraph (A) of each sub-paragraph allows the paragraph to apply to a profit on sale of a relevant interest if the company, partnership or trust estate, as the case requires, was a rental property company, etc. in the year of income in which the sale occurs. Sub-sub-paragraph (B) of each sub-paragraph allows the paragraph to apply if the company, etc. was a rental property company, etc. in an earlier year when the taxpayer - at some time in that year - held the interest referred to in the relevant sub-paragraph.
- Paragraph (j) refers to any assessable income derived by way of interest under a security (a defined term) in a rental property company, rental property partnership or rental property trust estate. The paragraph ensures that the operation of paragraphs (c) to (g) of the definition is not avoided by the expedient of lending money to, rather than acquiring an interest of a kind referred to in those paragraphs in, the relevant company, partnership or trust estate.
- Paragraph (k) treats as rental property income amounts recovered or reimbursed in respect of an outgoing which is an eligible rental property deduction (a defined term) and has, therefore, contributed to a reduction in the deduction limit for rental property loan interest. This paragraph has the effect of cancelling or offsetting that reduction. The paragraph would cover, for example, insurance recoveries in respect of repairs to rental property. Amounts that are given or granted in respect of services rendered are not within the paragraph.
- Paragraph (m) refers to any bad debt recovery included in a taxpayer's assessable income where the debt had originally been brought to account as rental property income and then allowed as a deduction - and therefore treated as an eligible rental property deduction (a defined term) - when written off. Inclusion of the recovery under this paragraph offsets that treatment.
- Paragraph (n) provides for the inclusion as rental property income of an appropriate part of any "balancing charge" included in a taxpayer's assessable income under sub-section 59(2) or (2C) where the consideration receivable upon the disposal, loss or destruction of property exceeds its depreciated value. The extent of the inclusion would have regard to the extent to which depreciation of the property (such as plant rented as one unit with the building housing it) had been treated as an eligible rental property deduction (a defined term) so as to identify the appropriate offsetting amount.
- "rental property loan interest", like the definitions of "rental property income" and "eligible rental property deductions", is a central definition in the Subdivision. It lists exhaustively all of the categories of interest incurred on money borrowed and used to acquire rental investments that are subject to the interest deduction limit imposed by section 82KZD. The interest must be otherwise deductible under section 51 of the Principal Act, and be incurred in respect of an investment acquired after 17 July 1985, for the Subdivision to apply. The meaning of acquiring property after 17 July 1985 is explained and modified in paragraphs (a), (b) and (d) to (f) of sub-section 82KZC(5) and section 82KZJ. Paragraphs (a) and (b) of the definition refer to interest relating to direct investments in land held for rent producing purposes. Paragraphs (c) to (e) refer to interest relating to indirect investments in rental land through rental property companies, partnerships and trust estates.
- Each of the paragraphs includes interest only to the extent that it is incurred in respect of the use of the funds to make the relevant investment and to the extent that the investment carries the designated description. In this latter regard, apportionment could be on the basis of the use of the investment or the time during which the investment was a rental investment. For example, interest paid in advance while a building was not held for rent producing purposes would not escape the operation of the Subdivision if the interest was paid in respect of a later period when the building would be so held. Another example would be where a taxpayer borrowed $100,000 at a rate of 15 per cent per annum and used $40,000 to acquire plant to use in a
business and the other $60,000 to acquire a building which the taxpayer fully used for 80 per cent of the year in conducting his business but during the other 20 per cent of the year used it to the extent of 50 per cent for rent producing purposes. The amount of interest to which paragraph (a) would apply is
. Where a rental investment is made with the use of funds obtained from more than one source at more than one rate of interest, the interest to which the definition applies would be calculated by reference to an appropriately weighted average of those rates. This could happen where a financial organisation, such as a bank, draws funds from a pool of borrowings to acquire a rental investment.$(.15 * 60,000 * .2 * .5) = $900 - Interest is deemed to be incurred in respect of money borrowed and used to acquire property if the taxpayer incurs interest on a loan taken over on purchasing the property from a vendor who used the loan to acquire or improve the property (sub-section 82KZC(3)).
- The ensuing notes on each of the paragraphs of the definition should be read in conjunction with the above general notes on the definition.
- Paragraph (a) refers to interest incurred to the extent to which it is incurred in respect of money borrowed and used to acquire an interest in land (sub-paragraph (i)) and to the extent that the and is used by the taxpayer for rent producing purposes (sub-paragraph (ii)). What is meant by land being used for rent producing purposes is explained in the notes on sub-section 82KZC(4).
- Paragraph (b) refers to interest incurred to the extent to which it is incurred in respect of money borrowed and used by the taxpayer or another person to make a post commencement date improvement (a defined term) to land (sub-paragraph (i)) and to the extent that the taxpayer has used the land for rent producing purposes (sub-paragraph (ii)). The special application of the Subdivision where money borrowed to make a post commencement date improvement is consolidated with the rollover of a loan used to acquire the land or to make an earlier improvement to it is explained in the notes on sub-section 82KZC(2).
- Paragraph (c) refers to interest incurred to the extent to which it is incurred in respect of money borrowed and used (sub-paragraph (i)) to acquire a share in (sub-sub-paragraph (A)) or a security of (sub-sub-paragraph (B)) a company or to pay a call in respect of a share acquired after 17 July 1985 in a company (sub-sub-paragraph (C)). Sub-paragraph (ii) ensures that the interest is included only to the extent to which it is incurred in respect of a time when the company is a rental property company (see notes on sub-section 82KZC(6)). "Share" and "security" are defined terms.
- Paragraph (d) applies to interest incurred to the extent to which it is incurred in respect of money borrowed and used (sub-paragraph (i)) to acquire an interest in (sub-sub-paragraph (A)) or a security of (sub-sub-paragraph (B)) a partnership. By sub-paragraph (ii), the paragraph applies only to the extent that the interest is incurred in respect of a time when the partnership is a rental property partnership (see notes on sub-section 82KZC(6)). "Interest in a partnership" and "security" are defined terms.
- Paragraph (e) refers to interest incurred to the extent to which it is incurred in respect of money borrowed and used (sub-paragraph (i)) to acquire a beneficial interest in (sub-sub-paragraph (A)) or a security of (sub-sub-paragraph (B)) a trust estate. By sub-paragraph (ii), the paragraph applies only to the extent that the interest is incurred in respect of a time when the trust estate is a rental property trust estate (see notes on sub-section 82KZC(6)). "Security" is a defined term.
- "rental property partnership deduction" is defined for the purposes of paragraph (b) of the definition of "eligible rental property deductions". Partnership losses are not carried forward within a partnership but are distributed to the partners in their respective shares. In the case of a rental property partnership (see notes on sub-section 82KZC(6)), a partner's share of any partnership net income is included in rental property income by paragraph (d) of the definition of that term and any interest on money borrowed and used to acquire the partnership interest is included in rental property loan interest by paragraph (d) of that definition. It is necessary, therefore, having regard to the overall plan of the Subdivision, and in particular section 82KZD, to treat a partner's share of the loss of such a partnership as an eligible rental property deduction.
- Where the partnership has not been allowed building depreciation deductions, paragraph (a) includes a partner's share of a loss as a rental property partnership deduction. Paragraph (b) applies where a partner in a rental property partnership has a share of a loss (sub-paragraph (i)) and deductions have been allowed to the partnership for building depreciation (sub-paragraph (ii)). Paragraph (b) treats as a rental property partnership deduction only the amount that would have been the partner's share of a loss (if any) if no deduction had been allowed to the partnership for building depreciation. The effect of paragraph (b) is to exclude building depreciation from the calculation of the loan interest deduction limit in section 82KZD and to complement paragraph (e) of the definition of "eligible rental property deductions" and paragraph (e) of the definition of "rental property income" (see the notes on those definitions).
- "rental property partnership equity investment" means an interest held by a taxpayer any time during the year of income in a rental property partnership (see notes on sub-section 82KZC(6)). The definition is a drafting device to facilitate the inclusion as rental property income (under paragraph (d) of the definition of that term) of a partner's share of the net income of such a partnership where the interest in the partnership (see also the notes on the definition of an "interest in a partnership") is acquired after 17 July 1985.
- "rental property partnership security investment" means a security (a defined term) The taxpayer at any time during the year of income in a rental property partnership (see notes on sub-section 82KZC(6)). The definition is a drafting device to facilitate the inclusion as rental property income (under sub-paragraph (j)(ii) of the definition of that term) of interest derived in respect of such investments made after 17 July 1985.
- "rental property trust estate equity investment" means a beneficial interest held by the taxpayer at any time during the year of income in a trust estate that is a rental property trust estate (see notes on sub-section 82KZC(6)). The definition is a drafting device to facilitate the inclusion as rental property income (under paragraph (f) or (g) of the definition of rental property income) of a beneficiary's interest in the income of such a trust estate where the beneficial interest is acquired after 17 July 1985. In this context "acquisition" includes the acquisition of a beneficial interest upon the creation of a trust (see the notes on paragraph 82KZC(5)(e)).
- "rental property trust estate security investment" means a security (a defined term) held by the taxpayer at any time during the year of income in a rental property trust estate (see notes on sub-section 82KZC(6)). The definition is a drafting device to facilitate the inclusion as rental property income (under sub-paragraph (j)(iii) of the definition of that term) of interest derived in respect of such investments made after 17 July 1985.
- "right to receive dividends" means a right to have dividends on shares paid to, or applied or accumulated for the benefit of, the person owning the right. Because such rights are brought within the extended definition of the term "share", it will not be possible to avoid the operation of the Subdivision by splitting the ownership of a share and the right to dividends on the share (between, say, associates) and financing the acquisition of the separate assets by separate borrowings.
- "right to receive income", in relation to land, means a right to have income from the land paid to, or applied or accumulated for the benefit of, the person owning the right. Rights of this kind are brought within the extended definition of the term "interest" in relation to land to prevent avoidance of the Subdivision by splitting the ownership of land and the rights to its rents.
- "right to receive interest" in relation to a security (a defined term) of a company, partnership or trust estate means a right to have interest derived under the security paid to, or applied or accumulated for the benefit of, the person owning the right. Rights of this kind are brought within the extended definition of "security" to prevent avoidance of the Subdivision by splitting the rights to repayment of a loan and interest on the loan.
- "security" is defined in three parts. In its primary meaning it refers to the rights of a lender under a loan (a defined term) to a company, partnership or trustee of a trust estate (paragraph (a)). The term also means a right to receive interest (a defined term) from a loan (paragraph (b)) and an interest in rights referred to in paragraphs (a) and (b) (paragraph (c)). The use of the term security is a drafting measure to facilitate references to investments, in the form of loans to rental property companies, partnerships and trust estates, to which the Subdivision applies. The relevant references are in the definitions of "rental property company security investment", "rental property partnership security investment" and "rental property trust estate security investment" and in paragraphs (c) (d) and (e) of the definition of "rental property loan interest".
- "share", in relation to a company, is given an extended meaning to include a right to receive dividends (a defined term) in respect of a share (paragraph (a)), and an interest in a share in the company or in a right to receive dividends (paragraph (b)). References to a share in a company occur in the definitions of "company title interest" and "rental property company equity investment", sub-paragraph (h)(i) of the definition of "rental property income" and paragraph (c) of the definition of "rental property loan interest".
- "transitional date" means 26 September 1985. The term is used in section 82KZJ in determining whether an investment is to be treated as having been made after 17 July 1985 - and therefore subject to the Subdivision - where a partial change of beneficial ownership of the investment occurs in certain circumstances (see notes on section 82KZJ).
- "transitional year of income" means the year of income in which 17 July 1985 occurred. The term is used in paragraph 82KZF(1)(c) as a drafting measure to ensure that the company group transfer provisions apply correctly in the first year of operation of the Subdivision (see notes on paragraph 82KZF(1)(c)).
- "underlying interest" in relation to property means a beneficial interest held by a natural person (a defined term) in the property or in any income that may be derived from the property. The interest may be held directly or through one or more interposed companies, partnerships or trusts. The term is used in sub-section 82KZJ(2) in determining whether an acquisition of property is to be within the scope of the Subdivision where a partnership formation, dissolution or variation is involved. A beneficial interest could be that of a partner in partnership property or of a beneficiary of a trust estate in trust property or property held by other entities in which the trustee holds an interest. It could also be the interest in the property of a company held indirectly by a shareholder by virtue of ownership of the shares. The reference to 'property' in the definition includes all property, such as interests in land (as defined) and interests in rental property companies, partnerships and trust estates (see sub-section 82KZC(6)), in respect of which the Subdivision is capable of applying.
- "unit trust dividend" means a unit trust dividend within the meaning of Division 6B or 6C of the Principal Act - that is, a distribution by the trustee of a trust estate that is a corporate unit trust or public trading trust within the meaning of those provisions, the net income of which is taxed as if the trust estate were a company. The term is defined for the purposes of paragraph (g) of the definition of rental property income.
Sub-section (2) of section 82KZC explains the operation of the Subdivision where money is borrowed to refinance - by way of the rollover or replacement of borrowings previously used to finance - a rental investment. The sub-section is in two parts. The first part - the first four lines of the sub-section - sets out the general rule that money borrowed, to the extent to which it is borrowed and used to repay other money previously borrowed and used for a particular purpose, is to be taken to have been borrowed and used for the same purpose as the money previously borrowed. For example, if a person borrowed and used $20,000 to acquire a house in 1980, and in 1986, when $15,000 of the original principal was still owing, borrowed $15,000 to pay off the original loan, the $15,000 borrowed in 1986 would be regarded as having been borrowed and used to acquire the house. Because the acquisition occurred before 18 July 1985, the Subdivision would not apply in relation to that investment should the house be used for rent producing purposes.
The second part of the sub-section - commencing with the word "but" - provides an exception to the general rule. In summary, where the replacement finance is borrowed under a contract entered into after 17 July 1985, and other money is borrowed under the same contract and used for any one or more of the three purposes described in paragraphs (a) to (c), the replacement loan may be taken to have been borrowed and used for the same purpose as the additional borrowings. The effect is that, if the additional borrowings are applied to a use that attracts the Subdivision, the replacement borrowings are also brought within the Subdivision. Paragraph (a) deals with the use of the additional finance to make a post commencement date improvement to land (as defined) paragraph (b) with its use to acquire a further interest in land (as defined), and paragraph (c) with its use to acquire a further interest in property other than land.
Under the exception, where the additional moneys are used to make a post commencement date improvement to land or to acquire a further interest in land (paragraph (d)) and the replacement finance is used to repay borrowings originally used either to make an improvement to the land (sub-paragraph (d)(i)) or to acquire an interest in the land (sub-paragraph (d)(ii)), the replacement borrowings are to be taken to have been used to make a post commencement date improvement to land (paragraph (f)). Where the additional finance is used to acquire a further interest in property other than land and the replacement finance is used to repay borrowings originally used to acquire an interest in the property (paragraph (e)), the replacement borrowings are to be taken to have been used to acquire that further interest (paragraph (g)).
Sub-section (3) of section 82KZC deems interest to have been incurred in respect of money borrowed and used to acquire property - and hence brings the interest within the meaning of "rental property loan interest" as defined in sub-section (1) if the acquisition takes place after 17 July 1985 and is an acquisition of relevant property - if the interest is incurred by the taxpayer on a loan taken over on purchasing the property from a vendor who used the loan to acquire or make an improvement to the property. Paragraph (a) states the first requirement for the operation of the sub-section - that is, that property be acquired by the taxpayer at a particular time. Paragraph (b) states the other requirement - that is, that the taxpayer incur interest on a loan used by either the taxpayer or another person to acquire or improve the property at an earlier time. The reference in paragraph (b) to the taxpayer using the loan to acquire or improve the property at an earlier time covers the unusual case of the taxpayer selling and subsequently repurchasing the property.
Sub-section (4) of section 82KZC stipulates what is meant by the references in the Subdivision to land being used by a person (the 'rent receiver') for rent producing purposes. The principal reference is in the definition of "rental property loan interest", where this sub-section has the effect that interest incurred on a loan used to acquire land or make an improvement to land is not subject to the Subdivision unless all three conditions set out in this sub-section are fulfilled.
Paragraph (a) of sub-section 82KZC(4) requires that, at the relevant time (in the case of the definition of "rental property loan interest", the time when interest is incurred), the land be used, or held ready for use, for the purpose of producing rent. That condition would not be satisfied while a building was under construction on the land, but generally would be satisfied once construction finished and tenants were being sought (even if not found). The reference to "another person" in the paragraph would cover the case, for example, of an assignee of the right to rents from the land who incurred interest on borrowings used to acquire that right (see the notes on the definition of "interest in land"). In that case the owner of the land would be the "other person" and the assignee would be the "rent receiver". The words in parenthesis at the end of the paragraph ensure that the condition is met where only part of the land is used for rent producing purposes. In that situation, the extent to which loan interest is subject to the Subdivision is governed by the definition of "rental property loan interest" (see the general note on that definition in sub-section 82KZC(1)). "Rent" is a defined term also.
Paragraph (b) requires that any of the rent referred to in paragraph (a) can be expected to form part of the assessable income of the rent receiver, including any future rent from land that is merely "held ready for use" for rent producing purposes so that rent is not actually being derived at the time in question.
Paragraph (c), by requiring that the land not be exempt residential land (a defined term) of the rent receiver, ensures that such land cannot be held for rent producing purposes for the purposes of the subdivision, if it is used by the rent receiver as exempt residential land.
Sub-section (5) of section 82KZC interprets, for the purposes of the Subdivision, various references to the acquisition of property and references to the making of an improvement by a person. The Subdivision applies in respect of an acquisition of rental property only if the acquisition occurs after 17 July 1985 and paragraph (a) ensures that an acquisition under a contract entered into on or before 17 July 1985 is not treated as an acquisition after that date. The reference to entering into a contract has its ordinary legal meaning.
Paragraph (b) of sub-section (5) is an interpretative provision applying to references to acquisitions of property occurring by reason of the death of a person (sub-sections 82KZJ(3) and (5)). Sub-paragraph (b)(i) lists the various kinds of testamentary dispositions and sub-paragraph (ii) describes the ways in which property can be acquired upon an intestacy.
Paragraph (c) extends the ordinary meaning of references to the making of an improvement (a defined term) by a taxpayer to include the making of an improvement by another person on behalf of the taxpayer (sub-paragraph (i)) - for example, where the taxpayer borrows the money and a co-owner provides the labour and other expertise for making the improvement - and the making of an improvement by the taxpayer and another person (sub-paragraph (ii)) - for example, where the taxpayer borrows money and, together with a co-owner who may or may not borrow and use other money for the same purpose, makes the improvement.
Paragraph (d) makes it clear that a reference to the acquisition of an interest in property is not limited to the acquisition of the taxpayer's first interest in that property. For example, the acquisition by a tenant-in-common or joint tenant of the remaining interest in the property would be the acquisition of an interest in property.
Paragraph (e) ensures that an acquisition of property can occur even though the property did not exist before the taxpayer owned it. An example would be the acquisition by a beneficiary of a beneficial interest in a trust estate upon the settling of property on the trust. Paragraph (f) specifically provides that a security (a defined term meaning, broadly, a lender's rights under a loan) is acquired when the loan is made.
Sub-section (6), which is subject to sub-section (7), specifies two conditions which, if both are satisfied, cause a company, partnership or trust estate to be a rental property company, partnership or trust estate in relation to a year of income for the purposes of the Subdivision (particularly the definitions of "rental property income" and "rental property loan interest"). The Subdivision applies to an investment made after 17 July 1985 in a company, etc. if the investment is made at any time during a year of income in relation to which the company, etc. is a rental property company, etc.
The first condition - set out in paragraph (a) - is that, at the end of the year of income, the company, etc. holds an interest or interests in land (as defined) that, at the end of the year of income, is used for rent producing purposes (see sub-section 82KZC(4) for the meaning of that expression). An interest in land may be held either directly by the company, etc. or through one or more interposed companies, partnerships or trust estates which may or may not be rental property companies, etc. An interest in land, whether a direct or indirect one, is within the paragraph irrespective of when it was acquired. An investor in a rental property company, etc., however, is only subject to the Subdivision in respect of an investment made after 17 July 1985. The second condition - set out in paragraph (b) - is that, at the end of the year of income, the aggregate of the net rental values of those interests in land is not less than 75% of the net worth of the relevant company, partnership or trust estate. The terms "net rental value" and "net worth" are defined in sub-section 82KZC(1).
Sub-section 82KZC(7) modifies the operation of sub-section (6) by providing for a company not to be treated as a rental property company in a limited set of circumstances. They are, broadly where the taxpayer has severed connections with the company before it is capable of satisfying the rental property company tests of sub-section (6) - for example, where a private company changes hands and then starts rental activities. In terms of sub-section (7), where -
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- the taxpayer disposes of a share (a defined term) or security (a defined term) in a company (paragraph (a));
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- the company would not have been a rental property company if the tests of sub-section (6) had then been applied (paragraph (b));
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- the taxpayer held no more shares or securities in the company after the disposal (paragraph (c)); and
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- it would be reasonable, having regard to the purpose or object underlying the Subdivision, to apply it in relation to the taxpayer as if the company were not a rental property company (paragraph (d)),
Sub-section (8) is a safeguarding measure to ensure the intended operation of sub-section 82KZC(6) - and thereby the operation of the central provision of the Subdivision, section 82KZD - where arrangements are made to have the aggregate of the net rental values of interests held by a company, partnership or trust estate fall below 75% of its net worth. In calculating net worth or the net value of an interest in land, the Commissioner of Taxation is to disregard any action (such as the discharge or release of liabilities, or any disposal or acquisition of assets), if he is satisfied that it was done with a purpose of ensuring that section 82KZD would not apply.
Section 82KZD: Limitation on deductions for rental property on interest
Section 82KZD is the operative provision of the Subdivision. It limits the taxpayer's deduction in a year of income under section 51 of the Principal Act, in respect of rental property loan interest (a defined term) incurred after 17 July 1985, to the amount (if any) by which the rental property income (a defined term) derived by the taxpayer in the year of income exceeds the taxpayer's eligible rental property deductions (also a defined term) of the year of income. Sub-section (1) applies, where rental property income does not exceed eligible rental property deductions, to deny any deduction in the year of income for rental property loan interest. Where rental property income exceeds eligible rental property deductions, sub-section (2) describes the excess as the "interest deduction limit" and limits the overall deduction for rental property loan interest in the year of income to the interest deduction limit (paragraph (a)).
The rental property income and eligible rental property deductions in respect of all rental investments of the taxpayer are aggregated in ascertaining the taxpayer's interest deduction limit. Therefore, if a taxpayer has two investments, A and B, with rental property income of $8000 from A and $12000 from B and eligible rental property deductions of $2000 relating to A and $3000 relating to B, the interest deduction limit will be
($8000 + $12000) - ($2000 + $3000) = $15000
(6000)/(18000) * 3000 = $1000
(12000)/(18000) * 3000 = $2000
The proportionate reduction of interest deductions would be relevant, for example, where interest was incurred by a company in respect of money borrowed and used to acquire shares in a rental property company. In that situation, the entitlement of the shareholder company to a rebate of tax under section 46 of the Principal Act in respect of any dividends on those shares included in taxable income could be expected to be affected by a reduction in the deduction allowed in respect of that interest.
Section 82KZE: Carry forward of excess rental property loan interest
By section 82KZE, rental property loan interest not allowed as a deduction by the operation of section 82KZD is deemed for the purposes of section 51 of the Principal Act and this Subdivision to have been incurred by the taxpayer at the beginning of the next year of income. That interest, along with any rental property loan interest actually incurred in the next year of income, is then subjected to the interest deduction limitation imposed by section 82KZD in that next year. The section deems carried-forward interest to have been incurred "at the beginning of" the next year of income to deal with a case where it is necessary for other purposes of the Principal Act to be able to identify precisely when expenditure is incurred - such as where the taxpayer is a company to which the "current year loss" provisions of Subdivision B of Division 2A of Part III of the Principal Act apply.
Section 82KZE does not apply in relation to a partnership (see section 82KZG).
Section 82KZF: Transfer of excess rental property loan interest within company group
Section 82KZF adopts the principles of the company group loss transfer provisions of section 80G of the Principal Act to allow a group company to transfer to one or more other companies in the company group all or part of any excess of rental property loan interest over the limited deduction allowed for such interest by the operation of section 82KZD.
Sub-section 82KZF(1) sets out the conditions and consequences of transferring loan interest. First, paragraph (a) requires that section 82KZD has applied to a resident company (the 'transferor') so that there is excess rental property loan interest. The other condition, described in paragraph (b), is that the transferor and another resident company in the same group notify the Commissioner of Taxation in writing that a specified part of the excess interest is to be transferred to that other company (the 'transferee'). The notice must be given on or before the date of lodgment of the transferor's tax return for the year of income in respect of which the excess arose, or within such further time as the Commissioner allows, and be signed by the public officer of each company.
When these two conditions are satisfied, the interest to which the notice relates is deemed by paragraph (c), for the purposes of section 51 of the Principal Act and this new Subdivision, to be rental property loan interest incurred by the transferee, in the year of income in respect of which the excess arose, in gaining or producing assessable income. Sub-paragraph (c)(i) applies where interest is transferred in respect of the first year of operation of the Subdivision and deems the interest to be incurred by the transferee immediately after 17 July 1985. In other cases, the interest is deemed to be incurred at the beginning of the year of income (sub-paragraph (ii)). The reason for these sub-paragraphs is the same as that given in the notes on section 82KZE. Interest deemed to be incurred by the transferee is then allowable as a deduction to the transferee in the year of income in respect of which the excess arose. Paragraph (d) ensures that the transferor is not allowed a deduction for the part of the excess interest transferred to the transferee.
Paragraph 82KZF(1)(b) requires the transferee company to be a group company in relation to the transferor in relation to the year of income. Sub-section 82KZF(2), by applying the tests in the existing group loss transfer provisions (section 80G of the Principal Act) of when a company is a group company in relation to another company, ensures that those provisions and this section have the same width of operation.
Sub-section (3) limits the amount of rental property loan interest a transferee company can take on transfer in a year of income to the amount which balances its rental property account. That is, a company cannot accept more rental property loan interest than it can set-off in the year of income. That limitation applies by making the transfer notice under consideration of no effect to the extent that the sum of the amount specified in the notice (paragraph (a)) and the amounts specified in any other notices transferring excess loan interest to the transferee from the particular transferor or any other transferor (paragraph (b)) exceeds the amount by which the transferee's rental property income exceeds the sum of the transferee's eligible rental property deductions (paragraph (c)) and rental property loan interest (paragraph (d)) of the year of income.
Sub-section (4) prevents a transferor company transferring a greater amount of rental property loan interest than the amount of excess interest arising from the operation of section 82KZD in the year of income. Where the sum of the amount specified in the paragraph (1)(b) transfer notice under consideration (paragraph (a)) and any amounts specified in other transfer notices given by the transferor in respect of any transferee (paragraph (b)) exceeds the transferor's excess interest, the notice under consideration is of no effect.
Sub-section 82KZF(5) gives the Commissioner of Taxation a limited special authority to amend a taxpayer's assessment that is not available under section 170 of the Principal Act. Where some or all of the excess rental property loan interest of a transferor has been allowed as a deduction to the transferee (paragraph (a)) and all or part of the excess was not available for transfer - for example, as a result of some amending action in respect of the assessment of the transferor - (paragraph (b)), the transferee's assessment may be amended to disallow an appropriate part of the transferred interest, notwithstanding that the circumstances - such as the effluxion of time - would have prevented such an amendment being made in terms of section 170.
Section 82KZG: Special provision relating to partnerships
Consistent with the general operation of the Principal Act, under which partnership losses are distributed proportionately to partners, section 82KZG provides that the "carry forward" rule in section 82KZE is not to apply in respect of partnerships. Instead, section 82KZG provides that, where the rental property loan interest of a partnership in a year of income exceeds the amount (if any) of the deduction allowable to the partnership in terms of section 82KZD in relation to the year of income in respect of that rental property loan interest, each partner in the partnership is deemed for the purposes of section 51 and this new Subdivision to have incurred the partner's portion of the excess interest in the year of income, in gaining or producing assessable income. The notes on the definition of "partner's portion" in sub-section 82KZC(1) explain that term. The function of paragraphs (a) and (b) is equivalent to that explained in the notes on sub-paragraphs 82KZF(1)(c)(i) and (ii) respectively.
Section 82KZH: Deemed acquisition of property
Section 82KZH ensures that, for the purposes of the Subdivision but subject to section 82KZJ (see notes on that section), property is regarded as having been acquired by its new owners at the time of a partial change of ownership, including where that change is associated with the formation, dissolution or variation of a partnership. If, for example, a partnership of A and B owns a rental property investment and A sells his partnership interest to C after 17 July 1985, the partnership of B and C will be regarded as having acquired an investment to which the Subdivision applies.
The section applies to any partial changes of ownership of, or of interests in, property but specifically including changes occurring in connection with -
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- the formation or dissolution of a partnership (paragraph (a)); or
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- a variation in the constitution of a partnership or in the interests of the partners (paragraph (b)).
Section 82KZJ: When property acquired
Section 82KZJ contains rules for the application of the subdivision where rental property is acquired by reason of death, or where there is a partial change in the beneficial ownership of rental property, after 17 July 1985.
The broad effect of sub-section 82KZJ(1) is that, where a taxpayer has acquired a rental investment on or before 17 July 1985 (so that the Subdivision would not, but for this sub-section, apply) and holds the property after 25 September 1985, the taxpayer will be deemed to have acquired the property after 17 July 1985 (and so be subject to the Subdivision) if continuity of beneficial ownership in the relevant property of more than 50% is not maintained from 26 September 1985 to the end of the year of income (see the meaning of "eligible year of income" in sub-section (7)) or the date of disposal of the property, whichever is earlier. The sub-section's ordinary application is in the case where there has not actually been an acquisition of the property after 17 July 1985, but it can also apply where, although an acquisition took place after that date, the acquisition is deemed by sub-section 82KZJ(2), (3) or (4) to have occurred before that date. The sub-section would apply only where there is a relevant change in beneficial ownership (for example, through a change in shareholding or in beneficial interests in trust property) after 25 September 1985. Changes of beneficial ownership that occur between 17 July 1985 and 26 September 1985 are not relevant to the operation of the sub-section. The operation of the sub-section, as described above, is subject to the Commissioner of Taxation being satisfied as to, or considering it reasonable to assume there has been, the required continuity of beneficial ownership. The terms "majority underlying interests" and "natural person" used in the sub-section are explained in the notes on the definitions of those terms. The term "eligible period" is explained in sub-section (6).
Sub-section (1) would apply where, for example, a partnership of companies A (10%) and B (90%), which acquired rental property before 18 July 1985, was dissolved on 30 July 1985, property being disposed of to company A (so that sub-section (2) deems the property to have been acquired by company A before 17 July 1985 - see the notes on that sub-section) but ownership of 50% of company A's shares changed hands on 30 October 1985. Notwithstanding sub-section (2), sub-section (1) would, by reason of the share ownership change, deem the property to have been acquired by company A after 17 July 1985 and the Subdivision would apply with effect from 30 October 1985.
Sub-section (2), which is subject to sub-section (1), applies in the limited range of cases where the taxpayer is deemed by section 82KZH to have acquired rental property upon a partial change of beneficial ownership of the property that occurred after 17 July 1985 and before 26 September 1985 upon either -
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- the formation or dissolution of a partnership (paragraph (a)); or
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- a variation in the constitution of a partnership or in the interests of partners (paragraph (b)).
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- there was any continuity of beneficial ownership (see the definition of "underlying interest" in sub-section (1)) from 17 July 1985 to the date of deemed acquisition by the taxpayer - paragraph (c); and
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- the former owner acquired, or is deemed (for example, by an earlier application of this sub-section) to have acquired, the property on or before 17 July 1985 - paragraph (d).
Sub-section (3) of section 82KZJ, by providing that a person who acquires property after 17 July 1985 and before 26 September 1985 by reason of the death of another person is deemed to have acquired it at the time it was acquired by the deceased person, ensures, among other things, that the Subdivision will not apply in respect of such an acquisition if the deceased acquired the property on or before 17 July 1985. An acquisition would occur by reason of death only where the acquisition was a direct consequence of the death, such as by devolution (see the notes on paragraph 82KZC(5)(b)) or by the operation of law (such as where property passes by survivorship on the death of a joint tenant). The sub-section would not apply to, for example, the purchase of property from the trustee of a deceased's estate. The sub-section does not apply where sub-section (2) does. The latter sub-section applies to acquisitions between the two dates involving partnership formations, dissolutions or variations occurring for any reason, including death.
Where rental property is acquired after 25 September 1985, it will be deemed by sub-section (4) to be acquired before 17 July 1985 (and, therefore, be outside the scope of the Subdivision) if three conditions are satisfied. First, paragraph (a) requires the Commissioner of Taxation to be satisfied as to two matters, namely that -
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- there is a continuity of beneficial ownership of the property of more than 50% (see the definitions of "majority underlying interest" and "transitional date" in sub-section 82KZC(1)) from 25 September 1985 to the time of acquisition (sub-paragraph (a)(i)); and
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- the former owner acquired or is deemed to have acquired the property on or before 17 July 1985 (sub-paragraph (a)(ii)).
Paragraphs (b) and (c) ensure that the concession available under the sub-section is not abused by providing the further requirement that, where in acquiring the property the taxpayer borrows and uses a greater amount than the amount (if any) owing by the vendor at the time of disposal to the taxpayer, the property will not be deemed to have been acquired before 17 July 1985, notwithstanding that the tests of paragraph (a) are satisfied. Paragraph (b) covers the case where the person disposing of the property did not borrow to acquire it and paragraph (c) covers other cases.
Sub-section (4) is subject to sub-section (1). That ensures that a majority continuity of ownership exists from 25 September 1985 to the end of the year of income or the date of any disposal of the property by the taxpayer, whichever is earlier, if the acquisition is to be outside the scope of the Subdivision. Sub-section (1) would apply where, for example, a partnership of companies A (51%) and B (49%), which acquired rental property before 18 July 1985, was dissolved on 30 September 1985, the property being disposed of to company A (so that sub-section (4) deems the property to have been acquired by company A before 17 July 1985) but ownership of 50% of company A' s shares changed hands on 30 October 1985. Despite sub-section (4), sub-section (1) would deem the property to have been acquired by company A after 17 July 1985 and the Subdivision would apply with effect from 30 October 1985.
Sub-section (5) provides that, for the purposes of section 82KZJ, a change in beneficial ownership of property on account of death will not be regarded as a change of ownership. An underlying interest in property (a defined term) held by the deceased at any time is to be deemed to have been held at that time by the person acquiring the underlying interest by reason of the death (for the meaning of this expression, see the notes on sub-section 82KZJ(3) and paragraph 82KZC(5)(b)). The provision is expressed in terms of percentages of total underlying interests to ensure that it applies where the deceased has held different kinds of beneficial interests in the property at different times (for example, as a shareholder in a company that owned the property and then as legal owner after buying the property from the company).
Sub-sections (6) and (7) are definitional provisions - for the purposes of sub-section (1) - stating that "eligible period" means the period from 26 September 1985 to the end of the year of income in question, and "eligible year of income" means the year of income in which 26 September 1985 occurred or a subsequent year of income.
Clauses 12 to 15 - Alienation of income
Clauses 12 to 15 of the Bill will give effect to the proposal, announced on 9 October 1985, to treat as assessable income amounts received as consideration for transferring to another person rights to receive income from property without also transferring the interest in the property. At the same time, existing anti-avoidance provisions relating to the alienation of income for short periods (i.e., less than 7 years) will be modified so that they apply only where income is transferred between associated persons for a consideration that is less than an arm's length value.
The amendments are designed to counter the adverse revenue implications of the decision of the Federal Court in FCT v Myer Emporium Ltd. In that case, the court was asked to consider the income tax effects of arrangements under which rights to receive future interest income payable under long-term agreements (more than 7 years) were assigned, for an arm's length consideration, to a finance company. The court found that the consideration for the transfer was a capital amount and did not form part of the assessable income of the assignor. The assignee, being a finance company, could effectively offset the consideration it paid against the interest as it was received. As a result of the transaction the revenue suffered a loss by the conversion to a non-taxable capital amount of the former income stream of the assignor.
Under existing Division 6A of Part III of the Principal Act, certain income transferred by a person to another person is deemed to remain the income of the transferor for income tax purposes. The Division applies in that way where the transfer (whether for valuable consideration or not) is, or may be, for a period of less than 7 years and the transferor does not also transfer his or her interest in the property that produces the income.
In those circumstances, the transferred income is in all cases treated as the income of the transferor for income tax purposes and not, in the generality of cases, treated as income of the transferee.
Division 6A is directed basically at transfers between related persons where there is usually little or no consideration, but it is also capable of application to transactions for commercial consideration between parties at arm's length. The amendments will restrict the application of the existing provisions of Division 6A to transfers for less than 7 years of rights to income where the parties to the transfer are associated persons and any consideration in respect of the transfer is less than could be expected under an arm's length transaction. In those circumstances, the provisions will continue to operate so that the transferred income is deemed to be the income of the transferor, but any consideration in respect of the transfer will not be included in the transferor's assessable income.
Where a transfer of a right to income from property is made in circumstances where the transferor does not transfer the underlying property, and the conditions outlined in the previous paragraph do not apply, new provisions will operate so that any consideration for the transfer will be included in the transferor's assessable income. Thus, the new provisions will apply where -
- •
- consideration is received or receivable for the transfer;
- •
- the transfer -
- • .
- is between persons who are not related or otherwise associated; or
- • .
- is between persons who are associated, but the consideration for the transfer is of full value; and
- •
- the transferor does not transfer the underlying property to the transferee.
As provided by sub-clause 25(5), the amendments of Division 6A contained in clauses 12 to 15 will apply to transfers of rights to receive income made after 9 October 1985 (paragraph (a)) and to income received after that date as a result of such transfers (paragraph (b)), except where the transfer is made pursuant to a contract entered into on or before that date.
Clause 12: Amendment of heading
By the amendment proposed by this clause, the words "for Short Periods" will be deleted from the heading to Division 6A so that it will now read "Alienation of Income". The amendment is consequential upon the proposed insertion in the Division, by clause 15, of new section 102CA, which will apply to "arm's length" transfers of rights to income regardless of the transfer period.
Section 102A of the Principal Act is a provision that defines the meanings of certain words and expressions used in Division 6A.
Paragraph (a) of clause 13 will insert in sub-section 102A(1) a definition of 'associate' that has the same meaning as in sub-section 26AAB(14) of the Principal Act. The definition specifies who is to be treated as an associate of a natural person, a company, a trustee of a trust estate or a partnership, and, broadly, refers to those persons who by reason of business or family connections might appropriately be regarded as being associated with a particular person. The new definition is used in amendments proposed to existing section 102B by clause 14 which will limit the application of that section to transfers of rights to income between associated persons.
Paragraph (b) of clause 13 will insert new sub-section 102A(6) which is a referential provision. Paragraph (a) of sub-section 102A(6) will provide that, for the purposes of Division 6A, the term "arm's length consideration" in respect of a transfer of a right to receive income from property means the amount of consideration that could reasonably be expected to be received by the transferor if the right was transferred under an agreement between parties who were independent of one another and who were dealing with each other on an arm's length basis in relation to the particular transaction. In other words, it seeks to identify the level of full commercial consideration. The paragraph relates to proposed new paragraph 102B(2)(c) which will ensure that section 102B does not apply, in relation to a less-than-7-years transfer of a right to income from property, if there has been full and adequate consideration for the transfer, notwithstanding that the transfer may be between associated persons.
Paragraph (b) of new sub-section 102A(6) is a precautionary measure the object of which is to make it clear that, in situations where any consideration for a transfer of a right to income from property is not in cash, references in new paragraph 102B(2)(c) and new sub-section 102B(4A) to the "amount" of consideration are to be taken as references to an amount equal to the money value of the consideration.
Clause 14: Certain income transferred for short periods to be included in assessable income of transferor
This clause will amend section 102B of the Principal Act in a number of respects.
Under sub-section 102B(1), which is the operative provision of existing Division 6A, the transferor of a right to income from property is taxed on the income transferred as if there had been no transfer where the period of the transfer is, or may be, for less than 7 years and the transferor retains ownership of the property giving rise to the right.
The effect of the amendment of section 102B proposed by paragraph (a) of clause 14 will be that, in future, it will only apply where the transferee is an associate (see earlier notes on clause 13) of the transferor and, where any consideration that has passed to the transferor in respect of the transfer is less than could be expected under an arm's length transaction.
Existing sub-sections (1), (2) and (3) of section 102B are, by paragraph (a) of clause 14, to be omitted and new sub-sections substituted. New sub-section 102B(1) will apply where a right to receive income (but not the underlying property) has been transferred, otherwise than by a will or codicil, to an associate of the transferor for a period that will, otherwise than because of the death of any person or the associate becoming under a legal disability, terminate within 7 years of the date of effect of the transfer. Consistent with the intention of the section to apply to transfers of income rights to associates, the new sub-section will ensure that section 102B cannot be circumvented by the device of the first associate re-assigning the right to receive the income to another associate of the transferor.
Existing sub-section 102B(2) of the Principal Act excludes from the operation of section 102B any transfer of a right to receive income from property where the right was not a right that arose from the ownership by the transferor of an interest in the property or where the property has also been transferred by the transferor either to the transferee or to another person. Paragraph (a) of the new sub-section 102B(2), is in the same terms as existing paragraph 102B(2)(a) and excludes the application of the section where the right transferred did not arise from the ownership by the transferor of an interest in the property. The effect of paragraph (b) of new sub-section 102B(2) is to ensure that section 102B will never apply in cases where the interest in the underlying property is transferred either before or at the time when the right to income from the property is transferred.
A further situation in which section 102B will not apply, additional to those currently applying, is where arm's length consideration (see earlier notes on clause 13) is given in respect of the transfer. This will be the case irrespective of whether or not the parties are associated with each other. That situation is specified in new paragraph 102B(2)(c). In such a case the consideration will be included in the assessable income of the transferor under proposed section 102CA which is to be inserted in the Principal Act by clause 15.
Existing sub-section 102B(3) has the purpose of terminating the operation of section 102B in relation to transferred income on the happening of specified events. The section ceases to apply in relation to income derived after the date of death of the transferor or, if the transferor is a company, to income derived after it ceases to exist. Sub-section 102B(3) is to be replaced by a new sub-section (3) which will terminate the application of section 102B in such situations. In addition, it clarifies that the section is not to apply to income from property derived after the transferor of the income right transfers the property either to the transferee or to another person.
Paragraph (b) of clause 14 will, as a consequence of new sub-sections 102B(1), (2) and (3), make a technical amendment of sub-section 102B(4), which relates to transfers of rights to receive income where the transfer is made for the purposes of providing alimony or maintenance, to make it clear that the exclusion provided for by sub-section (4) only applies in relation to sub-section (1).
Paragraph (c) of clause 14 will insert new sub-section 102B(4A) which will ensure that, where sub-section 102B(1) applies to include income from property in the assessable income of a transferor, the transferor will not also be taxed on any consideration given in respect of the transfer. The sub-section makes provision, however, for the possibility that this could occur where the general anti-avoidance provisions of Part IVA of the Principal Act have effect.
Clause 15: Consideration in respect of transfer to be included in assessable income of transferor in certain cases
Clause 15 will insert a new section - section 102CA - in the Principal Act. The broad effect of this section will be that, where a right to receive income from property is transferred from the owner of the property to another person, but the interest in the property that produces the income is not also transferred, the amount of any consideration received in respect of the transfer is to be included in the assessable income of the transferor in the income year in which the right is transferred. Section 102CA will not apply, however, where section 102B applies in relation to the transfer to treat the transferred income as if it were the income of the transferor (see notes on clause 14) .
Sub-section 102CA(1) will operate to ensure that the amount of any consideration for a transfer of a right to receive income is included in the transferor's assessable income of the year of income in which the transfer takes place. The conditions necessary for the application of sub-section (1) are that -
- •
- the right to receive income is transferred otherwise than under a will or codicil;
- •
- there is consideration for the transfer; and
- •
- sub-section 102B(1) does not apply to the transfer.
By sub-section 102CA(2) two particular situations are to be excluded from the operation of sub-section 102CA(1) . These are-
- •
- where the transferred right to receive income did not arise from the ownership of an interest in property (paragraph (a)). This exclusion is in similar terms to existing paragraph 102B(2)(a); and
- •
- where the transferor has already transferred, or concurrently transfers, the interest in property which gives rise to the transferred right to receive income to the transferee (paragraph (b)). In this situation the transfer is tantamount to a total disposal of the income producing property.
Under paragraph 23(1) of the Principal Act, income received by way of periodical payments in the nature of alimony or maintenance is exempt from income tax in the hands of the recipient unless, for the purpose of making such payments, the payer has diverted income that would otherwise have been subject to tax. If income has been so diverted, the recipient of the alimony or maintenance is assessable on the payments.
The purpose of sub-section 102CA(3), which is the counterpart to existing sub-section 102B(4), is to exclude from the operation of section 102CA transfers of rights to income made to provide alimony or maintenance where the recipient is subject to tax on the payments. Thus, the operation of the present law is preserved in these cases.
Clauses 16-18: Deductions for capital expenditure on certain income-producing buildings
The Bill will implement the proposal, announced on 17 July 1985, to allow deductions for capital expenditure incurred by a taxpayer on the construction of residential buildings, or of extensions, alterations and improvements, that are used for the purpose of producing assessable income where the construction commenced after that date.
Under existing provisions of the Principal Act, deductions for capital expenditure are available for -
- •
- buildings, extensions, etc. used to provide short-term accommodation for travellers, where the building commenced to be constructed after 21 August 1979 (Division 10C); and
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- non-residential buildings, extensions, etc., commenced to be constructed after 19 July 1982, that are used for the purpose of producing assessable income (Division 10D).
Allowing deductions for residential buildings, extensions, etc. will mean that, with some limited exceptions, all buildings commenced to be constructed after 17 July 1985 that are used for producing assessable income will become eligible for capital expenditure deductions. Consequently, the amendments proposed to give effect to the new measures will operate to limit the application of Division 10C to buildings that were commenced to be constructed before 18 July 1985 and to extend the application of Division 10D to virtually all income-producing buildings, including residential buildings, commenced to be constructed on or after that date.
A building or a part of a building commenced to be constructed after 17 July 1985 will not attract deductions under Division 10D in respect of any period that -
- •
- it is used wholly or principally for display or exhibition purposes in connection with the sale of any building or part of any building; or
- •
- it is residential accommodation that is used, or is for use, wholly or exclusively by the owner (including a lessee who is entitled to the deductions) or by an associate of the owner.
Capital expenditure on residential buildings, extensions, alterations or improvements that qualifies for deduction will be written-off over a 25 year period at the rate of 4% per annum. The deduction will commence to be available on the date, after completion of construction, on which the building, or extension, etc. is first used or maintained ready for use for the purpose of producing assessable income. Subject to a proportionate part-year deduction being allowable in the income year in which the residential building, extension, etc. first becomes eligible, the deduction will be available by way of an annual amount of 4% of the construction cost.
In order to qualify for deductions under Division 10D, a building, extension, etc. (or a part thereof) commenced to be constructed after 17 July 1985 must, at the time of its completion, be for use, or for disposal to another person for use, for the purpose of producing income (whether assessable or exempt income) or be residential accommodation. This means that a building could first be used as non-income-producing residential accommodation by its owner without excluding it from future eligibility for deductions under Division 10D. Deductions will only be allowable, however, in respect of periods during which the building, extension, etc. (or part) is used for the purpose of producing assessable income.
The cost of constructing an eligible residential building, extension, etc. will be taken to include such preliminary expenses as architect's fees, engineering fees and the cost of foundation excavations. Capital expenditure on land on which an eligible residential building, etc. is to be constructed, including clearing and demolition costs, will not qualify for deduction.
Expenditure on residential buildings that qualifies for deduction under existing provisions of the law (e.g. expenditure on such buildings that qualifies as allowable capital expenditure under the mining provisions - Divisions 10 and 10AA - of the Principal Act and on such buildings used in timber milling operations - Division 10A) will continue to qualify under those provisions. Similarly, the cost of plant, such as lifts and air-conditioning, that is depreciable under the general depreciation provisions of the Principal Act will continue to attract deductions under those provisions.
Generally, the owner of an eligible residential building who uses it for the purpose of producing assessable income will be entitled to the deductions. However, a lessee who incurs the qualifying capital expenditure, or who obtains the lease on assignment from a lessee who incurred that expenditure, will be entitled to the deductions in respect of so much of the building as that lessee continues to lease, whether under the original or a renewed lease. However, if an eligible lessee surrenders or otherwise terminates a lease, entitlement to the deductions will revert to the owner.
A balancing deduction will be allowed where an eligible building is demolished or destroyed during the statutory 25 year period. That deduction will, however, be limited to the extent to which any remaining entitlement to deductions exceeds any insurance or salvage proceeds. Partial demolition or destruction will attract corresponding adjustments.
In broad terms, a taxpayer who is the owner of the whole of an eligible building and who uses it to produce assessable income for a full income year will be entitled to a deduction equal to 4% of the qualifying expenditure. A taxpayer who owns only part of such a building during the income year will be entitled to a proportionate deduction determined by reference to the extent to which the qualifying expenditure is attributable to the part owned by the taxpayer. Where the whole of an eligible building is used for purposes of producing assessable income during part only of an income year, the deduction will be determined proportionately by reference to the number of days in that part of the year of income. Similarly, where part only of the building is used for income-producing purposes for a portion of the income year, the deduction will be determined by reference to the number of days in that portion of the year of income and the extent to which the qualifying expenditure is attributable to the part so used.
Additionally, where a building or a part of a building is only partly used by a person for the purpose of producing assessable income (for example, where a person shares his or her home with another person - other than an associate - who pays rent) then the deduction will be reduced by such amount as the Commissioner considers is fair and reasonable.
A lessee who incurs qualifying expenditure on a residential building (or an assignee of a lease from such a lessee) will be treated as the owner of so much of the building to which that expenditure is attributable as the lessee continues to lease and will therefore be entitled to the capital expenditure deductions.
Clause 16: Qualifying expenditure
This clause proposes the amendment of section 124ZB of the Principal Act, which sets out the conditions that must be satisfied for capital expenditure to constitute qualifying expenditure for the purposes of Division 10C of the Principal Act. Division 10C authorises deductions for capital expenditure on income-producing buildings, and extensions, alterations and improvements to such buildings, used to provide short-term accommodation for travellers, where construction commenced after 21 August 1979.
As a consequence of amendments proposed by clauses 17 and 18 of this Bill, deductions for capital expenditure on all residential income-producing buildings (including those used for short-term traveller accommodation) commenced to be constructed on or after 18 July 1985 will be allowed under Division 10D of the Principal Act. The application of Division 10C is therefore to be restricted to expenditure on traveller accommodation buildings, extensions, alterations or improvements that were commenced to be constructed after 21 August 1979 and before 18 July 1985.
To this end, clause 16 will amend section 124ZB by inserting the words "and before 18 July 1985" after the existing references to 21 August 1979 in paragraphs (1)(c) and (2)(b) of that section.
This clause will amend section 124ZF of the Principal Act, which contains a number of definitions and interpretative provisions necessary for the operation of Division 10D of that Act. Division 10D presently authorises deductions for capital expenditure on non-residential income-producing buildings, extensions, alterations or improvements construction of which commenced after 19 July 1982. The amendments are necessary to extend the application of Division 10D to residential income-producing buildings, extensions, etc. the construction of which commenced or commences on or after 18 July 1985.
Paragraphs (a) to (d) of clause 17 propose the insertion of five new definitions into sub-section 124ZF(1) of the Principal Act, which contains the definitions that apply for the purposes of Division 10D. The new definitions are of terms that are relevant to new sub-sections 124ZF(1A), (1B) and (4A), which are being inserted by paragraphs (e) and (f) of this clause.
By paragraph (a), the following definitions are to be inserted:
- "agreement" means any agreement, arrangement or understanding, whether wholly or partly -
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- formal or informal (paragraph (a)); or
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- written or oral (paragraph (b)),
- and whether or not having legal or equitable force or based on legal or equitable rights (paragraph (c)). This definition is connected with the term "exempt agreement", the meaning of which is set out in proposed new sub-section 124ZF(1A).
- "associate" is defined to mean, in relation to the owner of any building or part thereof-
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- where the owner is a private company - a director or member of the company (paragraph (a));
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- where the owner is a partnership - any partner in the partnership (paragraph (b));
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- where the owner is a trustee of a private trust estate - another trustee or a beneficiary of the trust estate (paragraph (c)); or
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- where the owner is a natural person - a spouse, parent or child of that person (paragraph (d)).
- The definition also extends to a spouse, parent or child of a director, member, partner, trustee or beneficiary as referred to in paragraphs (a), (b) and (c). The term "associate" is used in new sub-section 124ZF(4A).
Paragraph (b) of the clause will insert the following definitions:
- "parent", in relation to a person, is defined to mean any other person of whom the first-mentioned person is a child. The purpose of the definition is to ensure that the meaning of "parent" corresponds to the meaning of "child" when those terms are used in the definition of "associate". The term "child" is defined in section 6 of the Principal Act to include an adopted child, a step-child or an ex-nuptial child.
- "private trust estate" is to have the same meaning that the expression has in section 26AAA of the Principal Act. In that section, a private trust estate is any trust estate, other than a unit trust the units of which are listed for quotation in the official list of any stock exchange (whether in Australia or overseas) or are ordinarily available for purchase or subscription by the public.
The amendment proposed by paragraph (c) of clause 17 is one of punctuation only, to reflect the insertion, by paragraph (d) of the clause, of the following definition of "spouse":
- "spouse" is defined so that the term includes not only a person legally married to another but also a person who lives with another as husband or wife on a bona fide domestic basis. The term is used in the definition of associate.
Paragraph (e) of this clause will insert in the Principal Act new sub-sections 124ZF(1A) and (1B), which are interpretative provisions that set out the meaning of the term "exempt agreement". That term is used in new sub-section 124ZF(4A), which is proposed to be inserted in the Principal Act by paragraph (f) of this clause.
In broad terms, new sub-section 124ZF(4A) provides that, in certain circumstances, property is taken not to be used for the purpose of producing assessable income, so that deductions are not available under Division 10D. One such circumstance is where, pursuant to an agreement other than an exempt agreement, an associate of the taxpayer uses the property as residential accommodation. The effect of excluding an exempt agreement is that, even though property is used by an associate as residential accommodation, the property may still attract Division 10D deductions if it is used pursuant to an exempt agreement.
New sub-section 124ZF(1A) provides that an agreement is an "exempt agreement" only if the Commissioner of Taxation is satisfied, having regard to all relevant circumstances, that -
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- the parties to the agreement could reasonably have been expected to have entered into the agreement if they had been independent parties dealing with each other at arm's length (paragraph 124ZF(1A)(a)); and
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- none of the parties entered into the agreement for the purpose of obtaining a deduction under Division 10D (paragraph 124ZF(1A)(b)).
New sub-section 124ZF(1B) ensures that paragraph 124ZF(1A)(b) can be applied where the purpose of obtaining a deduction was only one of the purposes that the person entered into the agreement, provided it was not merely an incidental purpose.
Paragraph (f) of clause 17 will omit existing sub-section 124ZF(4) and insert new sub-sections 124ZF(4) and (4A) into the Principal Act. Existing sub-section 124ZF(4) sets out the circumstances in which the prescribed part of a building (i.e. the whole or part of it to which qualifying expenditure is attributable) is taken not to have been used for the purpose of producing assessable income. That part of a building cannot qualify for a Division 10D deduction in respect of any period during which it is not used for the purpose of producing assessable income (sub-section 124ZF(3)) .
Proposed new sub-section 124ZF(4) -
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- retains, for property commenced to be constructed before 18 July 1985, the existing circumstances in which property is taken not to have been used for the purpose of producing assessable income; and
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- together with new sub-section (4A), sets out the circumstances in which property commenced to be constructed on or after that date is taken not to have been used for that purpose.
Paragraph 124ZF(4)(a) restates the circumstances presently set out in existing sub-section (4), but confines them to buildings (and extensions, etc.) commenced to be constructed before 18 July 1985. Broadly, the property (being the whole or part of the prescribed part of a building) is to be taken not to have been used for the purpose of producing assessable income where -
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- it was used or available for use by any person wholly or principally for residential accommodation or was used or available for use wholly or principally in association with residential accommodation (sub-paragraph 124ZF(4)(a)(i)); or
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- it was used or for use by any person wholly or principally for exhibition or display in connection with the sale of the whole or any part of a building or in connection with its lease by any person for residential purposes (sub-paragraph 124ZF(4)(a)(ii)).
By paragraph 124ZF(4)(b), property that commenced to be constructed on or after 18 July 1985 is to be taken not to have been used for the purpose of producing assessable income if it is used, or for use, by any person wholly or principally for exhibition or display in connection with the sale of any building or part thereof. The paragraph relates to the exhibition or display of the whole or part of the property itself - for example, an on-site display home. It would not ordinarily apply to deny deductions in respect of the construction cost of a building within which are exhibited a variety of the components that might be incorporated in another building for sale - for example, an "open-plan" building constructed by a project home builder to house and exhibit model kitchens and bathrooms. The same test presently applies to buildings commenced to be constructed before 18 July 1985 and will continue to apply by virtue of new sub-sub-paragraph 124ZF(4)(a)(ii)(A).
Proposed sub-section 124ZF(4A) complements sub-section (4) by setting out further circumstances in which property commenced to be constructed on or after 18 July 1985 and used for the purpose of producing assessable income is deemed not to be used for that purpose.
The basic tests for the application of sub-section (4A) - that there be qualifying expenditure (see notes on clause 18) in respect of a building and that construction of the relevant building, extension, alteration or improvement commenced on or after 18 July 1985 - are set out in paragraphs (a) and (b) respectively. The other tests for its application - representing the two further circumstances (referred to in the preceding paragraph of these notes) in which relevant property is deemed not to be used for the purpose of producing assessable income - are described in sub-paragraphs (4A)(c)(i) and (c)(ii).
The first of these (sub-paragraph (4A)(c)(i)) is where property is used or is for use by its owner (or by a lessee who is eligible for deductions under Division 10D in respect of the property) wholly or principally for, or in association with, residential accommodation (i.e. the owner's or lessee's own residential accommodation). Two examples of this situation would be -
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- where a person owns an hotel and certain rooms in that hotel are wholly used by that person, or are wholly for that person's use, as his or her residential accommodation. In this example, the rooms would be deemed not to be used for the purpose of producing assessable income during the period they are used or for use by the hotel owner. Consequently, no deduction under Division 10D would be allowable in respect of the areas so used during the period that they were so used; and
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- where a person who owns his or her own home lets out part of it to a paying lodger so that there are parts of the home that are -
- • .
- exclusively for use by the owner;
- • .
- exclusively for use by the lodger; and
- • .
- for common use by the owner and the lodger.
- In this example, sub-section (4A) would deem those parts of the home that are for the owner's exclusive use, as well as those parts that are for common use (to the extent that use is attributable to the owner), to be not used for the purpose of producing assessable income. Consequently, while a full deduction would be allowable under Division 10D (assuming other requirements are satisfied) in respect of those parts of the home that are exclusively for use by the lodger, the deduction allowable in respect of the rooms for common use would be reduced by an appropriate amount.
The second situation in which sub-section (4A) applies (sub-paragraph (4A)(c)(ii)) is where, pursuant to an agreement that is not an exempt agreement, the property is used or is for use by an associate of the owner or eligible lessee wholly or principally for, or in association with, residential accommodation - i.e., as the residential accommodation of the associate. (A definition of "associate" is being inserted in sub-section 124ZF(1) by paragraph (a) of this clause.) The application of the sub-section in this situation is essentially as a safeguard against circumvention of sub-paragraph (4A)(c)(i), by having the ownership of property and its use as residential accommodation split between closely related entities. However, where the property is used as residential accommodation by an associate under an exempt agreement, sub-section (4A) does not apply to deem that property not to be used for the purpose of producing assessable income. An "exempt agreement" is described in new sub-sections 124ZF(1A) and (1B), being inserted by paragraph (e) of this clause (see notes on that paragraph).
Where either or both of the two situations set out in sub-paragraph (4A)(c)(i) or (ii) exist in relation to a building, extension, etc., the building, extension, etc. is deemed not to have been used for the purpose of producing assessable income except to the extent to which it is -
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- used or available for use by a person who is neither the owner (or eligible lessee) nor an associate thereof (paragraph (4A)(d)); or
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- used or available for use by an associate of the owner (or eligible lessee) pursuant to an exempt agreement to which those persons are parties (paragraph (4A)(e)).
If the building, extension, etc. is not used in either of the circumstances mentioned in paragraph (4A)(d) or (4A)(e), no deduction is to be allowable under either section 124ZH or section 124ZK of the Principal Act. Section 124ZH establishes a primary entitlement to deductions under Division 10D where a building, extension, etc. is used for eligible purposes, while section 124ZK authorises deductions in respect of the total or partial destruction of a building, extension, etc. that was used for eligible purposes.
If, however, a building, extension, etc. is used in any of the circumstances set out in paragraph (4A)(d) or (e), the amount of deduction allowable in respect of the building, extension, etc. will be determined under section 124ZJ. Section 124ZJ operates to reduce the amount of the deduction allowable under section 124ZH or 124ZK where, inter alia, the building (or extension, etc.) was used only partly for the purpose of producing assessable income. In these cases, the amount of the deduction allowable under either section 124ZH or 124ZK is reduced by such amount as the Commissioner of Taxation considers fair and reasonable.
Proposed sub-sections 124ZF(4) and (4A) will only render buildings, or parts thereof, ineligible for deductions under Division 10D during the period they are used in the circumstances set out in those sub-sections. If those circumstances cease to apply, deductions will be allowable under Division 10D - provided that all other eligibility requirements are met.
Paragraph (g) of clause 17 will amend sub-section 124ZF(5) of the Principal Act to restrict its application to a building (or part thereof) commenced to be constructed before 18 July 1985. Sub-section 124ZF(5) renders eligible for deductions under Division 10D certain buildings (or parts thereof) - such as hotel casinos and hotel convention centres - which would be eligible for deductions under Division 10C (i.e. deductions in respect of capital expenditure on traveller accommodation) but for the fact that they are specifically excluded. By deeming buildings of this kind not to be used for, or in association with, residential accommodation, the buildings become eligible for deductions under Division 10D. By virtue of the extension of Division 10D to residential income-producing buildings, buildings of the kind to which sub-section (5) presently applies that are commenced to be constructed after 17 July 1985 will automatically be eligible for deduction under the Division. The sub-section is therefore being amended so that it applies not for the purposes of amended Division 10D as a whole but only for the purposes of those provisions - new paragraph 124ZF(4)(a) and existing sub-section 124ZG(2) - relevant to pre-18 July 1985 buildings.
Paragraph (h) of clause 17 will correct a minor drafting error in paragraph 124ZF(5)(a) of the Principal Act by inserting a comma after the term "is used" in that paragraph. The effect of the amendment is to make it clear that the paragraph applies to a building (or part thereof) that is for use for, or is used for, the provision of a facility not commonly provided in a hotel, motel or guest house.
By amending sub-section 124ZF(6) of the Principal Act so that it applies for the purposes only of new paragraph 124ZF(4)(a) and existing sub-section 124ZG(2), paragraph (j) of clause 17 will restrict the application of sub-section 124ZF(6) to buildings, extensions, etc. the construction of which commenced before 18 July 1985. Broadly, sub-section 124F(6) presently treats as property used or for use as residential accommodation (and therefore as ineligible for deductions under Division 10D) property that -
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- is part of a person's home or is used wholly or principally for the purpose of operating a hotel, motel or guest house; and
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- but for sub-section 124ZF(6), would be taken not to be used for residential accommodation purposes.
The exclusion from Division 10D of any part of a person's home ensures that "home offices", for example, do not attract deductions. Although the application of sub-section (6) is to be confined to pre-18 July 1985 buildings, "home offices" that are part of buildings constructed on or after that date are to continue to be excluded from deductions under Division 10D (see notes on paragraph (k) of this clause). On the other hand, buildings used in hotel, motel or guest house operations, that were previously excluded from the Division, will come within its scope if their construction commenced after 17 July 1985.
Paragraph (k) will insert new sub-section 124ZF(6A) into the Principal Act. The purpose of sub-section (6A) is to maintain, for buildings, extensions, etc. commenced to be constructed after 17 July 1985, the existing exclusion from Division 10D of any part of a person's home that is used as, for example, a "home office". Such parts of houses are presently excluded under sub-section 124ZF(6) of the Principal Act but, by the amendment proposed in paragraph (j) of this clause, the operation of that sub-section is to be limited to buildings commenced to be constructed on or before 17 July 1985. By specifying that part of a person's home is to be taken to be used by that person wholly or principally for or in association with residential accommodation, sub-section (6A) ensures that new sub-section 124ZF(4A) (see notes on paragraph (f) of this clause) will apply to deem such a part of a post-17 July 1985 building not to be used for the purpose of producing assessable income.
Paragraph (m) of this clause will amend sub-section 124ZF(7) of the Principal Act, which ensures that a building (or part thereof) continues to be taken to be used or available for use for assessable income-producing purposes even though there is a temporary cessation of use in the circumstances set out in the sub-section. The amendment, which is of a technical nature only and does not alter the intended operation of sub-section 124ZF(7), will ensure that the sub-section applies not only in those cases where a building is "used or available for use" for income-producing purposes, but also where it is "for use" for those purposes.
Clause 18: Qualifying expenditure
Clause 18 of the Bill will amend section 124ZG of the Principal Act, which identifies expenditure that is qualifying expenditure for the purposes of Division 10D. The amendments proposed by this clause are part of the measures necessary to extend eligibility for deductions under Division 10D to residential income-producing buildings.
Sub-section 124ZG(1) of the Principal Act is the primary provision for identifying Division 10D qualifying expenditure and paragraph (1)(c) of that sub-section provides that, for expenditure to be classed as qualifying expenditure, it must be capital expenditure incurred on the construction of a building, or an extension, alteration or improvement, that is commenced to be constructed after 19 July 1982. The tests to be applied in identifying qualifying expenditure on buildings, extensions, etc. commenced to be constructed on or after 18 July 1985 are, however, somewhat different from those presently applicable under sub-section (1). Consequently, paragraph (a) of this clause proposes the amendment of paragraph 124ZG(1)(c) to limit its application to buildings commenced to be constructed after 19 July 1982 and before 18 July 1985.
Paragraph (b) of this clause will insert new sub-sections (2A) and (2B) into section 124ZG of the Principal Act for the purpose of identifying the amount of capital expenditure - on buildings, extensions, alterations or improvements commenced to be constructed on or after 18 July 1985 - that is to be an amount of qualifying expenditure for the purposes of Division 10D.
New sub-section (2A) is the counterpart of existing sub-section (1) and its terms largely mirror those of the existing sub-section. However, included within the Scope of sub-section (2A) is capital expenditure on the construction of a building, extension, etc. for residential use. Paragraphs (2A)(a) and (b) restate in the same terms paragraphs (1)(a) and (b) and set out the first two tests of qualifying expenditure - that is, it must be capital expenditure incurred by a person on the construction in Australia of a building, or of an extension, alteration or improvement of a building, the whole or part of which was to be owned or leased by that person.
The third test of qualifying expenditure - that construction of the building, extension, etc. in question must be commenced at a particular time and be completed - is set out in paragraph (2A)(c). Whereas existing paragraph (1)(c) (as proposed to be amended - see notes on paragraph (a) of this clause) provides that construction must have commenced after 19 July 1982 and before 18 July 1985, new paragraph (2A)(c) specifies that construction must have commenced after 17 July 1985. Paragraph (2A)(d) outlines the final test of qualifying expenditure and is in the same terms as existing paragraph (1)(d), except that it provides for buildings, extensions, etc. that, at the time of completion of construction, were for residential use, even though at that time they were not for use for income-producing purposes. Paragraph (2A)(d) requires that, at the time of completion of construction, the whole or the relevant part of the building, extension, etc. be for residential use or for use, or for disposal for use, for the purpose of producing income.
Where the requirements of paragraphs (2A)(a), (b) and (c) are met and the whole of the property is for use for a purpose specified in paragraph (d), all of the capital expenditure is qualifying expenditure (paragraph (e)). Where part only of the property is used for a specified purpose, so much only of the capital expenditure as is attributable to the relevant part is qualifying expenditure (paragraph (f)).
New sub-section (2B) applies for the purposes of paragraph (2A)(d) and provides that a building, extension, etc. is to be taken to be for residential use only if it is for use wholly or principally for, or in association with, residential accommodation.
Although capital expenditure on the construction of a building, extension, etc. for residential use may constitute qualifying expenditure where the construction commenced after 17 July 1985, as with any other Division 10D property, deductions are to be available only during a period that it was used for producing assessable income. It is also relevant that, in terms of sub-section 124ZH(3) of the Principal Act, deductions are available only over the 25 year period commencing on the first day after completion of construction on which the property was used for any purpose - that is, the period of 25 years is fixed, regardless of the use to which the property was put during that period.
In determining, as required by paragraph 124ZG(2A)(d), whether a building, extension, etc. or part thereof is for use for the purpose of producing income, neither paragraph 124ZF(4)(b) nor sub-section 124ZF(4A) has any application. Those provisions deal with circumstances in which buildings, extensions, etc. are not to be taken to be used for the purpose of producing assessable income.
Consequential on the insertion of new sub-section 124ZG(2A) by paragraph (b), paragraph (c) of clause 18 will amend sub-section 124ZG(3) of the Principal Act to extend its application to that new sub-section. By existing sub-section (3), Division 10D qualifying expenditure identified by sub-section 124ZG(1) does not include expenditure deductible under certain other provisions of the Act. Reflecting the fact that new sub-section (2A) also identifies qualifying expenditure for Division 10D purposes, the amendment will ensure that sub-section (3) continues to exclude that other deductible expenditure from the scope of the Division.
Clause 19: Reliance by Commissioner on return
This clause will insert new section 169A in the Principal Act. The new section is designed to facilitate "self-assessment" of income tax returns by making it clear that the Commissioner of Taxation may issue an assessment solely in reliance on the information in the taxpayer's return of income.
Under the self-assessment system there will generally be a prima facie acceptance of the calculation of taxable income in a return, although some obvious errors in returns may be corrected before an assessment is made. Sub-section 169A(1) will allow the Commissioner to accept the information disclosed in the taxpayer's return for the purposes of making an assessment.
Sub-section (2) will ensure that the correctness of an assessment cannot be called into question because a particular discretion has not been exercised by the Commissioner when making the assessment. The effect of the sub-section is to deem the exercise of any discretion by the Commissioner at the time of considering an objection against the assessment to have occurred at the time of making the assessment.
The amendments proposed by this clause will apply, by the operation of sub-clause 25(1), to original assessments made on or after 1 July 1986 in respect of the 1985-86 and subsequent years of income.
Clause 20: Amendment of assessments
Section 170 of the Principal Act sets out limitations on the power of the Commissioner of Taxation to amend an assessment. Under existing section 170, the Commissioner is not empowered to amend an assessment to correct an error of law. under the proposed system of self-assessment, an income tax return will not generally be subject to a technical examination prior to issue of a notice of assessment to enable errors of law to be detected and corrected. Accordingly, clause 20 proposes a number of amendments of section 170 to enable the Commissioner to amend an assessment for any reason including the correction of an error of law. Such amended assessments will be subject to the time limits presently specified.
Where a taxpayer has not made a full and true disclosure of all material facts necessary for a correct assessment and there is an avoidance of tax, existing sub-section 170(2) provides that an amended assessment to increase the liability of the taxpayer may be made, in a case of fraud or evasion, at any time, and, in any other case, within 6 years from when tax became due under the assessment. The amendment of the assessment, however, is limited to the correction of errors in calculation or mistakes of fact or the prevention of the avoidance of tax.
Paragraph (a) of clause 20 will amend sub-section 170(2) to remove these subject-matter limitations so that the Commissioner of Taxation will -
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- where fraud or evasion has occurred, at any time; and
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- where no fraud or evasion has occurred, within the present 6 year time limit,
The amendments proposed of sub-sections 170(3) and (4) by paragraphs (b) and (c) of clause 20 respectively are to the same general effect as the amendment proposed by paragraph (a). Sub-section 170(3), which authorises the amendment of an assessment increasing the liability of a taxpayer within 3 years where the taxpayer has made a full and true disclosure of all material facts, will be amended by paragraph (b) of clause 20 so that the Commissioner will have the power within that period to amend the assessment for any reason.
Paragraph (c) of clause 20 will similarly amend sub-section 170(4) which authorises the amendment of an assessment within 3 years reducing a taxpayer's liability to tax.
Paragraph (d) of clause 20 will omit sub-sections (8), (10A) and (12) of section 170 and is consequential upon the amendments of sub-sections 170(3) and (4). The sub-sections being omitted, which all contain specific amendment powers broader than those in sub-sections 170(3) and (4), are no longer necessary because the Commissioner will now be empowered to amend an assessment for any reason within 3 years.
The amendments proposed by this clause will apply, by the operation of sub-clause 25(1), to amendments of an original assessment in respect of the 1985-86 and subsequent years of income where the original assessment was made on or after 1 July 1986..
Clause 21: Payment of interest by taxpayer where assessment amended
Clause 21 will insert a new section - section 170AA - in the Principal Act. The new section will provide for the payment of interest at a prescribed rate by a taxpayer on an increase in tax payable in an amended assessment where the increase does not attract additional penalty tax (other than late lodgment penalty) under the provisions of Part VII of the Principal Act. Broadly, under that Part, additional tax is payable where, as a result of a false or misleading statement or the entering into of a tax avoidance arrangement, there has been an underpayment of tax. The rate of interest payable by a taxpayer will be the same as that applicable from time to time under the Taxation (Interest on Overpayments) Act 1983.
Interest will commence to run from the date on which the underpaid tax should have been paid (usually the due date for payment of the original assessment for the relevant year of income) and will end on the date on which the amended assessment is made.
The Commissioner will have power to remit interest payable by a taxpayer in appropriate circumstances.
More detailed explanations follow.
By sub-section 170AA(1), a taxpayer will, subject to the remaining provisions o the section, be liable to pay interest on an increase in tax under an amended assessment. The amount (referred to as the "principal amount") in respect of which interest is payable is the amount by which the tax payable under the amended assessment exceeds the tax payable under the assessment that was amended. Tax payable means the gross amount of tax assessed in respect of the taxable income less rebates of tax and certain credits such as those applicable to overseas tax paid. Credits for tax instalment deductions, prescribed payment system deductions or provisional tax are not deductible in ascertaining the amount of tax payable on which interest is to be charged.
Sub-section 170AA(2) gives effect to the policy that interest is not to be payable where a person is subject to a false or misleading statement or tax avoidance arrangement penalty in respect of the particular increase in tax. It provides that interest is not payable under sub-section (1) by a taxpayer where the taxpayer (sub-paragraph (b)(i)), a partner of the taxpayer (sub-paragraph (b)(ii)) or the trustee of a trust estate of which the taxpayer is a beneficiary (sub-paragraph (b)(iii)) is liable to penalty tax under Part VII of the Principal Act (other than a penalty under section 222 for a failure to furnish a return) in respect of the matter giving rise to the particular increase in liability. Interest is also not payable where such penalty tax has been fully remitted or, a taxpayer has been prosecuted in relation to the same act or omission giving rise to the underpayment of tax.
Sub-section 170AA(3) applies to situations where, as a result of an increase in tax payable on which interest is to be charged under sub-section 170AA(1), the taxpayer, a partner of the taxpayer or the trustee of a trust in which the taxpayer is a beneficiary becomes liable to an increased amount of additional penalty tax that was based on the original tax payable by the taxpayer. This could occur where an assessment of increased late lodgment penalty tax under section 222 of the Principal Act is made in respect of the taxpayer (sub-paragraph (b)(i)), an increase in additional tax payable by a defaulting partner under sub-section 223(2) (sub-paragraph (b)(ii)) or an increase in additional tax payable by a trustee of a trust estate under sub-section 223(4) (sub-paragraph (b)(iii)). Under the formula in sub-section 170AA(3) interest will be payable by the taxpayer, the defaulting partner or the trustee in the same proportion as the increased primary tax on which interest is payable bears to the total increase in primary tax.
The additional tax payable by a defaulting partner under sub-section 223(2) may be based on the primary tax payable by both the defaulting partner and any other partner. Where, for example, an increase in the additional tax payable by a defaulting partner is partly as a result of an increase in the primary tax payable by that partner and partly as a result of an increase in the primary tax payable by another partner, interest payable under sub-section 170AA(3) will be ascertained separately in respect of each component of the increase in additional tax.
Sub-section 170AA(4) sets out the basis of calculating interest payable by a taxpayer under the section. The period for which interest is payable is specified by paragraph (a) as commencing on the day upon which tax first became due and payable by the taxpayer under an assessment for the particular income year and ending on the day on which the amended assessment is made. This is the period in respect of which the revenue is to be recompensed for not having had the use of the tax underpaid. By paragraph (b) the rate of interest payable is the same as that applicable from time to time for the purposes of paying interest by the Commissioner to a person under the Taxation (Interest on Overpayments) Act 1983. In broad terms, this rate is the "long-term bond rate".
Sub-section 170AA(5) clarifies the calculation of the period during which interest runs under sub-section (4) in cases where the original tax was payable under an instalment arrangement or where the original due date for payment was extended. It provides that where an extension of time for payment of tax has been granted or an instalment arrangement approved under section 206 of the Principal Act, the commencement of the period in respect of which interest is payable is from a date (not earlier than the original due date for payment) to be determined by the Commissioner of Taxation. In effect, it ensures that instalment payment arrangements and extensions of time for payment may be authorised subject to the payment of interest in the event that tax is subsequently found to have been underpaid.
Sub-section 170AA(6) is a measure necessitated by the fact that, technically, a notice advising a taxpayer that no tax is payable, e.g., because the taxable income is below the threshold at which tax is assessed, or that the taxpayer has no taxable income for a particular year, is not an assessment for the purposes of the income tax law. It will ensure that a taxpayer will be liable to pay interest in respect of the amount of tax payable on assessment where the taxpayer had previously been notified that no tax was payable.
For the purposes of the section, sub-section (6) deems the notice advising that no tax was payable or that there was no taxable income to have been a notice of assessment (paragraph (c)) and the subsequent assessment to have been an amendment of that deemed assessment (paragraph (d)). Interest is then calculated under sub-section (4) In respect of the period commencing 30 days after service of the notice - a notional due date - and ending on the day on which the actual assessment is made.
Sub-section 170AA(7) sets an interest rate of 14.026% per annum until such time as regulations are made prescribing a different interest rate for the purposes of the Taxation (Interest on Overpayments) Act 1983. The present rate of interest payable under that Act is 14.026% per annum and, by virtue of paragraph 170AA(4)(b), the interest rate payable by a taxpayer under this section is to be that which is from time to time payable to a taxpayer in respect of an overpayment of tax. As explained earlier, the rate of interest is, broadly, equal to the rate payable on the longest term Treasury Bonds.
Sub-section 170AA(8) is an administrative measure designed to ensure that interest under sub-section 170AA(1) or (3) is not payable where the amount is less than 50 cents. Small amounts are not cost effective to impose and collect.
Sub-section 170AA(9) will require the Commissioner of Taxation to serve on a taxpayer liable to pay interest under this section a notice in writing specifying the period in respect of which the interest is payable, the amount of the interest and the date on which the interest is due and payable. At least 30 days must be allowed for payment of the interest.
Sub-section 170AA(10) allows the Commissioner of Taxation to incorporate the notice of interest due by a taxpayer in a notice of assessment that is being sent to the taxpayer. Generally, it may be anticipated that the amount of interest payable by a taxpayer will be notified in the notice of amended assessment.
By sub-section 170AA(11) the Commissioner of Taxation may remit the whole or any part of the interest payable by a taxpayer. It is not intended that the power of remission be exercised in the general run of cases. However, an example of where the remission power may be exercised would be where a taxpayer prepares a return in a particular way having regard to a decision of a court and, subsequent to lodgment of the return, a court of higher authority overturns that decision. The effect of this could be an unintended, but nevertheless valid at the time, understatement of taxable income by the taxpayer.
Sub-section 170AA(12) is a drafting device that provides or references to 'tax' or 'income tax' in certain provisions of the Principal Act to be read as including a reference to interest payable under section 170AA. It will therefore enable the collection and recovery of interest payable by a taxpayer in the same manner as income tax. In particular, it will mean that interest -
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- will be subject to payment by instalments or by an extended due date if the Commissioner of Taxation approves;
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- can be recovered from the trustee of a deceased taxpayer or from the liquidator of a company being wound up; and
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- can be waived in cases of serious hardship by the Relief Board.
Sub-section 170AA(13) provides that the calculation of an amount interest payable by a taxpayer is deemed not to be an assessment under the Principal Act. An effect of this is that a taxpayer cannot object against the imposition of interest nor have such imposition reviewed by a Board of Review. The absence of a right of review by a Board of Review is consistent with the existing policy of the law that additional tax payable at an effective rate at or under 20 per cent per annum is not subject to review.
Sub-section 170AA(14) is a drafting measure to ensure that references in the section to a taxpayer include a reference to a "penalty payer" referred to in sub-section (3). A penalty payer may be the taxpayer, a defaulting partner or a trustee of a trust estate (see notes on sub-section 170AA(3)). The sub-section will also mean that interest is not payable on an underpayment of additional tax on the undistributed income of a private company under Division 7 of Part III of the Principal Act. The reason for this is that the Government has, in the context of the proposed imputation system of company tax, announced its decision to abolish Division 7 tax and, given the complexity of the provisions that would be required to impose a properly calculated amount of interest, it has been decided not to impose interest in this situation.
The amendments proposed by this clause will apply, by the operation of sub-clause 25(1), to amendments of an original assessment in respect of the 1985-86 and subsequent years of income where the original assessment was made on or after 1 July 1986.
Clause 22: Refunds of amounts overpaid
Clause 22 will amend paragraph 172(1)(a) of the Principal Act. The proposed amendment will ensure that, where, after the imposition of interest, an amendment of an assessment has reduced a person's tax liability, any interest formerly payable under section 170AA, is to be recalculated as though the amount by which the tax was reduced was never payable.
Clause 23: Adjustment of tax after appeal
The amendment proposed by this clause is of similar effect to that being made by clause 22. It will ensure that, where an amendment of an assessment as a result of an appeal or reference has reduced a person's tax liability, interest payable under proposed section 170AA is to be recalculated as though the amount by which the tax has been reduced was never payable.
Clause 24: Commissioner may collect tax from person owing money to taxpayer
This clause expands the definition of "tax" in section 218 of the Principal Act so as to include interest payable under proposed section 170AA. Under section 218 the Commissioner of Taxation is authorised to collect ("garnishee") tax that is owing by a taxpayer from a person who, broadly, owes money to the taxpayer or has authority to pay money to the taxpayer. By this provision the Commissioner will be empowered to garnishee moneys to satisfy the payment of interest due.
Clause 25: Application of amendments
This clause, which will not amend the Principal Act, specifies the years of income in which, or the dates from which, various amendments proposed in Part II of the Bill will first apply. The clause also contains interpretative provisions relating to certain amendments.
An explanation of the application provisions - sub-clauses 25(1) and (3) to (5) - is contained in the notes on the clauses to which each of those provisions applies.
The first of the interpretative provisions - sub-clause 25(2) - is a drafting measure by which references to assessments and amended assessments in sub-clause 25(1) include references to deemed assessments and deemed amended assessments under proposed sub-section 170AA(6) of the Principal Act (see notes on clause 21).
The second of the interpretative provisions - sub-clause 25(6) - applies the existing provisions of section 102A of the Principal Act for the purposes of the amendments made by clauses 12, 13, 14 and 15 of the Bill.
Clause 26: Amendment of assessments
Clause 26, which will not amend the Principal Act, is a standard measure that will ensure that the Commissioner of Taxation has authority to re-open an income tax assessment made before the Bill becomes law if that should be necessary in order to give effect to the various amendments contained in Part II.
PART III - AMENDMENTS OF THE INCOME TAX (INTERNATIONAL AGREEMENTS) ACT 1953
Clause 27 formally provides that references to the "Principal Act" in Part III of this Bill relate to the Income Tax (International Agreements) Act 1953
This clause will amend section 3 of the Principal Act, which contains a number of definitions for the more convenient interpretation of the Act.
Clause 28 will insert in sub-section 3(1) of the Principal Act a definition of the term 'the Chinese airline profits agreement'. This term is defined to mean the airline profits agreement with China which is, by Clause 30 of this Bill, to be incorporated as Schedule 26 to the Principal Act.
Clause 29: Airline profits agreement with the People's Republic of China
Under the terms of the agreement, it is to enter into force when each country has formally notified the other of the completion of the procedures necessary for it to give the agreement the force of law, and thereupon it is to have effect in respect of profits and revenues derived on or after 1 July 1984. To this end, sub-clause 29(1) will insert a new section - section 11Q - in the Principal Act to give the force of law in Australia to the airline profits agreement.
By sub-section (1) of proposed section 11Q, the agreement, when it enters into force, will be deemed to have had effect in Australia in respect of profits and revenues derived on or after 1 July 1984. Sub-section (2) provides for the date on which the agreement enters into force to be notified in the Gazette as soon as practicable thereafter. As the agreement will enter into force at some future date, this will provide a readily available and authoritative source from which persons may ascertain the fact and date of entry into force of the agreement.
By sub-clause 29(2), which will not amend the Principal Act, the Commissioner will have the power to amend any assessment made before the Chinese airline profits agreement comes into force in order to give effect to that agreement.
This clause will add the airline profits agreement with China as Schedule 26 to the Principal Act.
TAXATION AGREEMENT WITH THE PEOPLE'S REPUBLIC OF CHINA ON AIRLINE PROFITS
This agreement effectively reserves to each country the right to tax profits and revenues derived by its international airline from international air transport operations, including profits derived from participation in a pool service, a joint transport operating organisation or an international operating agency. Any profits or revenues derived by the airline of one country from air transport operations confined solely between places in the other country may be taxed in that other country.
The taxes subject to the agreement are the existing income taxes of the Commonwealth of Australia and, in the case of the Peoples Republic of China, income tax concerning foreign enterprises and the consolidated industrial and commercial tax including any additional tax on that tax. The agreement will also apply to any substantially similar taxes subsequently imposed by either Government.
Article 2 - General Definitions
This article contains definitions of a number of terms used in the agreement. One term defined in this article is an "enterprise of one of the contracting states". By sub-paragraph (1)(b), that term is defined to mean an enterprise designated under an agreement between the Government of Australia and the Government of the People's Republic of China to operate authorised scheduled air services between those countries and that has its place of effective management in Australia or the People's Republic of China.
Paragraph (2) of the article is an interpretative clause which provides that, in the application of the agreement by each country, any term not defined in the agreement shall, unless the context otherwise requires, have the meaning which it has under the laws of that country relating to the taxes to which the agreement applies.
Article 3 - Air Transport Profits and Revenues
Paragraph (1) of this article is the operative provision of the agreement. It provides for reciprocal exemption from tax by Australia and China of profits and revenues from the operation of aircraft, including sales of tickets and documents relating to such operations, derived by an enterprise of the other country.
Paragraph (2) effectively limits the scope of paragraph (1) to profits and revenues from international air transport operations by providing that, where such profits and revenues are derived by an airline of one country from the carriage of passengers, livestock, mail, goods or merchandise solely from one place in the other country to another place in that country, those profits and revenues may be taxed in that other country. Paragraph (3) ensures that the provisions of paragraphs (1) and (2) will apply to profits and revenues derived by an enterprise of one of the countries from a pool service, a joint transport operating organisation, or an international operating agency.
This article contains provisions relating to the commencement of operation of the agreement. The Government of each country is to give written notice to the other when all its legal requirements to give the agreement the force of law have been completed. The agreement will come into force on the date of the later of these notifications, but will then have effect in respect of profits and revenues derived on or after 1 July 1984.
The agreement will continue in force indefinitely but the Government of either country may, by giving six months prior written notice to the Government of the other country in accordance with this article, terminate the operation of the agreement. In that event, the agreement will cease to be effective in relation to profits and revenues derived on or after 1 January in the calendar year following that in which the six months notice expires.
PART IV - AMENDMENTS OF THE PAY-ROLL TAX (TERRITORIES) ASSESSMENT ACT 1971
In terms of this clause, the Pay-roll Tax (Territories) Assessment Act 1971 is, in Part IV of the Bill, referred to as "the Principal Act".
The Pay-roll Tax (Territories) Act 1971 imposes tax in the Australian Capital Territory, at a rate of 5%, on any wages paid or payable by an employer either -
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- in the ACT, other than in respect of services rendered wholly in a State or the Northern Territory; or
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- outside the ACT, for services rendered wholly in the ACT.
For the purposes of determining the amount of tax payable by an employer during a full income year, the Principal Act authorises a deduction against the employer's Australia-wide wages paid or payable during the income year equal to the amount (the annual exemption level) prescribed under the Principal Act. The deduction is reduced by $2 for every $3 by which Australia-wide wages exceed the exemption level. The current annual exemption level is $170,000, with the result that an employer paying annual wages in excess of $425,000 is not entitled to any deduction from those wages. By arranging for their businesses to be conducted by a number of separate entities, employers have been able to substantially reduce, or avoid completely, the liability to pay-roll tax in respect of wages of the businesses.
Amendments proposed by clause 37 of the Bill will insert into the Principal Act "grouping provisions" to treat, in certain circumstances, 2 or more employers as an employer group for pay-roll tax purposes. Where such a group is constituted, only one member of the group, the designated group employer, will be entitled to benefit from the annual exemption level. All other members of the group will be required to pay pay-roll tax on their ACT-related wages. In the event that the group members do not nominate a designated group employer, no group member will benefit from the exemption level.
For the purposes of the grouping provisions, a new group will be created whenever the composition of an existing group alters. Where a group is constituted for a full financial year, an annual calculation will be made to determine whether the pay-roll tax paid is sufficient to cover the group's liability. In the event that insufficient tax has been paid, each group member will be jointly and severally liable for payment of the outstanding amount. where there has been an overpayment of tax, that overpayment will be refunded to the designated group employer or applied against any other outstanding tax liability of that employer. If a group exists for only part of the year of income, the amount of pay-roll tax payable will be calculated by reference to that proportion of the financial year.
By sub-clause 2(2) and clause 41, the grouping provisions are to apply to wages paid or payable on or after the first day of the month following the month in which the Bill receives the Royal Assent.
Clause 32 of the Bill proposes amendments of section 4 of the Principal Act consequent upon the insertion - by clause 37 of the Bill - of new Part IVA into the Principal Act. Section 4 sets out a number of definitions and interpretative provisions necessary for the operation of the Principal Act, and Part IVA contains the proposed grouping provisions.
The following new definitions are to be inserted in sub-section 4(1) by paragraphs be (a) and (b)d of this clause. The new definition of "tax" is to be substituted for the existing definition of that term.
- "group" is defined to mean a group constituted under Part IVA - that is, a group for the purposes of the grouping provisions in Part IVA (see the notes on new sections 21B to 21E) .
- "tax" means not only tax referred to in sections 10 and 15A of the Principal Act (as provided for in the existing definition of the term) but also tax referred to in proposed new sub-sections 21J(5) and 21K(6) of Part IVA. Those sub-sections impose tax on group members as a consequence of annual and part-year adjustments respectively.
Paragraph (c) of clause 32 will insert new sub-sections 4(4) and 4(5) into the Principal Act. By sub-section (4), it is made clear that, wherever there is a reference in the Act to wages paid or payable by a member of a group, that reference is to those wages paid or payable while that member is a member of a group. As a consequence, for example, in determining the pay-roll tax liability for a group constituted for part only of a year, it is only the wages paid or payable in respect of that part which are to be taken into account. Proposed sub-section 4(5) provides that, unless the contrary intention appears, a reference in Part V, VI, VII or IX of the Principal Act (which govern, broadly, collection and recovery of tax, objections and appeals, penalty tax and certain miscellaneous provisions respectively) to an employer includes a reference to a person who is not an employer but who is liable for tax under sub-section 21J(5) or 21K(6). An employer is, by virtue of the definition in sub-section 4(1), a person who pays or is liable to pay wages. However, sub-sections 21J(5) and 21K(6), which operate to impose additional tax on group employers as a result of annual or part-year adjustments, could, in certain circumstances, apply to group members who are not employers - that is, those who carry on a business but do not pay wages. The inclusion of sub-section 4(5) will ensure that those group members have the same rights and obligations as persons who pay or are liable to pay wages.
Section 12 of the Principal Act provides for a prescribed amount to be deducted from the wages included in a monthly pay-roll tax return lodged by an employer, for the purpose of determining pay-roll tax liability. To ensure that members of a group constituted under proposed Part IVA of the Principal Act are not entitled to the benefit of the monthly deduction (but see the notes on new section 21H, being inserted by clause 37), this clause will limit the application of section 12 to employers who are not members of a group by inserting a definition of wages in sub-section 12(9). Under the definition, "wages" as referred to in section 12 are to exclude those paid or payable by a group member.
Clause 34: Refund or rebate of tax on annual adjustment
Adjustments of pay-roll tax liabilities on an annual basis are, in relation to entitlements to refunds or rebates, governed by provisions of section 14 of the Principal Act. The amendment proposed by this clause - to insert in sub-section 14(9) definitions of "employer in Australia" and "wages" - will effectively limit the application of the section to those employers who are not group members. For the purposes of section 14, the term "employer in Australia" does not include an employer in Australia who is a member of a group. Similarly, "wages" do not include wages paid or payable by an employer as a member of a group. Refunds in the case of group members are dealt with in new sections 21J and 21K (see notes on clause 37).
Clause 35: Tax payable on annual basis
Section 15A of the Principal Act applies to employers who furnish returns otherwise than on an annual basis and provides for the payment of further tax on the basis of an adjustment at the end of the financial year where there has been deducted, in monthly or other periodic returns lodged by an employer, an amount in excess of the exemption entitlement calculated on an annual basis. Sub-section 15A(3) is to be amended by this clause to insert a definition of "taxable wages" which, in relation to the section, does not include wages paid or payable by an employer as a member of a group. As with the amendments proposed by clauses 33 and 34, the amendment will ensure that the provision only applies to employers who are not group members. sections 21J and 21K deal with the relevant adjustments in the case of group members (see notes on clause 37).
Clause 36 will amend section 16 of the Principal Act, which requires an employer to register as an employer for ACT pay-roll tax purposes, where wages are paid during a month, either wholly or partly in the ACT, at a rate (currently) in excess of $3,269.23 per week on an Australia-wide basis. In line with the proposed introduction of grouping provisions by clause 37, any employer who is a group member will be required to register, irrespective of the amount of wages that employer pays.
The amendments proposed by paragraph (a) (to make sub-section 16(1) subject to new sub-section 16(1A)) and paragraph (b) of clause 36 (to delete reference to a specific weekly rate of wages) ensure that any employer who pays or is liable to pay taxable wages during a month is required to register for pay-roll tax purposes. However, by virtue of the proposed inclusion of new sub-section 16(1A) by paragraph (c), an employer who is not a member of a group will not be required to register unless monthly taxable wages are paid at a rate in excess of $3,269.23 per week or such higher rate as is prescribed.
Clause 37: PART IVA - GROUPING PROVISIONS
This clause will insert new Part IVA into the Principal Act to provide that certain employers are to be grouped together for the purpose of ascertaining the employers' pay-roll tax liability.
Section 21A contains a number of definitions necessary for the operation of proposed new Part IVA.
- "business" is defined to include -
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- a person's profession, trade, vocation or calling (paragraph (a));
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- any other activity carried on by a person for fee, gain or reward (paragraph (b)); and
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- a person's activity that consists of employing persons to perform duties for or in connection with another business (paragraph (c)),
- whether the activity is carried on by the person alone or with other persons. The definition of business is relevant for determining whether a group is constituted under the provisions of new sections 21C and 21D (see notes on those sections).
- "corporation" is defined as having the same meaning as in the Companies Act 1981, where it means any body corporate, whether formed or incorporated within or outside the ACT, including any company, any foreign company and any recognised company but not including certain public authority corporations, credit unions and building societies. In terms of proposed section 21B, two corporations will constitute a group in certain circumstances.
- "deductible amount" in relation to a group in relation to a financial year is the amount of the designated group employer's deduction entitlement calculated in accordance with the formula set down in the definition. In effect, it is the equivalent of an employer's entitlement under section 14 of the Principal Act, but is calculated by reference to total wages paid by all members of the group, as group members. The deductible amount allowable to a designated group employer affects the calculation of annual and part year adjustments in terms of section 21J and 21K respectively.
- The formula
applies in relation to the 1985-86 and subsequent financial years. For the 1985-86 financial year, the formula applies only for the period from the date of commencement of the grouping provisions (as established by sub-clause 2(2) of the Bill) until 30 June 1986 - the "initial period" (as defined).(A)/(B)*(CD - ((2H)/(3))) - In the formula, A represents the amount of taxable wages (as defined in section 10 of the Principal Act) paid or payable by the members of the group during the financial year. As a consequence of proposed sub-section 4(4) of the Principal Act, those wages are taxable wages paid or payable during the period that the members of the group are members of that group.
- B in the formula is the total of both the taxable wages (i.e. the amount represented by A) and the interstate wages (as defined) paid or payable by the group members during the financial year. As is the case with A, it is only the wages paid or payable by the group members, while they are members of the group, that are to be taken into account.
- C is, in effect, the maximum annual exemption level deduction entitlement available under section 14 of the Principal Act in respect of the financial year. Thus, for the 1985-86 financial year, the amount is $170,000. In subsequent financial years, the amount will be an amount prescribed by regulations under sub-section 14(4C) of the Principal Act. If there are two or more amounts prescribed in relation to periods in a year, the aggregate of the amounts calculated pursuant to sub-paragraph 14(4A)(h)(i) of the Principal Act, will be taken to be C.
- D represents a factor calculated using the formula
where -(E-F)/(G)- E is, in relation to the 1985-86 financial year, the number of days in the initial period during which there was a designated group employer in respect of the group. In subsequent financial years, E is the number of days in that financial year when there was a designated group employer for the group;
- F is, in the 1985-86 financial year, the number of days in the initial period in respect of which neither taxable nor interstate wages was paid by a group member. In subsequent financial years, F is the number of days, in that year, in which neither taxable nor interstate wages was paid or payable by the members of the group as group members; and
- G is, in all cases, the number of days in the relevant financial year.
- The value for H is obtained by deducting from the total of the taxable and interstate wages paid by the group members (i.e. component B) the amount calculated by multiplying components C and D.
- The following example, applied to the initial period, illustrates the calculation of the deductible amount in respect of a group. The example proceeds on the assumptions that -
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- the initial period is from 1 June 1986 to 30 June 1986;
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- total taxable wages of the group during that period are $15,000;
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- total interstate wages paid or payable by group members during the initial period are $5,000;
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- taxable wages are paid by a group member for the entire initial period; and
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- there is a designated group employer for that initial period.
- The deductible amount in this instance would therefore be -
(15,000)/(20,000)*(170,000 * ((30 - 0)/(365)) - ((2)/(3)*(20,000 - 170,000 * (30)/(365))))= (3)/(4)*((13,973 #) - (2)/(3)(6,027 #))= (3)/(4)*(9,955)
# rounded to nearest whole dollar.= (7,466 #) - As a consequence, the designated group employer, in calculating pay-roll tax liability for the initial period, would be entitled to deduct $7,466 from the total taxable wages paid or payable by that employer during that period.
- "designated group employer" is the employer who, as a member of a group, is the designated group employer pursuant to section 21G. It is the designated group employer only who, as a group member, is entitled to the benefit of the annual exemption level deduction.
- "financial year" means the 1985-86 financial year (commencing on 1 July 1985) or a subsequent financial year.
- "initial period" is defined to mean the period commencing on the day on which section 21A comes into operation - which, by virtue of sub-clause 2(2) of the Bill, is the first day of the month following the month in which this Bill receives the Royal Assent - and ending on 30 June 1986. The term of the initial period affects the calculation of the deductible amount (as defined) in relation to the 1985-86 financial year.
- "interstate wages" are those wages that are taxable wages under a corresponding law. Corresponding law is defined in sub-section 4(1) to mean "a law of a State or of the Northern Territory relating to the imposition upon employers of a tax on wages paid or payable by them and the assessment and collection of that tax". The extent of interstate wages paid or payable by members will, in terms of the definition of "deductible amount", affect the amount claimable by the designated group employer.
- "return period", in relation to an employer, is the period for which that employer is required to provide the Commissioner with a pay-roll tax return under section 17 or 18 of the Principal Act. While returns are generally required monthly, the Commissioner may authorise the adoption of some other periodic basis.
Section 21B: Grouping of corporations
Section 21B operates to group together two corporations that are related corporations by virtue of sub-section 7(5) of the Companies Act 1981. Under that sub-section, where a corporation is -
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- the holding company of another corporation;
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- a subsidiary of another corporation; or
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- a subsidiary of the holding company of another corporation,
Section 21C: Grouping where employees used in another business
By virtue of section 21C, where an employee of an employer performs duties wholly or principally for or in connection with a business carried on by other persons, both the employer and each of the other persons carrying on that business are to be taken to constitute a group (paragraph 21C(1)(a)). It is not necessary that the business be carried on by the person and the employer.
Similarly, in terms of paragraph 21C(1)(b) a group consisting of an employer and another person are to be taken to exist where the employer has made an agreement with that other person that an employee of the employer will perform duties in relation to a business carried on by that other person. It is not necessary that the agreement be restricted to the performance of duties - it may also, for example, include provision for the supply of goods.
For the purposes of the section, sub-section 21C(2) defines agreement in broad terms as being an agreement, arrangement or understanding, whether formal or informal, express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings.
Section 21D: Grouping of commonly controlled businesses
Persons who carry on commonly controlled businesses are grouped together under the provisions of proposed section 21D.
In circumstances where a person has, or 2 or more persons have together, a controlling interest in each of two businesses, sub-section 21D(1) operates to group together all the persons who carry on those businesses. A person who owns more than one business (as distinct from having a controlling interest in a business) would, as an employer under the existing law, be required to return, for pay-roll tax purposes, all wages paid in respect of those businesses.
What constitutes a controlling interest in a business is laid down in sub-section 21D(2). Where a business is carried on by a corporation, a person or 2 or more persons together shall be taken to have a controlling interest only if that person or those persons together -
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- effectively control the voting power of any one or more of the directors of a corporation who is or are able to exercise a majority vote at directors' meetings (sub-paragraph 21D(2)(a)(i));
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- may effectively control 50% or more of the share voting power of the corporation (sub-paragraph 21D(2)(a)(ii)).
Paragraph 21D(2)(b) applies to determine whether a person, or 2 or more persons, together have a controlling interest in a partnership-run business. Where that person owns or those persons own together 50% or more of the partnership capital (sub-paragraph 21D(2)(b)(i)) or is or are together entitled to 50% or more of the partnership profits (sub-paragraph 21D(2)(b)(ii)), they will be considered to have a controlling interest in any business carried on by the partnership. For example, in a partnership to which A, B and C contribute capital of $10, $10 and $5 respectively, although none of the partners has a controlling interest on an individual basis, any two of the partners together would be taken to have a controlling interest. This circumstance would be relevant for sub-section 21D(1) purposes where, for example, A and B are also in partnership with D and have capital contributions in the same proportions. In these cases, A and B would be taken to have a controlling interest in both the partnerships with the consequence that all persons carrying on the partnership businesses (i.e. A, B, C and D) would be grouped together.
A person who has a 50% or more beneficial interest in a trust has a controlling interest in any business carried on by the trust. Similarly, 2 or more persons together having a 50% or greater interest as beneficiaries in a trust will be taken to have such a controlling interest (sub-paragraph 21D(2)(c)).
In any case where a person is the sole owner of a business or 2 or more persons are the owners of a business that person or those persons will be considered to have a controlling interest, irrespective of whether that ownership is in the capacity of trustee or trustees of a trust (paragraph 21D(2)(d)).
In terms of sub-section 21D(3), where a corporation has a controlling interest in a business, it will also be taken to have a controlling interest in any other business in which a related corporation (pursuant to sub-section 7(5) of the Companies Act 1981 - see notes on section 21B) has a controlling interest. Thus, for example, if company A is a related corporation of company B, company A would also be taken to have a controlling interest in any business in which company B has a controlling interest.
Sub-section 21D(4) operates to deem a person who has, or persons who together have, a controlling interest in a business to also have a controlling interest in any other business in which the person or persons who carries on, or carry on, the first-mentioned business has or have a controlling interest. By way of example, if A has a controlling interest in a business X carried on by A and B, and A and B together have a controlling interest in business Y carried on with C, then A individually would be deemed by sub-section (4) to have a controlling interest in business Y. Sub-section 21D(1) would in these circumstances operate to treat A, B and C as a group.
In cases where the trustee or trustees of a trust have a controlling interest in a business, any beneficiary (or beneficiaries) in respect of 50% or more of the value of the interests in that trust is, by virtue of sub-section 21D(5), also deemed to have a controlling interest in that business. The sub-section would operate, for instance, to deem any such beneficiary or beneficiaries to have a controlling interest in any corporation in which the trustees of the trust hold 50% or more of the voting power.
Sub-section 21D(6) is an interpretative provision by virtue of which a reference in section 21D (principally in sub-section (1)) to 2 businesses does not include a reference to 2 businesses both of which are owned by the same person (other than a trustee). The effect of the sub-section is to make it clear that a single employer is not, as such, subject to the grouping provisions. The existing provisions of the Principal Act, in subjecting to tax "wages that are paid or payable by an employer" (sub-section 10(3A)), already result in that person returning the total wages of those 2 businesses.
In determining whether a beneficiary under a discretionary trust is, for the purposes of paragraph (2)(c) and sub-section (5), a beneficiary in respect of 50% or more of the value of the interests in that trust, sub-section 21D(7) operates to deem any person who may benefit under the trust to be such a beneficiary.
Section 21E: Smaller groups subsumed into larger groups
If as a result of the application of section 21B, 21C or 21D a person is a member of 2 or more groups - termed "smaller groups" - all of the members of those groups are, effectively, grouped together to form a single group (sub-section 21E(1)). Whenever this grouping occurs, the smaller group ceases to be a group for the purposes of the Principal Act (sub-section 21E(2)). As an example, if A, B and C are members of, and constitute, a group under section 21B, 21C or 21D, section 21E will operate to group them with the members of the group constituted by A, D and E. As a consequence, these 2 smaller groups would cease to be groups and be replaced by a larger group having as its members A, B, C, D and E.
Section 21F: Exclusion of persons from groups
Because of the potentially wide scope of the provisions, section 21F provides that the Commissioner of Taxation may exclude persons ("independent persons") from a group in certain circumstances. The exclusion operates where the Commissioner is satisfied that, having regard to the nature of the businesses, to the nature and degree of ownership and control of each of the businesses carried on by the group members and to any other relevant matters, a business (or each of the businesses) carried on by the independent person is substantially independent of the businesses carried on by the other group members (paragraphs 21F(1)(a) and (b)). Relevant matters which might be taken into account would include the extent to which group members have independent resources and the extent of management, administration and financial independence between the person and the other group members.
Any exclusion of an independent person from a group is operative from the date specified by the Commissioner in a written order served on the independent person. The date specified in the order can only be the date of the order itself or an earlier date. The Commissioner may also specify in the order such circumstances in relation to its making as are appropriate (see notes on sub-section 21F(3)).
Sub-section 21F(2) prevents the Commissioner from making an order excluding a corporation from a group of which a related corporation (as defined in the Companies Act 1981) is a member. These corporations, which are automatically grouped together pursuant to section 21B, always constitute a group for pay-roll tax purposes.
In making an order under sub-section (1), the Commissioner may specify those factors and circumstances which were taken into account in determining to exclude the independent person from the group. By virtue of sub-section 21F(3), a person excluded from a group is required to notify the Commissioner in writing within 7 days if the circumstances specified in the order alter in a material respect. Such a notification may be required, for example, if a specified reason for exclusion of the independent person is the independence of its management and administration from other group members and subsequent alterations to the management structure are such that that independence no longer exists.
In respect of each day on which a person contravenes the requirement of sub-section (3) to notify the Commissioner of any material change in the circumstances specified in a sub-section (1) exclusion order the person is, under sub-section 21F(4), guilty of an offence punishable on conviction by a fine of up to $50. Failure to notify such a change would also be an offence under paragraph 8C(d) of the Taxation Administration Act 1953, punishable on conviction by a fine of up to $2000 for a first offence, a fine of up to $4000 for a second offence and a fine of up to $5000 and/or 12 months imprisonment for a third or subsequent offence. Although, as a result, a person may be guilty of an offence under both the Principal Act and the Taxation Administration Act in respect of the failure to notify, the person cannot, in terms of sub-section 30(1) of the Acts Interpretation Act 1901, be punished twice for the same offence. As a general rule, prosecution action would be taken under sub-section 21F(4) of the Principal Act, unless action under section 8C of the Administration Act would be more efficacious - for example, because conviction under section 8C would enable the court to order compliance with the requirement of sub-section 21F(3).
Sub-section 21F(5) enables the Commissioner to revoke an order made under sub-section (1) to exclude a person from a group where he is no longer satisfied, in terms of paragraph 21F(1)(b), that that person carries on a business substantially independently of another group member (paragraphs (a) and (b)). Paragraph (c) provides that, except where paragraph (d) applies, the revocation will have effect from the date on which a written notice of revocation is served on the previously excluded person. Paragraph (d) applies where the revocation is as a result of a change, in a material respect, in the circumstances specified in the exclusion order. In such cases, the revocation will be effective from the date of the change or, if there is more than one change, from the date of the earliest change. As from the date of service, or the date of change in circumstances (as appropriate), a new group is constituted and the wages paid or payable by the previously excluded person will be taken into account in determining the availability of any exemption level deduction to the designated group employer for that new group.
Section 21G: Designated group employer
The designated group employer - the only member of the group entitled to a monthly or annual reduction in pay-roll tax payable - may be nominated as such by all the group members. In terms of sub-section 21G(1), that written nomination is to be in the form approved by the Commissioner and signed by or on behalf of all the group members. In the event that the members of the group fail to nominate a designated group employer, each group member will be liable for pay-roll tax in respect of all wages paid or payable by that member - that is, no member will benefit from any monthly or annual reduction in pay-roll tax liability.
Where the members of a group have nominated a designated group employer, that designation will commence to operate either on the first day of the return period that commenced prior to the date of lodgment of the notice (paragraph 21G(2)(a)) or on the first day of such later return period as is specified in the notice (paragraph 21G(2)(b)). The return period, as defined in section 21A, will in most cases be a month.
A designated group employer will cease to be such, in relation to a group, if either -
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- the composition of the group alters (paragraph 21G(3)(a)); or
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- the group members lodge with the Commissioner a written notice, signed by or on behalf of each group member, revoking the designation (paragraph 21G(3)(b)).
The cessation of the designation by virtue of the operation of paragraph (3)(a) is effective from the first day of the return period during which the composition of the group alters. When the group alters, a new group is constituted and, unless a further nomination of a designated group employer is made, no group member is entitled to a reduced pay-roll tax liability. Similarly, the cessation of the designation by virtue of the operation of paragraph (3)(b) is also effective from the first day of the return period during which the notice of revocation is lodged with the Commissioner. However, sub-section 21G(4) operates to negate the effectiveness of a notice under paragraph (3)(b) unless -
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- before the notice is lodged, the Commissioner has consented in writing to such lodgment (paragraph (4)(a)); or
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- at the time the notice is lodged, the group members lodge a further notice under sub-section 21G(1) designating another group member as designated group employer (paragraph (4)(b)).
The Commissioner would consent to the lodgment of a notice under paragraph (3)(b) in instances where, for example, the level of group wages was such that there would be no group entitlement to any deduction.
Section 21H: Nominated deduction
Section 21H provides for the nomination of the monthly amount - termed the "statutory amount" - that the designated group employer will be entitled to deduct from wages included in a return lodged with the Commissioner. All other group members will be required to pay tax on their total ACT-related wages. Effectively, the statutory amount is the equivalent of the amount claimed pursuant to section 12 of the Principal Act by an employer, not being a group member, as the deduction entitlement based on the level of wages paid by that employer - in those cases, the maximum monthly deduction is (currently) $14,166.67, being 1/12 of the present maximum annual exemption level of $170,000. In the case of the designated group employer, however, that amount is to be calculated by reference to the total Australia-wide wages paid or payable by the group members.
Sub-section 21H(1) determines, for the purpose of calculating the amount of tax payable by a designated group employer in relation to a return period, the amount deductible from the wages included in a return lodged by the designated group employer (pursuant to section 17 or 18 of the Principal Act), or from an amount of wages assessed by the Commissioner where either the designated group employer has failed to furnish a return or the Commissioner is not satisfied with a return furnished (section 23 of the Principal Act).
Where a return or assessment relates to a one month period, the amount to be deducted is the "statutory amount" nominated by the designated group employer in terms of sub-section 21H(3) (paragraph 21H(1)(a)). For periods of part only of a month, paragraph 21H(1)(b) lays down a formula for calculating the amount that is deductible. As a result of the application of that formula, the statutory amount is reduced proportionately, based on the number of days in the relevant part of the month as a proportion of the number of days in the month.
The amount deductible where a return or assessment relates to a period in excess of a month is calculated by reference to a formula set down in paragraph 21H(1)(c). In terms of that formula, the statutory amount is multiplied by the number of whole months in the period, to which figure is added an amount, referable to any part of a month in that period, calculated on the same basis as applies under paragraph (b).
Sub-section 21H(2) provides that the statutory amount referred to in sub-section (1) is the amount specified in a written nomination lodged with the Commissioner pursuant to sub-section (3), although in those cases where the designated group employer does not lodge such a nomination the statutory amount is nil. The effect of not lodging a nomination therefore is that all members of the group, including the designated group employer, will be liable to pay-roll tax in respect of their total ACT-related wages.
The nomination of the statutory amount may, pursuant to sub-section 21H(3), be made in the notice lodged by the group members under sub-section 21G(1) designating one of the members to be the designated group employer. The amount must not exceed the relevant amount for the purposes of sub-section 12(9) of the Principal Act (currently $14,166.67) and must be calculated in the manner specified in the approved sub-section 21G(1) form. In practice, the amount nominated will be determined by reference to the total taxable and interstate wages paid or payable by the group members and will be a proportionate part of the 'relevant amount' defined in sub-section 12(9) of the Principal Act.
Sub-section 12(9) provides that the relevant amount is $10,000 or such higher amount as is prescribed. Currently an amount of $14,166.67 is prescribed, being the monthly equivalent of the present maximum annual deduction entitlement of $170,000. Therefore, on the basis of existing limits, if the estimated group wages for the full financial year were to exceed $425,000 (the maximum annual amount of wages in respect of which a deduction entitlement is presently available), no amount would be nominated as there would be no deduction entitlement.
Sub-section 21H(4) enables the Commissioner to make a determination at any time, either of his own motion or at the written request of the group members, specifying the amount (not exceeding the sub-section 12(9) relevant amount) that may be claimed by a designated group employer, in relation to a group, as the statutory amount. That statutory amount so determined shall apply with effect from the date specified in the notice - generally the first day of the return period in which the determination is made.
Sub-section 21H(5) requires the Commissioner to serve on the designated group employer a written notice of the sub-section (4) determination as soon as practicable after that determination is made, while sub-section 21H(6) provides the Commissioner with the power to vary or revoke, by written notice, a determination made under sub-section (4). That revocation or variation, which is operative from the date specified in the notice, would be made, for example, where it has become apparent that the level of the group wages has risen to such an extent that the statutory amount no longer reflects the correct position.
Section 21J: Annual adjustments
Under the existing pay-roll tax law, an employer who during a financial year has not received the full benefit of the exemptions available in monthly or other periodic returns is entitled to a refund of the appropriate amount of the pay-roll tax paid in respect of that year or part-year (section 14). Similarly, where there is a shortfall in tax paid or payable in respect of a financial year, section 15A provides for the payment of additional tax on the basis of an adjustment at the end of a financial year. Section 21J (and section 21K - see notes on that section) operate in a similar manner to the existing provisions relating to under and over-payments of pay-roll tax.
By virtue of sub-section 21J(1), the section applies to groups at least one member of which paid, or was liable to pay, taxable or interstate wages for the whole of the financial year. Section 21K applies where wages are paid, or liable to be paid, during part only of the year.
Sub-section 21J(2) outlines the meaning of references, in sub-sections (4) and (5), to the annual amount of tax paid or payable by the members of a group in respect of a financial year. The phrase refers to the amount obtained by applying the rate of tax prescribed in the Pay-roll Tax (Territories) Act 1971 - currently 5% - to the difference between -
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- the total amount of the taxable wages (in effect, the ACT-related wages) paid or payable by the members of the group during that year; and
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- so much of the "deductible amount" (if any) calculated in accordance with the formula set out in the definition of that term in section 21A as does not exceed the total amount of those taxable wages.
Similarly, sub-section 21J(3) describes the reference in sub-sections (4) and (5) to the actual amount of tax paid or payable in respect of a financial year by the members of a group, as a reference to the amount of tax referred to in section 10. That tax is the tax on wages paid or payable -
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- in the ACT, other than in respect of services rendered wholly in one of the States or the Northern Territory; or
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- other than in the ACT, in respect of services performed wholly in the ACT.
Where the actual amount of tax paid by group members in a financial year, determined by reference to sub-section (3), exceeds the annual amount of tax paid or payable by the group members, sub-section 21J(4) provides that the designated group employer at the end of that financial year may, before the end of the next succeeding financial year, apply for a refund of that excess. In those circumstances, the Commissioner will refund the excess to the designated group employer (paragraph (a)) or apply the excess or part of the excess against any other taxation liability of the designated group employer (paragraph (b)). Where only part of the excess is so applied, the balance will be refunded.
Sub-section 21J(5) applies where the actual amount of tax paid by the group members during a financial year is less than the annual amount of tax paid or payable by the group members in respect of that financial year. In those circumstances, the designated group employer (as at the end of the financial year) and the group members are jointly and severally liable for the excess amount of tax. As a consequence, the Commissioner will be entitled to recover the excess from one or more of the group members severally, or all members jointly.
Section 21K: Part-year adjustments
Section 21K provides the mechanism for determining the amount of any excess or shortfall in tax paid by group members where wages are paid, or liable to be paid, during part only of a financial year. As explained earlier, section 21J applies where wages are paid or payable for the whole of a financial year.
Sub-section 21K(1) provides that the section applies to groups at least one member of which paid or was liable to pay taxable wages or interstate wages for a continuous part of a financial year, but not a full financial year.
The term "group period" as used in sub-sections (3), (4), (5) and (6) is defined in sub-section 21K(2) to mean, in relation to a group, a continuous part of a financial year during which at least one group member paid, or was liable to pay, taxable or interstate wages. If no group member paid or was liable to pay such wages during, for example, the period January to March, there would be two group periods for that group - July to December and April to June. In these circumstances, although a group might exist for a full financial year, the group's pay-roll tax liability would be calculated pursuant to section 21K, rather than section 21J.
In calculating any part-year adjustment, regard is to be had to the total amount of tax paid or payable by the members of a group in respect of a group period in a financial year. Sub-section 21K(3) describes this amount as the amount obtained by applying the rate of tax prescribed by the Pay-roll Tax (Territories) Act 1971 (presently 5%) to the amount obtained from the formula
A - B
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- A is the total amount of taxable wages (as defined in sub-section 4(1) and calculated by reference to section 10) paid or payable by the group members during the group period; and
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- B is so much of the deductible amount in respect of that group period calculated in accordance with the formula contained in the definition of deductible amount in section 21A as does not exceed the amount of taxable wages paid by the group members.
Sub-section 21K(4) provides that a reference in the section to the actual amount of tax paid or payable in respect of a group period by the members of a group is a reference to the amount of tax referred to in section 10 of the Principal Act. As with sub-section 21J(3), the tax referred to is the tax paid or payable on taxable wages.
Sub-section 21K(5) applies in a similar manner to sub-section 21J(4), and provides for those instances in which the actual amount of tax paid by group members in respect of a group period exceeds the total amount of tax payable by the group members in respect of that period. In those cases, where the person who was the designated group employer at the end of the group period makes an application before the end of the next succeeding financial year, the Commissioner will either refund the excess to the designated group employer (paragraph (a)) or apply the excess, or part of the excess, to any other taxation liability of that employer (paragraph (b)). Any excess not so applied would be refunded.
Conversely, sub-section 21K(6) applies in cases where the total tax paid by the group members in respect of a group period exceeds the actual amount of tax paid or payable by the members in respect of that period. All group members who paid, or were liable to pay, taxable wages during the period, including the designated group employer at the end of the period, are jointly and severally liable for the tax shortfall.
Clause 38: Time for payment of tax
By this clause, section 22 of the Principal Act is to be amended, consequent upon the amendments effected by clause 37. Section 22 establishes the time limits within which pay-roll tax is payable. Under the existing provisions, payments in respect of periodic returns of wages must be made within the time for lodgment of such returns (7 days) and, similarly, payments on an annual adjustment must be made within the time limit for lodgment of a return after the end of a financial year (21 days). The amendment proposed by this clause will insert two new paragraphs in sub-section 22(3) to provide time limits for payment of the tax imposed under new sub-sections 21J(5) and 21K(6) respectively.
The amendment being made by paragraph (a) of clause 38 is a drafting measure to facilitate the insertion, by paragraph (b), of new paragraphs 22(3)(c) and (d). By paragraph (c), tax referred to in sub-section 21J(5) - that is, tax imposed by way of annual adjustment on group members (see notes on that sub-section, being inserted by clause 37 of this Bill) - is due and payable on the twenty-second day after the end of the financial year, in line with the existing provisions. Also in line with the existing provisions, paragraph (d) provides that tax payable by group members under sub-section 21K(6) as a consequence of a part-year adjustment is due and payable on the eighth day after the end of the group period (see notes on sub-section 21K(6), also being inserted by clause 37) .
This clause will amend section 23 of the Principal Act, which provides for the Commissioner of Taxation to make assessments of pay-roll tax in, broadly, cases where an employer has failed to lodge a return or has understated the amount of taxable wages paid or payable. The amendment will, by the inclusion of new sub-section (3), make it clear that the assessments may be made in relation to proposed new sub-sections 21J(5) and 21K(6), in addition to existing section 15A.
Sub-sections 21J(5) and 21K(6) impose a joint and several liability on all group members in relation to tax payable as a consequence of annual and part-year adjustments respectively (see notes on these new sub-sections, being inserted in the Principal Act by clause 37). Section 15A applies to impose additional tax on an employer, other than a group member, on the basis of an adjustment at the end of the financial year.
Section 70 of the Principal Act, which provides for the Governor-General to make regulations for the purposes of the Principal Act, will be amended by this clause. The amendment is consequential upon the amendment of section 16 of the Principal Act being effected by clause 36 of the Bill. As a result of that amendment, sub-section 16(1A) refers to a prescribed amount of weekly wages. That reference was formerly in sub-section 16(1) . Paragraph 70(1)(c), which presently contains a reference to the relevant amount in sub-section 16(1) is, as a result, being amended to refer to the relevant amount in sub-section 16(1A).
Clause 41: Application of amendments
Clause 41 specifies that the amendments of the Principal Act proposed by Part IV of the Bill will apply in relation to wages paid or payable by an employer on or after the date on which the clause comes into operation - that is, by sub-clause 2(2) of the Bill, the first day of the month after the month in which the amending Act receives the Royal Assent.
PART V - AMENDMENT OF THE TAXATION ADMINISTRATION ACT 1953
This clause facilitates references to the Taxation Administration Act 1953, which, in Part V, is referred to as "the Principal Act".
Clause 43 will make a technical amendment of section 8J of the Principal Act, which contains definitions and interpretative provisions that apply for the purposes of Subdivision B of Division 2 of Part III of that Act. Subdivision B describes certain offences against the various taxation laws administered by the Commissioner of Taxation and specifies the maximum penalties that apply. The offences include those of making, recklessly making and knowingly making false or misleading statements to a taxation officer (sections 8K, 8N and 8P, respectively, of the Principal Act).
Sub-section 8J(2) describes what constitutes a "statement made to a taxation officer" for the purposes of Subdivision B and excludes a statement made in a document produced pursuant to a request made by the Commissioner under any of the provisions of the taxation laws specified in the sub-section. Sub-section (2) should specify all of the provisions of the taxation laws under which the Commissioner has the general power to require documents to be produced, so that a false or misleading statement contained in such a document does not create an offence under section 8K, 8N or 8P of the Principal Act.
The amendment proposed by this clause will extend the list of provisions specified in sub-section 8J(2) to include, in paragraph (p), a reference to paragraph 13G(1)(c) of the Principal Act, under which the Commissioner may require the production of documents in relation to a matter arising under a State taxation law that has been referred to the Commissioner for investigation in the Australian Capital Territory. By oversight, sub-section 8J(2) was not amended to include a reference to paragraph 13G(1)(c) when that latter provision was inserted in the Principal Act by the Taxation Laws Amendment Act (No. 2) 1985. As the amendment made by this clause does not adversely affect taxpayers, the amendment will, by sub-clause 2 (3) of this Bill, apply from 28 October 1985, which is the date that section 13G of the Principal Act came into operation.
PART VI - AMENDMENTS OF THE TAXATION (INTEREST ON OVERPAYMENTS) ACT 1983
The amendments proposed in Part VI of the Bill of the Taxation (Interest on Overpayments) Act 1983 will require the Commissioner of Taxation to pay interest to a taxpayer where the Commissioner decides of his own motion to amend an assessment to reduce a taxpayer's liability resulting in an overpayment of tax by the taxpayer. In other words, interest will be payable by the Commissioner where amendment was not as a result of a request for amendment of the assessment or in consequence of a request for amendment of another assessment. Such a situation would usually arise where the Commissioner detects an error made by the taxpayer in favour of the revenue during the course of a post-assessment audit or examination. Under the proposed amendments interest will be payable to the taxpayer on the amount by which the tax payable is reduced by the amended assessment.
The proposed amendments complement new section 170AA of the Income Tax Assessment Act 1936 which, as explained earlier in this Memorandum, will provide for the payment of interest by a taxpayer where an assessment is amended increasing the liability of the taxpayer - see notes on clause 21.
This clause facilitates references to the Taxation (Interest on Overpayments) Act 1983 which, for the purposes of Part VI of the Bill, is referred to as "the Principal Act".
This clause will amend sub-section 3(1) of the Principal Act to insert new paragraph (ca) in the definition of "decision to which this Act applies". This amendment will include in the class of decisions to which the Principal Act applies a decision by the Commissioner to amend an assessment to reduce a taxpayer's liability to tax where the taxpayer did not make a request for the amendment or the assessment was not amended as a result of the request for amendment of another assessment of either the taxpayer or another person. For example, where a request is made by a taxpayer for a reduction in the taxpayer's share of the net income from a partnership and, as a result, another partner's liability to tax is also reduced, interest would not be payable to either taxpayer. It should be noted that, where an assessment is amended as a result of an objection by the taxpayer, interest is already payable under the Principal Act on the amount of tax found to have been overpaid. Where paragraph 3(1)(ca) applies, interest is likewise to be payable on the amount of tax which has been overpaid.
Paragraph 10(1)(a) of the Principal Act provides for the period in respect of which interest is payable under the Act. This clause will ensure, by new sub-sub-paragraph 10(1)(a)(iii)(AA). that interest payable in the circumstances mentioned in proposed paragraph 3(1)(ca) will not be calculated in respect of any period before 1 July 1986 when the self-assessment system comes into effect.
Clause 47: Application of amendments
This clause, which will not amend the Principal Act, specifies the years of income in which, or the circumstances in which the various amendments proposed in Part VI will first apply.
The clause provides that, consistent with the self-assessment amendments contained in Part II, the amendments being made by clauses 45 and 46 will apply to amendments of an original assessment in respect of the 1985-86 and subsequent years of income where the original assessment was made on or after 1 July 1986.
TAXATION (INTEREST ON UNDERPAYMENTS) BILL 1986
This Bill will formally impose an interest charge in respect of underpayments of income tax, liability for which is to be established by proposed section 170AA of the Income Tax Assessment Act 1936 ('the Assessment Act'). Section 170AA is to be inserted in the Assessment Act by clause 21 of the Taxation Laws Amendment Bill 1986.
The need for a separate Act to impose interest payable under section 170AA arises because the interest is, in all probability, a tax for the purposes of section 55 of the Australian Constitution. The enactment of a "taxing Act" is intended therefore to ensure that the imposition of interest is not subject to a successful constitutional challenge.
By this clause the Act imposing an interest charge in respect of underpayments of income tax will be known as the Taxation (Interest on Underpayments) Act 1986.
This clause provides for the Act to come into operation on the day on which it receives the Royal Assent. But for this clause, the Act would, by reason of sub-section 5(1A) of the Acts Interpretation Act 1901, come into operation on the twenty-eighth day after the date of Royal Assent. Notwithstanding this, interest will, as explained in the notes on clause 21, only be payable in relation to amended assessments made after 1 July 1986 when the self-assessment system is introduced.
Clause 3: Imposition of interest charge
This clause formally imposes an interest charge, liability for which is to be established by proposed section 170AA of the Assessment Act. As explained in the notes on that provision, the proposed rate of interest is 14.026% per annum.