Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 4 Refundable tax offset rules
Outline of chapter
4.1 Schedule 4 to this bill will amend the tax offset carry forward rules in Division 65 and the refundable tax offset rules in Division 67 of the ITAA 1997.
4.2 The amendments will:
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- make a minor change to the tax offset carry forward rules to ensure that taxpayers will always receive the maximum benefit from refundable tax offsets;
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- make changes to the refundable tax offset rules to reflect the new SIS rules; and
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- make a correction to the refundable tax offset rules so that double claiming of the private health insurance tax offset in respect of the same private health insurance premiums by both a trustee and beneficiary will not be possible.
Context of amendments
Amendment to tax offset carry forward rules
4.3 Tax offsets reduce the amount of income tax a person has to pay. If certain tax offsets exceed a person's tax liability for an income year, the tax offsets may be carried forward to the next income year or refunded. The order in which tax offsets are applied determines whether any tax offsets may be carried forward or refunded.
4.4 The current ordering rules set out in Division 65 do not apply correctly in relation to a number of refundable tax offsets, namely the tax offsets that arise for excess imputation credits, private health insurance, films, research and development and the 'first child'. An amendment is required to maximise the benefit of refundable tax offsets to taxpayers.
Amendments to reflect the simplified imputation system rules
4.5 Amendments to the refundable tax offset rules in ITAA 1997 are required to reflect the new SIS rules, which replaced the former imputation rules in Part IIIAA of the ITAA 1936 from 1 July 2002.
Removal of scope for double refunds of the private health insurance tax offset to trustees and beneficiaries
4.6 Due to a defect in the current law, both a trustee and a beneficiary may be entitled to a refund of the private health insurance tax offset in respect of the same private health insurance premiums. This may occur, for example, where a trustee is assessed in respect of trust income under section 98 of the ITAA 1936 because a beneficiary is a minor, and therefore under a legal disability, and the beneficiary is a beneficiary in another trust estate or has income from other sources.
Summary of new law
Amendment to tax offset carry forward rules
4.7 The tax offset carry forward rules in Division 65 of the ITAA 1997 will be amended so that tax offsets that are subject to the refundable tax offset rules will always be the highest priority tax offset for the purposes of calculating the amount of a tax offset that is carried forward.
Amendments to reflect the simplified imputation system rules
4.8 The refundable tax offset rules in Division 67 of the ITAA 1997 will be amended to reflect the new SIS rules. In particular, a corporate tax entity will generally not be entitled to a refund of excess imputation credits.
Removal of scope for double refunds of the private health insurance tax offset to trustees and beneficiaries
4.9 The refundable tax offset rules in Division 67 of the ITAA 1997 will be amended so that double claiming of a private health insurance tax offset in respect of the same private health insurance premiums by both a trustee and a beneficiary will not be possible.
Detailed explanation of new law
Amendment to tax offset carry forward rules
4.10 The tax offset carry forward rules in Division 65 of the ITAA 1997 will be amended so that tax offsets that are subject to the refundable tax offset rules in Division 67 will always be the highest priority tax offset for the purposes of calculating the amount of a tax offset that is carried forward. This amendment will maximise the benefit of these refundable tax offsets to taxpayers. [Schedule 4, item 1, subsection 65-25(2), item 1A in the table]
Amendments to reflect the simplified imputation system rules
4.11 Division 67 of the ITAA 1997 outlines the tax offsets that are subject to the refundable tax offset rules; when a taxpayer is entitled to a refund of a tax offset; and the amount of the refund.
4.12 Division 67 will be amended to reflect the new SIS rules. The amended provisions will provide the same outcome as the former rules. [Schedule 4, item 2, subsections 67-25(1) to (1E)]
4.13 A corporate tax entity will generally not be entitled to a refund of excess imputation credits. Under the SIS rules, the intercorporate dividend rebate has been replaced by a tax offset for franked distributions. Only individuals, complying superannuation entities and certain charities and gift deductible organisations are entitled to refunds of excess imputation credits.
4.14 However, consistent with the former rules, a corporate tax entity that is a life insurance company will be eligible for a refund. Certain charities and gift deductible organisations will also continue to be eligible for a refund. [Schedule 4, item 2, subsections 67-25(1C) to (1E)]
Removal of scope for double refunds of the private health insurance tax offset to trustees and beneficiaries
4.15 Subsection 67-25(2) of the ITAA 1997 will be amended so that the private health insurance tax offset allowable to a trustee under subsection 61-335(4) will not be refundable where a trustee is liable to be assessed under section 98. Beneficiaries will continue to be eligible for refunds of the private health insurance tax offset. This amendment will remove the scope for double refunds of that tax offset. [Schedule 4, items 3 and 4, subsection 67-25(2)]
Application and transitional provisions
Amendment to tax offset carry forward rules
4.16 The amendment to the tax offset carry forward rules in Division 65 of the ITAA 1997 will apply from 1 July 2000, when the tax offset for franked dividends became refundable.
Amendments to reflect the simplified imputation system rules
4.17 The amendments to the refundable tax offset rules in Division 67 of the ITAA 1997 will apply from 1 July 2002, when the SIS rules came into effect.
Removal of scope for double refunds of the private health insurance tax offset to trustees and beneficiaries
4.18 The amendments to subsection 67-25(2) of the ITAA 1997 will apply from 1 July 2002.