House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 1 - Second World War payments

Outline of chapter

1.1 Schedule 1 to this bill amends the ITAA 1936 and the ITAA 1997 to extend the current income tax and CGT exemptions for certain Second World War payments to payments relating to persecution suffered or property lost during the Second World War.

1.2 For the purposes of this chapter:

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payments for any wrong or injury or for any other detriment are referred to as payments for persecution suffered during the Second World War;

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payments for any loss of, or damage to, property are referred to as payments for property lost during the Second World War; and

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an Australian resident individual, the individual's legal personal representative or a trustee of a deceased estate (including a corporate trustee) who is eligible for, and receives a payment in connection with persecution suffered or property lost during the Second World War from, a foreign Second World War fund is referred to as the 'eligible claimant'.

Context of amendments

1.3 A number of foreign funds are making payments relating to persecution suffered or property lost during the Second World War to victims of the Second World War or to the deceased victims' surviving relatives, descendants or beneficiaries named in a will. The payments may be income or capital in nature. Under current tax law some of these payments are subject to income tax or to CGT.

1.4 Examples of the foreign Second World War funds are provided in paragraph 1.20.

Summary of new law

1.5 The amendments extend the current income tax exemption for certain foreign pensions, annuities and allowances relating to the Second World War to payments of an income nature in connection with persecution suffered or property lost during the Second World War that are received by an eligible claimant from a foreign Second World War fund.

1.6 The amendments also extend the current CGT exemption for certain capital payments relating to the Second World War to payments of a capital nature in connection with persecution suffered or property lost during the Second World War that are received by an eligible claimant from a foreign Second World War fund.

Comparison of key features of new law and current law

Detailed explanation of new law

Income tax exemption

1.7 A payment of an income nature received by an eligible claimant from a foreign fund in connection with persecution suffered or property lost during the Second World War is exempt from income tax. [Schedule 1, item 1, section 23AL]

CGT exemption

1.8 A payment of a capital nature, or property, received by an eligible claimant from a foreign fund in connection with persecution suffered or property lost during the Second World War is exempt from CGT. [Schedule 1, item 3, subsection 118-37(5)]

Eligible claimants

1.9 Each of the foreign Second World War funds has its own eligibility criteria to determine who is eligible for a payment in connection with persecution suffered or property lost during the Second World War. The funds make the payments to the Second World War victim in the first instance.

1.10 Where the Second World War victim has died, some of the funds make the payments to the deceased victim's surviving relatives or descendants, for example the deceased victim's spouse or children, or to a beneficiary named in a will. Some of the funds make the payments to the victim's legal personal representative, for example, the trustee of the deceased victim's estate.

1.11 The payments from a foreign Second World War fund are exempt from income tax or CGT when they are paid to the eligible claimant.

1.12 An eligible claimant includes:

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the Second World War victim;

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the victim's legal personal representative;

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a deceased victim's surviving relatives, descendants or beneficiaries named in a will;

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the executor, administrator or trustee of a deceased victim's estate; and

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the trustee of a trust established by the will of a deceased victim.

Nature of payments

1.13 The various foreign Second World War funds describe their payments in connection with persecution suffered or property lost during the Second World War as compensation, restitution or reparation. For the purposes of this chapter all such payments are generally referred to as compensation.

1.14 The payments may be of an income nature, such as:

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a pension, annuity or allowance;

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a regular payment (e.g. monthly);

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interest or compensation for lost interest; or

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compensation for lost rent, earnings or profits.

1.15 The payments may be of a capital nature, for example, a lump sum payment as compensation for lost property. A lump sum payment includes interim payments or instalment payments of the final entitlement.

1.16 In very limited circumstances a payment of a capital nature may be restitution of the lost property itself, for example, the return of a stolen work of art.

1.17 The CGT exemption applies only to the receipt of the capital payment or property. The exemption does not apply to any capital gains on the later disposal of the property.

Foreign Second World War funds

1.18 For the income tax or CGT exemption to apply, the payments in connection with persecution suffered or property lost during the Second World War must be received from a source in a foreign country.

1.19 The source of the payments include (but are not limited to):

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a fund established in a foreign country by a foreign government or whose payments are made under a law of a foreign government;

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a fund established in a foreign country by a foreign legal settlement; or

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a fund established in a foreign country by a foreign business or a group of foreign businesses or industries.

1.20 Examples of foreign Second World War funds include (but are not limited to):

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Commission de d é dommagement de la Communaut é juive de Belgique (Indemnification Commission for the Belgian Jewish Community's Assets), a Belgian fund established to compensate Jewish victims for assets plundered, surrendered or abandoned during the Second World War;

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Stichting Maror-gelden Overheid (the Maror fund), a Dutch fund established to compensate Jewish victims for persecution suffered or property lost during the Second World War;

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R é paration pour les orphelins dont les parents ont é t é d é port é s (Compensation for Orphans of Deported Parents), a French fund which makes payments to orphans whose parents were deported from France during the Second World War;

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Commission pour l'indemnisation des victimes de spoliations intervenues du fait des l é gislations antis é mites en vigueur pendant l'Occupation, (Compensation of Victims of Financial Spoliation), a French fund established to compensate victims and their families for property loss resulting from anti-semitic legislation in force during the Occupation;

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Holocaust Victim Assets Litigation (Swiss Banks), a legal settlement intended to resolve Holocaust-related bank claims; and

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International Commission on Holocaust Era Insurance Claims (ICHEIC), a commission established to resolve Holocaust-related insurance claims.

Reasons for payments

1.21 Each of the foreign Second World War funds has its own criteria to determine what the payment in connection with persecution suffered or property lost during the Second World War is for.

1.22 Payments for any wrong or injury include payments for:

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persecution on the basis of religion, race, physical or mental disabilities or sexual orientation;

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involuntarily performing work for little or no pay (e.g. slave or forced labourers);

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being refused entry into, or deported from, another country;

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the deportation of a child's parents; or

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an illness, injury or disability suffered as a result of persecution, participation in a resistance movement, slave or forced labour, or internment in a concentration camp.

1.23 Payments for any loss of, or damage to, property include payments for:

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property confiscated, stolen, looted, hidden or otherwise lost;

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real estate (e.g. residences, business premises, commercial property and agricultural land);

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businesses, including business assets;

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financial assets, including money, bank deposits, safety deposit box contents and securities;

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moveable assets, such as gold or other precious metals, works of art, and cultural property; and

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personal effects, such as furniture, antiques and jewellery.

1.24 Payments for any other detriment is intended to include payments which do not fall into either the wrong or injury category or the property damage or loss category. This could include, for example, a payment for unpaid insurance policies.

Second World War

1.25 For the purposes of this provision, the following terms used in connection with the Second World War apply.

1.26 The National Socialist period means the period beginning on 30 January 1933 (the date of Hitler's appointment as Chancellor) and ending at the end of the Second World War in Europe (8 May 1945).

1.27 The Second World War means the period beginning on 3 September 1939 and ending in Europe on 8 May 1945 (the date of Germany's unconditional surrender) and against Japan on 15 August 1945 (the date of Japan's unconditional surrender).

1.28 The duration of the Second World War also includes periods immediately before and after the War. The purpose of this provision is to ensure that payments in connection with persecution suffered or property lost that occurred just before 3 September 1939 or just after 8 May 1945 (in Europe) or 15 August 1945 (against Japan) are exempt from income tax or CGT.

1.29 An enemy of the Commonwealth during the Second World War means an enemy of the Commonwealth of Australia, that is a country on which Australia declared war at the beginning of, or during, the Second World War.

1.30 An enemy-associated regime during the Second World War means:

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countries which were officially allied with Germany (e.g. Italy and Japan);

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countries which were invaded, occupied, governed or administered directly or indirectly by the National Socialist regime of Germany (e.g. Belgium, France and the Netherlands); and

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countries which were neutral but surrounded by enemy-associated regimes (e.g. Switzerland).

1.31 Participation in a resistance movement during the Second World War means resistance against the National Socialist regime of Germany and resistance against the forces of any other enemy of the Commonwealth. This would include, for example, the French resistance and the resistance movement against Japan in the former Dutch East Indies.

Payments from associates

1.32 For the income tax or CGT exemption to apply, the payments in connection with persecution suffered or property lost during the Second World War must not be received from an associate of the eligible claimant.

1.33 An associate of a natural person (otherwise than in the capacity of trustee) is defined in subsection 318(1) of the ITAA 1936 and, in broad terms, is a person or an entity that, by reason of family or business connections, might be regarded as being an associate of a particular person. For the purposes of this provision, an associate includes:

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a relative of the eligible claimant;

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a partner of the eligible claimant, the partner's spouse or child, or a partnership of which the eligible claimant is a partner;

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a trustee of a trust under which the eligible claimant benefits; and

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a company significantly influenced by the eligible claimant, or in which the eligible claimant holds a majority voting interest.

1.34 This provision is an integrity measure intended to ensure that the income tax and CGT exemptions cannot be used as a means to direct otherwise taxable foreign payments to Australian resident individuals.

1.35 This provision is not intended to deny the exemption where the payment was made to the legal personal representative of a Second World War victim or to the trustee of a trust established by the deceased victim's will. The associate test applies to the legal personal representative or the trustee in the same way as it would have applied to the Second World War victim had the victim not died.

Application and transitional provisions

1.36 The amendments are to apply to payments in connection with persecution suffered or property lost during the Second World War from foreign Second World War funds received by the eligible claimant in 2001-2002 and subsequent income years.

1.37 The amendments are retrospective to ensure that Australian resident individuals who received payments in connection with persecution suffered or property lost during the Second World War in the 2001-2002 income year are entitled to the tax exemptions. Taxpayers will not be adversely affected by the retrospective commencement of the amendments.

Consequential amendments

1.38 The provision is included in a checklist of exempt income. [Schedule 1, item 2]