Senate

Revised Explanatory Memorandum

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

Chapter 5 Government grants

Outline of chapter

Capital gains tax exemption of expense-reimbursing government grants

5.1 Schedule 5 amends the Income Tax Assessment Act 1997 (ITAA 1997) to exempt from capital gains tax (CGT), the recipients of the Unlawful Termination Assistance Scheme, the Alternative Dispute Resolution Assistance Scheme and similar expense-reimbursing government grants from CGT.

5.2 This Schedule makes a further amendment to ensure capital losses, and not just capital gains, are exempt from CGT.

Context of amendments

Unlawful Termination Assistance Scheme and the Alternative Dispute Resolution Assistance Scheme grants

5.3 The Australian Government has established two financial assistance schemes to support the WorkChoices reforms. These are the Unlawful Termination Assistance Scheme and the Alternative Dispute Resolution Assistance Scheme grants.

5.4 The grants provide eligible parties with a capped amount of financial assistance. Any amount in excess of the cap will be borne by the recipients of the financial assistance. The financial assistance is delivered via a voucher.

5.5 Under the Unfair Termination Assistance Scheme, legal practitioners or their firms will supply services to eligible participants. The Commonwealth will pay for those services up to the capped amount.

5.6 Under the Alternative Dispute Resolution Assistance Scheme, alternative dispute resolution providers or their firms will supply services to eligible participants. The Commonwealth will pay for those services up to the capped amount.

CGT status of grants payable under the Unfair Termination Assistance Scheme and the Alternative Dispute Resolution Assistance Scheme

5.7 Under section 104-25 of the ITAA 1997, CGT event C2 (cancellation, surrender and similar endings) happens if an intangible CGT asset such as a right to a grant is satisfied (among other cases). This could technically give rise to CGT consequences on receipt or use of the vouchers under the two grant Schemes.

CGT status of similar grants

5.8 There is the potential for recipients of other similar expense-reimbursing government grants also to have CGT consequences.

Summary of new law

5.9 This Schedule amends subsection 118-37(2) of the ITAA 1997 specifically to exempt the Unlawful Termination Assistance Scheme and Alternative Dispute Resolution Assistance Scheme grants. It also adds a generic provision to exempt expense-reimbursing government grants under government schemes established under an enactment or an instrument of a legislative character.

5.10 This Schedule also amends the existing legislation so that not only capital gains are exempt for specifically listed programmes, but also capital losses.

5.11 This ensures that recipients of the Unlawful Termination Assistance Scheme and the Alternative Dispute Resolution Assistance Scheme grants, the specifically listed government programmes and more generally expense-reimbursing government grants, do not have CGT consequences as a result of receiving the grant.

Comparison of key features of new law and current law

Detailed explanation of new law

Unlawful Termination Assistance Scheme and the Alternative Dispute Resolution Assistance Scheme grants

5.12 The Australian Government has established two financial assistance schemes to support the WorkChoices reforms. These are the Unlawful Termination Assistance Scheme and the Alternative Dispute Resolution Assistance Scheme grants, which are administered by the Minister for Employment and Workplace Relations.

5.13 The grants provide eligible parties with a capped amount of financial assistance. Any amount in excess of the cap will be borne by the recipients of the financial assistance. The financial assistance is delivered via a voucher.

5.14 Under the Unfair Termination Assistance Scheme, legal practitioners or their firms will supply services to eligible participants. The Commonwealth will pay for those services up to the capped amount.

5.15 Under the Alternative Dispute Resolution Assistance Scheme, alternative dispute resolution providers or their firms will supply services to eligible participants. The Commonwealth will pay for those services up to the capped amount.

CGT status of grants payable under the Unfair Termination Assistance Scheme and the Alternative Dispute Resolution Assistance Scheme

5.16 Under section 104-25 of the ITAA 1997, CGT event C2 (cancellation, surrender and similar endings) happens if an intangible CGT asset such as a right to a grant is satisfied (among other cases). This could technically give rise to CGT consequences on receipt or use of the vouchers under the two grant schemes.

5.17 There is already a CGT exemption provision that applies to specific expense-reimbursing government grants. At present, this provision (subsection 118-37(2)) disregards a capital gain for the following grants:

•

the General Practice Rural Incentives Program or the Rural and Remote General Practice Program;

•

the Sydney Aircraft Noise Insulation Project; and

•

the M4/M5 Cashback Scheme (a scheme by the New South Wales Government to reimburse tolls paid on two motorways in Sydney).

5.18 In addition, section 118-14 of the ITAA 1997 provided a CGT exemption to disregard a capital gain or capital loss made in the 1999-2000 or the 2000-01 income years in relation to the use of goods and services tax (GST) Direct Assistance Certificates issued by the GST Start-Up Assistance Office in the Treasury of the Australian Government and associated with the introduction of the GST. These certificates were conceptually similar to the vouchers under the two schemes for which a CGT exemption to disregard a capital gain or capital loss is now being provided.

5.19 This amendment lists the Unlawful Termination Assistance Scheme and Alternative Dispute Resolution Assistance Scheme grants to ensure that recipients of the grants do not have a CGT consequence. [Schedule 5, item 1, paragraph 118-37(2)(e)]

CGT status of similar grants

5.20 There is the potential for recipients of other similar expense-reimbursing government grants to have CGT consequences.

5.21 These amendments also provide a generic CGT exemption to disregard a capital gain or capital loss as a result of receiving a payment or property as reimbursement or payment of expenses, or receiving or using a voucher or certificate, under a scheme established by an Australian government agency (as defined), a local governing body (as defined) or a foreign government agency (as defined). The scheme needs to be established under an enactment or an instrument of a legislative character.

5.22 This means that the scheme can be established by the Australian Government or its authorities, by the state and territory governments or their authorities, or by governments of (or part of) foreign countries or their authorities.

5.23 The requirement that the scheme be established under an enactment or an instrument of a legislative character would be satisfied where the scheme is established that way either expressly or by necessary implication. An enactment would include an Appropriation Act (or equivalent) having regard to associated documentation such as budget papers. An instrument of a legislative character would include regulations (and similar instruments) and local government by-laws.

5.24 The CGT exemption extends only to those cases where the receipt of the payment or property, or the receipt or use of the certificate or voucher, in itself directly gives rise to the capital gain or capital loss. It would not extend, for example, to cases where the payment, property, voucher or certificate is compensation (a form of capital proceeds) for the loss, destruction or transfer of an underlying asset. [Schedule 5, item 1, paragraph 118-37(2)(a)]

5.25 Consistent with the approach taken with the GST Direct Assistance Certificates and more generally with CGT exemptions such as the main residence exemption, the amendments ensure that the subsection 118-37(2) exemptions apply to disregard a capital loss as well as a capital gain. [Schedule 5, item 1, subsection 118-37(2)]

Application and transitional provisions

5.26 The amendments apply to assessments for the 2005-06 income year and later income years.