House of Representatives

Explanatory Memorandum

Circulated By the Authority of the Treasurer, the Hon Wayne Swan MP

Chapter 5 - Farm management deposits rewrite - Schedule 2G

Outline of chapter

5.1 Schedule 4 to this Bill rewrites Schedule 2G to the Income Tax Assessment Act 1936 ( ITAA 1936) to the Income Tax Assessment Act 1997 ( ITAA 1997).

Context of amendments

5.2 The farm management deposit (FMD) scheme in Schedule 2G to the ITAA 1936 allows eligible primary producers to set aside pre-tax income in profitable years for subsequent withdrawal in low-income years. FMDs allow primary producers to claim a deduction when they make an FMD. When an FMD is withdrawn, the amount of the withdrawal is included in their assessable income in the tax year of withdrawal. This reduces the risk to eligible primary producers of income variability owing to factors such as drought.

5.3 The rewrite reproduces the effect of Schedule 2G to the ITAA 1936 . [Schedule 4, item 2, Division 393]

Detailed explanation of new law

5.4 The rewrite repeals Schedule 2G and reproduces its effect in the ITAA 1997 . [Schedule 4, items 1 and 2, Division 393]

How the rewrite is different

Guide material

5.5 The rewrite contains newly written guide material for the Division . [Schedule 4, Part 1, item 2, section 393-1]

Structural changes

5.6 The rewrite of Schedule 2G has the same basic structure as Schedule 2G with some changes.

5.7 Subdivisions 393-A (tax consequences of FMDs) and 393-B (FMDs and related terms) in Schedule 2G have the same general effect in the rewrite.

5.8 Subdivision 393-C in Schedule 2G has not been rewritten. Subdivision 392-C (calculation of averaging adjustment for primary producers) of the ITAA 1997 already contains provisions that determine taxable primary production income and taxable non-primary production income. These provisions are the same as those in Schedule 2G except for one difference which is explained below.

5.9 Subdivision 393-D in Schedule 2G has been rewritten as Subdivision 393-C (special rules relating to financial claims scheme for account-holders with insolvent authorised deposit-taking institutions (ADIs)). The reporting obligations of FMD providers that were located in section 264AA of the ITAA 1936 have been relocated to the Taxation Administration Act 1953 ( TAA 1953). This centralises administration matters in the TAA 1953.

5.10 Some provisions have not been rewritten because they are no longer required or have been moved to more appropriate locations; for example, to the Dictionary in subsection 995-1(1) of the ITAA 1997 or the Income Tax (Transitional Provisions) Act 1997 ( IT(TP)A 1997).

Differences in Subdivision 393-A - Tax consequences of farm management deposits

5.11 Subdivision 393-A in Schedule 2G explains the tax consequences of FMDs. The rewritten Subdivision 393-A achieves the same outcome with some minor changes.

5.12 The deduction for making FMDs is only available to individuals who carry on a primary production business in Australia. This key requirement is not located centrally in Schedule 2G; however, it has been made explicit in the rewrite in the rules that determine the entitlement to the deduction and specify the requirements for FMD agreements . [Schedule 4, Part 1, item 2, paragraph 393-5(1)(b) and item 1 in the table in section 393-35]

5.13 The calculation of the amount to be included in assessable income on repayment of an FMD has been simplified in the rewrite. The rewritten provision contains a single formula for the calculation regardless of whether the FMD is repaid in part or in full. A comprehensive example has also been included to illustrate the calculation . [Schedule 4, Part 1, item 2, subsection 393-10(1) and example]

5.14 References to income equalisation deposits have been removed from the definition of 'unrecouped FMD deduction' in the rewrite because they are no longer relevant in the majority of cases (the Loan (Income Equalization Deposits) Act 1976 was repealed on 22 February 2005) [Schedule 4, Part 1, item 2, subsection 393-10(2)]. However, a provision has been inserted in the IT(TP)A 1997 to maintain the application where needed [Schedule 4, Part 3, item 50, section 393-10 of the IT(TP)A 1997].

5.15 Schedule 2G changes the ordinary meaning of some words, such as 'make' and 'repay', by defining or extending the terms for the purposes of the Schedule. Many of these terms have their ordinary meaning in the ITAA 1997 and cannot be used inconsistently. Therefore, the rewrite achieves the same effect by using operative application rules.

5.16 Schedule 2G modifies the meaning of 'repay' to include a transfer, reinvestment or other dealing on behalf of the depositor of the FMD. This is relevant for determining the assessable amount on repayment of an FMD. The rewrite provides an operative application rule to this effect . [Schedule 4, Part 1, item 2, subsection 393-10(3)]

5.17 Schedule 2G also modifies the meaning of 'make' and 'repay' to exclude immediate reinvestment as an FMD, extension of the term of an FMD and transfer to another provider as an FMD. This modification affects the deduction and assessment provisions. This is achieved in the rewrite by an operative provision that modifies the deduction, assessment and 12-month rules . [Schedule 4, Part 1, item 2, section 393-15]

Differences in Subdivision 393-B - Meaning of a farm management deposit and an owner

5.18 Subdivision 393-B in Schedule 2G explains what an FMD is and defines other related terms.

5.19 The definition of FMD in Schedule 2G takes its meaning from six operative provisions. The meaning of 'farm management deposit' has been clarified in the rewrite by restructuring the various elements of the definition [Schedule 4, Part 1, item 2, section 393-20]. The rewrite is explicit in identifying what are the requirements of an FMD agreement and the effects of contravening those requirements [Schedule 4, Part 1, item 2, sections 393-30 and 393-35].

5.20 Not all of the definitions in Schedule 2G have been rewritten because some of the terms are already defined in the ITAA 1997; for example, 'entity' and 'tax file number'. Other terms have not been rewritten because they have their ordinary meaning; such as, 'depositor', 'make' and 'repay'.

5.21 'Primary producer' is defined in Schedule 2G but has not been rewritten. Instead, references to 'primary producer' have been replaced with the defined term 'primary production business' and the concept of 'carrying on a primary production business' which are both used in the ITAA 1997.

5.22 The definition of 'owner' has been rewritten and replaced with 'owner of a *farm management deposit' . [Schedule 4, Part 1, item 2, subsection 393-25(1)]

5.23 Schedule 2G refers to FMDs being made by a depositor with a 'financial institution'. Because 'financial institution' is defined more widely in the ITAA 1997 than in Schedule 2G, a new term - 'FMD provider' - has been inserted in the rewrite in its place . [Schedule 4, Part 1, item 2, subsection 393-20(3)]

5.24 Schedule 2G provides for the treatment of deposits that are withdrawn within the first 12 months after the deposit was made (the 12-month rule). The concept of 'withdrawing' a deposit is only used in relation to the 12-month rule; elsewhere Schedule 2G refers to 'repayments'. For consistency throughout the provisions, the rewrite replaces the references to 'withdrawal' with 'repayment' . [Schedule 4, Part 1, item 2, section 393-40]

5.25 The 12-month rule in Schedule 2G is determined by reference to the 'applicable depositing day'. This term has not been used in the rewrite. Instead the rewrite deals with the concept by an operative application rule and removes outdated references to income equalisation deposits [Schedule 4, Part 1, item 2, subsection 393-40(6)]. However, a provision has been inserted in the IT(TP)A 1997 to maintain the application to income equalisation deposits where necessary [Schedule 4, Part 3, item 50, section 393-40 of the IT(TP)A 1997].

5.26 Schedule 2G contains inoperative provisions relating to certain deposits and transfers made prior to 1 July 2003. These provisions are not rewritten.

Taxable primary production income and taxable non-primary production income

5.27 Subdivision 393-C of Schedule 2G has not been rewritten because similar rules appear in Subdivision 392-C of the ITAA 1997 for calculating the averaging adjustment of long-term averaging of primary producers' tax liability. However, the provisions are not identical. The difference arises in the definition of 'primary production deductions', which is relevant for determining 'taxable primary production income'. One of the eligibility criteria for the FMD scheme is that taxable non-primary production income must not be more than $65,000.

5.28 In Schedule 2G, apportionable deductions are excluded from primary production deductions and are allocated entirely to non-primary production deductions. In Division 392 of the ITAA 1997, apportionable deductions are spread across both primary production deductions and non-primary production deductions. The Schedule 2G approach is generally more concessional than Division 392. By aligning the definitions, a greater proportion of basic taxable income will be subject to averaging. The impact on the income averaging calculations will depend on the individual circumstances of the taxpayer. Therefore, to maintain the treatment provided by Schedule 2G, subsection 392-80(3) of the ITAA 1997 is rewritten to exclude apportionable deductions from the definition of primary production deductions . [Schedule 4, Part 2, item 46, subsection 392-80(3)]

Special rules relating to the financial claims scheme for account-holders with insolvent ADIs

5.29 Subdivision 393-D of Schedule 2G - the financial claims scheme rules - has been rewritten as Subdivision 393-C . [Schedule 4, Part 1, item 2, Subdivision 393-C]

Reporting obligations

5.30 The reporting obligations contained in section 264AA of the ITAA 1936 have been relocated and the terminology has been updated . [Schedule 4, Part 1, item 7, Division 398, Schedule 1 to the TAA 1953]

Application and transitional provisions

Application

5.31 The rewrite applies to assessments for the 2010-11 income year and later years . [Schedule 4, Part 3, item 50, section 393-1 of the IT(TP)A 1997]

Transitional

5.32 The effect of the deductions provided under Schedule 2G continues under the rewrite. References in the rewrite to deductions for FMDs include references in Schedule 2G to deductions for FMDs that relate to deposits made before the 2010-11 income year. This is important particularly for the application of 'unrecouped FMD deduction' which is used to calculate the amount of assessable income on repayment of a deposit . [Schedule 4, Part 3, item 50, section 393-5 of the IT(TP)A 1997]

Consequential amendments

5.33 References to Schedule 2G are replaced by references to the equivalent provisions in the rewrite. Some of those consequential amendments also change wording, or add asterisks, to reflect the transfer of Schedule 2G defined terms into the ITAA 1997 Dictionary . [Schedule 4, Part 2, items 8 to 49, subsection 3(2) (paragraph (aa) of the definition of 'exempt livestock proceeds') of the Farm Household Support Act 1992, subsections 6(1), 95(1), 101A(4), 170(1) (item 9 in the table), 177B(1) and (2), 202DM(1) and 202DM(3) of the ITAA 1936, sections 97A, 202DK, 202DL, 202DL (note), 264AA of the ITAA 1936, paragraphs 202DL(a) and (b), 202DM(1)(a) and 202DM(3)(a) of the ITAA 1936, paragraph 268-35(5)(j) in Schedule 2F of the ITAA 1936, paragraph 268-35(5)(j) in Schedule 2F (note) of the ITAA 1936, sections 10-5 (item in the table headed 'farm management deposits') and 12-5 (item in the table headed 'primary production') of the ITAA 1997, paragraphs 26-55(2)(c), 165-55(5)(j) of the ITAA 1997, subparagraph 61-570(1)(a)(iii) of the ITAA 1997, paragraph 165-55(5)(j) (note) of the ITAA 1997, subsection 230-460(15) and 392-80(3) of the ITAA 1997, subsection 253-5(1) (paragraph (b) of the note) of the ITAA 1997, subsections 8J(18) and (19) of the TAA 1953, subsections 45-120(4) and (5) in Schedule 1 to the TAA 1953]

Legislative history of Schedule 2G

5.34 Schedule 2G to the ITAA 1936 was added by the Taxation Laws Amendment (Farm Management Deposits) Act 1998 [ Act No. 85 of 1998].

5.35 These Acts have amended Schedule 2G: