SENATE

Revised Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Chapter 3 - Consolidation

Outline of chapter

3.1 Schedule 3 to this Bill amends Schedule 3 to the Tax Laws Amendment ( 2012 Measures No. 2 ) Act 2012 to ensure that:

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no interest is payable if an overpayment of income tax arises because of a deduction under the pre-rules in Part 1 of Schedule 3 to that Act (which apply, broadly, to corporate acquisitions in the period before 12 May 2010); and

•

no shortfall interest or administrative penalty is payable if additional tax becomes payable because an amendment to an assessment is made, to the extent that the amendment is attributable to a deduction under the pre-rules in Part 1 of Schedule 3 to that Act or under the interim rules in Part 2 of Schedule 3 to that Act (which apply, broadly, to corporate acquisitions in the period between 12 May 2010 and 30 March 2011).

Context of amendments

3.2 Schedule 3 to the Tax Laws Amendment ( 2012 Measures No. 2 ) Act 2012 amended the consolidation provisions in the income tax law to modify the tax cost setting and rights to future income rules and to make the tax outcomes for consolidated groups more consistent with the tax outcomes that arise when assets are acquired outside the consolidation regime.

3.3 Under that Act, the changes affecting a corporate acquisition depend on the time when the acquisition took place. That is:

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the pre-rules in Part 1 of Schedule 3 apply, broadly, to corporate acquisitions that took place before 12 May 2010;

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the interim rules in Part 2 of Schedule 3 apply, broadly, to corporate acquisitions that took place between 12 May 2010 and 30 March 2011; and

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the prospective rules in Part 3 of Schedule 3 apply, broadly, to corporate acquisitions that take place after 30 March 2011.

3.4 The amendments in Schedule 3 to the Tax Laws Amendment ( 2012 Measures No. 2 ) Act 2012 were announced by the then Assistant Treasurer and Minister for Financial Services and Superannuation in Media Release No. 159 of 25 November 2011. That announcement specified that:

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no interest would be payable if an overpayment of income tax arises because of a deduction under the pre-rules; and

•

no interest or penalties would be payable if additional tax becomes payable because an amendment to an assessment is made, to the extent that the amendment is attributable to a deduction under the pre-rules or under the interim rules.

Summary of new law

3.5 Schedule 3 to this Bill amends Schedule 3 to the Tax Laws Amendment ( 2012 Measures No. 2 ) Act 2012 to ensure that:

•

no interest is payable where an overpayment of income tax arises because of a deduction under the pre-rules in Part 1 of Schedule 3 to that Act; and

•

no shortfall interest or administrative penalty is payable in respect of an amendment to an assessment that results in additional tax being payable, to the extent that the amendment is made because of a deduction under:

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the pre-rules in Part 1 of Schedule 3 to that Act; or

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the interim rules in Part 2 of Schedule 3 to that Act.

Comparison of key features of new law and current law

Detailed explanation of new law

3.6 Schedule 3 to this Bill inserts new items 53 and 54 into Schedule 3 to the Tax Laws Amendment ( 2012 Measures No. 2 ) Act 2012 . These items ensure that:

•

no interest is payable if an overpayment of income tax arises because of a deduction under the pre-rules in Part 1 of Schedule 3 to that Act; and

•

no shortfall interest or administrative penalty is payable in respect of an amendment to an assessment that results in additional tax being payable, to the extent that the amendment is made because of a deduction under:

-

the pre-rules in Part 1 of Schedule 3 to that Act; or

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the interim rules in Part 2 of Schedule 3 to that Act.

No interest payable if an overpayment of tax arises because of a deduction under the pre-rules

3.7 Companies are entitled to interest on overpayments arising from assessments under section 8G of the Taxation ( Interest on Overpayments and Early Payments ) Act 1983 .

3.8 A company is generally entitled to interest where, at a particular time, the sum of any income tax crediting amounts credited by the Commissioner of Taxation (Commissioner) exceeds, broadly, the income tax liabilities of the company (paragraphs 8G(1)(d) and 8G(2)(c) of the Taxation ( Interest on Overpayments and Early Payments ) Act 1983 ).

3.9 Similarly, a company is entitled to interest in certain circumstances where certain decisions are made by the Commissioner which result in a reduction of income tax that has previously been paid (section 9 of the Taxation ( Interest on Overpayments and Early Payments ) Act 1983 ).

3.10 Where the pre-rules in Part 1 of Schedule 3 to the Tax Laws Amendment ( 2012 Measures No. 2 ) Act 2012 apply in working out the amount of a deduction for a company, the company may, for example, receive an assessment that results in a refund of income tax. As a result, in the absence of these amendments, the company may be entitled to an amount of interest in respect of the deduction.

3.11 To this extent, it is considered that interest on overpayments should not be payable in these circumstances because the entitlement to interest arises only due to the beneficial retrospective operation of the pre-rules.

3.12 Therefore, the amendments will prevent interest from being payable in these circumstances.

3.13 That is, where the pre-rules in Part 1 of Schedule 3 to the Tax Laws Amendment ( 2012 Measures No. 2 ) Act 2012 apply in working out the amount of a deduction, the deduction is disregarded in working out:

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the amount (if any) of an excess mentioned in paragraph 8G(1)(d) or 8G(2)(c) of the Taxation ( Interest on Overpayments and Early Payments ) Act 1983 ; and

•

the extent (if any) to which an amount of relevant tax is overpaid as mentioned in paragraph 9(1)(b) of that Act.

[ Schedule 3, item 1, subitems 53(1 ) and ( 2 ) of Tax Laws Amendment ( 2012 Measures No . 2 ) Act 2012 ]

3.14 However, subitems 53(1) and (2) do not apply where an amount of interest has been paid by the Commissioner before 25 November 2011. Therefore, companies will not have to refund interest that they have already received. [ Schedule 3, item 1, subitem 53(3 ) of Tax Laws Amendment ( 2012 Measures No . 2 ) Act 2012 ]

No shortfall interest if additional tax becomes payable under the pre-rules or the interim rules

3.15 Where an income tax assessment is amended to increase the amount of tax payable, the taxpayer is liable to pay shortfall interest charge on the amount of the increase (section 280-100 in Schedule 1 to the Taxation Administration Act 1953 (TAA 1953)).

3.16 A company may be liable to pay additional tax because a claim for deduction is disallowed due to the operation of:

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the pre-rules in Part 1 of Schedule 3 to the Tax Laws Amendment ( 2012 Measures No. 2 ) Act 2012 ; or

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the interim rules in Part 2 of Schedule 3 to the Tax Laws Amendment ( 2012 Measures No. 2 ) Act 2012 .

3.17 It is considered that the shortfall interest charge should not be payable in these circumstances because the liability to interest arises only due to the retrospective operation of the pre-rules or the interim rules.

3.18 Therefore, the amendments will prevent a liability for shortfall interest charge from arising in these circumstances.

3.19 That is, where the pre-rules or the interim rules apply in working out the amount of a deduction, the deduction is disregarded in working out under subsection 280-100 in Schedule 1 to the TAA 1953 the extent, if any, to which an company is liable to pay an additional amount of income tax because of an amended assessment. [ Schedule 3, item 1, subitems 54(1 ) and ( 3 ) of Tax Laws Amendment ( 2012 Measures No . 2 ) Act 2012 ]

No administrative penalty if additional tax becomes payable under the pre-rules or the interim rules

3.20 A taxpayer may be liable to an administrative penalty where, broadly, the taxpayer makes, or fails to make, a statement to the Commissioner about the operation of the income tax law in certain circumstances (Division 284 in Schedule 1 to the TAA 1953).

3.21 The amount of the administrative penalty is generally based on the shortfall amount. The shortfall amount is the amount by which the relevant income tax liability, or the amount of a payment or credit of income tax, is less than or more than it would otherwise have been (section 284-80 in Schedule 1 to the TAA 1953).

3.22 A company may be liable to pay an administrative penalty because a claim for deduction is disallowed due to the operation of:

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the pre-rules in Part 1 of Schedule 3 to the Tax Laws Amendment ( 2012 Measures No. 2 ) Act 2012 ; or

•

the interim rules in Part 2 of Schedule 3 to the Tax Laws Amendment ( 2012 Measures No. 2 ) Act 2012 .

3.23 It is considered that an administrative penalty should not be payable in these circumstances because the liability to interest arises only due to the retrospective operation of the pre-rules or the interim rules.

3.24 Therefore, the amendments will prevent an administrative penalty from arising in these circumstances.

3.25 That is, where the pre-rules or the interim rules apply in working out the amount of a deduction, the deduction is disregarded in working out the amount, if any, of a shortfall amount under subsection 284-80(1) in Schedule 1 to the TAA 1953. [ Schedule 3, item 1, subitems 54(2 ) and ( 3 ) of Tax Laws Amendment ( 2012 Measures No . 2 ) Act 2012 ]

Application and transitional provisions

3.26 The amendments in Schedule 3 to this Bill commence on the day that the Tax Laws Amendment ( 2012 Measures No. 2 ) Act 2012 receives Royal Assent.

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights ( Parliamentary Scrutiny ) Act 2011

Consolidation

3.27 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights ( Parliamentary Scrutiny ) Act 2011 .

Overview

3.28 This Schedule amends Schedule 3 to the Tax Laws Amendment ( 2012 Measures No. 2 ) Act 2012 to ensure that:

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no interest is payable if an overpayment of income tax arises because of a deduction under the pre-rules in Part 1 of Schedule 3 to that Act; and

•

no shortfall interest or administrative penalty is payable if additional tax becomes payable because an amendment to an assessment is made, to the extent that the amendment is attributable to a deduction under the pre-rules in Part 1 of Schedule 3 to that Act or under the interim rules in Part 2 of Schedule 3 to that Act.

Human rights implications

3.29 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

3.30 This Schedule is compatible with human rights as it does not raise any human rights issues.

Assistant Treasurer, the Hon David Bradbury