House of Representatives

Explanatory Memorandum

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

General outline and financial impact

Taxation of interest on unclaimed money

Schedule 1 to this Bill amends the income tax and superannuation law to ensure that income tax is generally not payable on the interest paid by the Commonwealth on unclaimed money from 1 July 2013.

Date of effect: 1 July 2013.

Proposal announced: In the 2012-13 Mid-Year Economic and Fiscal Outlook (MYEFO), the Government announced reforms to unclaimed money and lost superannuation. As part of these reforms, interest will accrue and be payable on unclaimed money that is reclaimed from 1 July 2013.

The Treasury Amendment (Unclaimed Money and Other Measures) Act 2012 was enacted to give effect to these reforms. This Act did not deal with the taxation of interest paid on unclaimed money.

During the Parliamentary consideration of this legislation, the Government advised the Senate Standing Committee on Economics of its intention that this interest would be exempt from tax and this was included in the Senate Committee's report released on 19 November 2012.

Financial impact: Nil. The Government's intention to ensure that interest paid by the Commonwealth in respect of unclaimed money is not subject to income tax was reflected in the financial impact of the Treasury Amendment (Unclaimed Money and Other Measures) Bill 2012.

Human rights implications: This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 1, paragraphs 1.43 to 1.51.

Compliance cost impact: Nil. This measure is a minor consequential amendment. It will only affect a very small proportion of the business and not-for-profit sector in very limited circumstances. As it is a tax exemption it prevents affected businesses from needing to undertake compliance activities, avoiding costs.

Fringe benefits tax - reform of airline transport fringe benefits

Schedule 2 to this Bill amends the Fringe Benefits Tax Assessment Act 1986 to align the special rules for calculating airline transport fringe benefits with the general provisions dealing with in-house property fringe benefits and in-house residual fringe benefits.

The method for determining the taxable value of airline transport fringe benefits is also updated to simplify the practical operation of the law and to better reflect the economic value of the benefit.

Date of effect: 7:30 pm by legal time in the Australian Capital Territory on 8 May 2012.

Proposal announced: This measure was announced in the 2012-13 Budget and in the Treasurer and Assistant Treasurer's Joint Media Release No. 034 of 8 May 2012.

Financial impact: Unquantifiable.

Human rights implications: This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 2, paragraphs 2.82 to 2.86.

Compliance cost impact: Nil.

Sustainable Rural Water Use and Infrastructure Program

Schedule 3 to this Bill amends the Income Tax Assessment Act 1997 to allow participants in the Sustainable Rural Water Use and Infrastructure Program (SRWUIP) to choose to make payments they derive under the program free of income tax (including capital gains tax), with expenditure relating to the infrastructure improvements required under the program then being non-deductible.

Date of effect: Applies to payments made by the Commonwealth under a SRWUIP program on or after 1 April 2010, to reflect the date on which the Commonwealth signed the first contracts under the NSW Private Irrigation Infrastructure Operators Program (a major element of SRWUIP). Because irrigators enter into a SRWUIP program voluntarily and have the right to choose the new income tax treatment or to continue with the existing treatment, they suffer no disadvantage from this measure.

Proposal announced: 18 February 2011

Financial impact:

Human rights implications: This Schedule is compatible with human rights. See Statement of Compatibility with Human Rights - Chapter 3, paragraphs 3.87 to 3.95.

Compliance cost impact: This measure may impose some initial compliance costs on irrigators in choosing between the existing and new treatments. It may involve lower ongoing compliance costs for those who choose the new treatment because that removes SRWUIP amounts and related expenditure from the tax system.

Self managed superannuation funds - acquisitions and disposals of certain assets between related parties

Schedule 4 to this Bill amends the Superannuation Industry (Supervision) Act 1993 to prescribe requirements for acquisitions and disposals of certain assets between self managed superannuation funds (SMSFs) and related parties. These requirements ensure that these transactions are conducted with transparency and are not used to circumvent the requirements of the superannuation law.

Date of effect: This measure applies to transactions occurring on or after 1 July 2013.

Proposal announced: This measure was announced in the then Assistant Treasurer and Minister for Financial Services and Superannuation's Stronger Super Reforms Media Release, No. 024 of 16 December 2010. In September 2011, the Minister released the Stronger Super Information Pack, outlining key aspect of the Stronger Super Reforms. The Minister for Financial Services and Superannuation, Employment and Workplace Relations announced further details of these reforms in Media Release No. 044 of 13 July 2012.

Financial impact: Nil.

Human rights implications: Schedule 4 to the Bill does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 4, paragraphs 4.76 to 4.87.

Compliance cost impact: Low.

Summary of regulation impact statement

Regulation impact on business

Impact: A regulation impact statement for the measure contained in Schedule 4 to this Bill has been assessed as adequate by the Office of Best Practice Regulation.

Main points:

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Currently SMSF trustees are permitted to dispose of assets to related parties. They are prohibited from acquiring assets from related parties, subject to certain exceptions for assets such as listed securities and business real property.

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Related party transactions lack transparency and are open to abuse because the buyer and seller are often the same person, or are otherwise closely related. This is particularly the case where the transaction is conducted outside a formal market. The most common example of this is transfers of listed securities.

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There is a risk that related party transfers that occur 'off-market' or outside a formal market may involve transaction date or asset value manipulation to illegally benefit the SMSF or related party, for example, by circumventing the contribution caps and avoiding tax liabilities.

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Given the risk of abuse, new rules requiring transfers to be conducted through an underlying market or supported by an independent valuation were recommended.

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All stakeholders in the SMSF working group supported the recommendation to require transfers of assets between SMSFs and related parties to be supported by an independent valuation where there is no underlying market. Views regarding the recommendation for transfers to be conducted through an underlying market where one exists were mixed.

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It was concluded that the costs associated with these new rules would be low and affect only a small number of funds.

Loss carry-back

Schedules 5 and 6 amend the income tax law to allow corporate tax entities that have paid tax in the past, but are now in a tax loss position, to carry their loss back to those past years to obtain a refund of some of the tax they previously paid.

This is done through the mechanism of a refundable tax offset. The tax offset the entity can get is the lowest of:

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the tax value of the amount of the loss the entity chooses to carry back;

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the tax payable on $1 million taxable income ($300,000 at the current corporate tax rate);

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the entity's franking account balance at the end of the current year; and

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the tax liability for the year(s) the entity carries the loss back to.

Date of effect: These amendments apply to assessments for the 2012-13 income year and later income years.

Proposal announced: The measure was announced in the Assistant Treasurer and Minister for Small Business' Joint Media Release No. 022 of 6 May 2012.

Financial impact: The revenue impact of this measure is as follows:

Human rights implications: Schedules 5 and 6 do not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 8.

Compliance cost impact: The compliance cost for taxpayers that will arise from making the choice to obtain a refundable loss carry-back tax offset will be insignificant. As the process of making a claim for most taxpayers will involve lodging the current year return, no additional compliance costs are expected to arise. Taxpayers are already required to keep records concerning their losses.

Summary of regulation impact statement

Regulation impact on business

Impact: Schedules 5 and 6 give a corporate tax entity the choice of carrying back all or part of a tax loss from the current income year, or from the preceding income year, against an unutilised income tax liability for either of the two years before the current year. The measure applies to assessments for the 2012-13 and later income years. A transitional carry-back period of only one year applies for the 2012-13 income year.

Main points:

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Loss carry-back predominantly affects existing businesses that have been profitable in the recent past and are considering what changes they need to make in order to remain competitive or return to profitability.

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The measure will support businesses, particularly small and medium businesses that are not able to take advantage of the consolidation regime's loss utilisation rules (where losses incurred by one member of the group can be offset against income earned by other members of the same group).

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Firms that have recourse to loss carry-back can benefit from the improved cash flow that results from more timely and certain access to tax losses.

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The measure reduces the tax system's bias against sensible risk taking and thereby supports investment in innovation and adapting to changing economic circumstances.

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Carrying losses back flattens taxable income peaks and troughs. Consequently, this can help the economy in a downturn and allow for faster recovery of government revenue when the economy rebounds.

Miscellaneous amendments

Schedule 7 makes a number of miscellaneous amendments to the taxation laws as part of the Government's commitment to uphold the integrity of the taxation system.

Date of effect: Unless otherwise indicated in Chapter 9 of this explanatory memorandum, the amendments in Part 1 will commence on 1 July 2012, and the amendments in Parts 2 and 3 will commence on Royal Assent. Notwithstanding the retrospective nature of many of these amendments, they will not adversely impact upon any taxpayers. See paragraphs 9.253 to 9.263 for more information about the commencement and application provisions.

Proposal announced: The amendments in Part 1 were publicly released for consultation on the Treasury website on 15 August 2012. The amendments in Parts 2 and 3 were publicly released for consultation on the Treasury website on 21 December 2012.

Financial impact: These amendments will have a minimal impact on revenue over the forward estimates.

Human rights implications: These amendments do not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 9, paragraphs 9.266 to 9.270.

Compliance cost impact: Negligible.