SENATE

REPLACEMENT Explanatory Memorandum

(Circulated by the authority of the Treasurer the Hon John Dawkins, M.P.)THIS MEMORANDUM TAKES ACCOUNT OF AMENDMENTS MADE BY THE House of Representatives TO THE BILL AS INTRODUCED

Clauses involved in the proposed amendments

General

Clause 1: stipulates the short title of the Act as being Taxation Laws Amendment Act (No.2) 1993.

Clause 2: stipulates the commencement date of the provisions of the Bill.

Fringe Benefits Tax - Extension of Child Care Exemptions

[see pages 19-21 for further details]

Clause 3: defines "Principal Act" as being the Fringe Benefits Tax Assessment Act 1936

Clause 4: amends subsection 47(8) to extend the exemption available to priority of access payments to eligible child care centres to priority of access payments (made for similar purposes) to Family Day Care, Outside School Hours Care and Vacation Care.

Clause 5: sets out the date on or after which these amendments will apply.

Clause 6: is a transitional provision which provides for the change of name of the program known as Services for Families with Children to Children's Services Program.

Amendments of the Income Tax Assessment Act 1936

Clause 7: defines "Principal Act" as being the Income tax Assessment Act 1936.

Amendments to improve the readability of section 78

[see pages 23-25 for further details]

Clause 8: proposes to omit existing section 78 and replace it with new section 78 which restructures the gift provisions to improve their readability.

Clause 9: proposes a consequential amendment to the definition of 'apportionable deductions' in subsection 6(1) as a result of the restructuring of the gift provisions (by clause 8).

Clause 10: proposes a consequential amendment to section 78A as a result of the restructuring of the gift provisions.

Clause 11: proposes a consequential amendment to section 102AAH dealing with non- resident family trusts as a result of the restructuring of the gift provisions.

Clause 12: proposes a consequential amendment to section 328 dealing with non-resident family trusts as a result of the restructuring of the gift provisions.

Clause 13: proposes that the amendments made by this Division apply in relation to:

(a)

gifts and contributions made on or after 1 July 1993; and

(b)

pensions, gratuities and retiring allowances paid on or after 1 July 1993.

The amendments made by clauses 11 and 12 apply in relation to the characterisation of a trust as at a time on or after 1 July 1993.

Clause 14: proposes a transitional arrangement ensuring that those funds, authorities or institutions approved under the existing legislation will continue to hold that approval under the new legislation.

Amendments relating to migration information

[see pages 27-28 for further details]

Clause 15: amends section 16 by inserting new paragraph 4(hd). This new paragraph lists the Secretary to the Department of Immigration and Ethnic Affairs with the persons and entities to whom the Commissioner of Taxation or his delegate may furnish information.

Income tax exemption for Defence Force and Federal Police personnel serving in certain areas

[see pages 29-36 for further details]

Clause 16: is a technical amendment to section 23AB of the Income Tax Assessment Act 1936 (ITAA) to ensure that a member of the Australian Federal Police (AFP) does not become entitled to both a tax exemption and a tax rebate in respect of the same pay and allowances received in connection with United Nations service overseas.

Clause 17: extends the scope of section 23AC, which provides an income tax exemption for service in certain operational areas, to include Somalia and the area formerly known as Yugoslavia.

Clause 18: are new provisions which will provide:

•

any future income tax exemptions to members of the Defence Force through the Regulations; and

•

exemption of pay and allowances of AFP members serving with the United Nations Transitional Authority in Cambodia.

Clause 19: is a technical amendment to section 79B of the ITAA to ensure that a member of the ADF does not become entitled to both a tax exemption and a tax rebate in respect of the same pay and allowances received in connection with United Nations service overseas.

General Investment Allowance

[see pages 37-51 for further details]

Clause 20: inserts new Subdivision BA, containing the general investment allowance provisions [new sections 82AR to 82AW], in Division 3 of Part III of the Income Tax Assessment Act 1936.

New section 82AR specifies the purpose and nature of the general investment allowance.

New section 82AS explains that entitlement to the general investment allowance is to be worked out using the existing development allowance provisions with some changes inserted by the following clauses.

New section 82AT is the main deduction provision. It provides a deduction equal to 10% of the capital cost of eligible plant used wholly and exclusively in Australia in producing assessable income ordered or commenced to be constructed between 8 February 1993 and before 1 July 1994 and first so used or installed ready for such use before 1 July 1995.

New section 82AU substitutes dates relevant for the general investment allowance for dates contained in the development allowance.

New section 82AV modifies the application of existing section 82AC for the purposes of the general investment allowance. Section 82AC limits the amount that leasing companies can claim as a deduction for the development allowance from their leasing business to the amount of net income. New section 82AV ensures that the limit is to apply in relation to the sum of deductions allowable under either the general investment allowance or the development allowance.

New section 82AW allows a leasing company to transfer some or all of its entitlement to the general investment allowance from a lease transaction to the lessee by giving a declaration and statement to the lessee in a set time. Under the development allowance, the declaration and statement must be given to the Commissioner of Taxation.

New section 82AX removes the reference to the objects provision in the development allowance [section 82AAAA] for the purposes of this new allowance.

Clauses 21 & 22: are technical amendments to insert a reference to the general investment allowance in subparagraph 50C(3)(d)(ii) and in paragraph 50F(1)(b), relevant for working out the taxable income of a company for which there has been a disqualifying change in the degree of ownership or control of the company during a year of income.

Clause 23: is a technical amendment inserting a reference to new subdivision BA in subsection 56(3) so as to ensure that the general investment allowance is available in addition to plant depreciation.

Clause 24: is a technical amendment to insert a reference to the general investment allowance in existing section 82AC relevant for working out the maximum amount that leasing companies can claim for both the development allowance and the general investment allowance from their leasing business.

Clause 25: is a technical amendment to insert a reference to the general investment allowance in subparagraph 159GJ(1)(a)(i) and paragraph 159GJ(1)(a), contained in measures which deny property related deductions in certain circumstances for property used, or the use of which is controlled, by tax-exempt or non-taxable entities.

Clause 26: is a technical amendment to insert a reference to the general investment allowance in subsection 170(10) which deals with the time limits within which assessments may be amended.

The Taxation of Foreign Investment Funds

[see pages 53-94 for further details]

Subclause 2(2): provides that the amendments to the FIF measures apply from the commencement of the Income Tax Assessment Amendment (Foreign Investment) Act 1992, i.e., 1 January 1993.

Clause 27: inserts new subsection 96A(1A) to prevent double taxation of trust income.

Clause 28: amends the definition of "eligible exempt income" in subsection 160Z(10) to exclude amounts exempt under section 23AK.

Clause 29: inserts into section 317, definitions of certain terms used in relation to FIF attribution accounts which are to be used in Part X.

Clause 30: inserts new subsection 402(4) to provide an exemption from notional assessable income for amounts received by a CFC which are paid out of profits which have been taxed under the FIF measures.

Clause 31: inserts new subsection 607A which specifies how to determine the "grossed-up amount" in relation to a FIF attribution debit.

Clause 32: omits from section 470, the definition of "trading stock" thereby giving the term "trading stock" its normal meaning where it is used in Part XI unless a contrary intention is expressed.

Clause 33: modifies the meaning "trading stock" for the purposes of section 568 to exclude securities within the meaning of the Corporations Law that would normally be treated as "trading stock" for the purposes of the Act.

Clause 34: amends section 485 to clarify that the FIF measures do not apply to a taxpayer who is a resident of both Australia and another country where a double taxation agreement treats the taxpayer as a resident solely of the other country.

Clause 35: amends subsection 485(1) so that new section 485A will be taken into account when determining whether the FIF measures apply to a taxpayer.

Clause 36: inserts new section 485A to clarify, following the amendment made by clause 34, that the FIF measures are to apply when calculating the net income of a partnership or a trust estate (other than a trust which is exempt from the FIF measures because of the country fund exemption).

Clause 37: replaces existing paragraph 530(1)(d) with new paragraph 530(1)(d) to expand the types of exempt income received from a FIF which will reduce FIF income.

Clause 38: omits subsection 535(4) so that the calculation method may be used to determine FIF income for any notional accounting period of a FIF which ends during the taxpayer's year of income. It also inserts new subsection 535(4) to limit, prospectively, the circumstances where a taxpayer can elect to use the calculation method to determine FIF income.

Clause 39: inserts new subsection 580(4A) to apportion a company FIF's calculated profit where a taxpayer elects to use the calculation method to determine FIF income for a notional accounting period of the company FIF which does not correspond to the period for which the company FIF makes out its accounts.

Clause 40: inserts new subsection 582(7A) to apportion a trust FIF's calculated profit where a taxpayer elects to use the calculation method to determine FIF income for a notional accounting period of the trust FIF which does not correspond to the period for which the trust FIF makes out its accounts.

Clause 41: simplifies subsection 538(2) by replacing paragraphs 538(2)(b) to (e) with new paragraphs (b) to (e).

Clause 42: amends subsection 538(2) to provide a more equitable basis of taxation where a taxpayer changes from using the deemed rate of return method of calculating FIF income to the market value method. It also amends subsection 596(2) to provide a more equitable basis of taxation where a taxpayer changes from using the deemed rate of return method of calculating FIF income in relation to a FLP to the cash surrender value method.

Clause 43: amends subsection 538(3) and inserts new subsection 538(4) to allow a taxpayer to elect irrevocably to calculate FIF income under the market value method using Australian currency.

Clause 44: amends subsection 542(3) to ensure that it does not apply where a taxpayer has elected to calculate FIF income under the market value method using Australian currency.

Clause 45: amends subsections 539(3) and (4) to enable taxpayers to determine the market value of an interest in a company FIF by reference to the redemption price of the interest. It also allows a purchase price offered by an associate of a FIF for an interest in the FIF to be used to determine the FIF's market value.

Clause 46: allows Regulations to be made to prescribe the amortisation rate for a class of property prescribed for the purposes of subparagraph 570(1)(a)(iii);

Clause 47: replaces paragraph 606(2)(b) with new paragraph 606(2)(b) to ensure that a FIF attribution debit does not arise to the extent that a FIF attribution account payment gives rise to an attribution debit under the CFC measures thereby preventing double counting of the same amount under both the CFC and FIF attribution account systems.

Clause 48: makes a minor technical amendment to paragraph 160AFCK(2)(b).

Clause 49: makes a minor technical amendment to section 509.

Clause 50: makes a minor technical amendment to section 523.

Clauses 57 & 58: insert subsection 14(2) into the Income Tax Assessment Amendment (Foreign Investment) Act 1992 to provide that the exclusion from passive income of amounts that arise from an asset necessarily held by a taxpayer in connection with an insurance business actively carried on by the taxpayer has effect from the 1992-93 year of income.

Company Tax Instalment System

[see pages 95-102 for further details]

Clause 51: inserts the new Division 1C of Part VI of the Income Tax Assessment Act 1936 which deals with the payment of tax by companies and certain trustees.

Clause 52: inserts an interpretation clause required for the application and transitional provisions.

Clause 53: inserts the application provisions for the new Division 1C of Part VI of the Income Tax Assessment Act 1936, including the transitional provisions for large instalment taxpayers.

Clause 54: inserts a transitional penalty provision for excessive estimates made in the 1994-95 year of income.

Clause 55: inserts various consequential amendments.

Clause 56: amendment of assessments.

Income Tax Rates Act 1986

Clause 59: defines "Principal Act" as being the Income Tax Rates Act 1986

Company Tax Rates Reduction

[see pages 103-107 for further details]

Clause 60: amends section 23 of the Principal Act to reduce the rate of company tax from 39 per cent to 33 per cent and to reduce the concessional rate of tax applying to the income of Pooled Development Funds (PDFs) from 30 per cent to 25 per cent.

Paragraph (a) provides that the rate of tax for companies generally will be reduced from 39 per cent to 33 per cent.

Paragraph (b) provides that the rate of tax on the non-fund component of taxable income of a non-mutual life assurance company will be reduced from 39 per cent to 33 per cent

Paragraph (c) provides for the reduction in the concessional rate of tax applied to companies that are PDFs.

Paragraph (d) amends the shading in threshold that applies in respect of non-profit companies, other than registered organisations.

Clause 61: amends section 24 of the Principal Act to reduce the rate of tax on trustees of corporate unit trusts from 39 per cent to 33 per cent.

Clause 62: amends section 25 of the Principal Act to reduce the rate of tax on trustees of public trading trusts from 39 per cent to 33 per cent.

Clause 63: amends section 28 of the Principal Act to reduce from 39 per cent to 33 per cent the rate of tax on trustees to whom subsection 98(3) of the Income Tax Assessment Act 1936 applies (non-resident companies as presently entitled beneficiaries).

Clause 64: indicates that these amendments apply in respect of the 1993-94 and subsequent years of income.