Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Ralph Willis, MP)General Outline and Financial Impact
TAXATION LAWS AMENDMENT BILL (NO. 4) 1994
Mining and petroleum cash bidding
Amends the Income Tax Assessment Act 1936 to provide a deduction for successful cash bids for off-shore and on-shore mineral exploration authorities and mining authorities and on-shore petroleum exploration permits and production licences on a straight-line basis over the lesser of 10 years or the life of the mine or petroleum field. The amendment extends the present deduction for successful cash bids for off-shore petroleum exploration and production permits.
Date of effect: Mining cash bids incurred on or after 1 July 1993 and petroleum cash bids incurred from the date of introduction of this Bill into Parliament.
Proposal announced: The Treasurer's press release of 23 November 1993 for onshore mining exploration authorities and on-shore petroleum exploration permits. The proposed amendments for off-shore mining exploration authorities and mining authorities and on-shore petroleum production licences have not been announced.
Financial impact: The measure is estimated to cost the revenue less than $1 million each year. Without amendment miners would incur a capital loss at the time mining ceases or a permit is surrendered, where a successful cash bid has been made by the miner.
Compliance cost impact: To enable a deduction to be allowed over the 10 years or life of the mine or field taxpayers will need to keep a record of the expenditure incurred. Any additional cost is only the cost of keeping such records over the period for which deductions will now be allowed.
Children's income
Amends sections 102AE and 102AG of the Income Tax Assessment Act 1936 relating to certain income of minors to:
- •
- relieve from taxation at higher rates, income derived from the investment of property transferred, directly or beneficially, to a minor as part of a legal settlement in connection with a family breakdown. This gives effect to Parliament's original intention; and
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- clarify the anti-avoidance provisions relating to arm's length returns which limit the relief available to minor beneficiaries of 'income splitting' arrangements.
Date of effect: The first amendment will apply with effect from 1 July 1979 (the date of effect of sections 102AE and 102AG). The second will apply in relation to income derived on or after 7 March 1994.
Proposal announced: The amendments were announced in the Assistant Treasurer's press release of 7 March 1994.
Financial impact: The amendment of the anti-avoidance provisions will prevent a potential loss to the revenue of around $6 million per year.
Compliance cost impact: There should be no increase in compliance costs as a result of these amendments. The clarification of anti-avoidance provisions will make the law more certain and aid ease of compliance.
Dividend imputation
Company tax instalment system changes
Amends the imputation provisions of the Income Tax Assessment Act 1936 to bring franking account debits and credits into line with recently enacted changes to the arrangements for the collection of company tax.
Date of effect: The amendments will apply to the payment and refund of company tax instalments under the new quarterly arrangements relating to income derived during:
- •
- the 1994-95 year of income for small and medium instalment taxpayers; and
- •
- the 1995-96 year of income for large instalment taxpayers.
Proposal announced: Not previously announced. The new company tax instalment arrangements were enacted by the Taxation Laws Amendment Act (No.2) 1993.
Financial impact: No significant revenue impact.
Compliance cost impact: As there will be no change to the keeping of franking account records for company tax payments and refunds there will be no additional compliance costs.
Early payments of company tax for 1993-94
Amends the Income Tax Assessment Act 1936 to ensure that where an early payment of company tax, calculated at the 33% tax rate for the 1993-94 year of income, is made in that year itself and dividends are franked at the 39% rate on the basis of that payment, the total amount of imputation credits attached to the dividends cannot exceed the company tax paid.
Date of effect: The amendment will apply to payments of company tax made after 17 February 1994 but before the end of a company's 1993-94 franking year, and to any refund of such amounts.
Proposal announced: The Assistant Treasurer's press release No.15 of 17 February 1994.
Financial impact: The amendment will prevent a potential loss to revenue of around $1 million.
Compliance cost impact: The amendment substitutes the 39% rate for the 33% rate in the calculation of franking account entries for the few companies affected by this measure. This merely means that the formula used in the calculation by companies of their franking credits will be changed. It should not therefore have an impact on compliance costs.
Return of deducted superannuation contributions
Amends section 82AAQ of the Income Tax Assessment Act 1936 to ensure that it operates to include in assessable income any amounts representing the return of deductible superannuation contributions to a sponsoring employer or to an associate of a sponsoring employer.
Date of effect: 1 July 1988.
Proposal announced: Treasurer's Press Release of 9 September 1994.
Financial impact: There is insufficient data on which a reliable estimate of the revenue impact of this amendment can be made. However, the measure will ensure that the current law operates as intended and will remove scope for substantial revenue leakage.
Cost of compliance: The measure will have no impact on compliance costs.
Credit unions
Amends the Income Tax Assessment Act 1936 to ensure that the notional taxable income of a credit union is calculated as originally intended. The notional taxable income of a credit union comprises two classes of income:
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- member interest income (other than corporate members); and
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- non-member income and corporate member interest income.
The amendment allows credit unions to offset deductions incurred in deriving non-corporate member interest income against such income. The amendment also enables a net profit from one class of income to be offset against a net loss arising from the other class of income.
The term notional taxable income is used to determine whether a credit union is a small, medium or large credit union, and therefore the rate of tax that it pays.
Date of effect: 1994-95 year of income.
Proposal announced: Not previously announced.
Financial impact: None.
Compliance cost impact: These amendments allow credit unions to make the calculations the law already requires in a more sensible way, consistently with the original intention of the Parliament. The cost of making the required calculations is not affected.
Pooled development funds
Amends the Income Tax Rates Act 1986 to reduce the rate of tax payable by pooled development funds (PDF) on income from small and medium sized enterprises to 15%. All income from other sources (defined as unregulated investment income) will continue to be taxed at a rate of 25%.
Amends the Income Tax Assessment Act 1936 to divide the income of a PDF into two classes - income from small and medium sized enterprises and other income. A PDF is a company that is registered as such under the Pooled Development Funds Act 1992. PDFs provide a mechanism by which investors can provide development capital to small and medium sized enterprises.
Date of effect: 1994-95 year of income.
Proposal announced: Working Nation White Paper of 4 May 1994.
Financial impact: The measure is estimated to cost the revenue nil in 1994-95, $3 million in 1995-96, $4 million in 1996-97 and $4 million in 1997-98.
Compliance cost impact: No significant change in cost of compliance is involved. The administration of the two classes of income for tax purposes is simplified by automatic deduction rules which reduce the burden of complex apportionment calculations by companies.
Superannuation
Amends the Income Tax Assessment Act 1936 to:
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- clarify the existing tax treatment of overseas superannuation funds and payments related to them;
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- ensure tax concessions for superannuation contributions and benefits are limited to retirement benefits which accumulate in superannuation funds that comply with Australian regulations;
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- ensure non-resident superannuation funds cannot be used to avoid Australian regulations and that Australian tax concessions are not diverted to non-residents;
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- subject to withholding tax dividend, interest and royalty income derived by non-resident entities that do not qualify as foreign superannuation funds;
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- extend the current exemption for amounts that are taxed under the foreign investment fund measures to include amounts that are assessed under the eligible termination payment provisions;
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- recoup tax concessions given to superannuation funds that change their status from complying to non-complying and impose tax on funds which change their status from non-resident to resident.
Amends the Fringe Benefits Tax Assessment Act 1986 to include employer contributions paid to non-complying superannuation funds (other than contributions paid to a non-resident superannuation fund in respect of an employee who has a temporary entry permit for a period of up to four years) as fringe benefits.
Amends the Income Tax Act 1986 to make some minor consequential amendments.
Amends the Superannuation Industry (Supervision) Act 1993 to restrict complying status to resident superannuation funds and resident approved deposit funds.
Amends the Superannuation Guarantee (Administration) Act 1992 to make some minor consequential amendments.
The Income Tax (Former Complying Superannuation Funds) Bill 1994 and the Income Tax (Former Non-Resident Superannuation Funds) Bill 1994 will also be introduced as part of this measure to impose tax on superannuation funds that change their status from complying to non-complying or from non-resident to resident.
Date of effect: Generally these amendments will apply for the 1994-95 year of income.
However, the amendments to remove the withholding tax exemptions for certain dividend, interest and royalty income of overseas superannuation funds apply in relation to income derived by a fund after the day on which the amendments receive Royal Assent or the beginning of the 1994-95 year of income of the fund, whichever is later.
The amendments to extend the current exemption for amounts that are taxed under the foreign investment fund measures to include amounts that are assessed under Subdivision AA of Division 2 of Part III will apply in relation to amounts paid on or after 1 January 1993.
The amendments to recoup tax concessions given to superannuation funds that change their status from complying to non-complying and to impose tax on funds which change their status from non-resident to resident will apply from the beginning of the 1995-96 year of income.
Proposal announced: On 30 June 1994 the Treasurer released draft provisions necessary to give effect to changes announced by the former Treasurer in his Security in Retirement Statement of 30 June 1992.
Financial impact: The revenue implications are not expected to be significant.
Compliance cost impact: The measures will generally simplify and clarify the existing tax treatment. Consequently it is expected that there should be a reduction in compliance costs for superannuation funds and related entities and for taxpayers who receive superannuation benefits from outside Australia because of the removal of confusion caused by uncertainty about the application of the current law.
The amendments to impose fringe benefits tax on contributions paid to non-complying superannuation funds may increase compliance costs for some employers because they will need to keep records about contributions they make to non-complying superannuation funds for fringe benefit tax purposes. The employers affected will be primarily multi-national companies who employ expatriate employees for more than four years. However, those employers have to keep records of this nature under the existing law in order to claim deductions. Therefore, any additional compliance costs are likely to be relatively insignificant.
Research & development activities
Amends the
Income Tax Assessment Act 1936 and the
Industry, Research and Development Act 1986 to achieve three outcomes:
- (a)
- lower the expenditure threshold for the 150 per cent concession to $20,000. This removes the need for shading-in the higher rate of deduction for those companies with expenditure between $20,000 and $50,000;
- (b)
- allow certain expenditure incurred on research and development (R & D) activities undertaken outside Australia to be eligible for the concession; and
- (c)
- reduce the expenditure threshold from $1,000,000 to $500,000 for companies registering jointly. This will allow smaller R & D projects to be conducted by companies jointly.
Date of effect:
- (a)
- The elimination of shading-in rules will apply to deductions claimed for the 1994-95 or later years of income in respect of expenditure related to R & D activities.
- (b)
- The deduction for expenditure incurred on approved overseas R & D activities will be available for expenditure incurred after the Bill receives Royal Assent.
- (c)
- The reduced expenditure threshold for syndicates will apply to syndicate registrations on or after 1 July 1994 in respect of any proposed projects starting on or after that date and including R & D activities.
Proposal announced: Working Nation White Paper of 4 May 1994.
Financial impact:
- (a)
- Elimination of shading-in rules is estimated to cost the revenue $2 million per annum from 1995-96.
- (b)
- The tax deductibility of expenditure on overseas R & D activities cannot be quantified, but it is expected to have some cost to revenue.
- (c)
- The reduced expenditure threshold for syndicates is estimated to cost the revenue $4 million per annum from 1995-96.
Compliance cost impact:
- (a)
- Elimination of shading-in rules
- Compliance costs will be reduced because lowering the expenditure threshold to $20,000 will remove the shading-in calculation for R & D expenditure between $20,000 and $50,000. This amendment will simplify the law and make it easier for companies with small R & D projects to calculate the amount of their tax concession.
- (b)
- Expenditure on overseas R & D activities
- Entitlement to a deduction for expenditure on overseas R & D activities will require companies to seek approval for such activities from the Industry, Research and Development Board. Companies will be required to keep records of the approval and of their overseas R & D activities to be able to prove, where required, that expenditure claimed as a deduction relates only to the overseas R & D activities approved.
- Because taxpayers claiming deductions for R & D expenditure must show that the expenditure relates to R & D activities, most taxpayers are unlikely to have additional compliance costs beyond the cost of seeking prior approval from the Board. Some taxpayers may need minor additional records to distinguish expenditure on approved overseas R & D activities from expenditure on any other overseas R & D activities.
- (c)
- Reduced expenditure threshold for syndicates
- Reducing the expenditure threshold will have no effect on compliance costs of companies forming syndicates for R & D activities.
Payment of interest on overpayments and early payments
Amends the Taxation (Interest on Overpayments) Act 1982 to broaden the range of circumstances in which interest will be paid on overpayments of income tax.
Date of effect: 1 July 1994.
Proposal announced: The Treasurer's Information Paper of August 1991 titled 'Improvements to Self Assessment - Priority Tasks'.
Financial impact: If 10% of refunds are paid 15 days late, then the amendments will cost $1.7 million in 1994-95 and $1 million in subsequent years. The reduced amount in subsequent years results from the estimate of tax payable on the interest as income.
Compliance cost impact: As the Commissioner will be calculating interest entitlements and either refunding amounts to taxpayers or applying them in discharge of other tax liabilities, there will be no cost to taxpayers.
Amends the Taxation (Interest on Overpayments) Act 1982 to provide for payment of interest where there has been an early payment of:
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- income tax;
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- provisional tax;
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- an instalment of provisional tax;
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- an initial or final payment of tax by a company or superannuation fund; or
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- an instalment of tax by an instalment taxpayer.
Date of effect: 1 July 1994.
Proposal announced: The Treasurer's Information Paper of August 1991 titled 'Improvements to Self Assessment - Priority Tasks'.
Financial impact: The amount of interest paid will be negligible in 1994-95. Revenue costs are estimated to be $200,000 per annum in 1995-96 and then $130,000 in subsequent years, as tax is payable on the interest paid to taxpayers.
Compliance cost impact: After an entitlement to interest arises, taxpayers will have the option of either claiming the amount of interest in an income tax return or making a request to the Commissioner to calculate and refund the amount. No new records will have to be kept by taxpayers to justify the claim, since the Commissioner will have all the information necessary to calculate an interest entitlement.
Rates of interest for calculating superannuation guarantee charge
Amends the Superannuation Guarantee (Administration) Act 1992 to overcome a fall in the interest rate used to calculate superannuation guarantee charge (presently the rate prescribed in the Taxation (Interest on Overpayments) Regulations, which was reduced from 1 July 1994) by allowing for a rate of interest to be prescribed for the purposes of that Act. The amendments preserve the former rate of interest of 10 per cent by specifying that rate until such time that regulations are made.
Date of effect: 1 July 1994.
Proposal announced: Treasurer's press release of 18 July 1994.
Financial impact: The amendment will prevent a loss of around $80,000 in superannuation guarantee charges distributed for the benefit of employees.
Compliance cost impact: Because these changes merely maintain existing arrangements, there will not be any new costs for employers.
Employee share acquisition schemesTHIS MEASURE WAS WITHDRAWN FROM THE BILL
Development allowance
Amends the Development Allowance Authority Act 1992 to require the company chairperson's signature on applications for pre-qualifying certificates, and for transfers and variations of certificates of registration and pre-qualification for the development allowance.
Date of effect: Royal Assent.
Proposal announced: Not previously announced.
Financial impact: None.
Compliance cost impact: This minor amendment will not lead to an increase in compliance costs.
INCOME TAX (FORMER COMPLYING SUPERANNUATION FUNDS) BILL 1994
Imposes tax on the net previous income of superannuation funds that change their status from complying to non-complying. The liability for this tax is provided for in the measure on overseas superannuation funds and related matters included in Taxation Laws Amendment Bill (No. 4) 1994.
Date of effect: The amendments to recoup tax concessions given to superannuation funds that change their status from complying to non complying apply from the beginning of the 1995-96 year of income.
Proposal announced: On 30 June 1994 the Treasurer released draft provisions necessary to give effect to changes announced by the former Treasurer in his 'Security in Retirement' Statement of 30 June 1992.
Financial impact: The revenue implications are not expected to be significant.
Compliance cost impact: The measure on overseas superannuation funds and related matters will generally simplify and clarify the existing tax treatment. Consequently it is expected that there should be a reduction in compliance costs for superannuation funds and related entities and for taxpayers who receive superannuation benefits from outside Australia because of the removal of uncertainty about the application of the current law.
INCOME TAX (FORMER NON-RESIDENT SUPERANNUATION FUNDS) BILL 1994
Imposes tax on the net previous income of superannuation funds that change their status from non-resident to resident. The liability for this tax is provided for in the measure on overseas superannuation funds and related matters included in Taxation Laws Amendment Bill (No. 4) 1994.
Date of effect: The amendments to impose tax on superannuation funds that change their status from non-resident to resident apply from the beginning of the 1995-96 year of income.
Proposal announced: On 30 June 1994 the Treasurer released draft provisions necessary to give effect to changes announced by the former Treasurer in his 'Security in Retirement' Statement of 30 June 1992.
Financial impact: The revenue implications are not expected to be significant.
Compliance cost impact: The measure on overseas superannuation funds and related matters will generally simplify and clarify the existing tax treatment. Consequently it is expected that there should be a reduction in compliance costs for superannuation funds and related entities and for taxpayers who receive superannuation benefits from outside Australia because of the removal of uncertainty about the application of the current law.
INCOME TAX RATES AMENDMENT BILL 1994
Amends the Income Tax Rates Act 1986 to reduce the threshold at which the income of a medium credit union is subject to tax. This is a minor technical amendment which reduces the threshold from income exceeding $50,000 to income exceeding $49,999.
The alteration to the threshold aligns it with the threshold for a medium credit union in the Income Tax Assessment Act 1936 and ensures that the threshold accords with the original announcement.
Date of effect: 1994-95 year of income.
Proposal announced: Not previously announced.
Financial impact: None.
Compliance cost impact: This minor technical amendment has no impact on compliance costs.
INCOME TAX (DEFICIT DEFERRAL) BILL 1994
Imposes deficit deferral tax. The liability for deficit deferral tax is provided for in the amendments to the imputation provisions of the Income Tax Assessment Act 1936 by the Taxation Laws Amendment Bill (No. 4) 1994.
Date of effect: Royal Assent.
Proposal announced: Not previously announced.
Financial impact: Deficit deferral tax will prevent the deferral of tax that the amendments to the imputation provisions would otherwise permit.
Compliance cost impact: There will be an additional payment and reporting obligation for the relatively few companies that become liable for deficit deferral tax.