Explanatory Memorandum
(Circulated by the authority of the Treasurer,the Honourable Ralph Willis, M.P.)THIS MEMORANDUM TAKES ACCOUNT OF AMENDMENTS MADE BY THE HOUSE OF REPRESENTATIVES TO THE BILL AS INTRODUCED.CHAPTER 3
Explanation of Proposed Amendments to the Income Tax Assessment Act 1936
Tax Effects of Infrastructure Borrowings
3.1 The Bill also proposes amendments to the Tax Act to:
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- repeal the interpretations in the income tax law that define infrastructure borrowings and related concepts, that will be replaced in the development allowance authority law; and
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- allow investors, at their election, to include interest income derived from infrastructure borrowings in assessable income and receive a rebate of 33 per cent of that amount.
3.2 Subdivision A of Division 16L of the Tax Act specifies the conditions under which certain loans may be characterised as infrastructure borrowings. The Bill proposes amendments that will transfer the administration of revised conditions and some other administrative responsibilities relating to infrastructure borrowings to the DAA. Accordingly, the Bill will repeal Subdivision A of Division 16L for infrastructure borrowings raised on or after the date the Bill receives Royal Assent. [Clause 21] A heading is omitted in consequence. [Clause 22]
3.3 Under the existing law if a borrowing is an infrastructure borrowing then interest and payments in the nature of interest are exempt from income tax for the exemption period. [Subsection 159GZZZZE(1)]
3.4 Similarly, if a borrowing is a "security" within the definition of the term in section 159GP, the interest accrued on the borrowing during the exemption period is exempt from tax and not tax deductible to borrowers. Once the fifteenth anniversary of the issue of the security has passed, Division 16E will apply to determine the assessable return on the security. [Subsection 159GZZZZE(2)]
3.5 Section 159GZZZZE will be amended so that it will not apply to interest, payments in the nature of interest and accrued interest in a year of income if the taxpayer has elected to treat infrastructure borrowing (IB) amounts (see later notes) as assessable income and claim the rebate. [New subsection 159GZZZZE(1A)]
3.6 The Bill will extend the "exemption period" from 10 years to 15 years for borrowings raised on or after the date the Bill receives Royal Assent, other than refinancing infrastructure borrowings, which will have only the balance of the exemption period of the borrowing they replace. [New section 159GZZZZD]
3.7 The exemption period will commence at the time of the borrowing, which is when the lender/borrower relationship is created. Investors will therefore be exempt from income tax on interest, payments in the nature of interest, and accrued interest on securities on infrastructure borrowings (for which the DAA has issued a certificate) for 15 years from the day the borrowing was raised.
3.8 The amendments will provide investors in infrastructure borrowings with a choice as to the way interest, a payment in the nature of interest, or income accrued on a "security" within the definition of the term in section 159GP of the Tax Act, is to be treated for tax purposes.
3.9 The options available to an investor are to:
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- treat the income as exempt; or
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- include interest, payments in the nature of interest and accrued income on securities (assessable under Division 16E) in assessable income and receive a tax rebate of 33 per cent of the amount.
3.10 The rebate will be allowable on an "IB amount", which in the case of a share of the net income from a trust or partnership, will include an "IB attributable amount".
3.11 An IB amount will be interest, payments in the nature of interest or amounts that would be included in the assessable income of the investor under section 159GQ (which provides for the inclusion of income from certain securities on an accruals basis under Division 16E). Gains arising on the disposal of securities that are infrastructure borrowings will not be IB amounts and will not qualify for the rebate, whether those gains are of a capital or revenue nature and whether the securities are trading stock. [New section 159GZZZZD]
3.12 The IB attributable amount is the share of the net income of a beneficiary in a trust or a partner in a partnership that is attributable to IB amounts derived by the trust or partnership. It will include such amounts derived by the trust or partnership directly, or indirectly through other trusts or partnerships.
3.13 The length of the infrastructure period depends on the type of borrowing. It is the period for which conditions under section 93R of the DAA Act will have applied to the certificate holder, if the certificate had not been cancelled.
PERIOD BEGINS ENDS
Direct infrastructure borrowing
End of 25 year period from first use of asset
Indirect infrastructure borrowing
When the borrowed money is lent to the direct infrastructure borrower
Refinancing infrastructure borrowing - direct infrastructure borrowing
End of 25 year period for the direct infrastructure borrowing
Refinancing infrastructure borrowing - indirect infrastructure borrowing
When the borrowed money is lent to the direct infrastructure borrower
3.14 The tax benefit amount will be calculated for each year of income before the year in which the first act or omission occurred that was a ground for cancelling the certificate and for each subsequent year of income until the borrowings are repaid (see below).
3.15 The tax benefit amount for any year is the total of the interest, amounts in the nature of interest, and accrued amounts under section 159GT that would have been deductible to the borrowers of infrastructure borrowings used to finance the construction of the facility and the acquisition of any related facilities during that year but for the relevant certificate. The amount will be calculated in relation to each certificate cancelled.
3.16 A taxpayer who derives income from infrastructure borrowings, either from a direct investment or indirectly through a partnership or trust, will be able to elect to claim the rebate simply by including all the IB amounts derived in a year of income in the assessable income of that year of income. [New paragraph 159GZZZZG(1)(b)]
3.17 In the case of an investor who claims the rebate on interest accrued on a security, the IB amount to be included in assessable income will be calculated under section 159GQ.
3.18 A taxpayer who has elected to claim the rebate on an IB amount in a particular year of income must include all IB amounts and IB attributable amounts in assessable income. A taxpayer who includes only some amounts or part of any amount in assessable income will have elected to be taxed on all the IB amounts. Any IB amount or IB attributable amount not included in assessable income by a taxpayer who has included other such amounts in assessable income of that year of income, will constitute an omission of assessable income and may be penalised in the same way as any other omission of assessable income.
3.19 An election may be made by a taxpayer who in the year of income in which the income is derived is:
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- a natural person;
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- a company;
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- a corporate unit trust - that is a unit trust that is taxed as a company under Division 6B of the Tax Act;
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- a public unit trust - that is a unit trust that is taxed as a company under Division 6B of the Tax Act;
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- an eligible entity for the purposes of Part IX of the Tax Act. The following taxpayers are eligible entities:
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- a complying or non-complying approved deposit fund (ADF);
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- a complying or non-complying superannuation fund; and
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- a pooled superannuation trust.
3.20 A corporate limited partnership within the meaning of section 94D of the Tax Act is treated as a company for tax purposes because of the application of section 94J of that Act. A corporate limited partnership will therefore be entitled to elect to claim the rebate.
Beneficiary Assessable Under Section 97
3.21 A beneficiary is assessable under section 97 if he or she is beneficially entitled to a share of the net income of the trust and is not under a legal disability. If the beneficiary elects to claim the rebate, the beneficiary's share of the net income of the trust will be calculated as if the IB amount derived by the trust was assessable income of the trust. A beneficiary who elects to claim an IB attributable amount received through a trust must include all other IB amounts derived from all sources in assessable income. [New subsection 159GZZZZG(2)]
3.22 A beneficiary in a trust whose share of net income from the trust includes an amount that is an attributable IB amount (see above) will be able to elect to claim the rebate on an IB attributable amount received through the trust. Any beneficiary who elects to receive the rebate on an IB amount received from a trust must include all IB amounts and IB attributable amounts in assessable income.
3.23 A beneficiary must have a share of net income from the trust to be able to treat an IB attributable amount as assessable. If the trust incurs a net loss in a year of income, a beneficiary does not have a share of the net income. IB amounts derived by a trust will not have the effect of converting a net loss incurred by a trust into net income.
3.24 The trustee of a trust estate may be assessed on the net income of a trust estate if: a beneficiary is presently entitled to a share of the income of the trust but is under a legal disability (for example, a minor) (section 98); or no person is presently entitled to the whole or a part of the net income of the trust (section 99 or 99(A)) (for example, the administration of a deceased estate has not been completed or trust income has been accumulated).
Beneficiary Assessable Under Section 98
3.25 Where a trustee is assessed as an individual under section 98 on the income of a beneficiary who is under a legal disability, the trustee is liable for any tax assessed. The beneficiary must also include the trust income in his or her assessable income and receives a rebate of tax for the amount of tax paid by the trustee (section 100).
3.26 A trustee who is assessed on the trust income of a trust under section 98 will be able to elect to claim the rebate by including any of the IB attributable amount in the net income on a share of which the trustee is being assessed. The whole IB attributable amount must then be included in that net income for the purpose of calculating that share of income.
3.27 The beneficiary will not be able to make the decision as to whether the IB amount is rebatable or exempt. The amount on which the beneficiary is assessable (under section 100) will be assessed on the same basis as the section 98 assessment to the trustee. That is, if the trustee exercises the rebate election, the income will be included in the beneficiary's share of the net income and the rebate will be included in the credit allowed (under subsection 100(2)) to the beneficiary. Where a trustee does not elect to claim the rebate, the IB amount will constitute exempt income on which the trustee is exempt from tax.
3.28 If the beneficiary on whose behalf the trustee is assessed also derives another IB amount in the same year of income from a direct investment in infrastructure borrowings, the beneficiary is free to elect to claim the rebate in that respect or to treat that income as exempt. [New subsection 159GZZZZG(3)]
Beneficiary Assessable Under Section 99 or 99A
3.29 A trustee who is assessed on the trust income of a trust under section 99 or 99A will be able to elect to claim the rebate or to treat the IB amount derived by the trust as exempt. [New subsection 159GZZZZG(3)]
3.30 A partner in a partnership whose share of net income from the partnership includes an amount that is an attributable IB amount (see above) will be able to elect to claim the rebate on the IB amount received through the partnership. Any partner who elects to receive the rebate on any IB amount received through the partnership must include all IB amounts and IB attributable amounts in assessable income. [New subsection 159GZZZZG(4)]
3.31 The share of the net income of a partner who has elected to claim a rebate on IB amounts will be calculated as if the IB amount derived by the partnership was assessable income of the partnership.
3.32 A partner must have a share of net income from the partnership to be able to treat an IB attributable amount as assessable. If the partnership incurs a net loss in a year of income, a partner does not have a share of the net income. IB amounts derived by a partnership will not have the effect of converting a net loss incurred by the partnership into net income.
Non-deductibility of Payments Where Rebate Election is Made
3.33 The inclusion of an Infrastructure Borrowing amount in the assessable income of a person under this section does not affect the denial of allowability of a deduction to another person in respect of the same amount under subsections 159GZZZZG(1) or (2).
Assessment of Tax on Cancelled Certificate
3.34 If the DAA cancels a certificate (under new sections 93Z, 93ZA or 93ZB of the DAA Act) and there is a tax benefit amount (see above), the holder of the certificate is liable to pay tax imposed by the Infrastructure Certificate Cancellation Tax Bill 1994 on that amount. Assessments will be issued on the tax benefit amount for each year since the borrowing commenced up to and including the year of income in which the first act or omission occurred that was a ground for cancelling the certificate. For each future year of income, until the borrowings are repaid, there will be a further tax benefit amount and assessments will be issued on the tax benefit amount for that year (see below). [New section 159GZZZZH]
3.35 The provisions of the income tax law dealing with the issue of notices of assessment, amendments of assessments, refunds of amounts overpaid, various provisions relating to the collection and recovery of income tax, and miscellaneous provisions relating to agents, trustees, persons receiving or controlling a non-resident's money, recovery of tax paid on behalf of someone else, contribution by joint taxpayers, and relief in cases of hardship, will apply to the charge as if it was income tax. [New subsection 159GZZZZH(4)]
Assessment of Tax When a Certificate is Cancelled
3.36 If the DAA cancels a certificate and the DAA provides the Commissioner with all the information necessary to calculate: the interest, payments in the nature of interest or section 159GT amounts which would, but for subsections 159GZZZZE(1) and (2), have been allowable deductions during the 15 year exemption period (tax benefit amount); and the infrastructure period and the part of that period that occurred before the certificate was cancelled; the Commissioner will calculate the amount of the tax liability on the cancellation of the certificate. The tax will be calculated for each year of income up to and including the year of income in which the first act or omission occurred that was a ground for cancelling the certificate, and for each year of income until the borrowings are repaid. [New subsection 159GZZZZH(1)]
3.37 The tax will be calculated as 15 per cent of the tax benefit amount times a factor. For the year in which the first grounds for cancelling the certificate occurred and all previous years, this factor will be equal to the number of years remaining in the infrastructure period at the time of the first act or omission that was a ground for cancelling the certificate, divided by the total number of years in the infrastructure period. So the later the default on which cancellation is based, the smaller the proportion of the 15 per cent of tax benefits obtained up to and including the year of default that will be recovered by the tax. The charge levied on the certificate holder would be equal to the amount generated by the following formula:
15% Tax Benefit = Amount
3.38 For any years following the first default in which infrastructure borrowings remain outstanding, this factor will be equal to 1. So, wherever the default leads to a certificate being cancelled, all tax benefits obtained for years after the default will be subject to a 15% tax.
3.39 In the case of "tax benefit amounts" received following the breach, there will be no scaling down of the recoupment charge according to the proportion of the total infrastructure period following the breach. Effectively the formula will be "15% Tax Benefit = Amount" (that is, the charge will apply to the full "tax benefit amount").
3.40 If the infrastructure borrowings have not been repaid at the time the default occurs that leads to the certificate being cancelled, the formula effectively applies to the accumulated interest, amounts in the nature of interest, and accrued amounts (from when the borrowing commenced) that would have been deductible to the borrower up to the end of the year of income in which the default occurred. For those years, the formula scales down the 15 per cent tax in proportion to the part of the infrastructure period remaining after default. In each future year of income, until the borrowings are repaid, the formula would apply to the tax benefit amount for each year, which is the annual interest, amounts in the nature of interest and accrued amounts (that continue to be non-deductible to the borrower). For those years, the formula does not reduce the 15 per cent tax.
3.41 A direct infrastructure borrowing is raised in the year in which construction commences (year 1). Construction is completed in year 5 and the facility becomes income producing during that year. The infrastructure period will therefore end in year 30 (25 years after the first use of the facilities after their construction under the borrowing). The certificate is cancelled because of a default that occurred in year 13 and the infrastructure borrowings will be repaid in year 15. The tax benefit amount, being the total of the deductions that would have been allowed to the borrower and its predecessors from when the borrowing commenced, is $81,000 up to and including year 13, $12,000 for year 14 and $7,000 for year 15.
Charge assessed for year 13 and previous years is:
15% of $81,000 = $6,885
Charge assessed for year 14 is:
15% of $12,000 = $1800
Charge assessed for year 15 is:
15% of $7,000 = $1050
Kinds of Infrastructure Borrowing
3.42 Definitions of the following terms which are presently expressed in section 159GZZZU will now be included in proposed section 93D of the DAA Act:
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- direct infrastructure borrowing;
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- indirect infrastructure borrowing; and
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- refinancing infrastructure borrowing.
3.43 The Bill amends these definitions to give each term the same meaning as in the DAA Act. The term "certificate" will also have the same meaning as in the DAA Act. [New section 159GZZZZD]
3.44 The amendment proposed to section 16 of the Tax Act (the secrecy provision) is necessary because of the restructuring of the DAA Act to provide for the administration of infrastructure borrowings. Paragraph 16(4)(hba) of the Tax Act allows the Commissioner of Taxation to disclose information to enable the DAA to discharge its administrative responsibilities and to take prosecution action. [Clause 20]
Effect on Borrowings Before the Date the Bill Receives Royal Assent
3.45 Under the proposed amendments Subdivision A of the Tax Act will not apply to: direct and indirect infrastructure borrowings raised on or after the date the Bill receives Royal Assent; or refinancing infrastructure borrowings that relate to such direct or indirect borrowings
3.46 The Subdivision will continue to apply to a refinancing infrastructure borrowing raised on or after the date the Bill receives Royal Assent to repay a direct or indirect infrastructure borrowing raised before that date. The exemption period for these borrowings will continue to be 10 years, and investors in these borrowings will not be able to exercise the rebate option. [Clause 26]
3.47 Where a prospectus inviting subscriptions for infrastructure borrowings issued before the date of Royal Assent, borrowings raised under that prospectus will be treated as infrastructure borrowings raised before Royal Assent. The effect of this provision is that Division 16L as it stood before the amendments proposed by the Bill will apply to such borrowings.