Senate

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Ralph Willis, MP)

General outline and financial impact

State and Territory bodies

Amends the income and sales tax law to exempt wholly owned State and Territory bodies from income tax and sales tax, except for certain specified bodies. Many State and Territory bodies covered by the proposed new exemptions are already exempt, but the aim of the amendments is to clarify the existing law. From 1 July 1995, some bodies which are currently taxable will become exempt.

Date of effect:

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Income tax - in respect of 1994-95 and later years;

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sales tax - in respect of dealings with goods occurring on or after 1 July 1994.

Proposal announced: The broad outline of the agreement reached at the 1994 Premiers' Conference was contained in a press statement issued by the Treasurer on 25 March 1994.

Financial impact: Expected to be revenue neutral.

Compliance cost impact: The cost of compliance with Commonwealth laws will not change. There are expected to be some costs for State and Territory bodies and State and Territory governments in putting tax equivalent regimes in place.

Employee share schemes

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Amends the Income Tax Assessment Act 1936 to provide for the taxation of benefits received under employee share schemes. Concessional arrangements will apply to schemes meeting certain conditions.

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Amends the Fringe Benefits Tax Assessment Act 1986 to ensure that there is no double taxation of those benefits.

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Makes other consequential amendments to the above measures.

Date of effect: 6pm in the ACT (and the equivalent time elsewhere) on 28 March 1995

Proposal announced: 28 March 1995

Financial impact: The nature of this measure is such that a reliable estimate cannot be provided. However, revenue savings are expected as the measures counter a number of arrangements which exploited the existing provisions in the income tax law.

Compliance cost impact: There will be some increase in compliance costs where an employer is required to obtain valuations for shares and rights that remain subject to restrictions at the end of the tax deferral period of five years. The compliance costs will be minimal where the shares and rights are quoted on a stock exchange. In other cases there will be costs in having the shares and rights valued. It is anticipated that the number of these cases will not be substantial.

Moreover, in the case of share rights, the Bill contains tables that enable the employer to readily calculate the market value of the rights once the market value of the shares to which the rights relate and the exercise price of the rights are ascertained.

It is expected also that some employers will incur up front costs in restructuring existing employee share schemes to take advantage of the $500 concession and the five year deferral limit.

The new provisions have been written in a more explanatory drafting style using features developed by the Tax Law Improvement Project. The provisions are clearer and more readable than the current provisions of section 26AAC in the income tax law. This will assist employers and employees in understanding how the law applies to the taxation of benefits under employee share schemes. The drafting style should therefore help to minimise compliance cost impacts of the amendments.

Refunds of tax file number amounts deducted in error

Amends the income tax law to:

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limit investment body refunds of tax file number (TFN) amounts deducted in error to amounts deducted in the current year only;

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provide for the Commissioner, in appropriate cases where an amount has not been refunded earlier, to give a direct refund for amounts deducted in error rather than a credit on assessment;

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allow investment bodies to offset TFN amounts refunded against future remittances in respect of the same year.

Date of effect: 1 July 1995.

Proposal announced: Not previously announced. Proposal developed in consultation with the 'Interest and Dividend Payers Consultative Forums' (which consists of industry and ATO representatives).

Financial impact: No impact on revenue is expected.

Compliance cost impact: This measure will reduce compliance costs as investment bodies will process a lesser number of refunds and, except for existing refund entitlements, will not have to lodge the amended forms presently required.

Pensions, allowances and benefits

Amends the income tax law to remove the exemption from income tax of the mature age partner allowance. Also makes some minor technical amendments relating to removal of obsolete references; insertion of inadvertently omitted references relating to supplementary amounts and the beneficiary rebate; and the correction of a date of application for the partner allowance.

Date of effect: 1 July 1995 for the removal of exemption of mature age partner allowance from income tax. The dates of effect for the minor technical amendments vary.

Proposal announced: Not previously announced.

Financial impact: The financial impact of the removal of the exemption for the mature age partner allowance is a negligible gain to the revenue. There will be no financial impact of the minor technical amendments.

Compliance cost impact: Mature age partner allowees who would otherwise not have to lodge an income tax return may have to do so. This will be so where they have non-allowance income which raises their taxable income to above the relevant pensioner rebate threshold. Because of the pensioner rebate most mature age partner allowees will not be subject to income tax and so will not have to lodge a return.

There will be no compliance costs for the minor technical amendments.

Capital gains tax - roll-over relief for merging superannuation funds

Amends the capital gains tax (CGT) provisions of the income tax law to allow certain superannuation funds which merge on or after 1 July 1994 and before 1 July 1997 to defer (roll-over) any CGT gains or losses that would be realised at the time of the merger on the assets transferred.

Date of effect: The amendment will apply to superannuation funds that merge on or after 1 July 1994 and before 1 July 1997.

Proposal announced: Treasurer's Statement on Superannuation Policy of 28 June 1994.

Financial impact: The notional cost to the revenue from the proposal is estimated to be $50 million for each of the three years of its operation. The actual cost to the revenue will be less because many funds would not merge if roll-over relief was not available.

Compliance cost impact: The amendments will only affect superannuation funds that merge and elect to have CGT roll-over relief. Such funds will need to comply with the conditions for relief and keep records which provide evidence that they have met those conditions.

Fund managers may incur costs in seeking advice on the effect of this measure. However, superannuation funds that merge will reduce their operating costs and improve their economies of operation.

Superannuation - various amendments to the income tax law

Amends the income tax law to ensure that:

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the taxation arrangements for superannuation pensions and roll-over annuities operate as intended so that:

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the deductible amount of a life time superannuation pension or annuity is calculated based on life expectancy at the beginning of the period in respect of which the pension or annuity is payable;

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that people in receipt of disability pensions prior to 1 July 1994 retain their entitlement to a rebate;

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The undeducted purchase price (UPP) that applies to pensions and annuities purchased prior to 1 July 1994 will also apply to pensions and annuities purchased with an eligible termination payment (ETP) representing the commutation or residual capital value of a pension or annuity that commenced prior to 1 July 1994;

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deductions for employer superannuation contributions are not available when a contribution is made directly to a superannuation fund established primarily for the benefit of a spouse or another dependant of an employee; and

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the 90 day roll-over period applies to ETPs received before 1 July 1994.

Date of effect: The amendments relating to the time the deductible amount is calculated and employer superannuation contributions will apply from the date of introduction of the Bill. The remaining amendments will apply from 1 July 1994 as they clarify and remove anomalies in respect of provisions inserted into the law with effect from that date.

Proposal announced: The first two amendments relating to superannuation pensions and annuities and the amendment relating to employer superannuation contributions have not been previously announced. The amendment to retain the UPP of pension and annuities that commenced to be payable prior to 1 July 1994 was announced by the Treasurer on 23 December 1994. The amendment to allow the 90 day roll-over period in respect of ETPs received prior to 1 July 1994 was announced by the Parliamentary Secretary to the Treasurer on 29 June 1994.

Financial impact: The amendments are not expected to have any significant impact on the revenue.

Compliance cost impact: The amendments related to the time UPP is calculated are expected to reduce compliance costs because all the calculations affecting the tax treatment of pensions and annuities will be carried out at one time. Similarly, the amendments relating to disability pensions are expected to reduce compliance costs because taxpayers in receipt of disability pensions prior to 1 July 1994 will continue to be entitled to the pension and annuity rebate without having to satisfy the new conditions.

The amendments related to retaining the higher UPP in respect of superannuation pensions and annuities that commenced to be paid prior to 1 July 1994 are expected to increase compliance costs. In order to gain the benefit of the higher UPP in respect of these superannuation pensions and annuities taxpayers and pension and annuity providers will need to keep additional records of any underlying pension or annuity that was commuted and used to purchase a new pension or annuity.

Superannuation guarantee - jurisdiction of the Australian Industrial Relations Commission

Amends the SGAA to make it clear that the Australian Industrial Relations Commission's (AIRC's) jurisdiction in the ambit of superannuation is unaffected by the enactment of the superannuation guarantee legislation.

Date of effect: Applies since the enactment of the SGAA, ie from 1 July 1992.

Proposal announced: Treasurer's Statement on Superannuation Policy of 28 June 1994.

Financial impact: None

Compliance cost impact: None

Superannuation guarantee - flat dollar contributions

Amends the Superannuation Guarantee (Administration) Act 1992 (SGAA) to ensure that the actual percentage level of superannuation support provided for an employee for flat dollar contributions is calculated based on the actual contributions paid by the employer.

Date of effect: 1 July 1994.

Proposal announced: Treasurer's Statement on Superannuation Policy of 28 June 1994.

Financial impact: None.

Compliance cost impact: Recognition of flat dollar contributions on the basis of actual contributions paid will result in a reduction in compliance costs for some employers. The amendment will relieve employers of the need to amend awards or to calculate the additional super contributions they are required to make based on each employee's ordinary times earnings. This is currently needed where the superannuation guarantee minimum contribution required exceeds the contribution specified in an employee's award.

Superannuation guarantee - local government councillors

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Amends the SGAA to generally exempt from the scope of the SGAA the income which elected local government councillors derive in performing their duties as councillors.

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Inserts new definitions of employee and employer in the Superannuation Industry (Supervision) Act 1993 (SIS) to overcome unintended consequences resulting from the exclusion of councillors from the SGAA.

Date of effect: 1 July 1993.

Proposal announced: 18 April 1994.

Financial impact: Cost to the revenue in the 1994-95 and subsequent years will be less than $500,000.

Compliance cost impact: Exemption of councillors' allowances under the SGAA means compliance costs will be reduced for local councils.

Retention of councillors as employees for the purposes of SIS reduces potential compliance costs to some funds that may otherwise have been treated as non standard employer-sponsored funds.

Superannuation - miscellaneous amendments

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Amends the Superannuation Industry (Supervision) Act 1993 to:

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allow the Insurance and Superannuation Commissioner (or his delegates) to undertake statistical surveys of the superannuation industry and allow superannuation standards officers to provide information (such as statistical information derived from the surveys) to the Australian Bureau of Statistics for statistical purposes;

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ensure that the trustee or an investment manager of a less than five member regulated superannuation fund is not precluded from taking advantage of the exception to the rule prohibiting acquisition of members assets simply because the members business is established in a company form and not in the form of a sole trader or partnership;

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allow the financial backing requirements imposed on approved trustees and on custodians to be met by having an approved guarantee and net tangible assets which together sum to at least the prescribed amount (this has previously been provided for by a Temporary Modification Declaration made by the Insurance and Superannuation Commissioner);

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allow for the Superannuation Industry (Supervision) Regulations to provide some flexibility in determining the date by which an application for a pre 1 July 1988 funding credit must be made.

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Amends the Superannuation Entities (Taxation) Act 1987 to change the method of collection of the superannuation supervisory levy and to make some other largely consequential amendments, including changes to the manner in which the late payment penalty is calculated.

Date of effect: The amendments to the Superannuation Entities (Taxation) Act 1987 , relating to the collection of the superannuation supervisory levy, apply in relation to the levy payable on annual returns lodged for the 1994-95 and later years of income. The other amendments commence on Royal Assent.

Proposal announced: Not previously announced.

Financial impact: No overall impact on revenue is expected.

Compliance cost impact: No significant compliance costs should result. The amendments generally lessen existing restrictions. Funds may incur some minor compliance costs in completing statistical survey questionnaires but these costs should not be significant, if any, as the data collected will be data which is readily accessible to fund trustees.

Late lodgment penalty

Amends the penalty provisions in the income tax law to introduce a new system of late lodgment penalties.

There will be a flat rate penalty on relevant entities and instalment taxpayers (ie companies, superannuation funds and some trusts) that are late in lodging their income tax returns. They will be liable for a penalty of $25 for each week a return remains outstanding, up to a maximum of $500. The penalty will apply irrespective of whether the taxpayer has a tax liability.

Taxpayers other than relevant entities and instalment taxpayers who are late in lodging their income tax returns will be liable for additional tax of 8% per annum on the amount of net tax payable for the year of income. In addition, they will also be liable for interest on the net tax payable at the same rate that applies for late payments and underpayments of tax. Taxpayers will not be subject to any late lodgment penalty if they do not owe any tax.

Date of effect: The amendments will apply to 1994-95 and later year income tax returns where the due date for lodgment occurs after 30 June 1995.

Proposal announced: Proposals to change the late lodgment penalty for ordinary taxpayers was first announced in August 1991 by the then Treasurer in an information paper titled 'Improvements to Self Assessment - Priority Tasks'. The flat rate penalty for relevant entities and instalment taxpayers has not been announced.

Financial impact: A reliable estimate cannot be provided.

Compliance cost impact: Taxpayers will receive a notice of their liability where they have failed to lodge a return on time. Apart from paying the liability there is no compliance cost. Taxpayers are already required to lodge their returns on time.

Sales tax - exemption for UHF transmitters

Amends the sales tax law to extend the operation of an earlier exemption for certain UHF transmitters, for use in commercial television broadcasting, to cover the period 1 January 1994 to 31 December 1995. The new exemption will only apply to transmitters to be used in connection with the equalisation program, which provides services in regional areas comparable to those in capital cities.

Date of effect: The amendment will apply to transmitters installed between 1 January 1994 and 31 December 1995.

Proposal announced: Not previously announced.

Financial impact: The total cost to revenue for the duration of the concession is likely to be about $2 million.

Compliance cost impact: Apart from any costs incurred in obtaining the necessary certificate from the Department of Communications and the Arts, the impact on compliance costs will be no greater than for any other exemption. In order to claim this exemption, most licensees will be required to give an exemption declaration either to the supplier, or to Customs, if the goods are imported. The Department of Communications and the Arts has advised that it will probably require a written application for the certificate, supported by a statutory declaration.

Sales tax - new credit ground for unregistered exemption users

Amends the Sales Tax Assessment Act 1992 to provide a new credit ground so that unregistered persons can claim refunds of sales tax where they have borne tax on an assessable dealing even though they were entitled to quote an exemption declaration.

Date of effect: Royal Assent.

Proposal announced: Not previously announced.

Financial impact: Negligible.

Compliance cost impact: If a claimant wishes to apply for a credit under the new credit ground the claimant must make application in the form approved by the Commissioner and send the form to his or her local Australian Taxation Office.

Minor amendments

The Bill also makes several minor technical amendments to the tax laws.