Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Ralph Willis, MP)Chapter 7 - Privatised State Bank of New South Wales
Overview
7.1 The amendments in Part 7 of Schedule 1 of the Bill will deal with some transitional tax issues arising out of the sale of the State Bank of New South Wales (NSW State Bank) to private interests. This chapter explains how those amendments will apply following the NSW State Bank's change from exempt to taxable status.
Summary of the amendments
7.2 The amendments will:
- •
- ensure appropriate gains and losses accrued in assets and liabilities of the NSW State Bank at the time of its sale are not taken into account in determining its post sale taxable income;
- •
- deny deductions for superannuation contributions in respect of liabilities accrued during the time when the bank was exempt from tax; and
- •
- disallow deductions for bad debts written off after the bank's sale where the debt was known to be doubtful before the sale.
7.3 The amendments will have effect from the time when the NSW State Bank is sold and becomes a taxable entity. As a technical matter, the amendments will commence on the same day as the State Bank (Privatisation) Act 1994 of New South Wales commences [item 58] . That Act formally allows for the sale of the bank.
Background to the legislation
7.4 Because it is presently owned by the State of NSW, the NSW State Bank is exempt from tax as a "public authority" within the meaning in paragraph 23(d) of the Income Tax Assessment Act 1936 (the Act). The sale of the bank to private interests means that it will no longer qualify for that exemption. Because of the bank's move from exempt to taxable status a number of transitional tax issues need to be resolved. The amendments proposed in Part 7 of Schedule 1 will modify the operation of the Act to deal with some significant transitional issues. This will make clear how the law is to apply in respect of these issues.
Explanation of the amendments
Deemed disposal and re-acquisition of assets
7.5 First, the amendments will generally treat the assets of NSW State Bank as having been disposed of immediately before the bank becomes taxable and re-acquired when it becomes taxable [new subsection 121EN(1)] . This will ensure that gains and losses accrued in assets during the time when the bank was exempt will not be taken into account in determining the tax consequences of subsequent disposals of these assets.
7.6 For instance, an asset which was purchased by the bank for, say, $100 but has a market value of $120 at the time when the bank is sold, will be taken for income tax purposes to have been acquired by the bank for $120. If the asset is sold for $125, the maximum amount that could be assessable in respect of the sale is $5.
7.7 The deemed acquisition of assets may also affect the amount of income derived from an asset, e.g., from a discounted security held by the bank. If such a security cost $100 before the sale of the bank and on maturity after the sale will return $150, the amount assessable would ordinarily be $50. However, because the security will be taken to have been sold and re-acquired at its market value on the day when the sale of the bank takes place, say, $130, the amount assessable will be $20.
7.8 There are some exceptions to the general rule established in new subsection 121EN. The general revaluation of assets provided for in that subsection will not apply for the purposes of sections 54 to 62AAV and Divisions 10 to 10D of Part III of the Act [subsection 121EN(2)] . This will simply make it clear that depreciation and other capital allowance deductions will be based on the original cost of the particular items of plant or other property.
Deemed cessation and re-assumption of liabilities
7.9 Secondly, the amendments will treat the liabilities of the NSW State Bank as having been satisfied immediately before the sale of the bank and then assumed again when it is sold [new section 121EO] . The bank will be taken to have received consideration in return for taking on these liabilities equal to the market value of the corresponding asset or right held by the person to whom the liability is owed. This is because it is not strictly possible to talk about a liability as having a market value of its own. In broad terms, liabilities will be valued at the amount the bank would have had to pay to meet those liabilities immediately before the bank's sale.
7.10 The deemed re-assumption of liabilities could have an effect, for instance, where the bank subsequently satisfies a liability that it had before the bank was sold. Assume that the bank originally received $900 from the issue of a discounted security and is required to pay $1000 to the holder on maturity. If half of the discount period had elapsed at the time of the bank's sale then, in broad terms, half of the discount expense would have accrued during that period. In that case, the bank could expect to obtain a deduction after the bank's sale of $50, in respect of the remaining discount expense. However, if the market value of the security at the time of the sale was, say, $940, the effect of new section 121EO would be to allow a deduction of $60, being the difference between the consideration deemed to have been received at the sale date and the amount required to be paid on maturity ( i.e., $1000-$940 ).
Effect of unfunded pre-first taxing time superannuation liabilities
7.11 The Bill ensures that superannuation contributions made after the NSW State Bank becomes taxable are not tax deductible to the extent that they are in respect of liabilities that had accrued during the period when the bank was exempt from tax [new section 121EP] . This is achieved in two steps. First, no deduction at all will be allowable to the bank under section 82AAC of the Act unless it obtains a certificate from an actuary, stating the actuarial value of any unfunded superannuation liabilities at the time of the bank's sale [new subsections 121EP(2) and (3)] . The certificate must be obtained before the bank lodges its tax return for the year in which the sale takes place or within such further time as the Commissioner allows [new subsection 121EP(4)].
7.12 Secondly, if there is an amount of unfunded liabilities, deductions for superannuation contributions will be denied until, in total, they exceed the amount of the unfunded liabilities [new subsections 121EP(5) and (6)]. This is achieved by providing for a threshold amount of superannuation contributions that must be made in a year before a deduction will be available. The threshold is called the 'unfunded liability limit' [new subsection 121EP(7)] . In its first year of operation the limit will be the certified amount of unfunded liabilities. If the limit is not exceeded in the first year, it will be reduced in the second year by the amount of superannuation deductions denied under section 121EP in the first year. The limit will be progressively reduced in this way until it is extinguished.
7.13 Because it is possible to make more than one contribution in a year and each separate contribution is potentially deductible, where the sum of all superannuation contributions in a year exceeds the deduction limit subsection 121EP(6) allocates a part of the deduction limit to each superannuation contribution made in the year. This has been done purely as a technical matter and simply has the effect of allowing a deduction for the amount of contributions, in total, that exceed the deduction limit.
Effect of pre-first taxing time provision for doubtful debts
7.14 After the NSW State Bank becomes taxable it will be entitled to tax deductions in respect of bad debts. The Bill will deny deductions for bad debts written off by the bank to the extent the debts were known to be doubtful before the bank's sale [new section 121EQ] . In effect, deductions will be denied for the amount of doubtful debts identified in specific provisions for doubtful debts in the final accounts being prepared under the contract for the sale of the bank. This special rule will not apply to the general provision for doubtful debts shown in those accounts. The general provision covers non-specific, unidentified risks inherent in the bank's total portfolio. Among other things, it enables the bank to satisfy Reserve Bank prudential guidelines. Because the general provision bears no relationship to any particular debt, it would not be appropriate to take it into account in denying deductions in respect of any debts written off after the bank's sale.
7.15 The Bill deals with two types of debts covered by specific provisions for doubtful debts. The first type are those debts where a specific provision is made against an individual debt. Where such a debt is written off after the bank's sale, whether in whole or part, a deduction will not be available until the amount or amounts written off exceeds the amount of the specific provision for doubtful debts in the accounts immediately before the bank is sold. [New subsections 121EQ(1), (2) and (3)]
7.16 The second type are those debts of a particular class which are covered by a specific provision for doubtful debts against the class of debts. An example is where a specific provision is made against all credit card debts. In such a case the Bill will allocate the amount of the specific provision among all of the debts of that class in existence at the time when the bank is sold, in proportion to the amount of each debt [new subsection 121EQ(4)] . This will allow the rules established in subsections 121EQ(1) to (3) to apply when such a debt is subsequently written off.