Explanatory Memorandum
(Circulated by authority of the Treasurer,the Hon. Peter Costello, MP)
Chapter 2 - Assessable Income
This chapter explains the rewritten provisions that include particular amounts in a taxpayer's assessable income.
These provisions are contained in new Division 15 in Schedule 1 to the Tax Law Improvement Bill 1997.
Transitional and consequential amendments for the rewritten provisions are contained in Schedule 2 to the Bill.
This chapter covers:
- •
- the rewritten provisions in Division 15 (Assessable Income) in Schedule 1 to the Tax Law Improvement Bill 1997; and
- •
- the transitional provisions and consequential amendments for those rewritten provisions in Schedule 2 to the Bill.
Division 15 contains the rewritten provisions of the 1936 Act that include particular amounts in a taxpayers assessable income. The corresponding provisions of the 1936 Act are mainly in section 26 of that Act.
The rewritten provisions will complement the core provisions about assessable income contained in Division 6 of the 1997 Act.
Part A of this chapter summarises new Division 15.
Part B explains the changes proposed to the content of the current provisions.
Part C explains why some provisions of the 1936 Act have not been rewritten.
Part D explains the transitional provisions which set out how and when the rewritten provisions will apply.
Part E explains the amendments that need to be made to the 1997 Act, the 1936 Act and other Commonwealth legislation, because of the rewriting of the provisions of the 1936 Assessment Act.
A. Summary of the new law
Guide to Division 15: Some items of assessable income
| What the division will do | Division 15, which will apply to taxpayers generally, will include the following amounts in assessable income. |
| Return to work payments | Amounts received under an arrangement to induce you to resume working for, or providing services to, an entity. [section 15-3] |
| Accrued leave transfer payments | Amounts you receive from an entity for leave accrued by someone who previously worked for that entity, but now works for you. [section 15-5] |
| Bounties and subsidies | Bounties or subsidies received in carrying on a business (which are not already ordinary income). [section 15-10] |
| Profits arising from a profit-making undertaking | Profits from carrying on a profit-making undertaking (that are not ordinary income or do not arise from the sale of property acquired on or after 20 September 1985). [section 15-15] |
| Royalties | Amounts received as royalties in the ordinary sense (that are not ordinary income). [section 15-20] |
| Amounts for a lease obligation to repair | Amounts received as a lessor or former lessor from an entity for failing to comply with a lease obligation to repair premises where the entity uses or has used the premises to produce assessable income. [section 15-25] |
| Insurance or indemnity amounts for the loss of assessable income | Amounts received by way of insurance or indemnity for a loss of an amount that would have been included in your assessable income (where the insurance or indemnity amount is not ordinary income). [section 15-30] |
| Interest on overpayment or early payments of tax | Interest you receive under the Taxation (Interest on Overpayments and Early Payments) Act 1983 will be assessed when it is paid to you or applied to discharge a liability you have to the Commonwealth. [section 15-35] |
B. Discussion of changes
Section 15-3 Return to work payments
This section will include in your assessable income an amount you receive under an arrangement entered into to induce you to resume working for, or providing services to, someone else.
The section will only apply to an amount received under an arrangement (as defined in section 995-1 of the 1997 Act).
The existing law (paragraph 26(eb)) applies to an agreement, arrangement or understanding (whether formal or informal, whether express or implied and whether or not enforceable, or intended to be enforceable by legal proceedings).
The standardised definition of arrangement in section 995-1 of the 1997 Act is identical to the existing wording, except that it includes a reference to a promise or undertaking. However, in section 15-3 any promise or undertaking of the kind described would be covered by the existing reference to agreement, arrangement or understanding.
Section 15-10 Bounties and subsidies
This section will include in assessable income a bounty or subsidy received in carrying on a business, unless it is ordinary income.
Omit from the rewritten section the existing exemption for petroleum search subsidies.
The exemption in the existing provision (paragraph 26(g)) is redundant, as it was inserted to cover payments made under the Petroleum Search Subsidy Act 1957 , which was repealed in 1972.
Omit from the rewritten section the words that deem a bounty or subsidy to be part of the proceeds of a business.
These words are redundant. They were inserted to ensure that bounties and subsidies were treated as income from personal exertion for the purposes of the 1936 Act. That Act makes a distinction between income from personal exertion and income from property that no longer has any practical effect.
The rewritten section will only apply to bounties and subsidies that are not ordinary income.
Most bounties or subsidies in relation to business activities will be assessed as ordinary income. However any bounties or subsidies of a capital nature related to carrying on of business will be assessable under this provision. The exclusion of ordinary income makes it clear that the section does not modify the treatment of bounties or subsidies that are ordinary income where returnable on an accruals basis. Nor does it modify the treatment of any bounties and subsidies that are ordinary income where properly returnable on a cash receipts basis.
Section 15-15 Profit-making undertakings
This section will include in assessable income a profit that arises from carrying out a profit-making undertaking or plan, provided that the profit:
- •
- is not ordinary income; or
- •
- does not arise from the sale of property acquired on or after 20 September 1985.
The rewritten section will not include in assessable income profits from the sale of property acquired for the purpose of profit-making by sale.
The existing law (section 25A) includes in assessable income:
- •
- profits from a sale of property acquired for profit-making by sale; and
- •
- profits from carrying on any profit-making undertaking or plan.
Capital gains tax (CGT), introduced in 1985, provided for a new treatment of profits from the sale of property. As a consequence, section 25A only applies to a sale of property if the property was acquired before CGT was introduced. Because the ongoing operation of these rules is minimal, they will for the time being continue to operate in the existing law without being rewritten.
That part of the existing law that applies to profits from carrying on any profit-making undertaking or scheme has been rewritten in section 15-15.
The rewritten section will use the word plan instead of the defined term scheme .
The existing law uses the phrase profit-making undertaking or scheme.
Scheme has been defined in the 1997 Act. It is intended to be used in anti-avoidance contexts. As section 15-15 is not an anti-avoidance provision, plan will be used instead. There is no change from the meaning of the existing law.
The rewritten section will only assess amounts that are not ordinary income .
This wording change reflects the courts view of the existing law - that you only need to consider the specific rules about profit-making transactions if a profit is not assessable as ordinary income.
Profits arising from the carrying on of a profit-making undertaking or plan will generally be assessed as ordinary income. However, if there are any capital profits which satisfy the section, they will be assessable under this provision.
This section will include in assessable income an amount which is a royalty in the ordinary sense of that term (an ordinary royalty ), unless it is ordinary income.
This rewritten section will only assess ordinary royalties that are not ordinary income .
The existing provision (paragraph 26(f)) assesses all royalties (as defined), except those amounts which are royalties only because of the definition, and are not ordinary income.
This treatment of royalties is demonstrated in the following table:
| Amount is an ordinary royalty | Amount is a royalty only under statutory definition | |
|---|---|---|
| Amount is ordinary income | Assessable | Assessable |
| Amount is not ordinary income | Assessable | Not assessable |
The existing provision applies to every scenario in this table.
The rewritten section will allow the general income provision (section 6-5 of the 1997 Act) to assess amounts which are ordinary income. The only other type of payment that the rewritten section will cover is an ordinary royalty that is not ordinary income.
This will make the law easier to understand.
The exclusion of ordinary income also makes it clear that the section does not modify the treatment of royalties that are ordinary income where accounted for on an accruals basis. Nor does it modify the treatment of any royalties that are ordinary income where properly returnable on a cash receipts basis.
Section 15-25 Amount received for a lease obligation to repair
This section will include in assessable income an amount received by a lessor or former lessor from an entity for failing to comply with a lease obligation to repair premises where that entity uses or has used the premises to produce assessable income.
The rewritten section will only assess amounts that are not ordinary income.
The exclusion of ordinary income makes it clear that the section does not modify the treatment of amounts that are ordinary income where returnable on an accruals basis. Nor does it modify the treatment of amounts that are ordinary income where properly returnable on a cash basis.
Section 15-30 Insurance and indemnity amounts for the loss of assessable income
This section will include in assessable income an insurance and indemnity amount if:
- •
- it is for the loss of an amount that would have been included in assessable income; and
- •
- it is not ordinary income.
The rewritten section will only assess amounts that are not ordinary income.
Insurance and indemnity amounts for the loss of an amount that would have been assessable income will generally be assessed as ordinary income. Any amounts that are not ordinary income will be assessable under this provision.
The exclusion of ordinary income makes it clear that the section does not modify the treatment of insurance and indemnity amounts that are ordinary income where returnable on an accruals basis. Nor does it modify the treatment of insurance and indemnity amounts that are ordinary income where properly returnable on a cash basis.
C. Provisions of the old law that have not been rewritten
Some provisions of the existing law are redundant and have not been included in the new law. They are summarised in the following table:
| Provision | Subject | Reason for omission |
|---|---|---|
| Section 22 | Income received from a pre-1936 transaction is assessable under the 1936 Act if it would also have been assessable under the Income Tax Assessment Act 1922. | It is unlikely that any income of this kind is still being received. |
| Paragraph 26(h) | Fees and commissions received for procuring a loan. | These amounts, being rewards for service, are ordinary income, and do not need to be specifically included. |
| Paragraph 26(ja) | Amounts received for trading stock under the Decimal Currency Board Act 1963. | The Decimal Currency Board Act was repealed in 1981. |
The existing law (section 26AB) assesses any premium that:
- •
- a lessor receives for granting a lease if, when granted, the lessee did not intend the leased property to be used to produce assessable income; or
- •
- a lessee receives for assigning a lease if, when assigned, the assignee did not intend the leased property to be used to produce assessable income.
Section 26AB largely duplicates the work done by the capital gains tax (CGT) provisions, which deal more comprehensively with lease premiums.
In particular, section 160ZS provides that the grant of a lease is treated as a disposal of the lease by the lessor for the premium. Any excess of the premium over the cost base is a capital gain, the cost base being the expenses incurred by the lessor in respect of granting the lease.
The CGT treatment of lease assignments is similar.
Section 26AB, and the CGT provisions, often both apply to a grant or assignment of a lease for a premium. However, the premium is not taxed twice as the amount of a capital gain is reduced to the extent that the lease premium is assessable (section 160ZA).
The proposed omission of section 26AB will result in lease premiums that are not ordinary income being dealt with exclusively under the CGT regime. This change, which can give a slightly better outcome for taxpayers than if the premiums were excluded from the CGT provisions, will result in some changes in treatment:
- •
- a smaller amount may be brought to account. For example, expenses incurred in granting the lease would not normally be deductible but would reduce the capital gain;
- •
- a taxpayer may reduce a capital gain by unused capital losses of previous years; and
- •
- the taxpayers capital gains may be notionally averaged, reducing the tax on the premium.
D. Transitional arrangements
Part 1 of Schedule 2 of the Tax Law Improvement Bill 1997 will amend the Income Tax (Transitional Provisions) Act 1997 to insert the transitional provisions for the rewritten sections discussed earlier in this chapter.
Part 1 will insert in the Income Tax (Transitional Provisions) Act 1997 new Division 15. New Division 15 will set out how and when the rewritten sections will apply.
The rewritten provisions will generally apply to assessments for the 1997-98 or later income years. [Schedule 2, Part 1: subsection 15-1(1), Transitional Provisions Act]
In some cases, however, it is necessary to have different rules for the application of the rewritten provisions [Schedule 2, Part 1: subsection 15-1(2), Transitional Provisions Act] . The reasons for this are to ensure:
- •
- some rewritten provisions apply in the 1997-98 or later income years even though certain key events may have happened before that time;
- •
- a smooth transition between the existing provisions and the rewritten provisions where the rewritten provisions both assess amounts when received and exclude amounts that are assessable as ordinary income; and
- •
- a reference to assessable income in the rewritten provision covers amounts assessable under the 1936 Act and the 1997 Act.
Rewritten provisions that will apply from the 1997-98 income year, even though key events happened before that time
The transitional provisions that give effect to this purpose are explained in the table below. In each case, the transitional section number corresponds to the section number of the rewritten provisions.
| Transitional section | Nature of amount and section references in the rewrite | Description of event that can happen before the 1997-98 income year |
|---|---|---|
| 15-15 | Profits from a profit-making undertaking | The undertaking was entered into or began to be carried on. |
| 15-30 | Insurance or indemnity amounts for a loss of assessable income | The loss to which the insurance or indemnity amount relates. |
| 15-35 | Interest on overpayments or early payments of tax | Accrual of all or part of the interest. |
Rewritten provisions that will assess amounts when received and exclude amounts of ordinary income.
Sections 15-10 (bounties and subsidies), 15-20 (royalties), 15-25 (amounts for a lease obligation to repair) and 15-30 (amounts for a loss of assessable income) will all assess amounts when received while excluding amounts of ordinary income. These provisions will apply to amounts received in the 1997-98 income year and later income years [Schedule 2, Part 1: sections 15-10, 15-20, 15-25 and 15-30, Transitional Provisions Act] , rather than to assessments for the 1997-98 income year or later income years.
This will ensure that amounts of ordinary income that would otherwise fall within the existing provisions are assessed if they are derived in the 1996-97 or earlier income years, but are received in the 1997-98 or later income years.
A reference to assessable income covers amounts assessable under both the 1936 Act and the 1997 Act
Section 15-30 will assess insurance or indemnity amounts received for the loss of an amount of assessable income. The transitional section for this rewritten provision [Schedule 2, Part 1: section 15-30, Transitional Provisions Act] ensures that it applies to losses of amounts that are assessable income, regardless of whether the amounts are assessable under the 1936 Act or the 1997 Act.
E. Consequential amendments
Amendments of the Income Tax Assessment Act 1997
Part 2 of Schedule 2 to the Bill will amend the 1997 Act to:
- •
- update references to provisions of the 1936 Act that have been rewritten in Division 15; and
- •
- insert additional definitions in the Dictionary in section 995-1 of terms that are used in the rewritten provisions contained in Division 15 in Schedule 1.
Section 10-5 of the 1997 Act contains a list of all the provisions of both the existing and rewritten laws that deal with particular kinds of assessable income. Part 2 of Schedule 2 will update those references to existing provisions that have been rewritten in Division 15, so that the lists refer to the rewritten provisions. [Schedule 2, Part 2: items 3 to 16]
References in section 10-5 to existing provisions (section 26AB and parts of section 25A) that will have some limited ongoing operation have been changed to take account of this operation. [Schedule 2, Part 2: items 11 and 14]
Part 2 of Schedule 2 will insert a new definition of a term used in the rewritten provisions in Division 15 in.
- New Definition: Royalty [Schedule 2, Part 2: item 17]
- Commentary: For the time being, royalty will have the meaning given by the definition in subsection 6(1) of the 1936 Act.
The amendments made by Part 2 of Schedule 2 apply to assessments for the 1997-98 and later income years [clause 4, Tax Law Improvement Bill] . This ensures that these consequential amendments take effect at the same time as the rest of the amendments relating to the assessable income provisions.
Amendments of the Income Tax Assessment Act 1936
Part 3 of Schedule 2 to the Bill will amend the 1936 Act to:
- •
- insert references to the rewritten provisions contained in Division 15 where the 1936 Act currently refers to the existing provisions; and
- •
- close off the application of provisions of the 1936 Act that have been rewritten in Division 15, so that the existing provisions apply only to the 1996-97 and earlier income years; and
- •
- preserve the operation of an existing Income Tax Regulation made for the purposes of paragraph 26(eb) of the 1936 Act, which has been rewritten in Division 15.
Inserting references to rewritten provisions
Part 3 of Schedule 2 will insert in the 1936 Act references to the rewritten provisions contained in Division 15 where the 1936 Act currently refers to the existing provisions. There are two categories of these amendments as discussed below.
The first category will add a reference to a rewritten provision in a section of the 1936 Act where a reference to the existing provision currently appears, so that both existing and rewritten provisions are cited.
This is necessary for references to section 25A of the 1936 Act, which has been partly rewritten (section 15-15). The part of section 25A that has not been rewritten will continue to apply in the 1997-98 and later income years. This makes it necessary to refer to both the existing and rewritten provisions. [Schedule 2, Part 3: items 18, 23 to 28 and 35 to 37]
This approach is also necessary where the provision being consequentially amended (as opposed to the rewritten provision):
- •
- has not yet been rewritten and closed off; and
- •
- can apply to amounts relating to more than one income year (including an income year before the 1997-98 income year). [Schedule 2, Part 3, item 29]
The second category will omit the reference to the existing provision in a section of the 1936 Act and replace it with the rewritten provision. This is necessary for those sections of the 1936 Act that:
- •
- have not yet been rewritten and closed off; and
- •
- can apply to amounts that relate to only one income year at a time, being the 1997-98 or a later income year. [Schedule 2, Part 3: items 30 to 32 and 34]
Closing off the application of existing provisions
Part 3 of Schedule 2 will insert new provisions into the 1936 Act that will close off the application of existing provisions to the extent they have been rewritten or are redundant. [Schedule 2, Part 3: item 19 to 22]
In these cases, the existing provisions need to be closed off so that they only apply to the 1996-97 and earlier income years. This complements the transitional provisions in Part 1 of Schedule 2 which ensure that the corresponding rewritten provisions apply to the 1997-98 and later income years.
As with the transitional provisions, it is necessary to specify in some of the closing off provisions that the existing provisions do not apply to amounts received in the 1997-98 or later income years even though certain events may have happened before that time. They are the events set out in the table in the explanation of the transitional provisions.
New section 25B of the 1936 Act is a table that closes off the various paragraphs of section 26 of that Act [Schedule 2, Part 3: item 20] . Some of those paragraphs (parts of paragraph 26(j) and paragraph 26(k)) have been rewritten in the recoupment and trading stock rewrites in this Bill. However, all paragraphs in section 26 have been closed off by this Schedule for ease of drafting.
Preserving an existing Income Tax Regulation
Part 3 will also preserve, in particular cases, the operation of an Income Tax Regulation affected by the rewrite of paragraph 26(eb) of the 1936 Act [Schedule 2, Part 3: item 33] . Paragraph 26(eb) deals with return to work payments, and is rewritten at section 15-3.
Section 221C of the 1936 Act allows for regulations to prescribe rates of deductions of tax instalments by an employer from an employees salary or wages. Subsection (1AC) allows for the regulations to prescribe special rates for return to work payments paid to an employee. Income Tax Regulation 80 sets out the special rates.
Item 32 of Part 3 will substitute, in subsection 221C(1AC), a reference to section 15-3 of the 1997 Act for the existing reference to paragraph 26(eb). The amendment will apply to the 1997-98 and later income years.
Item 33 has been inserted as a consequence of the change made by item 32. It will ensure that paragraph (a) of Income Tax Regulation 80 continues to apply in the 1997-98 and later income years, to paragraph 26(eb) amounts received in the 1996-97 income year or an earlier income year. It does not give paragraph (a) of Regulation 80 general ongoing operation.
The amendments made by Part 3 of Schedule 2 apply to assessments for the 1997-98 and later income years [clause 4, Tax Law Improvement Bill] . This ensures that these consequential amendments take effect at the same time as the rest of the amendments relating to the assessable income provisions.
Amendments of other Commonwealth legislation
Part 4 of Schedule 2 to the Bill will amend the Financial Corporations (Transfer of Assets and Liabilities) Act 1993 to add references to rewritten provisions contained in Division 15 where that Act currently refers to the existing provisions. [Schedule 2, Part 4: items 38 and 39]
The amendments made by Part 4 of Schedule 2 apply to assessments for the 1997-98 and later income years [clause 4, Tax Law Improvement Bill] . This ensures that these consequential amendments take effect at the same time as the rest of the amendments relating to the assessable income provisions.