Explanatory Memorandum
(Circulated by authority of the Treasurer,the Hon. Peter Costello, MP)
Chapter 9 - Exempt Income
This chapter summarises the rewritten exempt income provisions. This Bill will not make any changes to the legal effect of those provisions.
These provisions are contained in Divisions 50 to 53 and 55 in Schedule 1 to the Tax Law Improvement Bill 1997.
Transitional and consequential amendments for the rewritten provisions are contained in Schedule 3 to the Bill.
This chapter covers:
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- the rewritten provisions in Divisions 50 to 53 and 55 in Schedule 1 (Exempt Income) to the Tax Law Improvement Bill 1997. These provisions will be in Divisions 50 to 53 and 55 of the 1997 Act; and
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- the transitional provisions and consequential amendments for those rewritten provisions contained in Schedule 3 to the Bill.
Divisions 50 to 53 and 55 in Schedule 1 contain the rewritten provisions of the 1936 Act that:
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- identify amounts of income that are exempt from income tax; or
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- identify those entities that are exempt from paying income tax.
The corresponding provisions of the 1936 Act are mainly contained in:
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- section 23 (types of exempt income and exempt entities); and
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- Division 1AA (exempt pensions, benefits and similar payments).
Part A of this chapter summarises Divisions 50 to 53 and 55 of the 1997 Act. They are in Schedule 1 to the Bill.
Part B explains that this Bill will not make any changes to the legal effect of the exempt income rules.
Part C explains why some provisions of the 1936 Act have not been rewritten.
Part D explains the transitional provisions that set out how and when the new Divisions will apply. They are in Part 1 of Schedule 3 to the Bill.
Part E explains the amendments that need to be made to the 1997 Act, the 1936 Act and other Commonwealth legislation, as a consequence of rewriting the provisions of the 1936 Act. These consequential amendments are in Parts 2 to 4 of Schedule 3 to the Bill.
A. Summary of the new law
There are several important consequences of an amount being exempt income:
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- it is not assessable income and is, therefore, tax free;
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- it may reduce the deduction allowable for a tax loss;
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- a loss or outgoing incurred in deriving the exempt income is not allowable as a general deduction;
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- the disposal of an asset used only to produce exempt income does not produce a capital gain or loss;
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- the disposal of an asset owned by an entity whose total income is exempt from income tax does not produce a capital gain or loss; and
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- exempt income is taken into account in working out the income tax payable on income from an approved overseas project, or on income earned in overseas employment.
Not every consequence applies to every amount of exempt income. For example, most fringe benefits are exempt income but do not reduce a deduction for a tax loss.
Guide to Division 50: What this Division is about
It will exempt from income tax the income of entities that are listed in the Division in these areas:
section 50-5 Charity, education, science and religion
section 50-10 Community service
section 50-15 Employers and employees
section 50-20 Finance
section 50-25 Government
section 50-30 Health
section 50-35 Mining
section 50-40 Primary and secondary resources, and tourism
section 50-45 Sports, culture, film and recreation.
Some entities must satisfy special conditions
Broadly, these are:
Societies, clubs and associations
Must not be carried on for the profit or gain of members.
Must be applied for their established purpose.
Guide to Division 51: What this Division is about
It will exempt from income tax certain income of entities that are listed in the Division in these areas:
section 51-5 Defence
section 51-10 Education and training
section 51-15 Vice-regal representatives
section 51-20 Mining
section 51-25 Welfare.
Some amounts must satisfy special conditions
Broadly, these are:
Allowances of a Reserve Force member
Must not be for continuous full time service.
Educational assistance to a student
Educational assistance is not paid by the Commonwealth, or by a person on the condition of rendering services.
Mining payment to an Aboriginal or distributing body
The mining payment was made to or on the behalf of one or more Aboriginals.
The maintenance payment must be made to the spouse or child of the person making the payment.
Guide to Division 52: What this Division is about
It will exempt from income tax certain pensions, benefits and allowances:
Subdivision 52A Various social security payments
Subdivisions 52B & 52C Various veterans' affairs payments
Special circumstances that determine whether the payment is wholly or partly exempt
Broadly, these are:
If the recipient is under pension age, the payment is wholly exempt.
If the recipient is pension age or over, the payment is exempt up to the tax-free amount.
However, a youth training allowance is always only partly exempt.
If the recipient receives a non-lump sum bereavement payment, the payment is wholly exempt.
If the recipient receives a lump sum bereavement payment, the payment is exempt up to the tax-free amount.
However, a veterans affairs bereavement payment is always wholly exempt.
Supplementary amounts are always wholly exempt.
Guide to Division 53: What this Division is about
It will identify various types of exempt payments, together with any special circumstances that must be satisfied for the payment to be exempt. The exempt payments it deals with are:
Disability services payment
Domiciliary nursing care benefit
Drought relief payment
Wounds and disability pension
Payments that are similar to Australian and United Kingdom veterans payments.
Some amounts must satisfy special conditions
Broadly, these are:
If the payment is made other than because of a persons death, only the supplementary amount is exempt.
If the payment is made because of a persons death, the payment is wholly exempt.
If the payment is similar in nature to another exempt payment in Division 52 or 53, the payment is wholly exempt.
Payments made by the Australian or United Kingdom Governments
If the payment is similar in nature to another exempt payment in subdivision 52-B and subdivision 52-C, the amount is wholly exempt.
Guide to Division 55: What this Division is about
It will identify some payments that are not exempt from income tax even though they are similar in nature to payments that are wholly or partly exempt in Divisions 50 to 53:
section 55-5 Occupational superannuation payments
section 55-10 Education entry payments.
B. Discussion of changes
The exempt income provisions in this Bill will not change the legal effect of the corresponding provisions in the 1936 Act.
C. Provisions of the old law that have not been rewritten
Some provisions of the 1936 Act are redundant and have been repealed, or have not been carried across to the 1997 Act. They are summarised in the following tables:
| Provisions to be repealed | Subject | Reason for repealing |
|---|---|---|
| Paragraph 23(ec) | Thalidomide Foundation | There are no longer persons under the age of 25 years that benefit from the Thalidomide Foundation. The provision is now redundant. |
| Subsection 24(1) | Limitation on exemptions | This rule does not change what the law would otherwise be and therefore serves no useful purpose. |
Provisions not carried across to the new law
| Provisions to be left behind in the 1936 Act | Subject | Reason for omission |
|---|---|---|
| Paragraph 23(kb) | Exempt allowances and expenses paid under Parts IV and VI of the Re-establishment and Employment Act 1945 | Parts IV and VI of the Re-establishment and Employment Act 1945 have been repealed |
| Paragraph 23(o) and section 23C | Exemption of gold mining income | The exemption does not apply to income derived after 31 December 1990. |
| Section 23AAA | Exemption of certain payments to persons formerly employed in Papua New Guinea | This exemption applies to payments made to former employees of Papua New Guinea whose employment ended before 31 December 1973. It is unlikely that income of this kind is still being received. |
| Section 23D | Exemption for income from mining and treating uranium | This section applies to certain income derived before 1 July 1968. |
| Section 23J | Exemption of proceeds from sale of securities purchased at a discount | This provision applies to securities purchased on or before 30 June 1982. It is unlikely that income of this kind is still being received. |
D. Transitional arrangements
Part 1 of Schedule 3 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.
The rewritten provisions will apply to assessments for the 1997-98 income year and later income years. [Schedule 3, Part 1, item 2]
Part 1 of Schedule 3 will preserve the operation of an existing Income Tax Regulation made for the purposes of a provision affected by the rewrite in Division 51 of Schedule 1. The provision is paragraph 23(t) of the 1936 Act (exempt bounties and allowances of a prescribed kind payable to a Defence Force member). [Schedule 3, Part 1, item 2]
E. Consequential amendments
Amendments of the Income Tax Assessment Act 1997
Part 2 of Schedule 3 to the Bill will amend the 1997 Act to:
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- update references to provisions of the 1997 Act that have been rewritten in Divisions 50 to 53 and 55 in Schedule 1;
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- insert additional definitions in the Dictionary in section 995-1 of terms that are used in the rewritten provisions contained Divisions 50 to 53 and 55 in Schedule 1; and
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- revise a definition in the 1997 Act.
Sections 11-5, 11-10 and 11-15 of the 1997 Act contain lists of provisions of both the 1936 and the 1997 Acts that deal with particular kinds of exempt income. Part 2 of Schedule 3 to the Bill will update those references to old provisions that have been rewritten in Divisions 50 to 53 and 55 in Schedule 1, so that the lists refer to the rewritten provisions. [Schedule 3, Part 2, items 3 to 11]
Part 2 of Schedule 3 to the Bill will insert into the Dictionary (section 995-1 of the 1997 Act) new definitions of terms used in the rewritten provisions in Divisions 50 to 53 and 55 in Schedule 1.
In some cases, the label used and the meaning of the definition have not changed from the 1936 Act. The following definitions fall into this category:
Aboriginal [Schedule 3, Part 2, item 17]
bereavement Subdivision [Schedule 3, Part 2, item 19]
distributing body [Schedule 3, Part 2, item 20]
exempt Australian government agency [Schedule 3, Part 2, item 21]
friendly society [Schedule 3, Part 2, item 22]
friendly society dispensary [Schedule 3, Part 2, item 23]
mining payment [Schedule 3, Part 2, item 25]
supplementary amount of a drought relief payment [Schedule 3, Part 2, item 29]
supplementary amount of a payment made because of the Veterans Entitlements (Transitional Provisions and Consequential Amendments) Act 1986 [Schedule 3, Part 2, item 29]
supplementary amount of a social security payment [Schedule 3, Part 2, item 29]
supplementary amount of a student and youth assistance payment [Schedule 3, Part 2, item 29]
supplementary amount of a veterans affairs payment [Schedule 3, Part 2, item 29]
tax-free amount of a social security payment [Schedule 3, Part 2, item 30]
tax-free amount of a student and youth assistance payment [Schedule 3, Part 2, item 30] .
Definitions that have changed from the 1936 Act, and new defined terms, that Part 2 of Schedule 3 to the Bill will insert into the Dictionary are explained below.
Part 2 of Schedule 3 to the Bill will insert new definitions of terms used in the rewritten provisions.
New Definition: Australian government agency [Schedule 3, Part 2, item 18]
Commentary: Australian government agency is a new term that does not appear in the 1936 Act. It will cover the Commonwealth, States and Territories together with any authority constituted under an Australian law. It will replace the existing term government body as well as phrases in operative provisions that repeat the definition in full. This will cause no change to the law.
New Definition: Member of the Forces [Schedule 3, Part 2, item 24]
Commentary: Member of the Forces has the meaning given by section 52-105. This is a sign post to the meaning given to member of the Forces in the Acts referred to in section 52-105 in Schedule 1.
New Definition: Ordinary payment [Schedule 3, Part 2, item 26]
Commentary: Ordinary payment has the meaning given by sections 52-10, 52-65 and 52-150. This is a new term developed for the purpose of separating those pensions, benefits and allowances that are paid for reasons other than because of another persons death, from those that are paid because of another persons death. By separating these two types of payments the tables, used in sections 52-10, 52-65 and 52-150, can easily apply the different types of tax treatment for these payments according to whether the payment was paid because of another persons death or not.
New Definition: Pension age [Schedule 3, Part 2, item 27]
Commentary: Pension age is defined in section 24ACC of the 1936 Act and covered in subsection 24ABB(1) of the same Act. These two provisions are sign posts to the definition of pension age as defined in the Social Security Act 1991. The new definition has combined section 24ACC and subsection 24ABB(1) of the 1936 Act so as to have a single sign post to the definition in the Social Security Act 1991.
The amendments made by Part 2 of Schedule 3 apply to assessments for the 1997-98 income year and later income years. [clause 4, Tax Law Improvement Bill 1997] This ensures that these consequential amendments take effect at the same time as the rest of the amendments relating to the exempt income provisions.
Amendments of the Income Tax Assessment Act 1936
Part 3 of Schedule 3 to the Bill will amend the 1936 Act to:
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- insert references to the rewritten provisions contained in Divisions 50 to 53 and 55 in Schedule 1 where the 1936 Act currently refers to the provisions in the 1936 Act; and
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- close off the application of provisions of the 1936 Act that have been rewritten in Divisions 50 to 53 and 55 in Schedule 1 so that the provisions in the 1936 Act apply only to the 1996-97 income year and earlier income years.
Inserting references to rewritten provisions
Part 3 of Schedule 3 will insert in the 1936 Act references to the rewritten provisions contained in Divisions 50 to 53 and 55 where the 1936 Act currently refers to the provisions in the 1936 Act. There are two categories of these amendments.
The first category will add a reference to a rewritten provision in a section of the 1936 Act where a reference to the 1936 Act provision currently appears so that both 1936 Act and 1997 Act provisions are referred to. [Schedule 3, Part 3, items 39, 40, 60]
The second category will omit the reference to the 1936 Act 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:
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- have not yet been rewritten and closed off; and
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- can apply to amounts that relate to only one income year at a time, being the 1997-98 income year or a later income year. [Schedule 3, Part 3, items 37, 38, 41 to 46, 48 to 51, 53 to 55, 57, 58, 61]
Closing off the application of provisions in the 1936 Act
Part 3 of Schedule 3 will insert new provisions into the 1936 Act that will close off the application of provisions in the 1936 Act that have been rewritten or are redundant. [Schedule 3, Part 3, items 31, 34]
In these cases, the provisions in the 1936 Act need to be closed off so that they only apply to the 1996-97 income year and earlier income years. This complements the transitional provisions in Part 1 of Schedule 3 that ensure that the corresponding rewritten provisions apply to the 1997-98 income year and later income years.
The amendments made by Part 3 of Schedule 3 apply generally to assessments for the 1997-98 income year and later income years. [clause 4, Tax Law Improvement Bill 1997] This ensures that these consequential amendments take effect at the same time as the rest of the amendments relating to the exempt income provisions.
Amendments of other Commonwealth legislation
Part 4 of Schedule 3 to the Bill will amend other Acts that currently refer to provisions in the 1936 Act that have been rewritten and are contained in Divisions 50 to 53 and 55 in Schedule 1. [Schedule 3, Part 4] They are:
| Commonwealth Act | Amended by |
|---|---|
| Australian Industry Development Corporation Act 1970 | Schedule 3, Part 4: item 62 |
| Australian National Railways Commission Act 1983 | Schedule 3, Part 4: item 63 |
| Australian Postal Corporation Act 1989 | Schedule 3, Part 4: item 64 |
| Australian Trade Commission Act 1985 | Schedule 3, Part 4: item 65 |
| Development Allowance Authority Act 1992 | Schedule 3, Part 4: items 66 and item 67 |
| Export Finance and Insurance Corporation Act 1991 | Schedule 3, Part 4: item 68 |
| Federal Airports Corporation Act 1986 | Schedule 3, Part 4: item 69 |
| Health Insurance Commission Act 1973 | Schedule 3, Part 4: item 70 |
| Legislative Instruments Act 1996 | Schedule 3, Part 4: item 71 |
| National Rail Corporation Agreement Act 1992 | Schedule 3, Part 4: item 72 |
| Social Security Act 1991 | Schedule 3, Part 4: items 73 and 74 |
| Superannuation Guarantee (Administration) Act 1992. | Schedule 3, Part 4: item 75 |