Revised Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
Chapter 2 - Tax Law Improvement Project (TLIP) - technical corrections
Overview
2.1 The amendments in Schedules 2, 3 and 4 to this Bill make technical corrections to the income tax and other laws rewritten by the TLIP.
2.2 These measures make miscellaneous amendments to the:
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- Income Tax Assessment Act 1997 (ITAA 1997);
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- Income Tax Assessment Act 1936 (ITAA 1936);
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- Airports (Transitional) Act 1996 ;
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- Income Tax (Transitional Provisions) Act 1997 (Transitional Act 1997); and
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- Tax Law Improvement Act 1997 (TLIA 1997).
Summary of the amendments
2.3 Schedules 2, 3 and 4 will amend minor technical errors that have arisen from the rewrite of the income tax laws. The amendments make corrections to the ITAA 1997 to correct errors in translating the fine detail of provisions of the ITAA 1936. They also make additional consequential amendments to the ITAA 1936 and corrections to provisions of the Transitional Act 1997 and other Acts.
2.4 The amendments discussed in this Chapter will apply to assessments for the 1997-1998 income year and later income years.
Background to the legislation
2.5 The Parliament has enacted the first three instalments of the rewrite of the ITAA 1936. The first instalment comprises three Acts, the:
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- ITAA 1997;
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- Transitional Act 1997; and
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- Income Tax (Consequential Amendments) Act 1997 .
Those Acts received Royal Assent on 18 April 1997 and have effect for the 1997-1998 income year.
2.6 The second instalment is the TLIA 1997 which received Royal Assent on 8 July 1997. The TLIA 1997 amends the ITAA 1997 and its provisions also have effect for the 1997-1998 income year.
2.7 The third instalment is the Tax Law Improvement Act (No.1) 1998 which received Royal Assent on 22 June 1998. It amends the ITAA 1997 and its provisions have effect for the 1998-1999 income year.
Explanation of the amendments
Schedule 2 Technical amendment of the ITAA 1997
Provision being amended : Section 2-30, which explains the reason for the gaps that have been left in the numbering system used in the ITAA 1997.
Amendment will : Insert a more complete explanation of the circumstances in which link notes will be used to tell readers where to find the next provision.
Provision being amended : Section 20-20, which defines assessable recoupment . Subdivision 20-A includes certain amounts in assessable income if they are received as a recoupment of a deductible loss or outgoing.
Amendments will : Ensure that the definition of assessable recoupment covers amounts received in an income year prior to the year in which a deduction is allowed.
Reason for amendments : It is doubtful whether the existing definition of assessable recoupment covers a recoupment received in an income year prior to the year in which a deduction is allowed. But the operative rules, subsections 20-35(3) and 20-40(1), expressly apply in those cases. The amendments ensure that, as in the ITAA 1936, the recoupment rules apply if an amount is recouped in an income year prior to when a deduction arises.
Provision being amended : Section 41-30, which deals with the roll-over relief that is available under Common rule 1 of the capital allowance common rules on the disposal of property for which a capital allowance deduction has been claimed. In particular, it explains the respective entitlements of the transferor and transferee to claim a deduction for the property.
Amendment will : Insert a new subsection 41-30(2A) which will clearly provide that if the transferee gains the entitlement to the deduction of the transferor, the transferee cannot also deduct any expenditure incurred in acquiring the property.
Reason for amendment : It has been suggested that where roll-over relief is given under the ITAA 1997 to a transferor of property, the transferee may be entitled to claim both the transferors deduction and a deduction based on the expenditure incurred in acquiring the property. It is clear under the ITAA 1936 that the expenditure incurred in acquiring the property is not deductible. This amendment clearly restates the effect of the ITAA 1936.
Provision being amended : Section 42-315, which ensures that a taxpayer will continue to be the quasi-owner of plant when their quasi-ownership right over the land to which the plant is attached expires, is surrendered or is terminated and a new right is granted.
Amendments will : Insert a requirement that a quasi-ownership right be granted by an exempt or foreign government agency.
Reason for amendments : Under the ITAA 1936 the single concept of Crown lease incorporated two elements that a right over the land be granted and that the right must be granted by an exempt government agency. Under the ITAA 1997 the two elements are dealt with separately. Only one of the concepts, namely the grant of the right over the land, is mentioned in existing section 42-315. Both must be mentioned for the ITAA 1997 to correctly restate the ITAA 1936.
Provision being amended : Section 50-25, which lists certain government entities whose ordinary and statutory income is exempt from tax.
Amendment will : Replace the reference in Item 5.2 of the table in section 50-25 to the defined term . Commonwealth law with a reference to the defined term . Australian law .
Reason for amendment : The existing use of the defined term Commonwealth law in the ITAA 1997 restricts Item 5.2 in the table in section 50-25 to authorities constituted under a Commonwealth law. The use of Australian law correctly restates the position under paragraph 23(d) of the ITAA 1936, which applies to public authorities constituted under any Commonwealth, State or Territory law.
Provision being amended : Division 70, which deals with the rules concerning trading stock.
Amendment will : Insert a heading before section 70-1 to indicate that the section is part of the guide to Division 70.
Provision being amended : Paragraph 70-100(10)(a). Section 70-100 treats a change in use of trading stock as a notional disposal of that stock.
Amendment will : Replace the incorrect reference in paragraph 70-100(10)(a) to transferee with a reference to transferor.
Provision being amended : Example 2 of section 70-110, which illustrates the effect of changing the use of an item of trading stock without disposing of it.
Amendment will : Add to the example an explanation of the impact of section 70-110 on the rewritten capital gains and losses provisions.
Reason for amendment : The existing example deals with the case of trading stock that is converted to use as plant and explains the interaction of the trading stock and depreciation provisions. To provide further assistance to readers, the example has been expanded to deal with the capital gains and losses implications.
Provision being amended : Section 385-5, which is part of the guide material for Division 385 dealing with special trading stock rules for primary producers.
Amendments will : Correct cross-referencing errors in Items 1 and 2 of the table.
Provision being amended : Note 2 to subsection 387-305(1), which is a signpost highlighting the impact of Subdivision 20-A on a recoupment of expenditure incurred on the establishment of a grapevine.
Amendment will : Replace the existing Note with a new Note .
Reason for amendment : Subdivision 20-A can include a recoupment in the assessable income of both the person who originally incurred the grapevine establishment expenditure and the transferee of the deduction for that expenditure. The new Note will accurately reflect Subdivision 20-As operation by referring more generally to a recoupment of expenditure instead of a recoupment by you.
Provision being amended : Note 1 to subsection 387-355(2), which refers readers to various provisions which may limit the deduction otherwise allowable under section 387-355 for expenditure on connecting power to land.
Amendment will : Replace an incorrect reference to sections 387-370 with a reference to section 387-370.
Application : The amendments made by Schedule 2 apply to assessments for the 1997-1998 income year and later income years.
Schedule 3 - Technical amendment of the ITAA 1936
Provision being amended : Section 75B, which provides a deduction for expenditure on measures to conserve water.
Amendment will : Correct a numbering error by inserting a new subsection 75B(3D) .
Reason for amendment : This amendment corrects Item 43 of Schedule 8 to the TLIA 1997 which inserted a new subsection 75B(3E) which should have been numbered new subsection 75B(3D) . Item 12 of Schedule 3, 8 to this Bill ensures that the earlier incorrect amendment is taken never to have commenced.
Provisions being amended : Sections 82KH and 399A.
Amendments will : Make various consequential amendments to insert references to section 25-35 of the ITAA 1997 instead of references to section 63 of the ITAA 1936.
Reason for amendments : These amendments replace Items 120, 134 and 135 of Schedule 4 to the TLIA 1997. They achieve the same outcome as those earlier amendments and also correct typing errors which caused sections 82KH and 399A as amended, to read section section. Item 11 of Schedule 4 to this Bill ensures that the TLIA 1997 amendments are taken never to have commenced.
Provisions being amended : Sections 122T, 123A, 123BD and 124AQ, each of which sets out the treatment of a recoupment of deductible expenditure under Divisions 10, 10AAA or 10AA.
Amendments will : Ensure that none of the provisions apply to a recoupment received in the 1997-1998 income year or later income years.
Reason for amendments : These are additional consequential amendments which close off sections of the ITAA 1936, rewritten in the ITAA 1997, from the date of effect of the relevant rewritten provisions. The amendment at Item 6 of Schedule 4 to this Bill preserves the operation of these sections in so far as they apply to an entitlement to a recoupment arising prior to the 1997-1998 income year.
Provision being amended : Subsection 160ZK(1A), which explains how the cost base of an asset used in calculating a capital loss is to be determined when a taxpayer has incurred heritage conservation expenditure.
Amendment will : Insert the omitted word of.
Reason for amendment : A consequential amendment made to subsection 160ZK(1A) by Item 239 of Schedule 1 to the Income Tax (Consequential Amendments) Act 1997 omitted the word of in citing Part III of the ITAA 1936.
Provision being amended : Section 413, which adjusts the cost base of certain non-taxable Australian assets where that cost base is used to calculate the capital gain or loss component of the attributable income of an eligible controlled foreign corporation.
Amendment will : Add a reference to Division 43 of the ITAA 1997 to the existing references to Division 10C or 10D of Part III of the ITAA 1936 in subsection 413(3).
Reason for amendment : This is a necessary consequential amendment to take account of the enactment of Division 43 of the ITAA 1997.
Application : The amendments made by Schedule 3 to this Bill apply to assessments for the 1997-1998 income year and later income years.
Schedule 4 - Amendment of other Acts
Airports (Transitional) Act 1996
Provision being amended : Section 49A, which was inserted in the Airports (Transitional) Act 1996 by the Taxation Laws Amendment Act (No. 1) 1998 . It sets out special rules for depreciating the fixtures that are attached to land acquired by airport lessee companies.
Amendments will :
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- Omit an incorrect cross-reference to subsection 42-310(2) of the ITAA 1997 in subparagraph 49A(2)(a)(ii); and
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- Replace incorrect cross-references to paragraph 42-310(2)(b) in paragraphs 49A(2)(d) and (3)(c).
Reason for amendments : Section 49A does not take account of an amendment made during the passage of the TLIA 1997. Consequently, section 49A contains incorrect references to paragraphs of subsection 42-310(2) instead of to subsection 42-310(1).
Provision being amended : Section 49A, which was inserted in the Airports (Transitional) Act 1996 by the Taxation Laws Amendment Act (No. 1) 1998 . It sets out special rules for depreciating the fixtures that are attached to land acquired by airport lessee companies.
Amendment will : Replace a reference to the acquisition of the lease in paragraph 49A(3)(e) with a reference to the acquisition of the right.
Reason for amendment : The amendment is needed to correct a cross-referencing error that occurred within the paragraph.
Application : The amendments made by Items 1 to 4 of Schedule 4 to a Bill apply to assessments for the 1997-1998 income year and later income years.
Provision being amended : Section 20-5 of the Transitional Act 1997, which ensures that certain ITAA 1936 provisions about recouping deductible expenses will continue to apply to assessments for the 1997-1998 income year and later income years in relation to recoupments received prior to the 1997-1998 income year.
Amendment will : Add references to additional provisions of the ITAA 1936 to the list of recoupment provisions which continue to apply for the 1997-1998 income year and later income years.
Reason for amendment : This amendment complements the amendments at Items 3, 4, 5 and 6 of Schedule 3 to this Bill. The amended section 20-5 clarifies the way in which taxpayers should apply the recoupment provisions of the ITAA 1936 and Subdivision 20-A of the ITAA 1997 in the transition to the ITAA 1997.
Provision being amended : Subsection 42-2(2) of the Transitional Act 1997, which explains that Division 42 of the ITAA 1997 (the rewritten depreciation provisions) does not apply to a ship to which section 57AM of the ITAA 1936 applies.
Amendment will : Substitute a new subsection 42-2(2) to ensure that the only aspects of Division 42 which do not apply to such a ship are those that go to the calculation of the allowable depreciation deduction.
Reason for amendment : The special deduction for trading ships has been retained in the ITAA 1936 as it has limited on-going application after 1 July 1997. The deduction is to be calculated and allowed under the ITAA 1936 but Division 42 of the ITAA 1997 applies for all other purposes, eg. calculating balancing adjustments. Section 42-2 of the Transitional Act 1997 and section 53I of the ITAA 1936 are intended to achieve this but they do not work correctly. For example, there may be no requirement to calculate a balancing adjustment on disposal of a ship if that ship is still being depreciated under the ITAA 1936 in the year of disposal.
Provision being amended : Section 330-75 of the Transitional Act 1997, which explains how Common rule 1 (Roll-over relief for related entities) of the capital allowance common rules is modified in relation to the disposal of property for which deductions have been claimed under Division 330 (Mining and quarrying).
Amendments will : Update a cross-reference by repealing paragraph 330-75(1)(d) and replacing it with new subsection 330-75(1A) .
Reason for amendment : Paragraph 330-75(1)(d) contains a reference to section 330-585 of the ITAA 1997 which has been repealed because its effect was incorporated into Subdivision 20-A of the ITAA 1997. New subsection 330-75(1A) will achieve the same outcome as the repealed paragraph 330-75(1)(d).
Application : The amendments made by Items 6 to 9 of Schedule 4 to this Bill apply to assessments for the 1997-1998 income year and later income years.
Provision being amended : Items 120, 134 and 135 of Schedule 4 to the TLIA 1997. These items made amendments to the ITAA 1936 consequential upon the rewrite of the deduction provisions in the TLIA 1997.
Amendment will : Ensure that those consequential amendments are taken never to have commenced.
Reason for amendment : The consequential amendments were incorrectly expressed in that they resulted in the amended provisions reading section section. This item will ensure those items are taken never to have commenced. The TLIA 1997 amendments will be replaced by the amendments at Items 2, 8 and 9 of Schedule 3 to this Bill.
Provision being amended : Item 43 of Schedule 8 to the TLIA 1997. It made an amendment to section 75B of the ITAA 1936 consequential upon the rewrite of various recoupment provisions.
Amendment will : Ensure that the consequential amendment is taken never to have commenced.
Reason for amendment : Item 43 of Schedule 8 to the TLIA 1997 inserted an incorrectly numbered subsection into the ITAA 1936, ie. subsection 75B(3E). This item will ensure that Item 43 is taken never to have commenced. It will be replaced by the amendment at Item 1 of Schedule 3 to this Bill.