House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello MP)

Glossary

The following abbreviations and acronyms are used throughout this explanatory memorandum.

General outline and financial impact

Tax concessions for philanthropy

Schedule 1 to this Bill amends the Income Tax Assessment Act 1997 to increase flexibility in the philanthropy measures and thereby encourage charitable giving in Australia.

Date of effect: These amendments apply to the first income year that starts after this Bill receives Royal Assent and to each later income year.

Proposal announced: These amendments were announced in the former Minister for Revenue and Assistant Treasurer's Press Release No. C037/04 of 11 May 2004.

Financial impact: The cost to revenue of allowing a franking credit refund to non-charitable ancillary funds and prescribed private funds is expected to be insignificant.

The cost to revenue of the remaining amendments are unquantifiable, but expected to be insignificant.

Compliance cost impact: These amendments will have minimal impact on compliance costs.

International shipping and airline profits

Schedule 2 to this Bill corrects an unintended outcome from the expansion of the foreign branch profits exemption. The unintended outcome means that foreign branch income and gains from the operation of ships or aircraft in international traffic are not being taxed in Australia nor in the country in which the company which owns the branch operates.

The expanded foreign branch income exemption will not apply to an Australian company's foreign branch income and gains from the operation of ships or aircraft in international traffic. This means that Australian companies will continue to be taxed in the same way as they were before the start of the expanded foreign branch income exemption.

Date of effect: Income years starting on or after 1 July 2004. The retrospective application date ensures no unintended consequences arise following the application of the New International Tax Arrangements (Participation Exemption and Other Measures) Act 2004.

Proposal announced: This measure was announced in the Minister for Revenue and Assistant Treasurer's Press Release No. 004 of 19 January 2005.

Financial impact: Nil.

Compliance cost impact: Nil.

Secrecy provisions

Schedule 3 to this Bill amends the Taxation Administration Act 1953 to allow disclosure of relevant information to the Corruption and Crime Commission of Western Australia.

Date of effect: The day after Royal Assent.

Proposal announced: Proposal not previously announced.

Financial impact: Nil.

Compliance cost impact: Nil.

Fringe benefits tax - rebatable employer status of certain government institutions

Schedule 4 to this Bill amends the Fringe Benefits Tax Assessment Act 1986 to correct an anomaly that allows government institutions that are charitable institutions at law to be eligible for fringe benefits tax rebatable employer status.

Date of effect: This amendment will apply from 1 July 2005.

Proposal announced: This measure has not previously been announced.

Financial impact: This measure has no financial impact if implemented. However, if this measure is not implemented the cost to the revenue will be $80 to $90 million per annum over the forward estimates period.

Compliance cost impact: This amendment is not expected to impact on compliance costs.

Dependent child age criterion

Schedule 5 to this Bill amends the Income Tax Assessment Act 1936 to standardise the age criteria for dependent children in respect of whom a taxpayer may be eligible for certain taxation concessions.

Date of effect: The proposed amendments apply to the 2005-06 income year and later years.

Proposal announced: This measure was announced in the 2004-05 Budget and in the former Minister for Revenue and Assistant Treasurer's Press Release No. C036/04 of 11 May 2004.

Financial impact: This measure is estimated to have an insignificant cost in 2005-06, $3 million in 2006-07 and $3 million in 2007-08.

Compliance cost impact: These amendments are expected to have a minimal impact on compliance costs.

Chapter 1 - Tax concessions for philanthropy

Outline of chapter

1.1 Schedule 1 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to introduce a number of new amendments to increase flexibility for charitable funds and prescribed private funds. Schedule 1 to this Bill also makes consequential amendments to the Income Tax Assessment Act 1936 (ITAA 1936).

Context of amendments

1.2 As part of its work on philanthropy in Australia, the Prime Minister's Community Business Partnership sought public submissions on ways to encourage greater levels of giving in Australia. The 2004-05 Budget announced that the Government will implement a number of amendments identified by the Partnership to increase flexibility for charitable funds, ancillary funds and prescribed private funds and further encourage private and corporate philanthropy.

1.3 A charitable fund is a fund established to receive donations to fund charitable work. Donations to the fund are tax deductible and any income derived by the fund is exempt from income tax.

1.4 An ancillary fund is a fund established and maintained solely for the purpose of receiving tax deductible public donations and providing donations to deductible gifts recipients (DGRs) or for the establishment of DGRs.

1.5 A prescribed private fund is established by businesses, families and individuals to receive private tax deductible donations to be used for similar purposes as an ancillary fund. Prescribed private funds are listed by name in the Income Tax Assessment Regulations 1997. Ancillary funds or prescribed private funds may only distribute donations to DGRs that are not ancillary funds or prescribed private funds.

1.6 The four policy changes expand the concessions relating to the capital gains tax (CGT) provisions, distributions by charitable funds, the income tax exemption for charities and the refund of franking credits provisions.

Summary of new law

1.7 The amendments improve the operation of a number of tax concessions currently available to charitable funds, ancillary funds and prescribed private funds. The amendments will:

•

remove the condition that testamentary gifts (ie gifts made under a will) of property to DGRs must be valued at greater than $5,000 before access to the CGT exemption is available

•

allow charitable funds to claim income tax exemptions whether they provide money, property and benefits solely to charities based in Australia, solely to charities that are also DGRs, or to a combination of these charities

•

allow prescribed private funds and ancillary funds that provide money, property and benefits solely to income tax-exempt DGRs to qualify for income tax exemptions where the Commissioner of Taxation (Commissioner) has endorsed these funds as being eligible for tax exemptions and

•

allow ancillary funds and prescribed private funds that are endorsed as income tax-exempt entities to be entitled to a refund of franking credits.

Comparison of key features of new law and current law

Detailed explanation of new law

Removal of the capital gains tax threshold

1.8 Gifts or contributions to DGRs may attract an income tax deduction provided that the conditions under Division 30 of the ITAA 1997 are met. Apart from the Cultural Bequests Program, testamentary gifts are not deductible, as reflected in subsection 30-15(2).

1.9 Section 118-60 of the ITAA 1997 provides a CGT exemption for certain testamentary gifts of property to DGRs if the requirements of section 30-15 are met. Subsection 30-15(2) requires that testamentary gifts be valued at more than $5,000 by the Commissioner.

1.10 A capital gain or loss made from a testamentary gift of property will be disregarded for CGT purposes regardless of the value of the property. This effectively removes the requirement that testamentary gifts have to be valued at greater than $5,000 in order to receive CGT exemptions and hence remove any impediment that may discourage the donation of testamentary gifts. [Schedule 1, item 20, subsection 118-60(1)]

1.11 The valuation requirements for all donations made under subsection 30-15(2) remain unchanged for tax deductibility purposes.

Distributions to charitable funds

1.12 Currently, an income tax exemption applies to charitable funds that provide money, property and benefits either solely to charities that are located in Australia and pursue their purposes in Australia, or solely to charities that are DGRs. However, the law creates an inconsistency by not allowing charitable funds to obtain income tax exemptions when they provide money, property and benefits to both types of charities.

1.13 This amendment allows funds that provide money, property and benefits to both types of charities to access an income tax exemption. [Schedule 1, item 13, paragraphs 50-60(c) and (d)]

1.14 Funds covered under items 1.5A and B in the table of section 50-5 continue to be exempt from income tax if they provide money, property and benefits solely to charities that are located in Australia and pursue their purposes in Australia or solely to charities that are DGRs.

Income tax exemption for funds distributing to certain entities

1.15 Ancillary funds and prescribed private funds are funds established for the purposes of collecting gifts to provide money, property or benefits to other DGRs.

1.16 The income tax law currently only allows ancillary funds and prescribed private funds access to an income tax exemption where they are charitable funds. Charitable ancillary funds and prescribed private funds only provide money, property and benefits to DGRs that are charities or for charitable purposes in benefiting DGRs. However, not all DGRs are endorsed as charities. DGRs that are income tax exempt, but not charities, include some Government bodies such as public ambulance services and research authorities. Consequently, ancillary funds and prescribed private fund cannot access an income tax exemption where they provide money, property or benefits to those bodies.

1.17 To rectify this anomaly, this amendment will allow non-charitable ancillary funds and prescribed private funds to benefit from an income tax exemption where they provide money, property and benefits to DGRs that are income tax exempt, whether or not the DGR is a charity. [Schedule 1, item 7, section 50-20]

1.18 The special conditions covered in sections 50-52, 50-72 and 50-75 are amended to include a reference to these new types of funds. [Schedule 1, items 8 to 12, section 52; item 14, section 50-72; item 15, paragraph 50-75(3)(b)]

1.19 Prescribed private funds and ancillary funds will only be entitled to the exemption where they are endorsed by the Commissioner. This is consistent with the requirement that organisations be endorsed by the Commissioner in order to access all relevant taxation concessions. [Schedule 1, items 16 to 19, section 50-110]

Refund on franking credits

1.20 The income tax law currently allows endorsed and specifically listed DGRs and endorsed charities and charitable funds to claim a refund of franking credits on franked dividends. The vast majority of prescribed private funds already benefit from a refund of franking credits by virtue of being endorsed as an income tax-exempt charity. However, an unintended consequence of this is that non-charitable prescribed private funds are not automatically entitled to this concession.

1.21 This measure ensures that non-charitable prescribed private funds will be able to access a refund of franking credits on the same basis as charitable prescribed private funds. Non-charitable prescribed private funds endorsed under the new exemption will also be entitled to a refund of franking credits. [Schedule 1, item 21, subsection 207-115(2); item 22, paragraph 207-115(2)(a)]

Application and transitional provisions

1.22 These amendments apply to the first income year that starts after this Bill receives Royal Assent and to each later income year. [Schedule 1, item 23]

Consequential amendments

1.23 A number of consequential amendments are made to the following provisions to include references to section 50-20:

•

Subparagraph 102M(b)(ii) of the ITAA 1936 - definition of 'exempt entity' [Schedule 1, item 1].

•

Paragraph 121F(1)(aa) of the ITAA 1936 - definition of 'relevant exempting provisions' [Schedule 1, item 2].

•

Paragraph 269B(1)(b) of the ITAA 1936 - certain exempting provisions ineffective [Schedule 1, item 3].

•

Paragraph 272-90(7)(b) in Schedule 2F to the ITAA 1936 - certain tax-exempt bodies [Schedule 1, item 4].

•

Section 11-5 of the ITAA 1997 - lists of classes of exempt income [Schedule 1, item 5].

•

Subparagraph 43-55(1)(a)(i) of the ITAA 1997 - anti-avoidance arrangements etc with a tax-exempt entity [Schedule 1, item 6].

Chapter 2 - International shipping and airline profits

Outline of chapter

2.1 Schedule 2 to this Bill corrects an unintended outcome resulting from recent changes to the tax laws that expanded the foreign branch income exemption. In summary, the correction ensures that an Australian company continues to include in its assessable income, foreign branch income and capital gains derived from the operation of ships or aircraft in international traffic.

Context of amendments

2.2 The exemptions for foreign branch profits and non-portfolio dividends were expanded by the New International Tax Arrangements (Participation Exemption and Other Measures) Act 2004. An unintended outcome of this expansion was that foreign branch profits derived by an Australian company from the operation of ships or aircraft in international traffic would not be taxed in Australia or the country in which the company operates.

2.3 Australia has exclusive rights under most of its tax treaties to tax an Australian company's foreign branch profits from the operation of ships or aircraft in international traffic. This is different to the tax treatment of other business profits derived through a foreign branch. The different tax treatment for those profits reflects the practical difficulties in allocating the income and expenses between countries in determining the profits from the operation of ships or aircraft in international traffic. The expansion to the foreign branch profits exemption meant that Australia would not tax those profits derived through foreign branches in treaty countries.

2.4 The amendment to section 23AH reinstates the way Australian companies, with certain types of foreign branch profits, were taxed prior to the implementation of the New International Tax Arrangements (Participation Exemption and Other Measures) Act 2004. This avoids the unintended effect of income and capital gains from the operation of ships or aircraft in international traffic from not being taxed in Australia or by the country in which the company operates.

Summary of new law

2.5 The amendment in Schedule 2 to this Bill ensures that certain foreign branch income and capital gains of an Australian company are included in its assessable income. This is implemented through a change to the foreign branch income exemption in section 23AH of the Income Tax Assessment Act 1936 (ITAA 1936).

2.6 The change to the foreign branch income exemption means the exemption does not apply to foreign branch income and capital gains from the operation of ships or aircraft in international traffic. This means that such amounts will be included in an Australian company's assessable income. This outcome supports Australian tax treaty policy on the taxation of profits from the operation of ships or aircraft in international traffic. Most of Australia's tax treaties provide exclusive taxing rights to Australia over such income if it is derived by Australian companies through foreign branches in the treaty country.

Comparison of key features of new law and current law

Detailed explanation of new law

2.7 An exemption is provided to Australian companies under section 23AH of the ITAA 1936 for most income and capital gains derived from an active business, through a permanent establishment (foreign branch) in a foreign country. Those amounts may be derived directly or indirectly and are treated as non-assessable non-exempt income. However, the amendment to section 23AH results in an exclusion from the exemption for income and capital gains from the operation of ships or aircraft in international traffic derived by an Australian company through a foreign branch. This means such amounts continue to be included in the Australian company's assessable income. [Schedule 2, item 2, paragraph 23AH(14A)(a)]

2.8 The amendment to section 23AH preserves the way some Australian companies with foreign branches were taxed prior to the implementation of the New International Tax Arrangements (Participation Exemption and Other Measures) Act 2004. That Act applied to income years starting on or after 1 July 2004. This amendment will also apply from that time to ensure that income and capital gains derived by an Australian company from the operation of ships or aircraft in international traffic through a foreign branch do not escape taxation. [Schedule 2, item 3]

2.9 The amendment to section 23AH does not affect compliance costs for an Australian company. The company will continue to allocate its expenses from operating ships or aircraft in international traffic in the way it did before the operation of the expanded foreign branch income exemption.

2.10 The amendment applies to the income and capital gains derived through foreign branches in all foreign countries. That is, there is no distinction between listed and unlisted countries, treaty or non-treaty countries or whether or not tax was paid on the amounts in any foreign country. The Australian company may be entitled to foreign tax credits under section 160AF of the ITAA 1936 for foreign tax paid.

Operation of ships or aircraft in international traffic

2.11 The foreign branch income exemption does not apply to an Australian company that derives foreign branch income and capital gains from the operation of ships or aircraft in international traffic. [Schedule 2, item 2, paragraph 23AH(14A)(a)]

2.12 The phrase 'operation of ships or aircraft in international traffic' is incorporated into most of Australia's tax treaties. The phrase is used in Article 8 of Australia's treaties, and also in Article 13 where treaties were negotiated after the introduction of tax on capital gains. The purpose of those Articles is to allocate the right to tax income and capital gains from the operation of ships or aircraft in international traffic. Australia has the exclusive taxing right, under those Articles, to tax those amounts when they are derived by an Australian resident company.

2.13 In Australia's tax treaties, there is a separate and different tax treatment for the foreign branch amounts from the operation of ships or aircraft in international traffic and from the operation of other types of businesses. The different treatment is because of the practical difficulties in allocating the income and expenses between treaty countries in determining the profits from the operation of ships or aircraft in international traffic.

2.14 The definition of 'operation of ships or aircraft in international traffic' is based on concepts in Australia's tax treaties. The meaning of 'international traffic' is the important part of that phrase. An Australian company operates a ship or aircraft in international traffic if the company transports passengers or goods by ship or aircraft from one place in a particular country to a place in a different country [Schedule 2, item 2, subsection 23AH(14B)]. A ship or aircraft that is used to transport passengers or goods solely between places within a particular country (including Australia) does not constitute the operation of a ship or aircraft in international traffic.

Example 2.1

Aust Co is an airline company with a foreign branch that conducts operations in New Zealand. Aust Co provides transport for passengers both domestically and internationally. During the Rugby World Cup, Aust Co's foreign branch in New Zealand offers special flights departing from Auckland and Wellington and arriving in Sydney. The flight departing from Wellington stops in Auckland before continuing on to Sydney.

Sharon, a New Zealand resident, purchases a ticket from the New Zealand airline office and travels from Wellington to Auckland and then on to Sydney. Sharon does not stop off at Auckland which means the entire trip (including the Wellington to Auckland leg) is classed as an international flight.

Belinda, also a New Zealand resident, purchases a ticket from the New Zealand airline office for travel from Wellington to Auckland and on to Sydney. Upon arrival in Auckland, Belinda attends a business meeting. Belinda then resumes her trip to Sydney. In this situation, only the Auckland to Sydney leg of the trip is treated as an international flight.

Aust Co will include in its assessable income the whole amount from Sharon's ticket but will only include the amount that related to the Auckland to Sydney leg for Belinda's ticket.

Things ancillary to the operation of ships and aircraft

2.15 An Australian company may derive foreign branch income and capital gains from activities other than from the direct transport of passengers or goods by ships or aircraft. Activities that are closely related to but form a minor part of the operations of ships or aircraft in international traffic are things that are ancillary to those operations. Income and capital gains from ancillary operations through a foreign branch are also excluded from the foreign branch income exemption. [Schedule 2, item 2, paragraph 23AH(14A)(b)]

2.16 Income and capital gains derived by an Australian company from leasing a ship or aircraft fully equipped, crewed and supplied are treated in the same way as income and gains from transporting passengers and goods. That is, such amounts of income and capital gains derived by an Australian company through a foreign branch will be excluded from the foreign branch income exemption [Schedule 2, item 2, paragraph 23AH(14A)(a)]. An Australian company would include those amounts in its assessable income.

2.17 Income and capital gains from the lease of a ship or aircraft on a dry lease or bare boat charter basis through a foreign branch will often be treated under the business profits article of an Australian tax treaty. However, where those leases are a very minor part of the operation of ships or aircraft or an occasional source of income, they are ancillary operations. The income and capital gains from those ancillary operations through a foreign branch are excluded from the foreign branch income exemption. Consequently, those amounts are included in an Australian company's assessable income.

Example 2.2

Aust Co is an Australian airline company that transports passengers and goods internationally. Aust Co's foreign branch in India has excess aeroplanes for its current operations. The foreign branch uses its aeroplanes to fly passengers and goods from India to other countries in the region. The foreign branch leases five aeroplanes (five per cent of the foreign branch's fleet) to Aparna Co (a foreign company) for a period of three months. There are two lease agreements. One agreement is for three aeroplanes to be leased without crew or other supporting services (on a dry lease). The other two aeroplanes are leased fully crewed (on a wet lease).

The foreign branch income and capital gains derived under both lease agreements will be included in Aust Co's assessable income as the leases are ancillary to the main operations of the foreign branch.

2.18 An Australian company's income and capital gains from the transportation of passengers or goods by types of transport other than ships or aircraft may also be excluded from the foreign branch income exemption. This occurs where that transportation is connected and incidental to (ie is ancillary to) the operation of ships or aircraft in international traffic through a foreign branch. The income and capital gains from those ancillary operations will be included in the Australian company's assessable income. [Schedule 2, item 2, paragraph 23AH(14A)(b)]

Example 2.3

Aust Co is an airline company offering international and domestic flights through a foreign branch in Canada. In order to boost awareness in regional centres, Aust Co introduces a bus service connecting regional towns in Canada with its international airport terminal. The bus service provides access to and from the airport to the passengers of its international flights.

Income and capital gains from the operation of the bus service are regarded as ancillary to the operation of ships or aircraft in international traffic. Consequently, Aust Co will include those amounts in its assessable income.

2.19 Other things included in ancillary operations where those things relate to the operation of ships or aircraft in international traffic are:

•

the sale of tickets at a foreign branch on behalf of other companies where that branch usually sells tickets for the transportation of passengers on ships or aircraft that it operates in international traffic

•

advertising at a foreign branch

•

the provisions of goods and

•

the provisions of services by engineers, ground and equipment maintenance staff, cargo handlers, catering staff and customer services personnel.

Application and transitional provisions

2.20 The amendment to section 23AH of the ITAA 1936 in Schedule 2 to the Bill applies to income years starting on or after 1 July 2004 [Schedule 2, item 3]. The amendment has a retrospective application date so that it operates from the time the expanded foreign branch income exemption applied. The expanded foreign branch income exemption was implemented by the New International Tax Arrangements (Participation Exemption and Other Measures) Act 2004. It is necessary to have this amendment apply from the time the expanded foreign branch income exemption applied to ensure no unintended outcomes arise for some Australian companies following the application of that Act.

2.21 The amendment means that Australian companies will continue to be taxed on their foreign branch income from the operation of ships or aircraft in international traffic as they were before the expansion of the section 23AH exemption.

Chapter 3 - Secrecy provisions

Outline of chapter

3.1 Schedule 3 to this Bill amends the Taxation Administration Act 1953 (TAA 1953) to allow disclosure of relevant information to the Corruption and Crime Commission of Western Australia.

Context of amendments

3.2 Section 3E of the TAA 1953 provides that the Commissioner of Taxation (Commissioner) may disclose information acquired by the Commissioner under the tax laws to an authorised law enforcement agency officer, or to an authorised Royal Commission officer, if the Commissioner is satisfied that the information is relevant to:

•

establishing whether a serious offence has been, or is being, committed or

•

the making, or proposed or possible making, of a proceeds of crime order.

3.3 Subsection 2(1) of the TAA 1953 includes an exhaustive definition of 'law enforcement agency' and includes state and national bodies responsible for crime and corruption investigation. The Corruption and Crime Commission of Western Australia which was established by the Corruption and Crime Commission Act 2003 (WA), replaces the Anti-Corruption Commission in Western Australia and the Royal Commission relating to the conduct of Western Australian Police Officers. The Corruption and Crime Commission of Western Australia has all the powers that the Anti-Corruption Commission had, as well as the powers of the Police Royal Commission. The Police Royal Commission was an 'eligible Royal Commission' under the definition of 'authorised Royal Commission officer' for the purposes of section 3E of the TAA 1953. As the new Corruption and Crime Commission of Western Australia is not an 'eligible Royal Commission', an amendment to the tax law would be required to enable the use of relevant taxation information by the new Commission.

3.4 The amendments insert the new Corruption and Crime Commission of Western Australia into the definitions of 'law enforcement agency' and 'head' under subsection 2(1) of the TAA 1953, to enable the Commissioner to disclose relevant taxation information to the Corruption and Crime Commission of Western Australia, if the Commissioner is satisfied that the information is relevant for the purposes outlined in section 3E of the TAA 1953.

Summary of new law

3.5 The amendments to the TAA 1953 include the Corruption and Crime Commission of Western Australia within the definitions of 'law enforcement agency' and 'head' to enable the Commissioner to disclose relevant taxation information to the Corruption and Crime Commission of Western Australia.

Detailed explanation of new law

3.6 Schedule 3 will amend the TAA 1953 by:

•

inserting, under the definition of 'law enforcement agency' in subsection 2(1), 'the Corruption and Crime Commission of Western Australia' [Schedule 3, item 4] and

•

inserting, under the definition of 'head' in subsection 2(1), 'in the case of the Corruption and Crime Commission of Western Australia - the Commissioner for that Commission' [Schedule 3, item 3].

3.7 Section 3E of the TAA 1953 provides that the Commissioner may disclose information acquired by the Commissioner under the tax laws to an 'authorised law enforcement agency officer'. An authorised law enforcement agency officer is defined in subsection 2(1) of the TAA 1953 as the head of a 'law enforcement agency' or an officer authorised in writing by this head to perform the functions of an authorised law enforcement agency officer under the TAA 1953.

3.8 The primary role of the Corruption and Crime Commission of Western Australia is to report and investigate misconduct by Western Australian public officers and public sector agencies.

3.9 Subsection 2(1) of the TAA 1953 would be amended to include the Corruption and Crime Commission of Western Australia in the definitions of 'law enforcement agency' and 'head'. This would enable the Commissioner to disclose taxation information, under section 3E of the TAA 1953, to the Commissioner of the Corruption and Crime Commission of Western Australia (or an authorised officer) to assist with investigations into misconduct by public officers which may involve serious offences or the making of a proceeds of crime order.

Application and transitional provisions

3.10 The amendments will commence on Royal Assent and apply to communications or disclosures of information from the day after Royal Assent (regardless of whether the information was acquired before or after that commencement). [Schedule 3, item 5]

3.11 This will ensure that the amendments do not have any retrospective application.

Chapter 4 - Fringe benefits tax - rebatable employer status of certain government institutions

Outline of chapter

4.1 Schedule 4 to this Bill amends the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986) to correct an anomaly that would allow government institutions that are charitable institutions at law to be eligible for fringe benefits tax (FBT) rebatable employer status from 1 July 2005.

Context of amendments

4.2 Schedule 10 of the Tax Laws Amendment (2004 Measures No. 1) Act 2004 introduced a requirement for charities, public benevolent institutions and health promotion charities to be endorsed by the Commissioner of Taxation in order to access certain taxation concessions, including FBT rebatable employer status. FBT rebatable employers are eligible for a 48 per cent rebate of the FBT amount that would otherwise be payable.

4.3 In introducing this new requirement, a caveat of the law precluding charitable institutions of the Commonwealth, a state or a territory from claiming FBT rebatable employer status was omitted. As a result of this anomaly, institutions such as public universities, public museums, public art galleries and other government bodies accepted as charitable at law will become eligible FBT rebatable employers from 1 July 2005.

4.4 These government institutions have traditionally been ineligible for FBT rebatable status as their overriding purpose is considered to be to carry out the functions or responsibilities of government. It is appropriate that this arrangement continues after 1 July 2005 in recognition of this distinction.

Summary of new law

4.5 This amendment will ensure that government institutions of the Commonwealth, a state or a territory that are accepted as charitable at law will continue to be ineligible for FBT rebatable employer status from 1 July 2005.

Comparison of key features of new law and current law

Detailed explanation of new law

4.6 Subsection 65J(1) of the FBTAA 1986 treats certain employers as 'rebatable employers' for the purposes of calculating their FBT liability. FBT rebatable employers are eligible for a rebate of 48 per cent of the FBT amount that would otherwise be payable.

4.7 An amendment is made to ensure that institutions of the Commonwealth, a state or a territory that are accepted as charitable institutions at law will remain ineligible for FBT rebatable employer status from 1 July 2005. [Schedule 4, item 1, paragraph 65J(1)(baa)]

4.8 A technical correction is made to paragraph 123E(1)(a) by omitting a reference to subsection 123E(3). [Schedule 4, item 2, paragraph 123E(1)(a)]

Application and transitional provisions

4.9 The amendments will apply from 1 July 2005. [Schedule 4, item 3]

Chapter 5 - Dependent child age criterion

Outline of chapter

5.1 Schedule 5 to this Bill amends the Income Tax Assessment Act 1936 (ITAA 1936) to standardise the age criteria for dependent children in respect of whom taxpayers may be eligible for certain tax concessions.

Context of amendments

5.2 Currently, the dependent child age criteria vary across entitlements, such that a taxpayer may be able to take a child into account when claiming the medical expenses offset, but not be able to take the same child into account when determining the family thresholds for the Medicare levy or the Medicare levy surcharge. A single set of age criteria will provide consistency and simplicity for taxpayers.

5.3 Prior to the introduction of this Bill the dependent child age test for the housekeeper, child-housekeeper, zone and overseas defence forces tax offset, as well as the Medicare levy and Medicare levy surcharge provisions was a child less than 16 years of age (not being a student) or a full-time student less than 25 years of age.

5.4 This differs from the dependent child age criteria for the medical expenses tax offset and the family tax benefit part A.

5.5 In the case of the medical expenses tax offset, a dependent child is:

•

a child of the taxpayer less than 21 years of age and

•

a child under 16 years of age (not being a student) or a full-time student under 25 years of age.

5.6 For the family tax benefit part A, a dependent child is:

•

an individual aged under 21 or

•

an individual who has turned 21 but is aged under 25 and is undertaking full-time study.

Summary of new law

5.7 The amendments will adjust the dependent child age criteria for the housekeeper, child-housekeeper, zone and overseas forces tax offsets, the notional dependent child tax offset and the notional sole parent tax offset and the Medicare levy and Medicare levy surcharge such that a dependant is a child less than 21 years of age (not being a student). The criteria for students will remain less than 25 years of age.

5.8 Standardising the age criteria for dependent children will allow more families to benefit from the dependant related tax offsets and the Medicare levy and the Medicare levy surcharge family thresholds.

Comparison of key features of new law and current law

Detailed explanation of new law

5.9 The amendments will adjust the dependent child age criteria for the housekeeper, child-housekeeper, zone and overseas forces tax offsets and the Medicare levy and Medicare levy surcharge such that a dependent child is less than 21 years of age (not being a student).

5.10 Existing subsection 159J(2) provides a table of tax offsets setting out the categories of dependants and the amounts of tax offsets for each class. Class 3 provides that a child less than 16 years of age (not being a student) is a dependant. The amendment will omit '16' and substitute '21'. This will extend eligibility for the child-housekeeper, notional sole parent and notional dependent child tax offset, zone and overseas forces and medical expenses tax offsets. [Schedule 5, item 1, subsection 159J(2)]

Example 5.1

A taxpayer who resides in a zone A area in 2005-06 has three children aged 19, 15 and 13. The 19 year old child is not a full-time student but still resides with the taxpayer and has a separate net income of $1,010. The two children aged 15 and 13 both have a separate net income of less than $282.

Previously, the taxpayer was only able to claim an amount of zone tax offset with respect to the children aged 15 and 13, therefore the relevant tax offset amount would have been $376 for each child as they are both students that is, a total of $752. The family would calculate their total entitlement by summing their fixed amount for residing in zone A of $338 plus 50 per cent of the relevant tax offset amount (ie $376) resulting in a total zone tax offset of $714.

Under the new law the taxpayer would be able to claim an additional amount of zone tax offset in respect of the 19 year old child. The amount of the relevant tax offset the taxpayer can claim in respect of the 19 year old child is worked out as follows:

The amount by which the separate net income exceeds the notional tax offset:

$1,010 - $282 = $728


Dividing this amount by four and then subtracting from the notional tax offset for a first non-student child under 21:

$376 - $728/4 = $194


Under the new law the relevant tax offset amount would increase by $194 to a total of $946. Therefore, the family's total entitlement to the zone tax offset would be the sum of their fixed amount for residing in zone A of $338 plus 50 per cent of the relevant tax offset amount (ie $473), resulting in a total zone tax offset of $811.

Under the new law the family would increase their zone tax offset entitlement compared to the previous law by $97.

5.11 Existing paragraphs 159L(1)(a) and (b) provide that a taxpayer may be entitled to the housekeeper tax offset if a person is engaged in keeping house for a taxpayer and the person cared for a child of the taxpayer who is less than 16 years of age or a dependant included in class 3. The amendment will omit '16' and substitute '21' to extend eligibility to children of the taxpayer who are less than 21 years of age. [Schedule 5, item 2, paragraphs 159L(1)(a) and (b)]

Example 5.2

A person is fully engaged in keeping house for a taxpayer and cares for the taxpayer's child who is 17 years of age and is not a student. Previously the taxpayer would not receive the housekeeper tax offset, however under the new law the taxpayer would receive the housekeeper tax offset.

5.12 Existing subparagraphs 251R(3)(b)(ii) and (iii) provide that a child will be taken to be a dependant for the purposes of the Medicare levy and Medicare levy surcharge if the child is less than 16 or not less than 16 but less than 25 and receiving full time education. The amendment will omit '16' and substitute '21'. [Schedule 5, item 3, subparagraphs 251R(3)(b)(ii) and (iii)]

Example 5.3

A couple have two children, one aged 15 and an 18 year old who is no longer a student. Under the current law the couple's Medicare levy surcharge is calculated on the basis that the family has only one dependent child, thus resulting in a family threshold of $100,000. However, under the medical expenses tax offset, the couple would be able to claim medical expenses for both children. Under the new law the couple would be classified as having two dependent children for both the medical expenses tax offset and the Medicare levy surcharge. Therefore, the family's Medicare levy threshold would rise to $101,500.

Application and transitional provisions

5.13 The amendments apply from 1 July 2005.

Index

Schedule 1: Philanthropy

Schedule 2: International shipping and airline profits

Schedule 3: Secrecy provisions

Schedule 4: Rebatable employer status

Schedule 5: Dependent child age criterion